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Registration No. 333-05053
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM S-6
Registration Statement
Under
THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 2
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SEPARATE ACCOUNT VL
(Exact name of trust)
FIRST VARIABLE LIFE INSURANCE COMPANY
(Name of depositor)
2122 York Road
Oak Brook, Illinois 60523
(Complete address of depositor's principal executive offices)
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ARNOLD R. BERGMAN
Vice President, General Counsel and Secretary
First Variable Life Insurance Company
2122 York Road
Oak Brook, Illinois 60523
(Name and Address of Agent for Service)
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Copy to:
Thomas C. Lauerman
Freedman, Levy, Kroll & Simonds
Suite 825
1050 Connecticut Ave., N.W.
Washington, D.C. 20036
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It is proposed that this filing will become effective
[ ] immediately upon filing pursuant to paragraph (b)
[X] on May 1, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on _________ pursuant to paragraph (a)(i) of Rule 485
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title and amount of securities being registered: An indefinite amount of
interests under variable life insurance policies.
Approximate date of proposed public offering:
[ ] Check box if it is proposed that this filing will become effective on
____________ at ___________ pursuant to Rule 487.
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CROSS-REFERENCE TABLE
Item No. in
Form N-8 B-2 Location
- ------------ --------
1, 2 Caption in Prospectus Cover, The Company, The
Separate Account
3 Inapplicable
4 Distribution and Other Agreements
5, 6 The Separate Account
7 Inapplicable
8 Financial Statements
9 Legal Proceedings
10(a), (b), (c), (d), (e) Highlights, Surrenders and Partial Withdrawals,
Withdrawal Charges, Transfers Among Contract
Options, Lapse and Reinstatement, Determination of
Account Value, Other Provisions of the Contract, The
Contract, Contract Options
10(f) Voting Rights, Other Provisions of the Contract
10(g), (h) Changes in Contract Options
10(i) Mixed and Shared Funding, Contract Values and
Benefits, Other Provisions of the Contract
11, 12 Variable Investors Series Trust, Federated Insurance
Series
13 Highlights, Charges and Expenses, Elimination and
Reduction of Charges and Expenses
14, 15 Application and Issuance of a Contract, Free Look
Right, Delayed Investment Start Date
16 Premiums, Allocation of Premiums, Determination of
Account Value
17 Surrenders and Partial Withdrawals, Payment of
Proceeds
18 Taxation of the Company and the Separate Account,
Determination of Account Value, The Separate
Account, Contract Options, The Contract, Charges and
Expenses
19 Reports and Records, Advertising Practices, Other
Provisions of the Contract
20 See 10(g) & 10(h)
21 Preferred and Non-Preferred Loans, The Contract
22, 23, 24 Inapplicable
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25 The Company
26 Inapplicable
27 The Company
28 Management of the Company
29 The Company
30, 31, 32, 33, 34 Inapplicable
35 State Regulation
36 Inapplicable
37 Inapplicable
38, 39, 40, 41(a) Distribution and Other Agreements, The Company
41(b), 41(c), 42, 43 Inapplicable
44 Determination of Account Value
45 Inapplicable
46 Surrenders and Partial Withdrawals
47, 48, 49, 50 Inapplicable
51 Contract Benefits and Values
52 Changes in Contract Options
53(a) Federal Tax Status
53(b), 54, 55 Inapplicable
56, 57, 58 Inapplicable
59 Financial Statements
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Prospectus Dated: May 1, ___
CAPITAL ONE PAY VL
A MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE CONTRACT
FUNDED IN
SEPARATE ACCOUNT VL
BY
FIRST VARIABLE LIFE INSURANCE COMPANY
Marketing and Executive Office: Variable Service Center:
2122 York Road P.O.Box 1317
Oak Brook, IL 60523 Des Moines, IA 50305-1317
Automated Information Line: (800) 59-FUNDS (800) 228-1035
This prospectus describes the Capital One Pay VL contract (the "Contract"), a
modified single premium variable life insurance contract offered by First
Variable Life Insurance Company (the "Company"). The Contracts provide for life
insurance coverage and for the accumulation of an Account Value. The Contract
requires the Owner to make an initial premium payment of at least $10,000 and,
subject to certain restrictions, permits additional premium payments.
