<PAGE>
As filed with the Securities and Exchange Commission on February 20, 1996
---
File No. 33-
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-1
Registration Statement Under
the Securities Act of 1933
VALLEY FORGE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 6312 23-6200031
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
CNA Plaza, 43 South
Chicago, Illinois 60685
(312) 822-6597
(Address, including zip code, and telephone
number, including area code, of registrant's principal
executive offices)
Corporate Secretary Copy to:
Continental Assurance Company Stephen E. Roth, Esq.
CNA Plaza, 43 South Sutherland, Asbill & Brennan
Chicago, Illinois 60685 1275 Pennsylvania Avenue, N.W.
(312) 822-6597 Washington, DC 20004-2404
(Name, address, including zip code,
and telephone number, including area
code, of agent for service)
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of the registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: |X|
<TABLE>
<CAPTION>
============================ ========== ================ ================ ==============
Title of Each Amount Proposed Maximum Proposed Maximum Amount of
Class of Securities to be Offering Price Aggregate Registration
to be Registered Registered Per Unit Offering Price Fee
============================ ========== ================ ================= =============
<S> <C> <C> <C> <C>
Flexible Premium Deferred * * $289,999.65 $100
Variable Annuity Contract
(Guaranteed Interest Option)
============================ ========== ================ ================== ============
</TABLE>
<PAGE>
* The proposed maximum aggregate offering price is estimated solely for
determining the registration fee. The amount to be registered and the
proposed maximum offering price per unit are not applicable since the
securities are not issued in predetermined amounts or units.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), shall
determine.
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Regulation S-K, Item 501(b)
ITEM OF FORM S-1 PROSPECTUS CAPTION
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus............ Outside Front Cover
2. Inside Front and Outside Back Cover
Pages of Prospectus............................... Summary; Table of
Contents
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges................ Outside Front Cover;
Summary;Definitions;
Description of
the Contract
4. Use of Proceeds .................................. Additional
Information About
Valley Forge Life
Insurance Company
-- Investments
5. Determination of Offering Price................... Not Applicable
6. Dilution ......................................... Not Applicable
7. Selling Security Holders ......................... Not Applicable
8. Plan of Distribution.............................. Other Information --
Distribution of the
Contracts
9. Description of Securities to be Registered........ Summary; Description
of the Contract;
Contract Charges and
Fees; Selecting an
Annuity Payment
Option; Other
Information
10. Interests of Named Experts and Counsel............ Legal Matters;
Experts
11. Information with Respect to the Registrant........ The Company, The
Variable Account,
The Funds, and The
Guaranteed Interest
Option; Additional
Information About
Valley Forge Life
Insurance Company
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.... Item 14 of Part II
<PAGE>
PROSPECTUS
FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
issued by
VALLEY FORGE LIFE INSURANCE COMPANY AND
VALLEY FORGE LIFE INSURANCE COMPANY VARIABLE ANNUITY SEPARATE ACCOUNT
This prospectus describes a flexible premium deferred variable annuity contract
(the "Contract") issued by Valley Forge Life Insurance Company (the "Company").
The Contract may be sold to or used in connection with retirement plans,
including plans that qualify for special federal income tax treatment under the
Internal Revenue Code.
The Owner of a Contract may allocate Net Purchase Payments and Contract Values
to one or more of the Subaccounts of Valley Forge Life Insurance Company
Variable Annuity Separate Account (the "Variable Account"), or to the Guaranteed
Interest Option for one or more Guarantee Periods, or to both. Assets of each of
the 18 Subaccounts of the Variable Account are invested in a corresponding
investment portfolio (each, a "Fund") of Insurance Management Series, Variable
Insurance Products Fund, Variable Insurance Products Fund II, The Alger American
Fund, MFS Variable Insurance Trust, SoGen Variable Funds, Inc., and Van Eck
Worldwide Insurance Trust. The Guaranteed Interest Option guarantees a minimum
fixed rate of interest for specified periods of time, currently 1 year, 3 years,
5 years, 7 years, and 10 years.
The Contract Value will vary daily as a function of the investment performance
of the Subaccounts and any interest credited under the Guaranteed Interest
Option. The Company does not guarantee any minimum Variable Contract Value for
amounts allocated to the Variable Account. Annuity Payments and other values
provided by this Contract, when based on the Guaranteed Interest Option, are
subject to a Market Value Adjustment, the operation of which may result in
upward or downward adjustments in amounts withdrawn, surrendered, transferred,
paid on a Death Benefit, or applied to purchase Annuity Payments.
This prospectus sets forth the information regarding the Contract, the Variable
Account, and the Guaranteed Interest Option that a prospective investor should
know before purchasing a Contract. The prospectuses for the Funds, which provide
information regarding investment objectives and policies of each of the Funds,
should be read in conjunction with this prospectus. A Statement of Additional
Information having the same date as this prospectus and providing additional
information about the Contract and the Variable Account has been filed with the
Securities and Exchange Commission and is incorporated herein by reference. To
obtain a free copy of this document, call or write the Service Center.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. THIS
PROSPECTUS MUST BE ACCOMPANIED BY THE CURRENT PROSPECTUS FOR EACH OF THE FUNDS.
AN INVESTMENT IN A CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, NOR IS THE CONTRACT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN THE
CONTRACT INVOLVES CERTAIN RISKS, INCLUDING THE RISK OF LOSS OF PURCHASE PAYMENTS
(PRINCIPAL).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
June __, 1996
<PAGE>
TABLE OF CONTENTS
DEFINITIONS................................................................. 1
FEE TABLE................................................................... 4
SUMMARY..................................................................... 7
General Description................................................ 7
Purchasing a Contract.............................................. 7
Cancelling the Contract............................................ 8
Transfers.......................................................... 8
Withdrawals........................................................ 8
Surrenders......................................................... 8
Charges and Fees................................................... 9
CONDENSED FINANCIAL INFORMATION............................................. 9
THE COMPANY, THE VARIABLE ACCOUNT, THE FUNDS, AND
THE GUARANTEED INTEREST OPTION.............................................. 10
The Company........................................................ 10
The Variable Account............................................... 10
The Funds.......................................................... 11
The Guaranteed Interest Option..................................... 14
DESCRIPTION OF THE CONTRACT................................................. 17
Purchasing a Contract.............................................. 17
Cancelling the Contract............................................ 17
Crediting and Allocating Purchase Payments......................... 17
Variable Contract Value............................................ 18
Transfers.......................................................... 19
Withdrawals........................................................ 20
Surrenders......................................................... 21
Death Benefits..................................................... 22
Payments by the Company............................................ 24
Telephone Transaction Privileges................................... 24
CONTRACT CHARGES AND FEES................................................... 25
Surrender Charge (Contingent Deferred Sales Charge)................ 25
Annual Administration Fee.......................................... 26
Transfer Processing Fee............................................ 26
Taxes on Purchase Payments......................................... 26
Mortality and Expense Risk Charge.................................. 27
Administration Charge.............................................. 27
Fund Expenses...................................................... 27
Possible Charge for the Company's Taxes............................ 27
- i -
<PAGE>
SELECTING AN ANNUITY PAYMENT OPTION......................................... 28
Annuity Date....................................................... 28
Annuity Payment Dates.............................................. 28
Election and Changes of Annuity Payment Options.................... 28
Annuity Payments................................................... 29
Annuity Payment Options............................................ 30
ADDITIONAL CONTRACT INFORMATION............................................. 31
Ownership.......................................................... 31
Changing the Owner or Beneficiary.................................. 31
Misstatement of Age or Sex......................................... 32
Change of Contract Terms........................................... 32
Reports to Owners.................................................. 32
Miscellaneous...................................................... 33
YIELDS AND TOTAL RETURNS.................................................... 33
FEDERAL TAX CONSIDERATIONS.................................................. 35
Introduction....................................................... 35
Tax Status of the Contract......................................... 35
Taxation of Annuities.............................................. 36
Transfers, Assignments or Exchanges of a Contract.................. 38
Withholding........................................................ 39
Multiple Contracts................................................. 39
Taxation of Qualified Plans........................................ 39
Other Tax Consequences............................................. 40
OTHER INFORMATION........................................................... 40
Distribution of the Contracts...................................... 40
Administrative Services............................................ 40
Voting Privileges.................................................. 40
Legal Proceedings.................................................. 41
Company Holidays................................................... 41
Legal Matters...................................................... 41
Experts............................................................ 42
ADDITIONAL INFORMATION ABOUT VALLEY FORGE LIFE INSURANCE COMPANY ........... 42
History and Business............................................... 42
Selected Financial Data............................................ 42
Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 43
Results of Operations.............................................. 43
Liquidity and Capital Resources.................................... 43
Segment Information................................................ 43
Reinsurance........................................................ 44
Investments........................................................ 44
Competition........................................................ 44
Employees.......................................................... 44
Property........................................................... 44
State Regulation................................................... 44
Directors and Executive Officers................................... 45
- ii -
<PAGE>
Executive Compensation............................................. 47
FINANCIAL STATEMENTS OF VALLEY FORGE LIFE INSURANCE COMPANY................. 48
STATEMENT OF ADDITIONAL INFORMATION......................................... 49
APPENDIX A ................................................................ A-1
APPENDIX B................................................................. B-1
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
- iii -
<PAGE>
DEFINITIONS
ACCUMULATION UNIT: A unit of measure used to calculate Variable Contract Value.
ADJUSTED CONTRACT VALUE: The Contract Value plus or minus any applicable Market
Value Adjustment less purchase payment tax charges not previously deducted less
the annual administration fee.
AGE: The Age of any person on the birthday nearest the date for which Age is
determined.
ANNUITANT: The person or persons whose life (or lives) determines the Annuity
Payments payable under the Contract and whose death determines the death
benefit. With regard to joint and survivorship Annuity Payment Options, the
maximum number of joint Annuitants is two and provisions referring to the death
of an Annuitant mean the death of the last surviving Annuitant. Provisions
relating to an action by the Annuitant mean, in the case of joint Annuitants,
both Annuitants acting jointly.
ANNUITY DATE: The date on which Surrender Value or Adjusted Contract Value is
applied to purchase Annuity Units or a Fixed Annuity.
ANNUITY PAYMENT: One of several periodic payments made by the Company to the
Payee under an Annuity Payment Option.
ANNUITY PAYMENT DATE: The date each month, quarter, semi-annual period, or
year as of which the Company computes Annuity Payments. The Annuity Payment
Date(s) is shown on the Contract.
ANNUITY PAYMENT OPTION: The form of Annuity Payments selected by the Owner
under the Contract. The Annuity Payment Option is shown on the Contract.
ANNUITY UNIT: A unit of measure used to calculate Variable Annuity Payments.
BENCHMARK RATE OF RETURN: An annual rate of return shown on the Contract and
used by the Company to determine the degree of fluctuation in the amount of
Variable Annuity Payments in response to fluctuations in the net investment
return of selected Subaccounts by assuming (among other things) that the assets
in the Variable Account supporting the Contract will have a net annual
investment return over the anticipated Annuity Payment period equal to that rate
of return.
BENEFICIARY: The person(s) to whom the death benefit will be paid on the death
of the Owner or Annuitant prior to the Annuity Date.
CANCELLATION PERIOD: The period described on the cover page of the Contract
during which the Owner may return the Contract for a refund.
THE CODE: The Internal Revenue Code of 1986, as amended.
THE COMPANY: Valley Forge Life Insurance Company.
CONTINGENT ANNUITANT: The person designated by the Owner in the application who
becomes the Annuitant in the event that the Annuitant dies before the Annuity
Date while the Owner is still alive.
<PAGE>
CONTINGENT BENEFICIARY: The person(s) to whom the death benefit will be paid if
the Beneficiary (or Beneficiaries) is not living.
CONTRACT ANNIVERSARY: The same date in each Contract Year as the Contract
Effective Date.
- 1 -
CONTRACT EFFECTIVE DATE: The date on which the Company issues the Contract and
upon which the Contract becomes effective. The Contract Effective Date is shown
on the Contract and is used to determine Contract Years and Contract
Anniversaries.
CONTRACT YEAR: A twelve-month period beginning on the Contract Effective Date
or on a Contract Anniversary.
CONTRACT VALUE: The total amount invested under the Contract. It is the sum of
Variable Contract Value and the Guaranteed Interest Option Value.
DUE PROOF OF DEATH: Proof of death satisfactory to the Company. Due Proof of
Death may consist of the following if acceptable to the Company:
(a) a certified copy of the death record;
(b) a certified copy of a court decree reciting a finding of
death; or
(c) any other proof satisfactory to the Company.
FIXED ANNUITY PAYMENT: An Annuity Payment that is supported by the General
Account and does not vary in amount as a function of the investment return of
the Variable Account from one Annuity Payment Date to the next.
FUND: Any open-end management investment company or investment portfolio
thereof or unit investment trust or series thereof, in which a Subaccount
invests.
GENERAL ACCOUNT: The assets of the Company other than those allocated to the
Variable Account or any other separate account of the Company.
GIO ACCOUNT: Valley Forge Life Insurance Company Guaranteed Interest Option
Separate Account.
GUARANTEE AMOUNT: Before the Annuity Date, the amount equal to that part of any
Net Purchase Payment allocated to or any amount transferred to the Guaranteed
Interest Option for a designated Guarantee Period with a particular expiration
date (including interest thereon) less any withdrawals (including any applicable
surrender charges and any applicable purchase payment tax charge) or transfers
therefrom.
GUARANTEE PERIOD: A specific number of years for which the Company agrees to
credit a particular effective annual rate of interest.
GUARANTEED INTEREST OPTION: An investment option under the Contract supported
by the GIO Account. It is not part of nor dependent upon the investment
performance of the Variable Account.
GUARANTEED INTEREST OPTION VALUE: The sum of all Guarantee Amounts.
GUARANTEED INTEREST RATE: Unless a Market Value Adjustment is made, an
effective annual rate of interest that the Company will pay on a Guarantee
Amount.
HOME OFFICE: The Company's office at 401 Penn Street, Reading, PA 19601.
<PAGE>
MARKET VALUE ADJUSTMENT: A positive or negative adjustment made to any portion
of a Guarantee Amount upon the surrender, withdrawal, transfer or application to
an Annuity Payment Option of such portion of the Guarantee Amount prior to 30
days before the expiration of the Guarantee Period applicable to that Guarantee
Amount.
- 2 -
NET ASSET VALUE PER SHARE: The value per share of any Fund on any Valuation Day.
The method of computing the Net Asset Value Per Share is described in the
prospectus for the Fund.
NET PURCHASE PAYMENT: A purchase payment less any purchase payment tax charge
deducted from the purchase payment.
NON-QUALIFIED CONTRACT: A Contract that is not a "qualified contract."
OWNER: The person or persons who owns (or own) the Contract and who is (are)
entitled to exercise all rights and privileges provided in the Contract. The
maximum number of joint Owners is two. Provisions relating to action by the
Owner mean, in the case of joint Owners, both Owners acting jointly. In the
context of a Contract issued on a group basis, Owners refers to holders of
certificates under a group Contract.
PAYEE: The person entitled to receive Annuity Payments under the Contract.
QUALIFIED CONTRACT: A Contract that is issued in connection with a retirement
plan that qualifies for special federal income tax treatment under Sections 401,
408 or 457 of the Code.
SEC: The U.S. Securities and Exchange Commission.
SERVICE CENTER: The offices of the Company's administrative agent at 95 Bridge
Street (or P.O. Box 310), Haddam, Connecticut 06438.
SUBACCOUNT: A subdivision of the Variable Account, the assets of which are
invested in a corresponding Fund.
SUBACCOUNT VALUE: Before the Annuity Date, the amount equal to that part of any
Net Purchase Payment allocated to the Subaccount and any amount transferred to
that Subaccount, adjusted by interest income, dividends, net capital gains or
losses, realized or unrealized, and decreased by withdrawals (including any
applicable surrender charges and any applicable purchase payment tax charge) and
any amounts transferred out of that Subaccount.
SURRENDER VALUE: The Adjusted Contract Value less any applicable surrender
charges.
VALUATION DAY: For each Subaccount, each day on which the New York Stock
Exchange is open for business except for certain holidays listed in the
prospectus and days that a Subaccount's corresponding Fund does not value its
shares.
VALUATION PERIOD: The period that starts at the close of regular trading on the
New York Stock Exchange on any Valuation Day and ends at the close of regular
trading on the next succeeding Valuation Day.
VARIABLE ACCOUNT: Valley Forge Life Insurance Company Variable Annuity Separate
Account.
VARIABLE CONTRACT VALUE: The sum of all Subaccount Values.
VARIABLE ANNUITY PAYMENT: An Annuity Payment that may vary in amount from one
Annuity Payment Date to the next as a function of the investment experience of
one or more Subaccounts selected by the Owner to support such payments.
WRITTEN NOTICE: A notice or request submitted in writing in a form satisfactory
to the Company that is signed by the Owner and received at the Service Center.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
FEE TABLE
<S> <C>
Contract Owner Transaction Expenses
Sales load imposed on purchase payments........................................................... 0%
Maximum Surrender Charge (as a percentage of purchase payments surrendered or withdrawn) ......... 7%
Transfer Processing Fee (each, after first 12 in a Contract Year) ................................ $25
Annual Administration Fee (waived if Contract Value exceeds $50,000) $30
Variable Account Annual Expenses
(as a percentage of net assets)
Mortality and Expense Risk Charge ............................................................... 1.25%
Administration Charge............................................................................ 0.15%
-----
Total Variable Account Expenses.................................................................. 1.40%
</TABLE>
<TABLE>
<CAPTION>
Annual Fund Expenses
(as a percentage of Fund average net assets)
Management
(Advisory) Other Total Annual
Fees Expenses Expenses
Insurance Management Series:
<S> <C> <C> <C>
Corporate Bond Fund 0._% 0._% 0._%
Prime Money Fund 0._% 0._% 0._%
Utility Fund 0._% 0._% 0._%
Variable Insurance Products Fund and
Variable Insurance Products Fund II:
VIP Equity-Income Portfolio 0._% 0._% 0._%
VIP II Asset Manager Portfolio 0._% 0._% 0._%
VIP II Contrafund Portfolio 0._% 0._% 0._%
VIP II Index 500 Portfolio 0._% 0._% 0._%
The Alger American Fund:
Alger American Growth Portfolio 0._% 0._% 0._%
Alger American MidCap Growth Portfolio 0._% 0._% 0._%
Alger American Small Capitalization Portfolio 0._% 0._% 0._%
MFS Variable Insurance Trust:
MFS Emerging Growth Series 0._% 0._% 0._%
MFS Growth With Income Series 0._% 0._% 0._%
- 4 -
<PAGE>
MFS Limited Maturity Series 0._% 0._% 0._%
MFS Research Series 0._% 0._% 0._%
MFS Total Return Series 0._% 0._% 0._%
SoGen Variable Funds, Inc.:
SoGen Overseas Portfolio 0._% 0._% 0._%
Van Eck Worldwide Insurance Trust:
Emerging Markets Fund 0._% 0._% 0._%
Gold and Natural Resources Fund 0._% 0._% 0._%
</TABLE>
Taxes on purchase payments, currently ranging from 0% to 3.5% of purchase
payments, may be applicable, depending upon the laws of various jurisdictions.
The above tables are intended to assist the Owner in understanding the costs and
expenses that he or she will bear directly or indirectly. The table reflects the
anticipated expenses of the Variable Account and reflect the actual expenses for
each Fund for the year ended December 31, 1995. Expenses for these Funds are
estimates and are not based on past experience. For a more complete description
of the various costs and expenses, see "CONTRACT CHARGES AND FEES" and the
prospectuses for each Fund.