After a Contract is approved for issue by the Company, the premium may be
allocated to the Company's segregated investment account called Separate Account
VL (the "Separate Account") or to the Company's Fixed Account, which guarantees
a minimum fixed rate of interest. The Separate Account invests in selected
portfolios of two mutual funds: Variable Investors Series Trust ("VIST") and
Federated Insurance Series ("Federated"). The portfolios currently available
under a Contract are: VIST Small Cap Growth, VIST World Equity, VIST Growth,
VIST Matrix Equity, VIST Growth & Income, VIST Multiple Strategies, VIST High
Income Bond, VIST U.S. Government Bond, and Federated Prime Money Fund II (the
"Portfolios"). (See "Contract Options.")
There is no guaranteed minimum Account Value for a Contract which is funded
through the Separate Account. The Death Benefit may, and the Account Value will,
vary up or down to reflect the investment experience of the Portfolios to which
premiums have been allocated. The Death Benefit, however, will never be less
than the Face Amount of the Contract. The Owner bears the investment risk for
all amounts allocated to the Portfolios.
An investment in a Contract is not a deposit or obligation of, or federally
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board,
or any other agency. An investment in the Contract is subject to risk that may
cause the value of the Owner's investment to fluctuate, and when the Contract is
surrendered, the value may be higher or lower than the premium payment.
Each Contract is a "modified endowment contract" for federal income tax
purposes, except in certain cases. Under current federal income tax law,
pre-death distributions under the Contract, including loans and assignments,
will be included in income on an income first basis, and a 10% penalty tax will
be imposed on income distributed before the Owner attains age 59 1/2 with
certain exceptions. (See "Federal Tax Status.") Death benefits under a modified
endowment contract, however, are generally not subject to federal income tax,
except in certain cases. (See "Federal Tax Status.")
It may not be advantageous to replace existing insurance with the Contract
described in this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS ACCOMPANIED BY THE CURRENT PROSPECTUSES OF THE VARIABLE
INVESTORS SERIES TRUST AND FEDERATED INSURANCE SERIES. ALL PROSPECTUSES SHOULD
BE READ AND RETAINED FOR FUTURE REFERENCE.
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TABLE OF CONTENTS
DEFINITIONS...................................................................
HIGHLIGHTS....................................................................
THE COMPANY...................................................................
THE SEPARATE ACCOUNT..........................................................
CONTRACT OPTIONS..............................................................
Variable Investors Series Trust............................................
Federated Insurance Series.................................................
Fixed Account Option.......................................................
Transfers Among Contract Options...........................................
General Requirements....................................................
Systematic Transfers - Dollar Cost Averaging............................
Asset Rebalancing Program...............................................
Restrictions on Transfers...............................................
Automatic Transfers of Small Accounts...................................
Changes in Contract Options................................................
Mixed and Shared Funding...................................................
CHARGES AND DEDUCTIONS........................................................
Monthly Deductions.........................................................
Administrative Charge..................................................
Maintenance Fee........................................................
Distribution Charge....................................................
Premium Tax Charge.....................................................
Federal Tax Charge.....................................................
Cost of Insurance......................................................
Daily Deductions...........................................................
Transfer Fee...............................................................
Withdrawal Charges.........................................................
Application of the Withdrawal Charges..................................
Waiver of Withdrawal Charges...........................................
Sales Charge Component.................................................
Unreimbursed Premium Tax Component.....................................
Fund Expenses..........................................................
Other Charges and Deductions...............................................
Income Taxes...........................................................
Special Service Fees...................................................
Elimination or Reduction of Charges and Expenses.......................
Group and Sponsored Arrangements.......................................
Purposes of Contract Charges...............................................
THE CONTRACTS.................................................................
Application and Issuance of a Contract.....................................
Free Look Right........................................................
Premiums...................................................................
Allocation of Premiums.....................................................
Delayed Investment Allocation Date.....................................
Telephone Transactions.....................................................