Examples
If you surrender your Contract at the end of the applicable time period, you
would pay the following expenses on a $1,000 purchase payment, assuming a 5%
annual rate of return on assets:
One Year Three Years
Corporate Bond Subaccount $__ $__
Prime Money Subaccount $__ $__
Utility Subaccount $__ $__
VIP Equity-Income Subaccount $__ $__
VIP II Asset Manager Subaccount $__ $__
VIP II Contrafund Subaccount $__ $__
VIP II Index 500 Subaccount $__ $__
Alger American Growth Subaccount $__ $__
Alger American MidCap Growth Subaccount $__ $__
Alger American Small Capitalization Subaccount $__ $__
MFS Emerging Growth Subaccount $__ $__
MFS Growth With Income Subaccount $__ $__
MFS Limited Maturity Subaccount $__ $__
MFS Research Subaccount $__ $__
MFS Total Return Subaccount $__ $__
SoGen Overseas Subaccount $__ $__
- 5 -
<PAGE>
Emerging Markets Subaccount $__ $__
Gold and Natural Resources Subaccount $__ $__
================================================================================
If you do not surrender your Contract or if you annuitize, you would pay the
following expenses on a $1,000 purchase payment, assuming a 5% annual rate of
return on assets:
<TABLE>
<CAPTION>
One Year Three Years
<S> <C> <C>
Corporate Bond Subaccount $__ $__
Prime Money Subaccount $__ $__
Utility Subaccount $__ $__
VIP Equity-Income Subaccount $__ $__
VIP II Asset Manager Subaccount $__ $__
VIP II Contrafund Subaccount $__ $__
VIP II Index 500 Subaccount $__ $__
Alger American Growth Subaccount $__ $__
Alger American MidCap Growth Subaccount $__ $__
Alger American Small Capitalization Subaccount $__ $__
MFS Emerging Growth Subaccount $__ $__
MFS Growth With Income Subaccount $__ $__
MFS Limited Maturity Subaccount $__ $__
MFS Research Subaccount $__ $__
MFS Total Return Subaccount $__ $__
SoGen Overseas Subaccount $__ $__
Emerging Markets Subaccount $__ $__
Gold and Natural Resources Subaccount $__ $__
================================================================================
</TABLE>
The examples provided above assume that no transfer processing fees or purchase
payment taxes have been assessed. The examples also assume that the annual
administration fee is $30 and that the Contract Value per Contract is $10,000,
which translates the annual administration fee into an assumed .30% charge for
purposes of the examples based on a $1,000 investment.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE 5% ANNUAL
RETURN ASSUMED IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE GREATER OR LESS THAN THE ASSUMED
RATE.
- 6 -
<PAGE>
SUMMARY
GENERAL DESCRIPTION
This prospectus has been designed to provide prospective Owners with the
information necessary to decide whether or not to purchase a Contract. This
summary provides a concise description of the more significant aspects of the
Contract. Further detail is provided in this prospectus, the related Statement
of Additional Information, the Contract, and the prospectuses of the Funds. For
further information, contact the Service Center.
In many jurisdictions, the Contract is issued directly to individuals. In
certain jurisdictions, however, the Contract is only available as a group
contract. Group Contracts are issued to or on behalf of groups such as employers
for their employees. Individuals who are part of groups for which a Contract is
issued receive a certificate that recites substantially all of the provisions of
the Group Contract. Throughout this prospectus, the term "Contract" refers to
individual Contracts, Group Contracts and certificates for Group Contracts.
Owners may allocate all or a portion of Net Purchase Payments or transfer
Contract Value among several Subaccounts of the Variable Account. The Contract
also offers a Guaranteed Interest Option under which Owners may allocate all or
a portion of Net Purchase Payments and transfer Contract Value among several
Guarantee Periods selected by the Owner. The Company currently offers Guarantee
Periods with durations of 1, 3, 5, 7, and 10 years. If the amount allocated or
transferred remains in a Guarantee Period until the expiration date of a
Guarantee Period, its value will be equal to the amount originally allocated or
transferred, multiplied on an annually compounded basis, by its Guaranteed
Interest Rate. Any surrender, withdrawal, transfer, or annuitization made prior
to 30 days before the expiration of a Guarantee Period will be subject to a
Market Value Adjustment that may increase or decrease the Guarantee Amount (or
portion thereof) being surrendered, withdrawn, transferred, or annuitized.
Depending on the size of the Market Value Adjustment, such an adjustment may
reduce the Guarantee Amount (or portion thereof) to less than the Net Purchase
Payment allocated to or Contract Value transferred to a Guarantee Period. (See
"THE COMPANY, THE VARIABLE ACCOUNT, THE FUNDS, AND THE GUARANTEED INTEREST
OPTION -- The Guaranteed Interest Option - Market Value Adjustment.")
The Company makes no promise that the Contract Value will increase. Depending on
the investment experience of the Subaccounts and interest credited to various
Guarantee Amounts, the Contract Value, Adjusted Contract Value, Surrender Value
and the death benefit may increase or decrease on any Valuation Day. Owners bear
the investment risk for amounts invested in the Subaccounts and for Guarantee
Amounts surrendered, withdrawn, transferred or applied to an Annuity Payment
Option before the 30-day period prior to the expiration of a Guarantee Period.
The Contract also offers a choice of Annuity Payment Options to which Owners may
apply the Adjusted Contract Value as of the Annuity Date. Beneficiaries may also
apply the death benefit to certain Annuity Payment Options. An Owner may change
the Annuity Date within certain limits.
<PAGE>
PURCHASING A CONTRACT
The minimum initial purchase payment for a Contract is $2,000. The minimum
additional purchase payment the Company will accept is $100. The Company may
refuse to accept additional purchase payments at any time for any reason.
The initial Net Purchase Payment is allocated to each Subaccount or to Guarantee
Periods of the Guaranteed Interest Option, or to both, as specified on the
application, unless the Contract is issued in a state that requires the return
of purchase payments during the Cancellation Period. In those states, that
portion of an Owner's initial Net Purchase Payment allocated to a Subaccount is
allocated to the Prime Money Subaccount (the "Money Market Subaccount") for a
- 7 -
<PAGE>
period equal to the number of days in the Cancellation Period. At the expiration
of this period, such portion of the Net Purchase Payment, as adjusted to reflect
the investment performance of the Money Market Subaccount during this period, is
then allocated to the Subaccounts based on the proportion that the Owner's
allocation percentage shown in the application bears to the Variable Contract
Value. (See "DESCRIPTION OF THE CONTRACT -- Cancelling the Contract.")
If an Owner elects to invest in a particular Subaccount or Guarantee Period, at
least 1% of the Net Purchase Payment must be allocated to that Subaccount or
Guarantee Period. All percentage allocations must be in whole numbers. In
addition, allocations to a Guarantee Period must be at least $500. The Company
allocates any additional Net Purchase Payments among the Subaccounts and the
Guarantee Periods in accordance with the allocation schedule in effect when such
Net Purchase Payment is received at the Service Center unless it is accompanied
by Written Notice directing a different allocation. (See "Crediting and
Allocating Purchase Payments.")
CANCELLING THE CONTRACT
At any time during the Cancellation Period, an Owner may cancel the Contract and
receive a refund equal to the Contract Value plus fees or charges deducted
except for the mortality and expense risk charge and the administration charge.
However, if required by state law, the Company will return the purchase payments
made. The Cancellation Period is a 10-day period of time beginning when the
Contract is received by an Owner. Some states may require that the Company
provide a longer Cancellation Period. (See "DESCRIPTION OF THE CONTRACT --
Cancelling the Contract.")
TRANSFERS
Prior to the Annuity Date, an Owner may transfer all or part of any Subaccount
Value to another available Subaccount(s) or to one or more Guarantee Periods, or
transfer all or part of any Guarantee Amount to any available Subaccount(s) or
other available Guarantee Periods, subject to certain restrictions. (See
"DESCRIPTION OF THE CONTRACT -- Transfers.")
WITHDRAWALS
Upon Written Notice prior to the Annuity Date, an Owner may, subject to certain
restrictions, withdraw part of the Surrender Value. Withdrawals of Surrender
Value may result in the Company deducting from the remaining Contract Value a
Market Value Adjustment, any applicable surrender charge and any applicable
purchase payment tax charge. (See "DESCRIPTION OF THE CONTRACT -- Withdrawals.")
A withdrawal may have adverse federal income tax consequences including the
possibility of being subject to a penalty tax. (See "FEDERAL TAX
CONSIDERATIONS.")
SURRENDERS
Upon Written Notice prior to the Annuity Date, an Owner may surrender the
Contract and receive its Surrender Value. An Owner may elect to have the
Surrender Value paid in a single sum or under an Annuity Payment Option. (See
"DESCRIPTION OF THE CONTRACT -- Surrenders.") Surrenders may have adverse
federal income tax consequences including the possibility of being subject to a
penalty tax. (See "FEDERAL TAX CONSIDERATIONS.")
- 8 -
<PAGE>
CHARGES AND FEES
The following charges and fees are assessed under the Contracts:
Surrender Charge. If a purchase payment is withdrawn or surrendered (or received
by a Payee as part of a lump sum payment) within five full calendar years since
the date the purchase payment was received, the Company assesses a surrender
charge. During the first five Contract Years, the Company also assesses a
surrender charge if a purchase payement is applied, as part of Contract Value,
to an Annuity Payment Option. The surrender charge is 7% of the purchase payment
if surrendered or withdrawn within two full years after the purchase payment was
received and reduces by 1% each year for the next three years and is 0% after
five full years following receipt of the purchase payment. No surrender charge
is assessed upon the withdrawal or surrender (or payment) of Contract Value in
excess of aggregate purchase payments (less prior withdrawals of purchase
payments). For purposes of determining the surrender charge, it is assumed that
purchase payments are surrendered or withdrawn before any Contract Value in
excess of purchase payments (less prior withdrawals of purchase payments) and
purchase payments are considered withdrawn on a first-in-first-out basis. (See
"Surrender Charge (Contingent Deferred Sales Charge).")
Administration Charge. The Company makes a daily charge of 0.000411%
(approximately equivalent to an effective annual rate of 0.15%) of the Variable
Account's net assets to cover a portion of the Company's Contract administration
costs. (See "Administration Charge.")
Mortality and Expense Risk Charge. The Company makes a daily charge of
0.003446% (approximately equivalent to an effective annual rate of 1.25%) of the
Variable Account's net assets to compensate the Company for assuming certain
mortality and expense risks. (See "Mortality and Expense Risk Charge.")
Annual Administration Fee. The Company deducts an annual administration fee of
$30 per Contract Year if an Owner's Contract Value is less than $50,000 at
the time of deduction. (See "Annual Administration Fee.")
Transfer Processing Fee. A $25 charge is assessed by the Company for each
transfer in excess of 12 during a Contract Year. (See "Transfer Processing
Fee.")
Taxes on Purchase Payments. Generally, taxes on purchase payments, if any, are
incurred as of the Annuity Date, and a charge for taxes on purchase payments is
deducted from the Contract Value as of that date. These taxes range from 0% to
3.5% of purchase payments. (See "Taxes on Purchase Payments.")
Expenses of the Funds. The investment experience of each Subaccount reflects
that of the Fund whose shares it holds. The investment experience of each Fund,
in turn, reflects its fees and other operating expenses. Please read the
prospectus for each of the Funds for details.
CONDENSED FINANCIAL INFORMATION
There is no condensed financial information included for the Variable Account
because, as of the date of this prospectus, the Variable Account had not yet
commenced operations. The audited financial statements of the Company (as well
as the auditors' reports thereon) appear elsewhere herein.
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<PAGE>
THE COMPANY, THE VARIABLE ACCOUNT, THE FUNDS, AND
THE GUARANTEED INTEREST OPTION
THE COMPANY
The Company is a life insurance company organized under the laws of the State of
Pennsylvania in 1956 and is authorized to transact business in the District of
Columbia, Puerto Rico, Guam and all states except New York. The Company's home
office is located at 401 Penn St., Reading, Pennsylvania 19601, and its
executive office is located at CNA Plaza, Chicago, Illinois 60685. The Company
is a wholly-owned subsidiary of Continental Assurance Company ("CAC"), a life
insurance company which, as of December 31, 1994, had assets of approximately
$11.1 billion. Subject to a coinsurance pooling agreement (a type of reinsurance
arrangement) with CAC, the Company assumes all insurance risks under the
Contracts, and the Company's assets, which as of December 31, 1994 exceeded
$507.7 million, support the benefits under the Contracts. See "ADDITIONAL
INFORMATION ABOUT VALLEY FORGE LIFE INSURANCE COMPANY" for more detail regarding
the Company.
THE VARIABLE ACCOUNT
The Variable Account is a separate investment account of the Company established
under Pennsylvania law on October 18, 1995. The Company owns the assets of the
Variable Account. These assets are held separate from the Company's General
Account and its other separate accounts. That portion of the Variable Account's
assets that is equal to the reserves and other Contract liabilities of the
Variable Account is not chargeable with liabilities arising out of any other
business the Company may conduct. If the assets exceed the required reserves and
other contract liabilities, the Company may transfer the excess to the Company's
General Account. The Variable Account's assets will at all times, equal or
exceed the sum of the Subaccount Values of all Contracts funded by the Variable
Account.
The Variable Account is registered with the SEC under the Investment Company Act
of 1940 (the "1940 Act") as a unit investment trust and meets the definition of
a "separate account" under the federal securities laws. Such registration does
not involve any supervision by the SEC of the management of the Variable Account
or the Company. The Variable Account also is governed by the laws of
Pennsylvania, the Company's state of domicile, and may also be governed by laws
of other states in which the Company does business.
The Variable Account has 18 Subaccounts, each of which invests in shares of a
corresponding Fund. Income, gains and losses, realized or unrealized, from
assets allocated to a Subaccount are credited to or charged against that
Subaccount without regard to other income, gains or losses of the Company.
Changes to the Variable Account. Where permitted by applicable law, the Company
may make the following changes to the Variable Account:
1. Any changes required by the 1940 Act or other applicable law
or regulation;
2. combine separate accounts, including the Variable Account;
3. add new subaccounts to or remove existing Subaccounts from the
Variable Account or combine Subaccounts;
<PAGE>
4. make Subaccounts (including new Subaccounts) available to such
classes of Contracts as the Company may determine;
5. add new Funds or remove existing Funds;
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<PAGE>
6. substitute new Funds for any existing Fund if shares of the
Fund are no longer available for investment or if the Company
determines that investment in a Fund is no longer appropriate
in light of the purposes of the Variable Account;
7. deregister the Variable Account under the 1940 Act if such
registration is no longer required; and
8. operate the Variable Account as a management investment
company under the 1940 Act or as any other form permitted by
law.
No such changes will be made without any necessary approval of the SEC and
applicable state insurance departments. Owners will be notified of any changes.
THE FUNDS
Each Subaccount invests in a corresponding Fund. Each of the Funds is either an
open-end diversified management investment company or a separate investment
portfolio of such a company and is managed by a registered investment adviser.
The Funds as well as a brief description of their investment objectives are
provided below.
Insurance Management Series
---------------------------
The Corporate Bond, Prime Money and Utility Subaccounts each invest in
shares of corresponding Funds (i.e., investment portfolios) of Insurance
Management Series ("IMS"). IMS issues five "series" or classes of shares, each
of which represents an interest in a Fund of IMS. Three of these series of
shares are available as investment options under the Contracts. The investment
objectives of these Funds are set forth below.
Corporate Bond Fund. This Fund invests primarily in lower-rated
fixed-income securities that seek to achieve high current income.
Prime Money Fund. This Fund invests in money market instruments
maturing in thirteen months or less to achieve current income
consistent with stability of principal and liquidity.
Utility Fund. This Fund invests in equity and debt securities of
utility companies to achieve high current income and moderate capital
appreciation.
IMS is advised by Federated Advisers.
Variable Insurance Products Fund and Variable Insurance Products Fund II
------------------------------------------------------------------------
The Equity-Income Subaccount invests in shares of a corresponding Fund
(i.e., investment portfolios) of Variable Insurance Products Fund ("VIP Fund").
VIP Fund issues five "series" or classes of shares, each of which represents an
interest in a Fund of VIP Fund. One of these series of shares is available as an
investment option under the Contracts. Asset Manager, Contrafund, and Index 500
Subaccounts each invest in shares of corresponding Funds (i.e., investment
portfolios) of Variable Insurance Products Fund II ("VIP Fund II"). VIP Fund II
<PAGE>
issues five "series" or classes of shares, each of which represents an interest
in a Fund of VIP Fund II. Three of these series of shares are available as
investment options under the Contracts. The investment objectives of these Funds
are set forth below.
Asset Manager Portfolio. This Fund seeks high total return with reduced
risk over the long-term by allocating its assets among domestic and
foreign stocks, bonds and short-term fixed-income instruments.
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<PAGE>
Contrafund Portfolio. This Fund seeks capital appreciation over the
long-term by investing in companies that are undervalued or
out-of-favor.
Equity-Income Portfolio. This Fund seeks current income by investing
primarily in income producing equity securities. In choosing these
securities, the Fund also considers the potential for capital
appreciation.
Index 500 Portfolio. This Fund seeks investment results that correspond
to the total return of common stocks publicly traded in the United
States, as represented by the Standard & Poor's 500 Composite Index of
500 Common Stocks.
VIP Fund and VIP Fund II are each advised by Fidelity Management &
Research Company.
The Alger American Fund
-----------------------
Alger American Growth, Alger American MidCap Growth and Alger American
Small Capitalization Subaccounts each invest in shares of corresponding Funds
(i.e., investment portfolios) of The Alger American Fund ("AAF"). AAF issues ___
"series" or classes of shares, each of which represents an interest in a Fund of
AAF. Three of these series of shares are available as investment options under
the Contracts. The investment objectives of these Funds are set forth below.
Alger American Growth Portfolio. This Fund seeks long-term capital
appreciation by investing in a diversified, actively managed portfolio
of equity securities, primarily of companies with total market
capitalization of $ 1 billion or greater.
Alger American MidCap Growth Portfolio. This Fund seeks long-term
capital appreciation by investing in a diversified, actively managed
portfolio of equity securities, primarily of companies with total
market capitalization between $750 million and $3.5 billion.
Alger American Small Capitalization Portfolio. This Fund seeks
long-term capital appreciation by investing in a diversified, actively
managed portfolio of equity securities, primarily of companies with
total market capitalization of less than $1 billion.
AAF is advised by Fred Alger Management, Inc.
<PAGE>
MFS Variable Insurance Trust
----------------------------
The MFS Emerging Growth, MFS Growth with Income, MFS Limited Maturity,
MFS Research and MFS Total Return Subaccounts each invest in shares of
corresponding Funds (i.e., investment portfolios) of MFS Variable Insurance
Trust ("MFSVIT"). MFSVIT issues 12 "series" or classes of shares, each of which
represents an interest in a Fund of MFSVIT. Five of these series of shares are
available as investment options under the Contracts. The investment objectives
of these Funds are set forth below.
MFS Emerging Growth Series. This Fund seeks to obtain long-term growth
of capital by investing primarily in common stocks of small and
medium-sized companies that are early in their life cycle but which
have the potential to become major enterprises.
MFS Growth With Income Series. This Fund seeks to provide reasonable
current income and long-term growth of capital and income.
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<PAGE>
MFS Limited Maturity Series. This Fund seeks to provide as high a level
of current income as is believed to be consistent with prudent
investment risk, with capital protection as a secondary objective.
MFS Research Series. This Fund seeks to provide long-term growth of
capital and future income.
MFS Total Return Series. This Fund seeks primarily to provide
above-average income consistent with prudent employment of capital and
secondarily to provide a reasonable opportunity for growth of capital
and income.
MFSVIT is advised by Massachusetts Financial Services Company.
SoGen Variable Funds, Inc.
-------------------------
The SoGen Overseas Subaccount invests in shares of a corresponding Fund
(i.e., investment portfolio) of SoGen Variable Funds, Inc. ("SGVF"). SGVF issues
___ "series" or classes of shares, each of which represents an interest in a
Fund of SGVF. One of these series of shares is available as an investment option
under the Contracts. The investment objective of this Fund is set forth below.
SoGen Overseas Portfolio. This Fund seeks long-term growth of capital
by investing primarily in securities of small and medium size non-U.S.
companies.
SGVF is advised by Societe Generale Asset Management Corp.
Van Eck Worldwide Insurance Trust
---------------------------------
The Emerging Market and Gold and Natural Resources Subaccounts each
invest in shares of corresponding Funds (i.e., investment portfolios) of Van Eck
Worldwide Insurance Trust ("VEWIT"). VEWIT issues ___ "series" or classes of
shares, each of which represents an interest in a Fund of VEWIT. Two of these
series of shares are available as investment options under the Contracts. The
investment objectives of these Funds are set forth below.
Emerging Markets Fund. This Fund seeks capital appreciation by
investing primarily in equity securities in emerging markets around the
world.
Gold and Natural Resources Fund. This Fund seeks long-term capital
appreciation by investing in equity and debt securities of companies
engaged in the exploration, development, production and distribution of
gold and other natural resources such as strategic and other metals,
minerals, forest products, oil, natural gas and coal.
VEWIT is advised by Van Eck Associates Corporation.
NO ONE CAN ASSURE THAT ANY FUND WILL ACHIEVE ITS STATED OBJECTIVES AND
POLICIES.
<PAGE>
More detailed information concerning the investment objectives, policies and
restrictions of the Funds, the expenses of the Funds, the risks attendant to
investing in the Funds and other aspects of their operations can be found in the
current prospectus for each Fund which accompanies this prospectus and the
current statement of additional information for the Funds. The Funds'
prospectuses should be read carefully before any decision is made concerning the
allocation of Net Purchase Payments or transfers among the Subaccounts.
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<PAGE>
Please note that not all of the Funds described in the prospectuses for the
Funds are available with the Contract. Moreover, the Company cannot guarantee
that each Fund will always be available for its variable annuity contracts, but
in the unlikely event that a Fund is not available, the Company will take
reasonable steps to secure the availability of a comparable fund. Shares of each
Fund are purchased and redeemed at net asset value, without a sales charge.
The Company has entered into agreements with the investment advisers of several
of the Funds pursuant to which each such investment adviser pays the Company a
servicing fee based upon an annual percentage of the average aggregate net
assets invested by the Company on behalf of the Variable Account. These
agreements reflect administrative services provided to the Funds by the Company.
Payments of such amounts by an adviser do not increase the fees paid by the
Funds or their shareholders.
Shares of the Funds are sold to separate accounts of insurance companies that
are not affiliated with the Company or each other, a practice known as "shared
funding." They are also sold to separate accounts to serve as the underlying
investment for both variable annuity contracts and variable life insurance
contracts, a practice known as "mixed funding." As a result, there is a
possibility that a material conflict may arise between the interests of Owners,
whose Contract Values are allocated to the Variable Account, and of owners of
other contracts whose contract values are allocated to one or more other
separate accounts investing in any one of the Funds. Shares of some of the Funds
may also be sold directly to certain qualified pension and retirement plans
qualifying under Section 401 of the Code. As a result, there is a possibility
that a material conflict may arise between the interests of Owners or owners of
other contracts (including contracts issued by other companies), and such
retirement plans or participants in such retirement plans. In the event of any
such material conflicts, the Company will consider what action may be
appropriate, including removing the Fund from the Variable Account or replacing
the Fund with another Fund. There are certain risks associated with mixed and
shared funding and with the sale of shares to qualified pension and retirement
plans, as disclosed in each Fund's prospectus.
THE GUARANTEED INTEREST OPTION
The Guaranteed Interest Option is an investment option available under the
Contract and is supported by the Company's General Account and the GIO Account
(described below). All or a portion of an Owner's Net Purchase Payments may be
allocated to and transfers of Contract Value may be made to Guarantee Periods
under the Guaranteed Interest Option. Through the Guaranteed Interest Option,
the Company offers specified effective annual rates of interest (Guaranteed
Interest Rates) that are credited daily and available for specified periods of
time selected by an Owner (Guarantee Periods). Although the Guaranteed Interest
Rate may differ among Guarantee Periods, it will never be less than the
effective annual rate shown in the Contract.
Interests issued by the Company in connection with the Guaranteed Interest
Option have been registered under the Securities Act of 1933, but neither the
Guaranteed Interest Option, the GIO Account, nor the General Account has been
registered as an investment company under the 1940 Act. Accordingly, neither the
Guaranteed Interest Option, the GIO Account, nor the General Account, nor any
interest therein are generally subject to regulation under the 1940 Act.
<PAGE>
Initial Guarantee Periods begin on the date as of which a Net Purchase Payment
is allocated to or a portion of Contract Value is transferred to the Guarantee
Period, and end when the number of years in the Guarantee Period elected
(measured from the end of the calendar month in which the amount was allocated
or transferred to the Guarantee Period) has elapsed. The last day of the
Guarantee Period is the expiration date for that Guarantee Period. Subsequent
Guarantee Periods begin on the first day following the expiration date of a
previous Guarantee Period.
Allocations of Net Purchase Payments and transfers of Contract Value to the
Guaranteed Interest Option may have different applicable Guaranteed Interest
Rates depending on the timing of such allocations or transfers. However, the
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<PAGE>
applicable Guaranteed Interest Rate does not change during a Guarantee Period.
If the allocated or transferred amount remains in the Guaranteed Interest Option
until the end of the applicable Guarantee Period, its value will be equal to the
amount originally allocated or transferred, multiplied, on an annually
compounded basis, by its Guaranteed Interest Rate. If a Guarantee Amount is
surrendered, withdrawn, transferred, or applied to an Annuity Payment Option
prior to 30 days before the expiration of the Guarantee Period, the Guaranteed
Interest Rate for that Guarantee Period is subject to a Market Value Adjustment,
as described below, the application of which may result in the payment of an
amount less than the amount originally allocated or transferred to the Guarantee
Period.
The Company will notify Owners in writing at least 30 days prior to the
expiration date of any Guarantee Period about the then currently available
Guarantee Periods and the Guaranteed Interest Rates applicable to such Guarantee
Periods. A new Guarantee Period of the same duration as the previous Guarantee
Period will commence automatically on the first day following the expiring
Guarantee Period unless the Company receives Written Notice prior to the start
of the new Guarantee Period of the Owner's election of a different Guarantee
Period from among those being offered by the Company at that time, or
instructions to transfer all or a portion of the expiring Guarantee Amount to a
Subaccount. If the Company does not receive such Written Notice and is not
offering a Guarantee Period of the same duration as the expiring Guarantee
Period or if the duration of the expiring Guarantee Period would, if renewed,
extend beyond the Annuity Date, then a new Guarantee Period of one year will
commence automatically on the first day following the expiring Guarantee Period.
The minimum Guarantee Amount is $500.
To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods that differ from those available when an Owner's
Contract was issued. The Company also reserves the right, at any time, to stop
accepting Net Purchase Payment allocations or transfers of Contract Value to a
particular Guarantee Period. Since the specific Guarantee Periods available may
change periodically, please contact the Service Center to determine the
Guarantee Periods currently being offered.
GIO Account. The assets in the GIO Account are used to support the values and
benefits under the Guaranteed Interest Option of the Contract and similar
contracts. The Company owns the assets in the GIO Account and holds such assets
separately from other Company assets and from the General Account. The portion
of the assets of the GIO Account equal to the reserves and other contract
liabilities of the GIO Account are not chargeable with liabilities that arise
from any other business that the Company conducts. The Company may transfer to
the General Account any assets of the GIO Account that are in excess of such
reserves and other liabilities.
Under Pennsylvania insurance law, the Company is required to maintain assets in
the GIO Account at least equal to the reserves and other contract liabilities of
the GIO Account. In the unlikely event of liquidation of the Company, if the
Company cannot satisfy all of its insurance obligations, Owners with Guaranteed
Interest Option Value will have a priority claim against assets of the GIO
Account equal to its liabilities, and a claim against the Company's general
account for any remaining Company liabilities. Thus, the GIO Account represents
a pool of assets that provides an additional measure of assurance that Owners
allocating Net Purchase Payments and Contract Value to the Guaranteed Interest
Option will receive full payment of benefits attributable to Guaranteed Interest
Option.
<PAGE>
Owners allocating Net Purchase Payments and/or Contract Value to the Guaranteed
Interest Option do not participate in the investment performance of assets of
the GIO Account, and this performance does not determine the Guaranteed Interest
Option Value or benefits relating thereto. The Guaranteed Interest Option
provides values and benefits based only upon the Net Purchase Payments and
Contract Values allocated thereto, the Guaranteed Interest Rate credited on such
amounts, and any charges or Market Value Adjustments imposed on such amounts in
accordance with the terms of the Contract.
- 15 -
<PAGE>
Market Value Adjustment. A Market Value Adjustment reflects the relationship
between: (i) the current Guaranteed Interest Rate that the Company is crediting
for a Guarantee Period equal to the time remaining in the Guarantee Period from
which the Guarantee Amount is requested to be surrendered, withdrawn,
transferred or annuitized; and (ii) the Guaranteed Interest Rate being applied
to the Guarantee Period from which the Guarantee Amount will be surrendered,
withdrawn, transferred or annuitized. Any surrender, withdrawal, transfer or
application to an Annuity Payment Option of a Guarantee Amount is subject to a
Market Value Adjustment that may be positive or negative, unless the effective
date of the surrender, withdrawal, transfer or application is within 30 days
prior to the end of a Guarantee Period. The Market Value Adjustment will be
applied after the deduction of any applicable annual administration fee or
transfer processing fee, and before the deduction of any applicable surrender
charge or charge for taxes on purchase payments (also referred to as a "premium
tax" charge).
Generally, if the Guaranteed Interest Rate for the selected Guarantee Period is
lower than the Guaranteed Interest Rate currently being offered for new
Guarantee Periods of a duration equal to the balance of the selected Guarantee
Period as of the date that the Market Value Adjustment is applied, then the
application of the Market Value Adjustment will result in the payment, upon
surrender, withdrawal, transfer or application of amounts to an Annuity Payment
Option, of an amount less than the Guarantee Amount (or portion thereof) being
surrendered, withdrawn, transferred or applied to an Annuity Payment Option, or
may even result in the payment of an amount less than the Net Purchase Payment
allocated to or the portion of Contract Value transferred to the Guarantee
Period. Similarly, if the Guaranteed Interest Rate for the selected Guarantee
Period is higher than the Guaranteed Interest Rate currently being offered for
new Guarantee Periods of a duration equal to the balance of the selected
Guarantee Period as of the date that the Market Value Adjustment is applied,
then the application of the Market Value Adjustment will result in the payment,
upon surrender, withdrawal, transfer or application of amounts to an Annuity
Payment Option, of an amount greater than the Guarantee Amount (or portion
thereof) being surrendered, withdrawn, transferred or applied to an Annuity
Payment Option.
The Market Value Adjustment is computed by multiplying the amount being
surrendered, withdrawn, transferred, or applied to an Annuity Payment Option,
by the Market Value Adjustment Factor. The Market Value Adjustment Factor is
calculated as follows:
<PAGE>
Market Value Adjustment = Amount multiplied by
[[(1+a)/(1+b)]^n/12 -1]
where:
"Amount" is the amount being surrendered, withdrawn, transferred or
applied to an Annuity Payment Option less any applicable
annual administration fees or transfer processing fees;
"a" is the Guaranteed Interest Rate currently being credited to the
"Amount";
"b" is the Guaranteed Interest Rate that is currently being offered for a
Guarantee Period of duration equal to the time remaining to the
expiration of the Guarantee Period for the Guarantee Amount from which
the "Amount" is taken. Where the time remaining to the expiration of
the Guarantee Period is not 1, 3, 5, 7, or 10 years, "b" is the rate
found by linear interpolation of the rate for the Guarantee Period
having the duration closest to the time remaining or, if the time
remaining is less than 1 year, "b" is the rate for a 1 year period; and
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<PAGE>
"n" is the number of complete months remaining before the expiration of the
Guarantee Period for the Guarantee Amount from which the "Amount" is
taken.
Examples of computing the Market Value Adjustment are set forth in Appendix A.
DESCRIPTION OF THE CONTRACT
PURCHASING A CONTRACT
A prospective Owner may purchase a Contract by submitting an application through
a licensed agent of the Company who is also a representative of a broker-dealer
having a selling agreement with CNA Investor Services, Inc. ("CNA/ISI"), the
principal underwriter for the Contracts. The maximum Age for Owners on the
Contract Effective Date is 85. An initial purchase payment must be delivered to
the Service Center along with the Owner's application. The minimum initial
purchase payment is $2,000. The minimum additional purchase payment the Company
will accept is $100. Unless the Company gives its prior approval, it will not
accept an initial purchase payment in excess of $500,000 and reserves the right
to not accept any purchase payment for any reason. The Company will send Owners
a confirmation notice upon receipt and acceptance of the Owner's purchase
payment.
CANCELLING THE CONTRACT
Owners may cancel the Contract during the Cancellation Period, which is the
10-day period after an Owner receives the Contract. Some states may require a
longer Cancellation Period. To cancel the Contract, the Owner must mail or
deliver the Contract to the Service Center or to the agent who sold it. The
Company will refund the Contract Value plus any fees or charges deducted except
for the mortality and expense risk charge and the administration charge. If the
Owner purchased a Contract in a state that requires the return of purchase
payments during the Cancellation Period and the Owner chooses to exercise the
cancellation right, the Company will return the purchase payments.
CREDITING AND ALLOCATING PURCHASE PAYMENTS
If the application for a Contract is properly completed and is accompanied by
all the information necessary to process it, including payment of the initial
purchase payment, the initial Net Purchase Payment will be allocated, as
designated by the Owner, to one or more of the Subaccounts or to one or more
Guarantee Periods within two business days of receipt of such Net Purchase
Payment by the Company at the Service Center. If the application is not properly
completed, the Company reserves the right to retain the Net Purchase Payment for
up to five business days while it attempts to complete the application. If the
application cannot be made complete within five business days, the applicant
will be informed of the reasons for the delay and the initial purchase payment
will be returned immediately unless the applicant specifically consents to the
Company retaining the initial purchase payment until the application is made
complete. The initial Net Purchase Payment will then be credited within two
business days after receipt of a properly completed application. The Company
will credit additional Net Purchase Payments that are accepted by the Company as
of the end of the Valuation Period during which the Payment was received at the
Service Center.
<PAGE>
The initial Net Purchase Payment is allocated among the Subaccounts and
Guarantee Periods as specified on the application, unless the Contract is issued
in a state that requires the return of purchase payments during the Cancellation
Period. In those states, any portion of the initial Net Purchase Payment
allocated to the Guaranteed Interest Option will be allocated to that option
upon receipt; and any portion of the initial Net Purchase Payment allocated to
the Subaccounts will be allocated to the Money Market Subaccount for a period
equal to the number of days in the Cancellation Period. At the expiration of
this period, such portion of the Net Purchase Payment, as adjusted to reflect
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<PAGE>
the investment performance of the Money Market Subaccount during this period, is
then allocated to the Subaccounts as described above.
Owners may allocate Net Purchase Payments among any or all Subaccounts or
Guarantee Periods available. If an Owner elects to invest in a particular
Subaccount or Guarantee Period, at least 1% of the Net Purchase Payment must be
allocated to that Subaccount or Guarantee Period. All percentage allocations
must be in whole numbers. The minimum amount that may be allocated to any
Guarantee Period is $500. The Company allocates any additional Net Purchase
Payments among the Subaccounts and the Guaranteed Interest Option in accordance
with the allocation schedule in effect when such Net Purchase Payment is
received at the Service Center unless it is accompanied by Written Notice
directing a different allocation.
VARIABLE CONTRACT VALUE
Subaccount Value. The Variable Contract Value is the sum of all Subaccount
Values and therefore reflects the investment experience of the Subaccounts to
which it is allocated. The Subaccount Value for any Subaccount as of the
Contract Effective Date is equal to the amount of the initial Net Purchase
Payment allocated to that Subaccount. On subsequent Valuation Days prior to the
Annuity Date, the Subaccount Value is equal to that part of any Net Purchase
Payment allocated to the Subaccount and any amount transferred to that
Subaccount, adjusted by interest income, dividends, net capital gains or losses,
realized or unrealized, and decreased by withdrawals (including any applicable
surrender charges and any applicable purchase payment tax charge) and any
amounts transferred out of that Subaccount.
Accumulation Units. Net Purchase Payments allocated to a Subaccount or amounts
of Contract Value transferred to a Subaccount are converted into Accumulation
Units. For any Contract, the number of Accumulation Units credited to a
Subaccount is determined by dividing the dollar amount directed to the
Subaccount by the value of the Accumulation Unit for that Subaccount for the
Valuation Day on which the Net Purchase Payment or transferred amount is
invested in the Subaccount. Therefore, Net Purchase Payments allocated to or
amounts transferred to a Subaccount under a Contract increase the number of
Accumulation Units of that Subaccount credited to the Contract.
Decreases in Subaccount Value under a Contract are effected by the cancellation
of Accumulation Units of a Subaccount. Therefore, surrenders, withdrawals,
transfers out of a Subaccount, payment of a death benefit, the application of
Variable Contract Value to an Annuity Payment Option on the Annuity Date, and
the deduction of the annual administration fee all result in the cancellation of
an appropriate number of Accumulation Units of one or more Subaccounts.
Accumulation Units are cancelled as of the end of the Valuation Period in which
the Company received Written Notice regarding the event.
The Accumulation Unit value for each Subaccount was arbitrarily set initially at
$10 when the Subaccount began operations. Thereafter, the Accumulation Unit
value at the end of every Valuation Day equals the Accumulation Unit value at
the end of the preceding Valuation Day multiplied by the Net Investment Factor
(described below). The Subaccount Value for a Contract is determined on any day
by multiplying the number of Accumulation Units attributable to the Contract in
that Subaccount by the Accumulation Unit value for that Subaccount.
<PAGE>
The Net Investment Factor. The Net Investment Factor is an index applied to
measure the investment performance of a Subaccount from one Valuation Period to
the next. For each Subaccount, the Net Investment Factor reflects the investment
experience of the Fund in which that Subaccount invests and the charges assessed
against that Subaccount for a Valuation Period. The Net Investment Factor is
calculated by dividing (1) by (2) and subtracting (3) from the result, where:
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<PAGE>
(1) is the result of:
a. the Net Asset Value Per Share of the Fund held in the
Subaccount, determined at the end of the current
Valuation Period; plus
b. the per share amount of any dividend or capital gain
distributions made by the Fund held in the
Subaccount, if the "ex-dividend" date occurs during
the current Valuation Period; plus or minus
c. a per share charge or credit for any taxes reserved
for, which is determined by the Company to have
resulted from the operations of the Subaccount.
(2) is the Net Asset Value Per Share of the Fund held in the
Subaccount, determined at the end of the last prior Valuation
Period.
(3) is a daily factor representing the mortality and expense risk
charge and the administration charge deducted from the
Subaccount, adjusted for the number of days in the Valuation
Period.