CONTRACT VALUES AND BENEFITS..................................................
Death Benefit..............................................................
Impact of Additional Premiums Payments.................................
Adjustments to the Death Benefit Proceeds..............................
Acceleration of Death Benefit Rider........................................
Determination of Account Value.............................................
Account Value and Cash Surrender Value.................................
Net Investment Experience..............................................
Contract Loans.............................................................
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Immediate Loan Repayment...............................................
Interest Credited on Loan Account......................................
Surrender and Partial Withdrawals..........................................
Maturity Proceeds..........................................................
Lapse and Reinstatement....................................................
Payment of Proceeds........................................................
Tax Withholding............................................................
Optional Annuity Payment Options...........................................
Annuitization Bonus....................................................
Right to Exchange for a Fixed Benefit Contract.............................
OTHER PROVISIONS OF THE CONTRACT..............................................
Suicide Exclusion..........................................................
Representations and Contestability.........................................
Misstatement of Age or Sex.................................................
Owner and Beneficiary......................................................
Assignments................................................................
Reports and Records........................................................
Voting Rights..............................................................
Suspension of Payments and Transfers.......................................
Nonparticipation in Company Dividends......................................
DISTRIBUTION AND OTHER AGREEMENTS.............................................
SAFEKEEPING OF ASSETS.........................................................
MANAGEMENT OF THE COMPANY.....................................................
FEDERAL TAX STATUS............................................................
General ...................................................................
Taxation of the Company and the Separate Account...........................
Income Tax Treatment of Contract Benefits..................................
Diversification Requirements...............................................
ADVERTISING PRACTICES.........................................................
LEGAL MATTERS.................................................................
State Regulation...........................................................
Legal Proceedings..........................................................
Counsel....................................................................
EXPERTS.......................................................................
REGISTRATION STATEMENT........................................................
APPENDICES
APPENDIX A: ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, CASH SURRENDER
VALUES AND ACCUMULATED VALUE OF THE PREMIUM
APPENDIX B: FINANCIAL STATEMENTS
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS (OR IN ANY SALES
LITERATURE APPROVED BY THE COMPANY) IN CONNECTION WITH THE OFFER OF THE CONTRACT
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED. THE CONTRACTS ARE NOT AVAILABLE IN ALL
JURISDICTIONS, AND THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY
JURISDICTION TO ANY PERSON TO WHOM SUCH OFFER WOULD BE UNLAWFUL THEREIN.
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DEFINITIONS
ACCOUNT - The Fixed Account and/or one or more of the Sub-Accounts of the
Separate Account.
ACCOUNT VALUE - The sum of the amounts attributable to a Contract that are: (a)
in the Separate Account; (b) in the Fixed Account; and, if there is an
outstanding Contract loan, (c) in the Loan Account.
ACCUMULATION UNIT - A unit of measure used to calculate the Account Value of a
Sub-Account of the Separate Account.
ACCUMULATION UNIT VALUE OR AUV - The value of an Accumulation Unit on a Business
Day.
AGE - The attained age of the Insured on the date for which age is being
determined.
BENEFICIARY - The person(s) or entity who will receive the Death Benefit.
BUSINESS DAY - Each day the New York Stock Exchange is open for regular trading,
which is Monday through Friday, except for the following holidays: New Year's
Day, Martin Luther King Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, Christmas Day.
CASH SURRENDER VALUE - The amount available upon surrender of the Contract,
which is equal to the Contract's Account Value reduced by any outstanding
Contract loan and accrued interest; and reduced by any applicable Withdrawal
Charges.
CODE - The Internal Revenue Code of 1986, as amended.
COMPANY - First Variable Life Insurance Company.
CONTRACT ANNIVERSARY - An anniversary of the Contract Date.
CONTRACT DATE - The date the provisions of the Contract take effect, as shown on
the Owner's Contract data page. Contract Months and Contract Years are measured
from this date.
CONTRACT OPTION - The Fixed Account or any of the Sub-Accounts of the Separate
Account which can be selected by the owner of a Contract.
CONTRACT YEAR - Each 12-month period beginning on the Contract Date.