TRANSFERS
General. Prior to the Annuity Date and after the Cancellation Period, by Written
Notice, an Owner may transfer all or part of any Subaccount Value to another
Subaccount(s) (subject to its availability) or to one or more available
Guarantee Periods, or transfer all or part of any Guarantee Amount to any
Subaccount(s) (subject to its availability) or to one or more available
Guarantee Periods, subject to the following restrictions. The minimum transfer
amount is $500 or the entire Subaccount Value or Guarantee Amount, if less. The
minimum Subaccount Value or Guarantee Amount that may remain following a
transfer is $500. A transfer request that would reduce any Subaccount Value or
Guarantee Amount below $500 is treated as a transfer request for the entire
Subaccount Value or Guarantee Amount. Only four transfers may be made per
Contract Year from all or part of any Guarantee Amount. The first 12 transfers
during each Contract Year are free. The Company assesses a transfer processing
fee of $25 for each transfer in excess of 12 during a Contract Year. The
transfer processing fee is deducted from the amount being transferred. Each
Written Notice of transfer is considered one transfer regardless of how many
Subaccounts or Guarantee Periods are affected by the transfer.
Dollar-Cost Averaging Facility. If elected in the application or at any time
thereafter prior to the Annuity Date by Written Notice, an Owner may
systematically transfer (on a monthly, quarterly, semi-annual or annual basis)
specified dollar amounts from the Money Market Subaccount to other Subaccounts.
This is known as the "dollar-cost averaging" method of investment. The
fixed-dollar amount purchases more Accumulation Units of a Subaccount when their
value is lower and fewer units when their value is higher. Over time, the cost
per unit averages out to be less than if all purchases of Units had been made at
the highest value and greater than if all purchases had been made at the lowest
value. The dollar-cost averaging method of investment reduces the risk of making
purchases only when the price of Accumulation Units is high. It does not assure
a profit or protect against a loss in declining markets.
<PAGE>
Owners may only elect use the dollar-cost averaging facility if their Money
Market Subaccount Value is at least $1,000 at the time of the election. The
minimum transfer amount under the facility is $100 per month (or the
equivalent). If dollar-cost averaging transfers are to be made to more than one
Subaccount, then the Owner must indicate the dollar amount of the transfer to be
made to each. At least $50.00 must be designated to each Subaccount.
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<PAGE>
Transfers under the dollar-cost averaging facility are made as of the same
calendar day each month. If this calendar day is not a Valuation Day, transfers
are made as of the next Valuation Day. Once elected, transfers under the
dollar-cost averaging facility continue until the Money Market Subaccount Value
is depleted, the Annuity Date occurs or until the Owner cancels the election by
Written Notice at least seven days in advance of the next transfer date.
Alternatively, Owners may specify in advance a date for transfers under the
facility to cease. There is no additional charge for using the dollar-cost
averaging facility. Transfers under the facility do not count towards the 12
transfers permitted without a transfer processing fee in any Contract Year. The
Company reserves the right to discontinue offering the dollar-cost averaging
facility at any time and for any reason or to change its features.
Automatic Subaccount Value Rebalancing. If elected in the application or
requested by Written Notice at any time thereafter prior to the Annuity Date, an
Owner may instruct the Company to automatically transfer (on a quarterly,
semi-annual or annual basis) Variable Contract Value between and among specified
Subaccounts in order to achieve a particular percentage allocation of Variable
Contract Value among such Subaccounts ("automatic Subaccount Value
rebalancing"). Such percentage allocations must be in whole numbers. Once
elected, automatic Subaccount Value rebalancing begins on the first Valuation
Day of the next calendar quarter or other period (or, if later, the next
calendar quarter or other period after the expiration of the Cancellation
Period).
Owners may stop automatic Subaccount Value rebalancing at any time by Written
Notice at least seven calendar days before the first Valuation Day in a new
period. Owners may specify allocations between and among as many Subaccounts as
are available at the time automatic Subaccount Value rebalancing is elected.
Once automatic Subaccount Value rebalancing has been elected, any subsequent
allocation instructions that differ from the then-current rebalancing allocation
instructions are treated as a request to change the automatic Subaccount Value
rebalancing allocation. Owners may change automatic Subaccount Value rebalancing
allocations at any time. Allocation changes will take effect as of the Valuation
Day that instructions are received at the Service Center. Once automatic
Subaccount Value rebalancing is in effect, an Owner may only transfer Subaccount
Value among or between Subaccounts by changing the automatic Subaccount Value
rebalancing allocation instructions. Changes to automatic Subaccount Value
rebalancing must be made by Written Notice.
There is no additional charge for automatic Subaccount Value rebalancing and
rebalancing transfers do not count as one the 12 transfers available without a
transfer processing fee during any Contract Year. If automatic Subaccount Value
rebalancing is elected at the same time as the dollar-cost averaging facility or
when the dollar-cost averaging facility is being utilized, automatic Subaccount
Value rebalancing will be postponed until the first Valuation Day in the
calendar quarter or other period following the termination of dollar-cost
averaging facility. The Company reserves the right to discontinue offering
automatic Subaccount Value rebalancing at any time for any reason or to change
its features.
<PAGE>
WITHDRAWALS
General. Prior to the Annuity Date and after the Cancellation Period, an Owner
may withdraw part of the Surrender Value, subject to certain limitations. Each
withdrawal must be requested by Written Notice. The minimum withdrawal amount is
$500. The maximum withdrawal is the amount that would leave a minimum Surrender
Value of $1,000. A withdrawal request that would reduce any Subaccount Value or
Guarantee Amount below $500 will be treated as a request for a withdrawal of all
of that Subaccount Value or Guarantee Amount.
The Company withdraws the amount requested from the Contract Value as of the day
that the Company receives an Owner's Written Notice, and sends the Owner that
amount. The Company will then deduct any applicable surrender charge and any
applicable purchase payment tax charge from the remaining Contract Value. If the
withdrawal is requested from a Guarantee Amount, the Company deducts any
applicable Market Value Adjustment from, or adds any applicable Market Value
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<PAGE>
Adjustment to, remaining Contract Value. A deduction of a Market Value
Adjustment from Contract Value may result in the payment of an amount which,
when added to any remaining Guarantee Amount and amounts previously withdrawn or
transferred, is less than the amount allocated or transferred to a Guarantee
Period to create that Guarantee Amount.
A Written Notice of withdrawal must specify the amount to be withdrawn from each
Subaccount or Guarantee Amount. If the Written Notice does not specify this
information, or if any Subaccount Value or Guarantee Amount is inadequate to
comply with the request, the Company will make the withdrawal based on the
proportion that each Subaccount Value and each Guarantee Amount bears to the
Contract Value as of the day of the withdrawal.
Systematic Withdrawals. If elected in the application or requested at any time
thereafter prior to the Annuity Date by Written Notice, an Owner may elect to
receive periodic withdrawals under the Company's systematic withdrawal plan.
Under the systematic withdrawal plan, the Company will make withdrawals (on a
monthly, quarterly, semi-annual or annual basis) from Subaccounts specified by
the Owner. Systematic withdrawals must be at least $100 each and may only be
made from Variable Contract Value. Withdrawals under the systematic withdrawal
plan may only be made from Subaccounts having $1,000 or more of Subaccount Value
at the time of election. The systematic withdrawal plan is not available to
Owners using the dollar-cost averaging facility or automatic Subaccount Value
rebalancing.
The Company makes systematic withdrawals on the following basis: (1) as a
specified dollar amount, or (2) as a specified whole percent of Subaccount
Value.
Participation in the systematic withdrawal plan terminates on the earliest of
the following events: (1) the Subaccount Value from which withdrawals are being
made becomes zero, (2) a termination date specified by the Owner is reached, or
(3) the Owner requests that his or her participation in the plan cease.
Systematic withdrawals being made in order to meet the required minimum
distribution under the Code or to make substantially equal payments as required
under the Code will continue even though a surrender charge is deducted.
Tax Consequences of Withdrawals. Consult your tax adviser regarding the tax
consequences associated with making withdrawals. A withdrawal made before the
taxpayer reaches Age 59 1/2, including systematic withdrawals, may result in
imposition of a penalty tax of 10% of the taxable portion withdrawn. See
"FEDERAL TAX CONSIDERATIONS" for more details.
SURRENDERS
An Owner may surrender the Contract for its Surrender Value at any time prior to
the Annuity Date. A Contract's Surrender Value fluctuates daily as a function of
the investment experience of the Subaccounts in which an Owner is invested. The
Company does not guarantee any minimum Surrender Value for amounts invested in
the Subaccounts. Likewise, the Company does not guarantee any minimum Surrender
Value for Guarantee Amounts surrendered, withdrawn, transferred or applied to an
Annuity Payment Option before the 30-day period prior to the expiration of a
Guarantee Period.
An Owner may elect to have the Surrender Value paid in a single sum or under an
Annuity Payment Option. The Surrender Value will be determined as of the date
the Company receives the Written Notice for surrender and the Contract at the
Service Center.
<PAGE>
Consult your tax adviser regarding the tax consequences of a Surrender. A
Surrender made before age 59 1/2 may result in the imposition of a penalty tax
of 10% of the taxable portion of the Surrender Value. See "FEDERAL TAX
CONSIDERATIONS" for more details.
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<PAGE>
DEATH BENEFITS
Death Benefits on or After the Annuity Date. If an Owner dies on or after the
Annuity Date, any surviving joint Owner becomes the sole Owner. If there is no
surviving Owner, any successor Owner becomes the new Owner. If there is no
surviving or successor Owner, the Payee becomes the new Owner. If an Annuitant
or an Owner dies on or after the Annuity Date, the remaining undistributed
portion, if any, of the Contract Value will be distributed at least as rapidly
as under the method of distribution being used as of the date of such death.
Under some Annuity Payment Options, there will be no death benefit.
Death Benefits When the Owner Dies Before the Annuity Date. If any Owner dies
prior to the Annuity Date, any surviving joint Owner becomes the new sole Owner.
If there is no surviving joint Owner, any successor Owner becomes the new Owner
and if there is no successor Owner the Annuitant becomes the new Owner unless
the deceased Owner was also the Annuitant. If the sole deceased Owner was also
the Annuitant, then the provisions relating to the death of the Annuitant
(described below) will govern unless the deceased Owner was one of two joint
Annuitants, in which event the surviving Annuitant becomes the new Owner.
The following options are available to new Owners:
1. to receive the Adjusted Contract Value in a single lump sum
within five years of the deceased Owner's death; or
2. elect to receive the Adjusted Contract Value paid out under an
Annuity Payment Option provided that: (a) Annuity Payments
begin within one year of the deceased Owner's death, and (b)
Annuity Payments are made in substantially equal installments
over the life of the new Owner or over a period not greater
than the life expectancy of the new Owner; or
3. if the new Owner is the spouse of the deceased Owner, he or
she may by Written Notice within one year of the Owner's
death, elect to continue the Contract as the new Owner. If the
spouse so elects, all of his or her rights as a Beneficiary
cease and if the deceased Owner was also the sole Annuitant
and appointed no Contingent Annuitant, he or she will become
the Annuitant. The spouse will be deemed to have made the
election to continue the Contract if he or she makes no
election before the expiration of the one year period or if he
or she makes any purchase payments under the Contract.
With regard to new Owners who are not the spouse of the deceased Owner: (a) 1
and 2 apply even if the Annuitant or Contingent Annuitant is alive at the time
of the deceased Owner's death, (b) if the new Owner is not a natural person,
only option 1 is available, (c) if no election is made within one year of the
deceased Owner's death, option 1 is deemed to have been elected.
Adjusted Contract Value is computed as of the date that the Company receives Due
Proof of Death of the Owner. Payments under this provision are in full
settlement of all of the Company's liability under the Contract.
<PAGE>
Death Benefits When the Annuitant Dies Before the Annuity Date. If the Annuitant
dies before the Annuity Date while the Owner is still living, any Contingent
Annuitant will become the Annuitant. If the Annuitant dies before the Annuity
Date and no Contingent Annuitant has been named, the Company will pay the death
benefit described below to the Beneficiary. If there is no surviving
Beneficiary, the Company will pay the death benefit to any Contingent
Beneficiary. If there is no surviving Contingent Beneficiary, the Company will
immediately pay the death benefit to the Owner's estate in a lump sum.
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<PAGE>
If the Annuitant who is also an Owner dies or if the Annuitant dies and the
Owner is not a natural person, a Beneficiary (or a Contingent Beneficiary):
1. will receive the death benefit in a single lump sum within 5
years of the deceased Annuitant's death; or
2. may elect to receive the death benefit paid out under an
Annuity Payment Option provided that: (a) Annuity Payments
begin within 1 year of the deceased Annuitant's death, and (b)
Annuity Payments are made in substantially equal installments
over the life of the Beneficiary or over a period not greater
than the life expectancy of the Beneficiary; or
3. if the Beneficiary is the spouse of the deceased Annuitant, he
or she may by Written Notice within one year of the
Annuitant's death, elect to continue the Contract as the new
Owner. If the spouse so elects, all his or her rights as a
Beneficiary cease and if the deceased Annuitant was also the
sole Annuitant and appointed no Contingent Annuitant, he or
she will become the Annuitant. The spouse will be deemed to
have made the election to continue the Contract if he or she
makes no election before the expiration of the one year period
or if he or she makes any purchase payments under the
Contract.
The Death Benefit. If the Annuitant is Age 75 or younger, the death benefit is
an amount equal to the greatest of:
1. aggregate purchase payments made less any withdrawals
(including the applicable surrender charges, purchase payment
tax charge and Market Value Adjustments) as of the date that
the Company receives Due Proof of Death of the Annuitant; or
2. the Contract Value as of the date that the Company receives
Due Proof of Death of the Annuitant; or
3. the minimum death benefit described below;
less any applicable purchase payment tax charge on the date that the death
benefit is paid.
The minimum death benefit is the death benefit floor amount as of the date of
the Annuitant's death (a) adjusted, for each withdrawal made since the most
recent reset of the death benefit floor amount, multiplying that amount by the
product of all ratios of the Contract Value immediately after a withdrawal to
the Contract Value immediately before such withdrawal (b) plus any purchase
payments made since the most recent reset of the death benefit floor amount.
The death benefit floor amount is the largest Contract Value attained on any
prior death benefit floor computation anniversary. Death benefit floor
computation anniversaries are the 5th Contract Anniversary and each subsequent
5th Contract Anniversary (i.e., the 10th Contract Anniversary, the 15th Contract
Anniversary, etc.) prior to the Annuitant's Age 76. Therefore, the death benefit
floor amount is reset when, on a death benefit floor computation anniversary,
Contract Value exceeds the current death benefit floor amount.
<PAGE>
If the Annuitant is Age 76 or older, the death benefit is an amount equal to the
greater of 1 or 2 above.
Examples of the computation of the death benefit are shown in Appendix B.
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<PAGE>
PAYMENTS BY THE COMPANY
The Company generally makes payments of withdrawals, surrenders, death benefits,
or any Annuity Payments within seven days of receipt of all applicable Written
Notices and/or Due Proofs of Death. However, the Company may postpone such
payments for any of the following reasons:
1. when the New York Stock Exchange ("NYSE") is closed for
trading other than customary holiday or weekend closing, or
trading on the NYSE is restricted, as determined by the SEC;or
2. when the SEC by order permits a postponement for the
protection of Owners; or
3. when the SEC determines that an emergency exists that would
make the disposal of securities held in the Variable Account
or the determination of their value not reasonably practicable.
If a recent check or draft has been submitted, the Company has the right to
defer payment of surrenders, withdrawals, death benefits, or Annuity Payments
until the check or draft has been honored.
The Company may defer payment of any withdrawal, surrender, or transfer of
Guaranteed Interest Option Value up to six months after it receives an Owner's
Written Notice. The Company pays interest on the amount of any payment that is
deferred.
TELEPHONE TRANSACTION PRIVILEGES
If an Owner has elected this privilege in a form provided by the Company, an
Owner may make transfers or change allocation instructions by telephoning the
Service Center. A telephone authorization form received by the Company at the
Service Center is valid until it is rescinded or revoked by Written Notice or
until a subsequently dated form signed by the Owner is received at the Service
Center. The Company will send Owners a written confirmation of all transfers and
allocation changes made pursuant to telephone instructions.
The Service Center requires a form of personal identification prior to acting on
instructions received by telephone and also may tape record instructions
received by phone. If the Company follows these procedures, it is not liable for
any losses due to unauthorized or fraudulent transactions. The Company reserves
the right to suspend telephone transaction privileges at any time for any
reason.
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<PAGE>
CONTRACT CHARGES AND FEES
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE)
General. No sales charge is deducted from purchase payments at the time that
such payments are made. However, within certain time limits described below, a
surrender charge is deducted upon any withdrawal or surrender. A surrender
charge is assessed on Cash Value applied to an Annuity Payment Option during the
first five Contract Years. No surrender charge is assessed on Contract Value
applied to an Annuity Payment Option after the fifth Contract Year. If on the
Annuity Date, however, the Payee elects (or the Owner previously elected) to
receive a lump sum, this sum will equal the Surrender Value on such date.
In the event that surrender charges are not sufficient to cover sales expenses,
such expenses will be borne by the Company. Conversely, if the revenue from such
charges exceeds such expenses, the excess of revenues from such charges over
expenses will be retained by the Company. The Company does not currently believe
that the surrender charges deducted will cover the expected costs of
distributing the Contracts. Any shortfall will be made up from the Company's
general assets, which may include amounts derived from the mortality and expense
risk charge.
Charge for Surrender or Withdrawals. The surrender charge is equal to the
percentage of each purchase payment surrendered or withdrawn (or applied to an
Annuity Payment Option during the first five Contract Years) as shown in the
table below. The surrender charge is separately calculated and applied to each
purchase payment at the time that the purchase payment is surrendered or
withdrawn. No surrender charge applies to the Contract Value in excess of
aggregate purchase payments (less prior withdrawals of the payments). The
surrender charge is calculated using the assumption that purchase payments are
surrendered or withdrawn before Contract Value in excess of aggregate purchase
payments (less prior withdrawals of purchase payments) and that purchase
payments are withdrawn on a first-in-first-out basis.
Number of Full Years Elapsed Between Surrender Charge as a Percentage
Date of Receipt of Purchase Payment and of Purchase Payment
Date of Surrender of Withdrawal Withdrawn or Surrendered
0 7%
1 7%
2 6%
3 5%
4 4%
5+ 0%
Withdrawals. With regard to all withdrawals, the Company withdraws the amount
requested from the Contract Value as of the day that it receives the Written
Notice regarding the withdrawal and sends the Owner that amount. The Company
then deducts any surrender charge and any applicable purchase payment tax charge
from the remaining Contract Value. If the withdrawal is requested from a
Guarantee Amount, the Company deducts any applicable Market Value Adjustment
from, or adds any applicable Market Value Adjustment to, remaining Contract
Value. For the purpose of computing the surrender charge, the deduction of the
Market Value Adjustment, purchase payment tax charge and surrender charge is
considered to be made from Contract Value in excess of aggregate purchase
payments (less prior withdrawals of purchase payments).
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<PAGE>
Amounts Not Subject to a Surrender Charge. Each Contract Year after the first
Contract Year, an Owner may withdraw an amount equal to 15% of the aggregate
purchase payments less prior withdrawals of purchase payments as of the first
Valuation Day of that Contract Year without incurring a surrender charge. The
Company reserves the right to limit the number of such "free" withdrawals in any
Contract Year.
Waiver of Surrender Charge. The Company will waive the surrender charge in the
event that the Owner: (1) enters an "eligible nursing home," as defined in the
Contract, for a period of at least 90 days, (2) is diagnosed as having a
"terminal medical condition," as defined in the Contract, or (3) is less than
age 65 and sustains a "permanent and total disability," as defined in the
Contract. The Company reserves the right to require written proof of terminal
medical condition or permanent and total disability satisfactory to it and to
require an examination by a licensed physician of its choice. The surrender
charge waiver is not available in all states due to applicable insurance laws in
effect in various states.
ANNUAL ADMINISTRATION FEE
An annual administration fee is deducted as of each Contract Anniversary for the
prior Contract Year. The Company also deducts this fee for the current Contract
Year when determining the Surrender Value prior to the end of a Contract Year
and on the Annuity Date. If Contract Value is $50,000 or less at the time of the
fee deduction, then the annual administration fee is $30. The fee is zero for
Contracts where the Contract Value exceeds $50,000 at the time the fee would be
deducted. This fee is to cover a portion of the Company's administrative
expenses related to the Contracts. The Company does not expect to make a profit
from this fee.
The annual administration fee is assessed against Subaccount Values and
Guarantee Amounts based on the proportion that each bears to the Contract Value.
Where the fee is deducted from Subaccount Values, the Company will cancel an
appropriate number of Accumulation Units. Where the fee is obtained from a
Guarantee Amount, the Company will reduce the Guarantee Amount by the amount of
the fee.
TRANSFER PROCESSING FEE
Prior to the Annuity Date, the Company permits 12 free transfers per Contract
Year among and between the Subaccounts and the Guarantee Periods. For each
additional transfer, the Company charges $25 at the time each such transfer is
processed. The fee is deducted from the amount being transferred. The Company
does not expect to make a profit from this fee.
<PAGE>
TAXES ON PURCHASE PAYMENTS
Certain states and municipalities impose a tax on the Company in connection with
the receipt of annuity considerations. This tax can range from 0% to 3.5% of
such considerations and generally varies based on the Annuitant's state of
residence. Taxes on annuity considerations are generally incurred by the Company
as of the Annuity Date based on the Contract Value on that date, and the Company
deducts the charge for taxes on annuity considerations from the Contract Value
as of the Annuity Date. Some jurisdictions impose a tax on annuity
considerations at the time such considerations are made. In those jurisdictions,
the Company's current practice is to pay the tax on annuity considerations and
then deduct the charge for these taxes from the Contract Value upon surrender,
payment of the death benefit, or upon the Annuity Date. The Company reserves the
right to deduct any state and local taxes on annuity considerations from the
Contract Value at the time such tax is due.
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<PAGE>
MORTALITY AND EXPENSE RISK CHARGE
The Company deducts a daily charge from the assets of the Variable Account to
compensate it for mortality and expense risks that it assumes under the
Contract. The daily charge is at the rate of 0.003446% (approximately equivalent
to an effective annual rate of 1.25%) of the net assets of the Variable Account.
Approximately .70% of this annual charge is for the assumption of mortality risk
and .55% is for the assumption of expense risk. If the mortality and expense
risk charge is insufficient to cover the actual cost of the mortality and
expense risks undertaken by the Company, the Company will bear the shortfall.
Conversely, if the charge proves more than sufficient, the excess will be profit
to the Company and will be available for any proper purpose including, among
other things, payment of expenses incurred in selling the Contracts.
The mortality risk that the Company assumes is the risk that Annuitants, as a
group, will live for a longer period of time than the Company estimated when it
established the guaranteed Annuity Payment rates in the Contract. Because of
these guarantees, each Payee is assured that his or her longevity will not have
an adverse effect on the Annuity Payments that he or she receives under Annuity
Payment Options based on life contingencies. The Company also assumes a
mortality risk because the Contracts guarantee a death benefit if the Annuitant
dies before the Annuity Date. The expense risk that the Company assumes is the
risk that administration charge, annual administration fee and the transfer
processing fee may be insufficient to cover the actual expenses of administering
the Contracts.
ADMINISTRATION CHARGE
The Company deducts a daily administration charge from the assets of the
Variable Account to compensate it for a portion of the expenses it incurs in
administering the Contracts. The daily charge is at a rate of 0.000411%
(approximately equivalent to an effective annual rate of 0.15%) of the net
assets of the Variable Account. The Company does not expect to make a profit
from this charge.
FUND EXPENSES
The investment performance of each Fund reflects the management fee that it pays
to its investment manager or adviser as well as other operating expenses that it
incurs. Investment management fees are generally daily fees computed as a
percent of a Fund's average daily net assets at an annual rate. Please read the
prospectus for each Fund for complete details.
POSSIBLE CHARGE FOR THE COMPANY'S TAXES
At the present time, the Company makes no charge to the Variable Account for any
federal, state, or local taxes that the Company incurs which may be attributable
to the Variable Account or the Contracts. The Company, however, reserves the
right in the future to make a charge for any such tax or other economic burden
resulting from the application of the tax laws that it determines to be properly
attributable to the Subaccounts or to the Contracts.
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<PAGE>
SELECTING AN ANNUITY PAYMENT OPTION
ANNUITY DATE
The Owner selects the Annuity Date in the application. For Non-Qualified
Contracts, the Annuity Date must be no later than the later of the Contract
Anniversary following the Annuitant's Age 85 or 10 years after the Contract
Effective Date. For Qualified Contracts, the Annuity Date must be no later than
April 1 of the calendar year following the calendar year in which the Owner
attains age 70 1/2. An Owner may change the Annuity Date by Written Notice,
subject to the following limitations:
1. Written Notice is received at least 30 days before the current
Annuity Date; and
2. the requested new Annuity Date must be at least 30 days after
the Company receives Written Notice.
ANNUITY PAYMENT DATES
The Company computes the first Annuity Payment as of the Annuity Date and makes
the first Annuity Payment as of the initial Annuity Payment Date selected by the
Owner. The initial Annuity Payment Date is the Annuity Date unless the Annuity
Date is the 29th, 30th, or 31st day of a calendar month, in which event, the
Owner must select a different date. All subsequent Annuity Payments are computed
and payable as of Annuity Payment Dates. These dates will be the same day of the
month as the initial Annuity Payment Date. Monthly Annuity Payments will be
computed and payable as of the same day each month as the initial Annuity
Payment Date. Quarterly Annuity Payments will be computed and payable as of the
same day in the third, sixth, ninth, and twelfth month following the initial
Annuity Payment Date and on the same days of such months in each successive
Contract Year. Semi-annual Annuity Payment Dates will be computed and payable as
of the same day in the sixth and twelfth month following the initial Annuity
Payment Date and on the same days of such months in each successive Contract
Year. Annual Annuity Payments will be computed and payable as of the same day in
each Contract Year as the initial Annuity Payment Date. The frequency of Annuity
Payments selected is shown in the Contract. In the event that the Owner does not
select a payment frequency, payments will be made monthly.
ELECTION AND CHANGES OF ANNUITY PAYMENT OPTIONS
On the Annuity Date, the Surrender Value or Adjusted Contract Value is applied
under an Annuity Payment Option, unless the Owner elects to receive the
Surrender Value in a lump sum. If the Annuity Date falls during the first five
Contract Years, Surrender Value is applied under an Annuity Payment Option. If
the Annuity Date falls after the fifth Contract Anniversary, Adjusted Contract
Value is applied under an Annuity Payment Option. The Annuity Payment Option
specifies the type of annuity to be paid and determines how long the annuity
will be paid, the frequency, and the amount of each payment. The Owner may elect
or change the Annuity Payment Option by Written Notice at any time prior to the
Annuity Date. The Owner may elect to apply any portion of the Surrender Value or
Adjusted Contract Value to provide either Variable Annuity Payments or Fixed
Annuity Payments or a combination of both. If Variable Annuity Payments are
selected, the Owner must also select the Subaccounts to which Surrender Value or
Adjusted Contract Value will be applied. If no selection has been made by the
Annuity Date, Surrender Value or Adjusted Contract Value from any Guaranteed
Interest Option Value will be applied to purchase Fixed Annuity Payments and
Surrender Value or Adjusted Contract Value from each Subaccount Value will be
<PAGE>
applied to purchase Variable Annuity Payments from that Subaccount. If no
Annuity Payment Option has been selected by the Annuity Date, Surrender Value or
Adjusted Contract Value will be applied under Annuity Payment Option 5 (Life
Annuity with Period Certain) with a designated period of 10 years. Any death
benefit applied to purchase Annuity Payments is allocated among the Subaccounts
and/or the Guaranteed Interest Option as instructed by the Beneficiary unless
the Owner previously made the foregoing elections.
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<PAGE>
ANNUITY PAYMENTS
Fixed Annuity Payments. Fixed Annuity Payments are periodic payments from the
Company to the designated Payee, the amount of which is fixed and guaranteed by
the Company. The dollar amount of each Fixed Annuity Payment depends on the form
and duration of the Annuity Payment Option chosen, the Age of the Annuitant, the
sex of the Annuitant (if applicable), the amount of Adjusted Contract Value
applied to purchase the Fixed Annuity Payments and, for Annuity Payment Options
3-6, the applicable annuity purchase rates. The annuity purchase rates in the
Contract are based on a Guaranteed Interest Rate of not less than 3.0%. The
Company may, in its sole discretion, make Fixed Annuity Payments in an amount
based on a higher interest rate. If Fixed Annuity Payments are computed based on
an interest rate in excess of the minimum Guaranteed Interest Rate, then, for
the period of the higher rate, the dollar amount of such Fixed Annuity Payments
will be greater than the dollar amount based on 3.0%. The Company guarantees
that any higher rate will be in effect for at least 12 months.
Except for Annuity Payment Options 1 and 2, the dollar amount of the first Fixed
Annuity Payment is determined by dividing the dollar amount of Adjusted Contract
Value being applied to purchase Fixed Annuity Payments by $1,000 and multiplying
the result by the annuity purchase rate in the Contract for the selected Annuity
Payment Option. Subsequent Fixed Annuity Payments are of the same dollar amount
unless the Company makes payments based on an interest rate different from that
used to compute the first payment.
Variable Annuity Payments. Variable Annuity Payments are periodic payments from
the Company to the designated Payee, the amount of which varies from one Annuity
Payment Date to the next as a function of the net investment experience of the
Subaccounts selected by the Owner or Payee to support such payments. The dollar
amount of the first Variable Annuity Payment is determined in the same manner as
that of a Fixed Annuity Payment. Therefore, provided that the interest rate on
which Fixed Annuity Payments are based equals the Benchmark Rate of Return on
which Variable Annuity Payments are based, for any particular amount of Adjusted
Contract Value applied to a particular Annuity Payment Option, the dollar amount
of the first Variable Annuity Payment would be the same as the dollar amount of
each Fixed Annuity Payment. Variable Annuity Payments after the first Payment
are similar to Fixed Annuity Payments except that the amount of each Payment
varies to reflect the net investment experience of the Subaccounts selected by
the Owner or Payee.
The dollar amount of the initial Variable Annuity Payment attributable to each
Subaccount is determined by dividing the dollar amount of the Adjusted Contract
Value to be allocated to that Subaccount on the Annuity Date by $1,000 and
multiplying the result by the annuity purchase rate in the Contract for the
selected Annuity Payment Option. The dollar value of the total initial Variable
Annuity Payment is the sum of the initial Variable Annuity Payments attributable
to each Subaccount.
The number of Annuity Units attributable to a Subaccount is derived by dividing
the initial Variable Annuity Payment attributable to that Subaccount by the
Annuity Unit Value for that Subaccount for the Valuation Period ending on the
Annuity Date or during which the Annuity Date falls if the Valuation Period does
not end on such date. The number of Annuity Units attributable to each
Subaccount under a Contract remains fixed unless there is an exchange of Annuity
Units.
<PAGE>
The dollar amount of each subsequent Variable Annuity Payment attributable to
each Subaccount is determined by multiplying the number of Annuity Units of that
Subaccount credited under the Contract by the Annuity Unit Value (described
below) for that Subaccount for the Valuation Period ending on the Annuity
Payment Date, or during which the Annuity Payment Date falls if the Valuation
Period does not end on such date. The dollar value of each subsequent Variable
Annuity Payment is the sum of the subsequent Variable Annuity Payments
attributable to each Subaccount.
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<PAGE>
The Annuity Unit Value of each Subaccount for any Valuation Period is equal to
(a) multiplied by (b) divided by (c) where:
(a) is the Net Investment Factor for the Valuation Period for
which the Annuity Unit Value is being calculated;
(b) is the Annuity Unit Value for the preceding Valuation Period;
and
(c) is a daily Benchmark Rate of Return factor (for the 3%
benchmark rate of return) adjusted for the number of days in
the Valuation Period.
The Benchmark Rate of Return factor is equal to one plus 3%, or 1.03. The annual
factor can be translated into a daily factor of 1.00008098.
If the net investment return of the Subaccount for an Annuity Payment period is
equal to the pro-rated portion of the 3% Benchmark Rate of Return, the Variable
Annuity Payment attributable to that Subaccount for that period will equal the
Payment for the prior period. To the extent that such net investment return
exceeds an annualized rate of return of 3% for a Payment period, the Payment for
that period will be greater than the Payment for the prior period and to the
extent that such return for a period falls short of an annualized rate of 3%,
the Payment for that period will be less than the Payment for the prior period.
Exchange of Annuity Units. By Written Notice at any time after the Annuity Date,
the Payee may exchange the dollar value of a designated number of Annuity Units
of a particular Subaccount for an equivalent dollar amount of Annuity Units of
another Subaccount. On the date of the exchange, the dollar amount of a Variable
Annuity Payment generated from the Annuity Units of either Subaccount would be
the same. Exchanges of Annuity Units are treated as transfers for the purpose of
computing any transfer processing fee.
ANNUITY PAYMENT OPTIONS
OPTION 1. INTEREST PAYMENTS. The Company holds the Adjusted Contract Value as
principal and pays interest to the Payee. The interest rate is 3% per year
compounded annually. The Company pays interest every 1 year, 6 months, 3 months
or 1 month, as specified at the time this option is selected. At the death of
the Payee, the value of the remaining payments are paid in a lump sum to the
Payee's estate. Only Fixed Annuity Payments are available under Annuity Payment
Option 1.
OPTION 2. PAYMENTS OF A SPECIFIED AMOUNT. The Company pays the Adjusted Contract
Value in equal payments every 1 year, 6 months, 3 months or 1 month. The amount
and frequency of the payments is specified at the time this option is selected.
After each payment, interest is added to the remaining amount applied under this
option that has not yet been paid. The interest rate is 3% per year compounded
annually. Payments are made to the Payee until the amount applied under this
option, including interest, is exhausted. The total of the payments made each
year must be at least 5% of the amount applied under this option. If the Payee
dies before the amount applied is exhausted, the Company pays the value of the
remaining payments in a lump sum to the Payee's estate. Only Fixed Annuity
Payments are available under Annuity Payment Option 2.
ADDITIONAL INTEREST EARNINGS. The Company may pay interest at rates in excess
of the rates guaranteed in Annuity Payment Options 1 and 2.
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<PAGE>
OPTION 3. PAYMENTS FOR A SPECIFIED PERIOD. The Company pays the lump sum in
equal payments for the number of years specified when the option is selected.
Payments are made every 1 year, 6 months, 3 months or 1 month, as specified when
the option is selected. If the Payee dies before the expiration of the specified
number of years, the Company pays the commuted value of the remaining payments
in a lump sum to the Payee's estate.
OPTION 4. LIFE ANNUITY. The Company makes monthly payments to the Payee for as
long as the Annuitant lives. UNDER THIS OPTION, A PAYEE COULD RECEIVE ONLY ONE
PAYMENT IF THE ANNUITANT DIES AFTER THE FIRST PAYMENT, TWO PAYMENTS IF THE
ANNUITANT DIES AFTER THE SECOND PAYMENT, ETC.
OPTION 5. LIFE ANNUITY WITH PERIOD CERTAIN. The Company makes monthly payments
to the Payee for as long as the Annuitant lives. At the time this option is
selected, a period certain of 5, 10, 15, or 20 years must also be selected. If
the Annuitant dies before the specified period certain ends, the payments to the
Payee will continue until the end of the specified period. The amount of the
monthly payments therefore depends on the period certain selected.
OPTION 6. JOINT LIFE AND SURVIVORSHIP ANNUITY. The Company makes monthly
payments to the Payee while both Annuitants are living. After the death of
either Annuitant, payments continue to the Payee for as long as the other
Annuitant lives. UNDER THIS OPTION, THE PAYEE COULD RECEIVE ONLY ONE PAYMENT IF
BOTH ANNUITANTS DIE AFTER THE FIRST PAYMENT, TWO PAYMENTS IF BOTH ANNUITANTS DIE
AFTER THE SECOND PAYMENT, ETC.
ADDITIONAL CONTRACT INFORMATION
OWNERSHIP
The Contract belongs to the Owner. An Owner may exercise all of the rights and
options described in the Contract.
Subject to more specific provisions elsewhere herein, an Owner's rights include
the right to: (1) select or change a successor Owner, (2) select or change any
Beneficiary or Contingent Beneficiary, (3) select or change the Payee prior to
the Annuity Date, (4) select or change the Annuity Payment Option, (5) allocate
Net Purchase Payments among and between the Subaccounts and Guarantee Periods,
(6) transfer Contract Value among and between the Subaccounts and Guarantee
Periods, and (7) select or change the Subaccounts on which Variable Annuity
Payments are based.
The rights of Owners of Qualified Contracts may be restricted by the terms of a
related employee benefit plan. For example, such plans may require an Owner of a
Qualified Contract to obtain the consent of his or her spouse before exercising
certain ownership rights or may restrict withdrawals. See "FEDERAL TAX
CONSIDERATIONS" for more details.
Selection of an Annuitant or Payee who is not the Owner may have tax
consequences. See "FEDERAL TAX CONSIDERATIONS" for more details.
CHANGING THE OWNER OR BENEFICIARY
Prior to the Annuity Date and after the Cancellation Period, an Owner may
transfer ownership of the Contract subject to the Company's published rules at
the time of the change. A new Owner must be less than Age 76.
<PAGE>
At any time before a death benefit is paid, the Owner may name a new Beneficiary
by Written Notice unless an irrevocable Beneficiary has previously been named.
When an irrevocable Beneficiary has been designated, the Owner must provide the
irrevocable Beneficiary's written consent to the Company before a new
Beneficiary is designated.
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<PAGE>
These changes take effect as of the day the Written Notice is received at the
Service Center and the Company is not liable for any payments made under the
Contract prior to the effectiveness of any change. For possible tax consequences
of these changes, see "FEDERAL TAX CONSIDERATIONS."
MISSTATEMENT OF AGE OR SEX
If an Age or sex of the Annuitant given in the application is misstated, the
Company will adjust the benefits it pays under the Contract to the amount that
would have been payable at the correct Age or sex. If the Company made any
underpayments because of any such misstatement, it shall pay the amount of such
underpayment plus interest at an annual effective rate of 3%, immediately to the
Payee or Beneficiary in one sum. If the Company makes any overpayments because
of a misstatement of Age or sex, it shall deduct from current or future payments
due under the Contract, the amount of such overpayment plus interest at an
annual effective rate of 3%.
CHANGE OF CONTRACT TERMS
Upon notice to the Owner, the Company may modify the Contract to:
1. conform the Contract or the operations of the Company or of
the Variable Account to the requirements of any law (or
regulation issued by a government agency) to which the
Contract, the Company or the Variable Account is subject;
2. assure continued qualification of the Contract as an annuity
contract or a Qualified Contract under the Code;
3. reflect a change (as permitted in the Contract) in the
operation of the Variable Account; or
4. provide additional Subaccounts and/or Guarantee Periods.