DEATH BENEFIT - The Death Benefit is the amount of insurance provided under a
Contract on the life of an Insured.
DEATH BENEFIT PROCEEDS - The amount payable on the death of the Insured. This
amount is the Death Benefit less Indebtedness.
DISTRIBUTOR - First Variable Capital Services, Inc., 2122 York Road, Oak Brook,
IL 60523.
FIXED ACCOUNT - The Fixed Account is the non-loaned portion of the Contract's
Account Value that is part of the Company's general account. The Fixed Account
provides guarantees of principal and interest and is not part of the Separate
Account.
FUNDS - Variable Investment Series Trust and Federated Insurance Series, each of
which is an open-end management investment company (i.e., a "mutual fund") in
which the Separate Account invests.
GUIDELINE PREMIUM - A hypothetical amount used to determine the Death Benefit
under a Contract. The Guideline Premium is the maximum amount of a single
premium that would be permitted to be paid under a Contract having a given
benefit, based on the applicable death benefit percentage under the guideline
premium test in section 7702 of the Code.
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INDEBTEDNESS - All amounts owed to the Company by an Owner for loans on the
Contract plus interest due or accrued on the loans.
INSURED - The person on whose life the Contract is issued.
LOAN ACCOUNT - An account which is established in the Company's general account
for any amounts requested for loans. Account Value equal to the amounts loaned
are transferred to the Loan Account from the Fixed Account and the Separate
Account when the loans are made by the Company. Amounts in the Loan Account are
credited with interest.
MATURITY DATE - The Contract Anniversary on or following the Insured's 100th
birthday.
NET INVESTMENT EXPERIENCE - For any period, the Net Investment Experience of a
Sub-Account of the Separate Account is the investment experience of the
underlying Portfolio for the same period, reduced by the amount of charges
against the Sub-Account for that period.
OWNER - The person entitled to all the ownership rights under a Contract. The
initial owner is stated on the application for a Contract, and may be later
changed as the Contract provides.
PORTFOLIO - A Fund's separate and distinct class of shares that is available as
the underlying investment under a Contract Option.
SEPARATE ACCOUNT - A separate investment account of the Company, designated as
Separate Account VL.
SUB-ACCOUNT - A segment of the Separate Account which invests in a specified
Portfolio of the Funds.
VALUATION PERIOD - The period of time between the close of one Business Day and
the close of business for the next succeeding Business Day.
VARIABLE SERVICE CENTER - The Company's administrative service center for the
Contracts is located at 1206 Mulberry Street, Des Moines, IA 50309. The mailing
address is P.O. Box 1317, Des Moines, IA 50305-1317.
HIGHLIGHTS
The following is a brief listing of the basic features of the Contract. These
and other features of the Contract are explained in detail throughout the
prospectus. Investors should be sure to read the prospectus and the prospectuses
of the Funds for more complete information.
This prospectus describes a Contract issued by the Company that provides
modified single premium life insurance. Death Benefits and Account Value under
these Contracts are "variable" and will reflect the Net Investment Experience of
the Contract Options and Portfolios chosen by the Owner. The Fixed Account
Contract Option provides guarantees of principal and interest. (For a
description of the Fixed Account, see "Fixed Account Option" which appears later
in this prospectus.) However, the portion of the Account Value invested in the
Sub-Accounts is not guaranteed, and the Owner bears the investment risk on this
portion of the Account Value. (See "Account Value.")
The Contract requires payment of a single premium on or before the Contract
Date. Additional amounts may be paid thereafter, subject to certain
restrictions, as long as the Contract meets the definition of a life insurance
contract under the Code.
Generally, a Contract may be issued to cover an Insured from the age of one to
80 and, if the Company consents, to an Insured from the age of 81 to 85. All
persons must meet the Company's underwriting and other criteria for issuance.
Owners have the right to return the Contract according to the terms of its
"free-look" right. (See "Application and Issuance of a Contract--Free Look
Right.")
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The Contract provides for a Death Benefit determined by treating the initial
premium as equal to 100% of the "guideline single premium" on the Contract Date.