In the event of any such modification, the Company will make appropriate
endorsements to the Contract.
Only one of the Company's officers may modify the Contract or waive any of the
Company's rights or requirements under the Contract. Any modification or waiver
must be in writing. No agent may bind the Company by making any promise not
contained in the Contract.
REPORTS TO OWNERS
Prior to the Annuity Date, the Company will send each Owner a report at least
annually, or more often as required by law, indicating: the number of
Accumulation or Annuity Units credited to the Contract and the dollar value of
such units; the Contract Value, Adjusted Contract Value and Surrender Value; any
purchase payments, withdrawals, or surrenders made, death benefits paid and
charges deducted since the last report; the current interest rate applicable to
each Guarantee Amount; and any other information required by law.
The reports, which will be mailed to Owners at their last known address, will
include any information that may be required by the SEC or the insurance
supervisory official of the jurisdiction in which the Contract is delivered.
The Company will also send any other reports, notices or documents required by
law to be furnished to Owners.
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<PAGE>
MISCELLANEOUS
Non-Participating. The Contract does not participate in the surplus or profits
of the Company and the Company does not pay dividends on the Contract.
Protection of Proceeds. To the extent permitted by law, no benefits payable
under the Contract to a Beneficiary or Payee are subject to the claims of an
Owner's or a Beneficiary's creditors.
Discharge of Liability. Any payments made by the Company under any Annuity
Payment Option or in connection with the payment of any withdrawal, surrender or
death benefit, shall discharge the Company's liability to the extent of each
such payment.
Proof of Age and Survival. The Company reserves the right to require proof of
the Annuitant's Age prior to the Annuity Date. In addition, for life contingent
Annuity Options, the Company reserves the right to require proof of the
Annuitant's survival before any Annuity Payment Date.
Contract Application. The Company issues the Contract in consideration of the
Owner's application and payment of the initial purchase payment. The entire
Contract is made up of the Contract, any attached endorsements or riders, and
the application. In the absence of fraud, the Company considers statements made
in the application to be representations and not warranties. The Company will
not use any statement in defense of a claim or to void the Contract unless it is
contained in the application. The Company will not contest the Contract.
YIELDS AND TOTAL RETURNS
From time to time, the Company may advertise or include in sales literature
certain performance related information for the Subaccounts, including yields
and average annual total returns. Certain Funds have been in existence prior to
the commencement of the offering of the Contracts. The Company may advertise or
include in sales literature the performance of the Subaccounts that invest in
these Funds for these prior periods. The performance information of any period
prior to the commencement of the offering of the Contracts is calculated as if
the Contract had been offered during those periods, using current charges and
expenses.
Performance information discussed herein is based on historic results and does
not indicate or project future performance. For a description of the methods
used to determine yield and total return for the Subaccounts, see the Statement
of Additional Information.
Effective yields and total returns for the Subaccounts are based on the
investment performance of the corresponding Funds. The performance of a Fund in
part reflects its expenses. See the prospectuses for the Funds for Fund expense
information.
The yield of the Money Market Subaccount refers to the annualized income
generated by an investment in the Subaccount over a specified seven-day period.
The yield is calculated by assuming that the income generated for that seven-day
period is generated each seven-day period over a 52-week period and is shown as
a percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Subaccount is assumed
to be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
<PAGE>
The yield of a Subaccount other than the Money Market Subaccount refers to the
annualized income generated by an investment in the Subaccount over a specified
30-day or one-month period. The yield is calculated by assuming that the income
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<PAGE>
generated by the investment during that 30-day or one-month period is generated
each period over a 12-month period and is shown as a percentage of the
investment.
The total return of a Subaccount refers to return quotations assuming an
investment under a Contract has been held in the Subaccount for various periods
of time including, but not limited to, a period measured from the date the
Subaccount commenced operations. Average annual total return refers to total
return quotations that are annualized based on an average return over various
periods of time.
The average annual total return quotations represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Contract to the redemption value of that investment as of the last day
of each of the periods for which total return quotations are provided. Average
annual total return information shows the average annual percentage change in
the value of an investment in the Subaccount from the beginning date of the
measuring period to the end of that period. This standardized version of average
annual total return reflects all historical investment results, less all charges
and deductions applied against the Subaccount (including any surrender charge
that would apply if an Owner terminated the Contract at the end of each period
indicated, but excluding any deductions for premium taxes). When a Subaccount,
other than the Money Market Subaccount, has been in operation for one, five and
ten years respectively, the standard version average annual total return for
these periods will be provided.
In addition to the standard version described above, total return performance
information computed on two different non-standard bases may be used in
advertisements or sales literature. Average annual total return information may
be presented, computed on the same basis as described above, except deductions
will not include the surrender charge. In addition, the Company may from time to
time disclose cumulative total return for Contracts funded by Subaccounts.
From time to time, yields, standard average annual total returns, and
non-standard total returns for the Funds may be disclosed, including such
disclosures for periods prior to the date the Variable Account commenced
operations.
Non-standard performance data will only be disclosed if the standard performance
data for the required periods is also disclosed. For additional information
regarding the calculation of other performance data, please refer to the
Statement of Additional Information.
In advertising and sales literature, the performance of each Subaccount may be
compared with the performance of other variable annuity issuers in general or to
the performance of particular types of variable annuities investing in mutual
funds, or investment portfolios of mutual funds with investment objectives
similar to the Subaccount. Lipper Analytical Services, Inc. ("Lipper"), Variable
Annuity Research Data Service ("VARDS") and Morningstar, Inc. ("Morningstar")
are independent services which monitor and rank the performance of variable
annuity issuers in each of the major categories of investment objectives on an
industry-wide basis.
<PAGE>
Lipper's and Morningstar's rankings include variable life insurance issuers as
well as variable annuity issuers. VARDS rankings compare only variable annuity
issuers. The performance analyses prepared by Lipper, VARDS and Morningstar each
rank such issuers on the basis of total return, assuming reinvestment of
distributions, but do not take sales charges, redemption fees, or certain
expense deductions at the separate account level into consideration. In
addition, VARDS prepares risk rankings, which consider the effects of market
risk on total return performance. This type of ranking provides data as to which
funds provide the highest total return within various categories of funds
defined by the degree of risk inherent in their investment objectives.
Advertising and sales literature may also compare the performance of each
Subaccount to the Standard & Poor's Index of 500 Common Stocks, a widely used
measure of stock performance. This unmanaged index assumes the reinvestment of
dividends but does not reflect any "deduction" for the expense of operating or
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<PAGE>
managing an investment portfolio. Other independent ranking services and indices
may also be used as a source of performance comparison.
The Company may also report other information including the effect of
tax-deferred compounding on a Subaccount's investment returns, or returns in
general, which may be illustrated by tables, graphs or charts.
FEDERAL TAX CONSIDERATIONS
THE FOLLOWING DISCUSSION IS GENERAL AND
IS NOT INTENDED AS TAX ADVICE
INTRODUCTION
This discussion is not intended to address the tax consequences resulting from
all of the situations in which a person may be entitled to or may receive a
distribution under the Contract issued by the Company. Any person concerned
about these tax implications should consult a competent tax adviser before
initiating any transaction. This discussion is based upon the Company's
understanding of the present federal income tax laws, as they are currently
interpreted by the Internal Revenue Service ("IRS"). No representation is made
as to the likelihood of the continuation of the present federal income tax laws
or of the current interpretation by the IRS. Moreover, no attempt has been made
to consider any applicable state or other tax laws.
The Contract may be purchased on a non-qualified basis or purchased and used in
connection with plans qualifying for favorable tax treatment. The Qualified
Contract is designed for use by individuals whose purchase payments are
comprised solely of proceeds from and/or contributions under retirement plans
that are intended to qualify as plans entitled to special income tax treatment
under sections 401(a), 408, or 457 of the Code. The ultimate effect of federal
income taxes on the amounts held under a Contract, or Annuity Payments, and on
the economic benefit to the Owner, the Annuitant, or the Beneficiary depends on
the type of retirement plan, on the tax and employment status of the individual
concerned, and on the Company's tax status. In addition, certain requirements
must be satisfied in purchasing a Qualified Contract with proceeds from a
tax-qualified plan and receiving distributions from a Qualified Contract in
order to continue receiving favorable tax treatment. Therefore, purchasers of
Qualified Contracts should seek competent legal and tax advice regarding the
suitability of a Contract for their situation, the applicable requirements, and
the tax treatment of the rights and benefits of a Contract. The following
discussion assumes that Qualified Contracts are purchased with proceeds from
and/or contributions under retirement plans that qualify for the intended
special federal income tax treatment.
TAX STATUS OF THE CONTRACT
Diversification Requirements. Section 817(h) of the Code provides that separate
account investments underlying a contract must be "adequately diversified" in
accordance with Treasury Department regulations in order for the contract to
qualify as an annuity contract under Section 72 of the Code. The Variable
Account, through each underlying Fund, intends to comply with the
diversification requirements prescribed in regulations under Section 817(h) of
the Code, which affect how the assets in the various Subaccounts may be
invested. Although the Company does not have direct control over the Funds in
which the Variable Account invests, the Comapny believes that each Fund will
meet the diversification requirements, and therefore, the Contract will be
treated as an annuity contract under the Code.
<PAGE>
In certain circumstances, owners of variable annuity contracts may be considered
the owners, for federal income tax purposes, of the assets of the separate
account used to support their contracts. In those circumstances, income and
gains from the separate account assets would be includible in the variable
annuity contract owner's gross income. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate account
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<PAGE>
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The Treasury
Department has also announced, in connection with the issuance of regulations
concerning investment diversification, that those regulations "do not provide
guidance concerning the circumstances in which investor control of the
investments of a segregated asset account may cause the investor (i.e., the
contract owner), rather than the insurance company, to be treated as the owner
of the assets in the account." This announcement also states that guidance would
be issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular subaccounts without being treated as
owners of the underlying assets." As of the date of this prospectus, no such
guidance has been issued.
The ownership rights under the Contracts are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets. For
example, the Owner of a Contract has the choice of several Subaccounts in which
to allocate Net Purchase Payments and Contract Values, and may be able to
transfer among Subaccounts more frequently than in such rulings. These
differences could result in an Owner being treated as the owner of the assets of
the Variable Account. In addition, the Company does not know what standards will
be set forth, if any, in the regulations or rulings which the Treasury
Department has stated it expects to issue. The Company therefore reserves the
right to modify the Contract as necessary to attempt to prevent the Owner from
being considered the owner of the Variable Account's assets.
Required Distributions. In order to be treated as an annuity contract for
federal income tax purposes, section 72(s) of the Code requires any
Non-Qualified Contract to provide that: (a) if any Owner dies on or after the
Annuity Date but prior to the time the entire interest in the Contract has been
distributed, the remaining portion of such interest will be distributed at least
as rapidly as under the method of distribution being used as of the date of that
Owner's death; and (b) if any Owner dies prior to the Annuity Date, the entire
interest in the Contract will be distributed within five years after the date of
the Owner's death. These requirements will be considered satisfied as to any
portion of the Owner's interest that is payable to or for the benefit of a
"designated beneficiary," and that is distributed over the life of such
beneficiary or over a period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin within one year of that
Owner's death. The Owner's "designated beneficiary" is the person designated by
such Owner as a beneficiary and to whom ownership of the contract passes by
reason of death and must be a natural person. However, if the Owner's
"designated beneficiary" is the surviving spouse of the Owner, the Contract may
be continued with the surviving spouse as the new Owner.
Non-Qualified Contracts contain provisions that are intended to comply with the
requirements of section 72(s) of the Code, although no regulations interpreting
these requirements have yet been issued. The Company intends to review such
provisions and modify them if necessary to assure that they comply with the
requirements of Code section 72(s) when clarified by regulation or otherwise.
Other rules may apply to Qualified Contracts.
The following discussion assumes that the Contracts will qualify as annuity
contracts for federal income tax purposes.
<PAGE>
TAXATION OF ANNUITIES
In General. Section 72 of the Code governs taxation of annuities in general. The
Company believes that an Owner who is a natural person is not taxed on increases
in Contract Value until distribution occurs by withdrawing all or part of the
Contract Value (e.g., withdrawals and surrenders) or as Annuity Payments under
the Annuity Payment Option elected. For this purpose, the assignment, pledge, or
agreement to assign or pledge any portion of the Contract Value (and in the case
of a Qualified Contract, any portion of an interest in the qualified plan)
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<PAGE>
generally will be treated as a distribution. The taxable portion of a
distribution (in the form of a single sum payment or payment option) is taxable
as ordinary income.
The owner of any annuity contract who is not a natural person generally must
include in income any increase in the excess of the contract value over the
"investment in the contract" during the taxable year. There are some exceptions
to this rule, and a prospective Owner that is not a natural person may wish to
discuss these with a competent tax adviser.
The following discussion generally applies to Contracts owned by natural
persons.
Withdrawals. In the case of a withdrawal from a Qualified Contract, under
section 72(e) of the Code, a ratable portion of the amount received is taxable,
generally based on the ratio of the "investment in the contract" to the
participant's total accrued benefit or balance under the retirement plan. The
"investment in the contract" generally equals the portion, if any, of any
purchase payments paid by or on behalf of the individual under a Contract that
was not excluded from the individual's gross income. For Contracts issued in
connection with qualified plans, the "investment in the contract" can be zero.
Special tax rules may be available for certain distributions from Qualified
Contracts.
In the case of a withdrawal from a Non-Qualified Contract, under section 72(e),
any amounts received are generally first treated as taxable income to the extent
that the Contract Value immediately before the withdrawal exceeds the
"investment in the contract" at that time. Any additional amount withdrawn is
not taxable.
In the case of a surrender under a Qualified or Non-Qualified Contract, the
amount received generally will be taxable only to the extent it exceeds the
"investment in the contract."
Section 1035 of the Code generally provides that no gain or loss shall be
recognized on the exchange of one annuity contract for another. If the
surrendered contract was issued prior to August 14, 1982, the tax rules formerly
provided that the surrender was taxable only to the extent the amount received
exceeds the owner's investment in the contract will continue to apply to amounts
allocable to investments in that contract prior to August 14, 1982. In contrast,
contracts issued after January 19, 1985 in a Code section 1035 exchange are
treated as new contracts for purposes of the penalty and distribution-at-death
rules. Special rules and procedures apply to section 1035 transactions.
Prospective Owners wishing to take advantage of section 1035 should consult
their tax adviser.
Annuity Payments. Although tax consequences may vary depending on the payment
option elected under an annuity contract, under Code section 72(b), generally
(prior to recovery of the investment in the contract) gross income does not
include that part of any amount received as an annuity under an annuity contract
that bears the same ratio to such amount as the investment in the contract bears
to the expected return at the annuity starting date. For variable annuity
payments, the taxable portion is generally determined by an equation that
establishes a specific dollar amount of each payment that is not taxed. The
dollar amount is determined by dividing the "investment in the contract" by the
total number of expected periodic payments. However, the entire distribution
will be taxable once the recipient has recovered the dollar amount of his or her
<PAGE>
"investment in the contract." For fixed annuity payments, in general, there is
no tax on the portion of each payment that represents the same ratio that the
"investment in the contract" bears to the total expected value of the annuity
payments for the term of the payments; however, the remainder of each annuity
payment is taxable until the recovery of the investment in the contract, and
thereafter the full amount or each annuity payment is taxable. If death occurs
before full recovery of the investment in the contract, the unrecovered amount
may be deducted on the annuitant's final tax return.
- 37 -
<PAGE>
Taxation of Death Benefit Proceeds. Amounts may be distributed from a Contract
because of the death of an Owner. Generally, such amounts are includible in the
income of the recipient as follows: (i) if distributed in a lump sum, they are
taxed in the same manner as a full surrender of the Contract or (ii) if
distributed under an Annuity Payment Option, they are taxed in the same way as
Annuity Payments.
Penalty Tax on Certain Withdrawals. In the case of a distribution pursuant to a
Non-Qualified Contract, there may be imposed a federal penalty tax equal to 10%
of the amount treated as taxable income. In general, however, there is no
penalty on distributions:
1. made on or after the taxpayer reaches age 59 1/2;
2. made on or after the death of the holder (or if the holder is
not an individual, the death of the primary annuitant);
3. attributable to the taxpayer's becoming disabled;
4. a part of a series of substantially equal periodic payments
(not less frequently than annually)for the life (or life
expectancy) of the taxpayer or the joint lives (or joint life
expectancies) of the taxpayer and his or her designated
beneficiary;
5. made under certain annuities issued in connection with
structured settlement agreements; and
6. made under an annuity contract that is purchased with a single
purchase payment when the annuity date is no later than a year
from purchase of the annuity and substantially equal periodic
payments are made, not less frequently than annually, during
the annuity payment period.
Other tax penalties may apply to certain distributions under a Qualified
Contract.
Possible Changes in Taxation. In past years, legislation has been proposed that
would have adversely modified the federal taxation of certain annuities. For
example, one such proposal would have changed the tax treatment of non-qualified
annuities that did not have "substantial life contingencies" by taxing income as
it is credited to the annuity. Although as of the date of this prospectus
Congress is not considering any legislation regarding taxation of annuities,
there is always the possibility that the tax treatment of annuities could change
by legislation or other means (such as IRS regulations, revenue rulings,
judicial decisions, etc.). Moreover, it is also possible that any change could
be retroactive (that is, effective prior to the date of the change).
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A CONTRACT
A transfer of ownership of a Contract, the designation of an Annuitant, Payee or
other Beneficiary who is not also the Owner, the selection of certain Annuity
Dates or the exchange of a Contract may result in certain tax consequences to
the Owner that are not discussed herein. An Owner contemplating any such
transfer, assignment, or exchange of a Contract should contact a competent tax
adviser with respect to the potential tax effects of such a transaction.
- 38 -
<PAGE>
WITHHOLDING
Pension and annuity distributions generally are subject to withholding for the
recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions. Effective January 1, 1993, distributions from certain qualified
plans are generally subject to mandatory withholding. Certain states also
require withholding of state income tax whenever federal income tax is withheld.
MULTIPLE CONTRACTS
All non-qualified deferred annuity contracts that are issued by the Company (or
its affiliates) to the same owner during any calendar year are treated as one
annuity contract for purposes of determining the amount includible in gross
income under section 72(e) of the Code. The effects of this rule are not yet
clear; however, it could affect the time when income is taxable and the amount
that might be subject to the 10% penalty tax described above. In addition, the
Treasury Department has specific authority to issue regulations that prevent the
avoidance of section 72(e) of the Code through the serial purchase of annuity
contracts or otherwise. There may also be other situations in which the Treasury
Department may conclude that it would be appropriate to aggregate two or more
annuity contracts purchased by the same owner. Accordingly, a Contract Owner
should consult a competent tax adviser before purchasing more than one annuity
contract.
TAXATION OF QUALIFIED PLANS
The Contracts are designed for use with several types of qualified plans. The
tax rules applicable to participants in these qualified plans vary according to
the type of plan and the terms and conditions of the plan itself. Special
favorable tax treatment may be available for certain types of contributions and
distributions. Adverse tax consequences may result from contributions in excess
of specified limits; distributions prior to age 59 1/2 (subject to certain
exceptions); distributions that do not conform to specified commencement and
minimum distribution rules; aggregate distributions in excess of a specified
annual amount; and in other specified circumstances. Therefore, no attempt is
made to provide more than general information about the use of the Contracts
with the various types of qualified retirement plans. Owners, Annuitants, and
Beneficiaries are cautioned that the rights of any person to any benefits under
these qualified retirement plans may be subject to the terms and conditions of
the plans themselves, regardless of the terms and conditions of the Contract,
but the Company shall not be bound by the terms and conditions of such plans to
the extent such terms contradict the Contract, unless the Company consents to be
bound. Brief descriptions follow of the various types of qualified retirement
plans in connection with a Contract. The Company will amend the Contract as
necessary to conform it to the requirements of such plan.
Corporate Pension and Profit Sharing Plans and H.R. 10 Plans. Section 401(a) of
the Code permits corporate employers to establish various types of retirement
plans for employees, and permits self-employed individuals to establish these
plans for themselves and their employees. Such retirement plans may permit the
purchase of the Contract to provide benefits under the plans. Employers
intending to use the Contract with such plans should seek competent advice.
<PAGE>
Individual Retirement Annuities. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA." These IRAs are subject to limits on
the amount that may be contributed, the persons who may be eligible, and on the
time when distributions may commence. Also, distributions from certain other
types of qualified retirement plans may be "rolled over" on a tax-deferred basis
into an IRA. Sales of the Contract for use with IRAs may be subject to special
requirements of the IRS. Employers may establish Simplified Employee Pension
(SEP) Plans to provide IRA contributions on behalf of their employees.
- 39 -
<PAGE>
Deferred Compensation Plans. Section 457 of the Code provides for certain
deferred compensation plans. These plans may be offered with respect to service
for state governments, local governments, political subdivisions, agencies,
instrumentalities, certain affiliates of such entities, and tax exempt
organizations. The plans may permit participants to specify the form of
investment for their deferred compensation account. All investments are owned by
the sponsoring employer and are subject to the claims of the general creditors
of the employer.
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the federal tax consequences under
these Contracts are not exhaustive, and special rules are provided with respect
to other tax situations not discussed in the prospectus. Further, the federal
income tax consequences discussed herein reflect the Company's understanding of
current law and the law may change. Federal estate and state and local estate,
inheritance and other tax consequences of ownership or receipt of distributions
under a Contract depend on the individual circumstances of each Owner or
recipient of the distribution. A competent tax adviser should be consulted for
further information.
OTHER INFORMATION
DISTRIBUTION OF THE CONTRACTS
CNA/ISI, which is located at CNA Plaza, Chicago, Illinois 60685, is principal
underwriter and distributor of the Contracts. CNA/ISI is an affiliate of the
Company, is registered with the SEC as a broker-dealer, and is a member of the
National Association of Securities Dealers, Inc. ("NASD"). The Company pays
CNA/ISI for acting as principal underwriter under a distribution agreement. The
Contract are offered on a continuous basis and the Company does not anticipate
discontinuing the offer.
Applications for Contracts are solicited by agents who are licensed by
applicable state insurance authorities to sell the Company's insurance contracts
and who are also registered representatives of a broker-dealer having a selling
agreement with CNA/ISI. Such broker-dealers will generally receive commissions
based on a percent of purchase payments made (up to a maximum of 7%). The
writing agent will receive a percentage of these commissions from the respective
broker-dealer, depending on the practice of that broker-dealer. Owners do not
pay these commissions.
ADMINISTRATIVE SERVICES
Financial Administration Services, Inc. administers the Contract on behalf of
the Company at the Service Center. In this capacity, Financial Administration
Services, Inc. is responsible for the following: processing purchase payments,
Annuity Payments, death benefits, surrenders, withdrawals, and transfers;
preparing confirmation notices and periodic reports; calculating mortality and
expense risk charges; calculating Accumulation and Annuity Unit Values;
distributing voting materials and tax reports; and generally assisting Owners.
<PAGE>
VOTING PRIVILEGES
In accordance with current interpretations of applicable law, the Company votes
Fund shares held in the Variable Account at regular and special shareholder
meetings of the Funds in accordance with instructions received from persons
having voting interests in the corresponding Subaccounts. If, however, the 1940
Act or any regulation thereunder should be amended, or if the present
interpretation thereof should change, or the Company otherwise determines that
it is allowed to vote the shares in its own right, it may elect to do so.
- 40 -
<PAGE>
The number of votes that an Owner or Annuitant has the right to instruct are
calculated separately for each Subaccount, and may include fractional votes.
Prior to the Annuity Date, the Owner holds a voting interest in each Subaccount
to which Variable Contract Value is allocated. After the Annuity Date, the Payee
has a voting interest in each Subaccount from which Variable Annuity Payments
are made.
For each Owner, the number of votes attributable to a Subaccount will be
determined by dividing the Owner's Subaccount Value by the Net Asset Value Per
Share of the Fund in which that Subaccount invests. For each Payee, the number
of votes attributable to a Subaccount is determined by dividing the liability
for future Variable Annuity Payments to be paid from that Subaccount by the Net
Asset Value Per Share of the Fund in which that Subaccount invests. This
liability for future payments is calculated on the basis of the mortality
assumptions, the selected Benchmark Rate of Return and the Annuity Unit Value of
that Subaccount on the date that the number of votes is determined. As Variable
Annuity Payments are made to the Payee, the liability for future payments
decreases as does the number of votes.
The number of votes available to an Owner or Payee are determined as of the date
coinciding with the date established by the Fund for determining shareholders
eligible to vote at the relevant meeting of the Fund's shareholders. Voting
instructions are solicited by written communication prior to such meeting in
accordance with procedures established for the Fund. Each Owner or Payee having
a voting interest in a Subaccount will receive proxy materials and reports
relating to any meeting of shareholders of the Funds in which that Subaccount
invests.
Fund shares as to which no timely instructions are received and shares held by
the Company in a Subaccount as to which no Owner or Payee has a beneficial
interest are voted in proportion to the voting instructions that are received
with respect to all Contracts participating in that Subaccount. Voting
instructions to abstain on any item to be voted upon are applied to reduce the
total number of votes eligible to be cast on a matter. Under the 1940 Act,
certain actions affecting the Variable Account may require Contract Owner
approval. In that case, an Owner will be entitled to vote in proportion to his
Variable Contract Value.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party or to
which the assets of the Variable Account are subject. The Company, as an
insurance company, is ordinarily involved in litigation. The Company does not
believe that any current litigation is material to its ability to meet its
obligations under the Contract or to the Variable Account nor does the Company
expect to incur significant losses from such actions.
COMPANY HOLIDAYS
The Company is closed on the following days in 1996: New Year's Day, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, the day after Thanksgiving
Day, and Christmas Day.
<PAGE>
LEGAL MATTERS
All matters relating to Pennsylvania law pertaining to the Contracts,
including the validity of the Contracts and the Company's authority to issue the
Contracts, have been passed upon by Lynne Gugenheim, Esquire, Vice President and
Associate General Counsel of the Company. Sutherland, Asbill & Brennan of
Washington, D.C. has provided advice on certain matters relating to the federal
securities laws.
- 41 -
<PAGE>
EXPERTS
The balance sheets of the Company as of December 31, 1995 and 1994, and the
related statements of income, stockholder's equity, and cash flows for the years
ended December 31, 1995, 1994 and 1993, which are included in the prospectus,
have been audited by Deloitte & Touche LLP, independent auditors, as set forth
in their report therein, and are included therein in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION ABOUT VALLEY FORGE LIFE INSURANCE COMPANY
HISTORY AND BUSINESS
Valley Forge Life Insurance Company was incorporated under the laws of the state
of Pennsylvania on August 9, 1956 and began its operations on December 1, 1956.
The Company markets a full range of insurance products, including group medical
and life, universal life, traditional life, annuities, and guaranteed investment
contracts.
Formation of the Company was sponsored American Casualty Company of Reading,
Pennsylvania, which owned 50% of the 44,000 outstanding shares of the Company.
The remaining 50% interest was held by the Valley Forge Insurance Company, a
wholly owned subsidiary of American Casualty Company.
In late 1963, control of the parent companies was acquired by Continental
Casualty Company of Chicago, Illinois. In 1967, all outstanding shares of
Continental Casualty Company were exchanged for stock of CNA Financial
Corporation, the parent company of the CNA pool of life insurance companies. On
December 30, 1983, all outstanding shares of the Company were acquired by
Continental Assurance Company, a life insurance company subsidiary of CNA
Financial Corporation. Controlling interest of CNA Financial Corporation is held
by Loews Corporation.
Effective December 31, 1985, pursuant to a _________agreement entered into
on ________, the Company began ceding all of its business to its parent,
Continental Assurance Company. This business was then pooled with the business
of Continental Assurance Company, excluding Continental Assurance Company's
participating contracts and separate accounts, and 10% of the combined net pool
was retroceded to the Company.
The nature and results of any other reclassification, merger or consolidation,
acquisitions and dispositions of material amounts of the Company's assets, as
well as any material changes in the Company's mode of conducting business are as
follows: [ ].
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the financial statements and notes thereto included in this
prospectus.
Selected Financial Data
For the Periods Ended December 31,
------------------------------------------
1995 1994 1993 1992 1991
Net Investment Income $ $ $ $ $
Net Earnings $ $ $ $ $
Total Assets $ $ $ $ $
- 42 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Financial Statements and Notes
to Financial Statements included herein.
RESULTS OF OPERATIONS
The following are comparisons of 1995 to 1994, 1994 to 1993, and 1993 to 1992
with respect to net earnings, net investment income and interest credited to
policyholders' account balances, net realized investment gains or losses, policy
charge revenue, reinsurance premium ceded, amortization of deferred policy
acquisition costs, and insurance expenses and taxes.
[TO BE ADDED BY AMENDMENT]
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements include the payment of sales commissions
and other underwriting expenses and the funding of its contractual obligations
for the life insurance it has in-force. The Company has developed and utilizes
[a cash flow projection system and regularly performs asset/liability duration
matching in the management of its asset and liability portfolios.]
In order to continue to market life insurance and annuity products, the Company
must meet or exceed the statutory capital and surplus requirements of the
insurance departments of the states in which it conducts business. Statutory
accounting practices differ from generally accepted accounting principles in two
major respects: under statutory accounting practices, the acquisition costs of
new business are charged to expenses; and the required additions to statutory
reserves for new business in some cases may initially exceed the statutory
revenues attributable to such business. These practices result in a reduction of
statutory income and surplus at the time of recording new business.
The National Association of Insurance Commissioners ("NAIC") has developed and
implemented effective December 31, 1993, the Risk Based Capital ("RBC") adequacy
monitoring system. The RBC calculates the amount of adjusted capital that a life
insurance company should have based upon that company's risk profile. The NAIC
has established four different levels of regulatory action with respect to the
RBC adequacy monitoring system. Each of these levels may be triggered if an
insurer's total adjusted capital is less than a corresponding level of RBC. As
of December 31, 1995 and 1994, based on the RBC formula, the Company's total
adjusted capital level was [in excess] of the minimum amount of capital required
to avoid regulatory action.
The Company believes that it will be able to fund the capital and surplus
requirements of projected new business from current statutory earnings and
existing statutory capital and surplus. If sales of new business significantly
exceed projections, the Company may have to look to its parent and other
affiliated companies to provide the capital or borrowings necessary to support
its current marketing efforts. The Company's future marketing efforts could be
hampered should its parent and/or affiliates be unwilling to commit additional
funding.
<PAGE>
SEGMENT INFORMATION
The Company's operations consist of [one] business segment, which is the sale of
life insurance. The Company is not dependent upon any single customer, and no
single customer accounted for more than 10% of the Company's revenues during
1995.
- 43 -
<PAGE>
REINSURANCE
Portions of the Company's life insurance risks are reinsured with other
companies. The Company has reinsurance agreements with other insurance companies
for individual life insurance. The maximum retention on any one life is
approximately $20 million.
INVESTMENTS
As of December 31, 1995, the Company had total invested assets of $_____ million
consisting of $_____ million of short-term securities and $_____ million of
bonds and other long-term investments. The Company's assets must be invested in
accordance with applicable state laws. These laws govern the nature and
quality of investments that may be made by life insurance companies and the
percentage of their assets that may be committed to any particular type of
investment. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state, and municipal
obligations, corporate bonds, preferred or common stocks, real estate
mortgages, real estate and certain other investments. All of the Company's
assets, except for the separate account assets supporting variable products,
are available to meet its obligations under the Contracts.
The Company makes investments in accordance with investment guidelines that take
into account investment quality, liquidity and diversification, and invests
assets supporting Contract guarantees primarily in U.S. Government agency and
corporate issues.
COMPETITION
The Company is engaged in a business that is highly competitive due to the large
number of stock and mutual life insurance companies and other entities marketing
insurance products. Based upon total assets, a substantial number of these
insurers are larger than the Company.
Employees
As of December 31, 1995, the Company had approximately ______employees at its
Home Office in Reading, Pennsylvania, and approximately ______employees at its
executive office in Chicago, Illinois. [IN ADDITION THERE ARE APPROXIMATELY
______COMPANY EMPLOYEES AT VARIOUS BRANCH AND MARKETING OFFICES THROUGHOUT THE
UNITED STATES.]
PROPERTIES
The Company [owns/leases] its home office located at 401 Penn St. Reading,
Pennsylvania 19601. In addition, the Company [owns/leases] its executive office
which is located at CNA Plaza, Chicago, Illinois 60685. The Company also
[own/leases] its business offices located at ____________, Nashville, Tennessee.
<PAGE>
STATE REGULATION
The Company is subject to the laws of the Commonwealth of Pennsylvania governing
insurance companies and to the regulations of the Pennsylvania Department of
Insurance (the "Insurance Department"). A detailed financial statement in the
prescribed form (the "Statement") is filed with the Insurance Department each
year covering the Company's operations for the preceding year and its financial
condition as of the end of that year. Regulation by the Insurance Department
includes periodic examination to determine contract liabilities and reserves so
that the Insurance Department may certify that these items are correct. The
Company's books and accounts are subject to review by the Insurance Department
at all times. A full examination of the Company's operations is conducted
periodically by the Insurance Department and under the auspices of the NAIC.
- 44 -
<PAGE>
In addition, the Company is subject to regulation under the insurance laws of
all jurisdictions in which it operates. The laws of the various jurisdictions
establish supervisory agencies with broad administrative powers with respect to
various matters, including licensing to transact business, overseeing trade
practices, licensing agents, approving contract forms, establishing reserve
requirements, fixing maximum interest rates on life insurance contract loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. The Company is required to file the Statement with
supervisory agencies in each of the jurisdictions in which it does business, and
its operations and accounts are subject to examination by these agencies at
regular intervals.
The NAIC has adopted several regulatory initiatives designed to improve the
surveillance and financial analysis regarding the solvency of insurance
companies in general. These initiatives include the development and
implementation of a risk-based capital formula for determining adequate levels
of capital and surplus. Insurance companies are required to calculate their
risk-based capital in accordance with this formula and to include the results in
their Statement. It is anticipated that these standards will have no significant
effect upon the Company.
Further, many states regulate affiliated groups of insurers, such as the Company
and its affiliates, under insurance holding company legislation. Under such
laws, inter-company transfers of assets and dividend payments from insurance
subsidiaries may be subject to prior notice or approval, depending on the size
of the transfers and payments in relation to the financial positions of the
companies involved.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for contract owner losses
incurred by other insurance companies that have become insolvent. Most of these
laws provide that an assessment may be excused or deferred if it would threaten
an insurer's own financial strength.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Certain insurance products of the Company are subject to
various federal securities laws and regulations. In addition, current and
proposed federal measures that may significantly affect the insurance business
include regulation of insurance company solvency, employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies and the tax
treatment of insurance products and its impact on the relative desirability of
various personal investment vehicles.
DIRECTORS AND EXECUTIVE OFFICERS
The name, age, positions and offices, term as director, and business experience
during the past five years for the Company's directors and executive officers
are listed in the following table:
Name (Age) Position(s) with the Company and Business Experience
- -------------------------- ----------------------------------------------------
Dennis H. Chookaszian ( ) Director, Chairman of the Board
--
Philip L. Engel ( ) Director, President
--
Peter E. Jokiel ( ) Director, Senior Vice President,
-- Chief Financial Officer
<PAGE>
Donald M. Lowry ( ) Director, Senior Vice President,
-- General Counsel and Secretary
Donald C. Rycroft ( ) Director, Senior Vice President, Treasurer
--
William H. Sharkey, Jr. ( ) Director, Senior Vice President
--
Floyd E. Brady ( ) Senior Vice President
--
Bruce B. Brodie ( ) Senior Vice President
--
Thomas E. Donnelly ( ) Senior Vice President
--
James P. Flood ( ) Senior Vice President
--
- 45 -
<PAGE>
Michael C. Garner ( ) Senior Vice President
--
Bernard L. Hengesbaugh ( ) Senior Vice President
--
Jack Kettler ( ) Senior Vice President
--
Carolyn L. Murphy ( ) Senior Vice President
--
Wayne R. Smith, III ( ) Senior Vice President
--
Adrian M. Tocklin ( ) Senior Vice President
--
Jae L. Wittlich ( ) Senior Vice President
--
William J. Adamson, Jr. ( ) Group Vice President
--
Danielle Barcilon ( ) Group Vice President
--
Michael J. Berkery ( ) Group Vice President
--
Carolyn A. Boyle ( ) Group Vice President
--
Daniel A. Cacchione ( ) Group Vice President
--
James P. Carollo ( ) Group Vice President
--
Michael L. Connelly ( ) Group Vice President
--
Peter P. Conway, Jr. ( ) Group Vice President
--
David T. Cumming ( ) Group Vice President
--
Gary R. Dittman ( ) Group Vice President
--
Steven Freund ( ) Group Vice President
--
David A. Froelich ( ) Group Vice President
--
Roy German ( ) Group Vice President
--
Thomas M. Gill ( ) Group Vice President
--
Roger Graham ( ) Group Vice President
--
Thomas J. Grzelinski ( ) Group Vice President
--
Allan C. Hamann, Jr. ( ) Group Vice President
--
Paul F. Hourihan ( ) Group Vice President
--
Thomas B. Johnson ( ) Group Vice President
--
Jonathan D. Kantor ( ) Group Vice President
--
Patricia L. Kubera ( ) Group Vice President, Controller
--
Ernest A. Lausier ( ) Group Vice President
--
Jon Levy ( ) Group Vice President
--
<PAGE>
John R. Lusk ( ) Group Vice President
--
Glenn A. Mateja ( ) Group Vice President
--
Edward J. McCabe, Jr. ( ) Group Vice President
--
James W. Macdonald ( ) Group Vice President
--
Tim I. Madden ( ) Group Vice President
--
Gerald Maskowsky ( ) Group Vice President
--
Michael S. McGavick ( ) Group Vice President
--
Timothy P. Mitchell ( ) Group Vice President
--
James G. Pettorini ( ) Group Vice President
--
Thomas J. Prendergast ( ) Group Vice President
--
Richard W. Quehl ( ) Group Vice President
--
Robert P. Rego ( ) Group Vice President
--
Richard E. Ruddick ( ) Group Vice President
--
David L. Stone ( ) Group Vice President
--
John J. Sullivan, Jr. ( ) Group Vice President
--
Thomas F. Taylor ( ) Group Vice President
--
Robert J. Teske ( ) Group Vice President
--
Allen Uyeda ( ) Group Vice President
--
Mark C. Vonnahme ( ) Group Vice President
--
Douglas Walters ( ) Group Vice President
--
Frank R. Waters ( ) Group Vice President
--
John H. Wehner ( ) Group Vice President
--
- 46 -
<PAGE>
Each director is elected to serve until [______] or until his or her successor
is elected and shall have qualified. Some directors have held various executive
positions with insurance company affiliates of the Company.
[Business experience to be added]
Executive Compensation
The salaries and any other compensation of the chairman of the board and the
four most highly compensated executive officers whose compensation exceeded
$100,000 for the fiscal year ended December 31, 1995 is provided below.
[To be added]
<TABLE>
SUMMARY COMPENSATION TABLE
|============|=========|================================|=====================================|============|
| | | | | |
| | | nual Compensation | Long-Term Compensation | |
| | |-------|----------|-------------|-------------------------|-----------| |
| | | | | | | | |
| | | | | | Awards | Payouts | |
| | | | | |-------------|-----------|-----------| |
<S> <C> <C> <C> <C> <C> <C> <C> <C>
| | | | | | | | | |
| Name and | | | | | |Securities | | |
| Principal | | | | Other | |Under-Lying| | |
| Position | | | | Annual | Restricted | Options/ | | All Other |
| | | | | Compensation| Stock | SARs | LTIP |Compensation|
| | Year |Salary | Bonus | ($) | Award(s) | (#) | Payouts | ($) |
| | | ($) | ($) | | ($) | | ($) | |
| | | | | | | | | |
|============|---------|-------|----------|-------------|-------------|-----------|-----------|============|
| | | | | | | | | |
|CEO....... | | | | | | | | |
|============|---------|-------|----------|-------------|-------------|-----------|-----------|============|
| | | | | | | | | |
|A......... | | | | | | | | |
|============|---------|-------|----------|-------------|-------------|-----------|-----------|============|
| | | | | | | | | |
|B......... | | | | | | | | |
|============|---------|-------|----------|-------------|-------------|-----------|-----------|============|
| | | | | | | | | |
|C......... | | | | | | | | |
|============|---------|-------|----------|-------------|-------------|-----------|-----------|============|
| | | | | | | | | |
|D......... | | | | | | | | |
|============|=========|=======|==========|=============|=============|===========|===========|============|
| | | | | | | | | |
|============|=========|=======|==========|=============|=============|===========|===========|============|
</TABLE>
- 47 -
<PAGE>
FINANCIAL STATEMENTS OF VALLEY FORGE LIFE INSURANCE COMPANY
[To be added by amendment]
- 48 -
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information is available which contains more details
concerning subjects discussed in this prospectus. The following is the Table of
Contents for that Statement of Additional Information.
PERFORMANCE INFORMATION..................................................... 1
Money Market Subaccount Yields..................................... 1
Other Subaccount Yields............................................ 2
Average Annual Total Returns....................................... 3
Other Total Returns................................................ 4
Effect of the Annual Administration Fee on Performance Data........ 5
VARIABLE ANNUITY PAYMENTS................................................... 5
Annuity Unit Value................................................. 5
Illustration of Calculation of Annuity Unit Value.................. 5
Illustration of Variable Annuity Payments.......................... 5
VALUATION DAYS.............................................................. 6
OTHER INFORMATION........................................................... 6
FINANCIAL STATEMENTS........................................................ 6
Issued by:
Valley Forge Life Insurance Company
CNA Plaza
Chicago, Illinois 60684
Distributed by:
CNA Investor Services, Inc.
CNA Plaza
Chicago, Illinois 60684
Service Center:
Financial Administration Services, Inc.
95 Bridge Street
Haddam, Connecticut 06438
- 49 -
<PAGE>
APPENDIX A
The Market Value Adjustment is computed by multiplying the amount being
surrendered, withdrawn, transferred, or applied to an Annuity Payment Option, by
the Market Value Adjustment Factor. The Market Value Adjustment factor is
calculated as follows:
Market Value Adjustment = Amount multiplied by
[[(1+a)/(1+b)]^n/12 -1]
where:
"Amount" is the amount being surrendered, withdrawn, transferred or
applied to an Annuity Payment Option less any applicable
annual administration fees or transfer processing fees;
"a" is the Guaranteed Interest Rate currently being credited to the
"Amount"; and
"b" is the Guaranteed Interest Rate that is currently being offered for a
Guarantee Period of duration equal to the time remaining to the
expiration of the Guarantee Period for the Guarantee Amount from which
the "Amount" is taken. Where the time remaining to the expiration of
the Guarantee Period is not 1, 3, 5, 7, or 10 years, "b" is the rate
found by linear interpolation of the rate for the Guarantee Period
having the duration closest to the time remaining or, if the time
remaining is less than 1 year, "b" is the rate for a 1 year period; and
"n" is the number of complete months remaining before the expiration of the
Guarantee Period for the Guarantee Amount from which the "Amount" is
taken.
As an example of calculating "b" by linear interpolation, if the time remaining
to the expiration of the Guarantee Period is 4.5 years, the interpolated
Guaranteed Interest Rate is equal to the sum of one-fourth of the three-year
Guaranteed Interest Rate and three-fourths of the five-year Guaranteed Interest
Rate. If the three-year Guaranteed Interest Rate is 4.5% and the five-year
Guaranteed Interest Rate is 5%, the interpolated Guaranteed Interest Rate equals
4.875% -- that is, 4.5% multiplied by 0.25 plus 5% multiplied by 0.75.
The Market Value Adjustment is computed as in the following examples:
1. Assume that the Owner selects a 7 year Guarantee Period and that the Company
is crediting a 4.5% effective annual interest rate on the amount allocated or
transferred to such Guarantee Period. Assume also that 55 months into the 7-year
Period (seven months into the fifth year), the Owner withdraws $7,500.
<PAGE>
If at the time of the withdrawal the Company is offering a 2.5%
effective annual rate of interest on Guarantee Periods of 3 years and a 2.0%
effective annual rate of interest on Guarantee Periods of 1 year, then:
i = 0.04500
j = 0.02354 = (0.025 * 17/24) + (0.02 * 7/24) = linear interpolation
between the 3 year rate and the 1 year rate
The MVA factor = [(1.04500)/(1.02354)]^(29/12)-1= 0.05142
MVA = $7,500.00 * 0.05142 = $385.65
Amount received = $7,500 + $385.65 = $7,885.65
A - 1
<PAGE>
If at the time of the withdrawal the Company is offering a 5.75%
effective annual rate of interest on Guarantee Periods of 3 years and a 6.5%
effective annual rate of interest on Guarantee Periods of 1 year, then:
i = 0.04500
j = 0.05969 = (0.0575 * 17/24) + (0.065 * 7/24) = linear interpolation
between the 3 year rate and the 1 year rate
The MVA factor = [(1.04500)/(1.05969)]^(29/12)-1= 0.03317
MVA = $7,500.00 * -0.03317 = -$248.78
Amount received = $7,500 - $248.78 = $7,251.22
A - 2
<PAGE>
APPENDIX B
DEATH BENEFIT EXAMPLES
Assume that an Owner makes purchase payments on the first day of certain
Contract Years as shown in the table below. Assume also that the Owner withdraws
$7,500 during the seventh month of Contract Year five and $5,000 at the
beginning of Contract Years thirteen and fifteen. Assume that the Annuitant is
younger than age 76 for all twenty years. All "beginning of year death benefits"
are computed as of the first day of the Contract Year except for the figure for
Contract Year 5 which is computed as of the seventh month of that year (i.e., as
of the time of the $7,500 withdrawal).
Explanations:
The Death Benefit at the beginning of Contract Years 1 through 4 is
determined from the Contract Value at the end of the prior Contract
Year plus the purchase payment made at the beginning of the year for
which the computation is being made.
The Death Benefit at the end of month 7 of Contract Year 5 is
determined from the prior year's Contract Value plus the purchase
payment made at the beginning of that year, minus the $7,500 withdrawn
in the seventh month minus a $318.75 surrender charge assessed in
connection with the withdrawal.
The Death Benefit at the beginning of Contract Years 6 through 10 is
determined from the Contract Value at the end of the prior Contract
Year plus the purchase payment made at the beginning of the Year for
which the computation is being made. Since the first day of Contract
Year 6 is a minimum death benefit floor computation anniversary, a new
death benefit floor amount is set at $8,506.
The Death Benefit at the beginning of Contract Year 11 is determined
solely from the prior Year's Contract Value. Since this is a minimum
death benefit floor computation anniversary, a new death benefit floor
amount is set at $42,610.
The Death Benefit at the beginning of Contract Year 12 is determined
from the minimum death benefit which is the most recently reset death
benefit floor amount of $42,610. This is so because the Contract Value
declined and no purchase payments or withdrawals occured since the
prior reset of the death benefit floor amount.
The Death Benefit at the beginning of Contract Year 13 is determined
from the minimum death benefit which is the most recently reset death
benefit floor amount of $42,610 adjusted for the $5,000 withdrawal. The
$36,762 results from $42,610 being multiplied by $31,432/$36,432.
The Death Benefit at the beginning of Contract Year 14 is the minimum
death benefit which is the most recently reset death benefit floor
amount adjusted for the $5,000 withdrawal made since that floor amount
was set, or $36,762.
<PAGE>
The Death Benefit at the beginning of Contract Year 15 is the minimum
death benefit which is the most recently reset death benefit floor
amount of $42,610 adjusted for both $5,000 withdrawals made since that
floor amount was set. The $28,372 results from $42,610 being multiplied
by $31,432/$36,432, and this result multiplied by $16,908/$21,908.
The Death Benefit at the beginning of Contract Year 16 is the minimum
death benefit which is the most recently reset death benefit floor
amount of $42,610 adjusted for both $5,000 withdrawals made since that
floor amount was set. The $28,372 results from $42,610 being multiplied
by $31,432/$36,432, and this result multiplied by $16,908/$21,908. Even
though this is a death benefit floor computation anniversary, the death
benefit floor amount is not reset since the Contract Value has not
exceeded its previous high of $42,610 occurring in Contract Year 10. No
purchase payments or withdrawals were made.
B - 1
<PAGE>
The Death Benefit at the beginning of Contract Year 17 through 20 is
the minimum death benefit which is the most recently reset death
benefit floor amount of $42,610 adjusted for both $5,000 withdrawals
made since that floor amount was set and adjusted further for the
$10,000 purchase payment made on the first day of Contract Year 17.
<TABLE>
<CAPTION>
|================|=============|===============|=================|===============|===============|===============|
|Beginning of |Purchase | Withdrawals | Accumulated Net | End of Year | End of Year | Beginning of |
|Contract Year |Payments | | Purchase | Accumulation | Contract Value| Year Death |
| | | | Payments | Unit Value | | Benefit |
<S> <C> <C> <C> <C> <C> <C>
|================|=============|===============|=================|===============|===============|===============|
| 1 | $ 2,000 | $ 0 | $ 2,000 | 10.50000 | $ 2,100| $ 2,000 |
|================|-------------|---------------|-----------------|---------------|---------------|===============|
| 2 | $ 2,000 | $ 0 | $ 4,000 | 11.23500 | $ 4,387| $ 4,100 |
|================|-------------|---------------|-----------------|---------------|---------------|===============|
| 3 | $ 2,500 | $ 0 | $ 6,500 | 12.13380 | $ 7,438| $ 6,887 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 4 | $ 3,000 | $ 0 | $ 9,500 | 13.34718 | $11,482| $10,438 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 5 | $ 4,000 | $ 7,500 | $ 6,000 | 14.81537 | $ 8,506| $ 7,663 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 6 | $ 5,000 | $ 0 | $11,000 | 16.59321 | $15,127| $13,506 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 7 | $ 5,000 | $ 0 | $16,000 | 18.25254 | $22,139| $20,127 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 8 | $ 5,000 | $ 0 | $21,000 | 19.71274 | $29,310| $27,139 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 9 | $ 5,000 | $ 0 | $26,000 | 20.89550 | $36,369| $34,310 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 10 | $ 5,000 | $ 0 | $31,000 | 21.52237 | $42,610| $41,369 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 11 | $ 0 | $ 0 | $31,000 | 20.44625 | $40,480| $42,610 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 12 | $ 0 | $ 0 | $31,000 | 18.40162 | $36,432| $42,610 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 13 | $ 0 | $ 5,000 | $26,000 | 15.64138 | $26,717| $36,762 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 14 | $ 0 | $ 0 | $26,000 | 12.82593 | $21,908| $36,762 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 15 | $ 0 | $ 5,000 | $21,000 | 13.46723 | $17,753| $28,372 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 16 | $ 0 | $ 0 | $21,000 | 14.14059 | $18,641| $28,372 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 17 | $10,000 | $ 0 | $31,000 | 14.14059 | $28,641| $38,372 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 18 | $ 0 | $ 0 | $31,000 | 13.43356 | $27,209| $38,372 |
|================|-------------|---------------|-----------------|---------------|---------------| ==============|
| 19 | $ 0 | $ 0 | $31,000 | 13.43356 | $27,209| $38,372 |
|================|=============|===============|=================|===============|===============| ==============|
| 20 | $ 0 | $ 0 | $31,000 | 13.97090 | $28,297| $38,372 |
|================|=============|===============|=================|===============|===============| ==============|
</TABLE>
B - 2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Securities and Exchange Commission Registration Fees $________
Printing and engraving $________
Accounting fees and expenses $________
Legal fees and expenses $________
Miscellaneous $________
Total Expenses $________
[to be completed by amendment]
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The registrant has no officers, directors or employees. The depositor
and the registrant do not indemnify the officers, directors or
employees of the depositor. CNA-Financial Corporation, ("CNAFC") a
parent of the depositor, indemnifies the depositor's officers,
directors and employees in their capacity as such. Most of the
depositor's officers, directors and employees are also officers,
directors and/or employees of CNAFC.
CNAFC indemnifies any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of CNAFC) by reason of the
fact that he is or was a director, officer, employee or agent of CNAFC,
or was serving at the request of CNAFC as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of CNAFC, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful.
CNAFC indemnifies any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit
by or in the right of CNAFC to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or
agent of CNAFC, or was serving at the request of CNAFC as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including
attorney's fees) actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of CNAFC. No indemnification is made,
however, in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to CNAFC unless and only to
the extent that a court determines that, despite the
-1-
<PAGE>
adjudication of liability but in view of all of the circumstances of
the case, such person is fairly and reasonably entitled to indemnity
for such expenses which the court deems proper.
To the extent that any person referred to above is successful on the
merits or otherwise in defense of any action, suit or proceeding
referred to above, or in defense of any claim, issue or matter therein,
CNAFC will indemnify such person against expenses (including attorney's
fees) actually and reasonably incurred by him in connection therewith.
CNAFC may advance to such a person, expenses incurred in defending a
civil or criminal action, suit or proceeding as authorized by CNAFC's
board of directors upon receipt of an undertaking by (or on behalf of)
such person to repay the amount advanced unless it is ultimately
determined that he is entitled to be indemnified.
Indemnification and advancement of expenses described above (unless
pursuant to a court order) is only made as authorized in the specific
case upon a determination that such indemnification or advancement of
expenses is proper in the circumstances because he has met the
applicable standard of conduct. Such determination must be made by a
majority vote of a quorum of CNAFC's board of directors who are not
parties to the action, suit or proceeding or by independent legal
counsel in a written opinion or by CNAFC's stockholders.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable
ITEM 16. EXHIBITS
1. Form of Underwriting Agreement between Valley Forge
Life Insurance Company (the "Company") and CNA
Investor Services, Inc.*
3(i). Articles of Incorporation of Valley Forge Life
Insurance Company.**
(ii). By-Laws of Valley Forge Life Insurance Company.**
<PAGE>
4. (a) Form of Flexible Premium Deferred Variable
Annuity Contract.***
(b) Form of Qualified Plan Endorsement.***
(c) Form of IRA Endorsement.***
(d) Form of Nursing Home Confinement, Terminal
Medical Condition, Total Disability
Endorsement.***
5. Opinion regarding legality.****
- 2 -
<PAGE>
10. (a) Form of Participation Agreement between the
Company and Insurance Management Series.****
(b) Form of Participation Agreement between the
Company and Variable Insurance Products
Fund.****
(c) Form of Participation Agreement between the
Company and The Alger American Fund.****
(d) Form of Participation Agreement between the
Company and MFS Variable Insurance
Trust.****
(e) Form of Participation Agreement between the
Company and SoGen Variable Funds, Inc.****
(f) Form of Participation Agreement between
the Company and Van Eck Worldwide Insurance
Trust.****
23. (a) Consent of Sutherland, Asbill & Brennan.****
(b) Consent of Deloitte & Touche LLP.****
27. Financial Data Schedule.****
_____________________
* Incorporated herein by reference to exhibit number 3 to the Form N-4
Registration Statement filed with the Securities and Exchange
Commission on the same date as this filing.
** Incorporated herein by reference to exhibit number 6 to the Form N-4
Registration Statement filed with the Securities and Exchange
Commission on the same date as this filing.
*** Incorporated herein by reference to exhibit number 4 to the Form N-4
Registration Statement filed with the Securities and Exchange
Commission on the same date as this filing.
**** To be filed by amendment.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section 10(a)
(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;
and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
- 3 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chicago,
State of Illinois, on this day of February, 1996.
VALLEY FORGE LIFE INSURANCE COMPANY
(Registrant)
S/DONALD M. LOWRY S/PETER E. JOKIEL
Attest: ________________ By: ____________________________
Donald M. Lowry Peter E. Jokiel
Senior Vice President, Senior Vice President,
Secretary and General Chief Financial Officer,
Counsel Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
_____________________________ _________________________________ _________________
S/DENNIS H. CHOOKAZIAN
_____________________________ Chairman of the Board, February 20, 1996
Dennis H. Chookaszian Chief Executive Officer, Director
S/PHILIP L. ENGEL
_____________________________ President, Director February 20, 1996
Philip L. Engel
S/FLOYD E. BRADY
_____________________________ Senior Vice President February 20, 1996
Floyd E. Brady
S/BRUCE B. BRODIE
_____________________________ Senior Vice President February 20, 1996
Bruce B. Brodie
S/THOMAS E. DONNELLY
_____________________________ Senior Vice President February 20, 1996
Thomas E. Donnelly
S/JAMES P. FLOOD
_____________________________ Senior Vice President February 20, 1996
James P. Flood
S/MICHAEL C. GARNER
_____________________________ Senior Vice President February 20, 1996
Michael C. Garner
S/BERNARD L. HENGESBAUGH
_____________________________ Senior Vice President February 20, 1996
Bernard L. Hengesbaugh
S/PETER E. JOKIEL
_____________________________ Senior Vice President,
Peter E. Jokiel Chief Financial Officer, Director February 20, 1996
S/JACK KETTLER
_____________________________ Senior Vice President February 20, 1996
Jack Kettler
S/PATRICIA L. KUBERA
_____________________________ Group Vice President, February 20, 1996
Patricia L. Kubera Controller, Director
S/DONALD M. LOWRY
_____________________________ Senior Vice President, February 20, 1996
Donald M. Lowry General Counsel, Secretary,
<PAGE>
SIGNATURES CONTINUED
Director
S/CAROLYN L. MURPHY
_____________________________ Senior Vice President February 20, 1996
Carolyn L. Murphy
S/DONALD C. RYCROFT
_____________________________ Senior Vice President, February 20, 1996
Donald C. Rycroft Treasurer, Director
S/WILLIAM H. SHARKEY, JR.
_____________________________ Senior Vice President, February 20, 1996
William H. Sharkey, Jr. Director
S/WAYNE R. SMITH, III
_____________________________ Senior Vice President February 20, 1996
Wayne R. Smith, III
S/ADRIAN M. TOCKLIN
_____________________________ Senior Vice President February 20, 1996
Adrian M. Tocklin
S/JAE L. WITTLICH
_____________________________ Senior Vice President February 20, 1996
Jae L. Wittlich
</TABLE>
- 4 -