After the Contract Date, the Death Benefit is determined monthly based upon the
Account Value at that time multiplied by a specified percentage. Upon the death
of the Insured, the Company will pay the Death Benefit Proceeds to the
beneficiary. (See "Death Benefit Proceeds.")
The Account Value may be transferred by the Owner among the Sub-Accounts (see
"Transfers Among Contract Options") or from the Fixed Account. Transfers from
the Fixed Account are more restrictive, however. (See "Transfers Among Contract
Options" and "Fixed Account Option.")
A loan privilege is available under the Contract. Surrenders and partial
withdrawal features are also permitted and may be subject to withdrawal charges,
discussed below. (See "Preferred and Non-Preferred Loans" and "Surrenders and
Partial Withdrawal.")
The Account Value of the Contract will vary daily based on, among other things,
the Net Investment Experience of the Sub-Accounts to which amounts have been
allocated and the amount of interest credited to any of the Contract's Account
Value in the Fixed Account. (See "Account Value", "Charges and Expenses",
"Premiums", "Preferred and Non-Preferred Loans", "Surrenders and Partial
Withdrawal" and "Fixed Account Option.")
The Contract is subject to the following charges and deductions:
Monthly Deductions - composed of the following:
- - administrative charge - at an annualized rate of .40% of Account Value;
- - maintenance fee - $2.50 if Account Value is less than $100,000;
- - cost of insurance - at an annualized rate of .40% of Account Value for
the first 10 Contract Years and then at an annualized rate of .55% of
Account Value, based on the Company's current scale, which is not
guaranteed; and
- - distribution, premium tax and federal tax charges for the first ten
Contract Years, at an annualized rate of .65% of Account Value (.20% on
an annual basis for distribution expenses; .25% on an annual basis for
premium tax expenses; and .20% on an annual basis for federal tax
expense)
Daily Deductions - a mortality and expense risk charge is taken and is equal to
an annual rate of 0.90% of the daily net assets in each Sub-Account.
Transactions Fees - for certain transfers of Account Value between and among
Contract Options, withdrawals of Account Value and upon surrender of a Contract:
- - transfers - the Company will deduct a transfer fee of $10 per transfer if
more than 12 transfers are made in a Contract Year.;
- - withdrawals and surrenders - withdrawal charges may be assessed during
the first nine Contract Years. The withdrawal charge decreases from 9.75%
of premiums to 0% at the end of the ninth Contract Year. It is composed
of a Sales Charge of up to 7.5% of premium(s) and an Unreimbursed Premium
Tax Charge of up to 2.25% of premiums These Withdrawal Charges will also
apply if the Account Value is applied to an optional annuity payment
option within five years of the Contract Date. (See "Optional Annuity
Payment Options") No Withdrawal Charges will be taken on a partial
withdrawal in any Contract Year unless the amount withdrawn exceeds the
annual Free Withdrawal Amount. The annual Free Withdrawal Amount is equal
to 15% of the premium payment(s) that have been made. (These 15%
withdrawals do not reduce premium payments for purposes of computing the
Withdrawal Charges.)
For more information about each of these charges and deductions, see the
"Charges and Deductions" section of this prospectus.
Fund Expenses - underlying shares of the Portfolios of Variable Investors Series
Trust ("VIST") and Federated Insurance Series ("Federated") are purchased at net
asset value, which reflects investment management fees, other operating expenses
and any expense reimbursement paid by an investment adviser to the applicable
Portfolio. The total annual expenses of the Portfolios as a percentage of
average net assets for the year ended December 31, 1997 were:
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<TABLE>
<CAPTION>
Other Operating
Management Expenses (After Total Annual
Portfolio Fees Reimbursement) Expenses
--------- ---- -------------- --------
<S> <C> <C> <C>
VIST Small Cap Growth .85% .50% 1.35%
VIST World Equity .70% .50% 1.20%
VIST Growth .70% .40% 1.10%
VIST Matrix Equity .65% .50% 1.15%
VIST Growth & Income .75% .50% 1.25%
VIST Multiple Strategies .70% .49% 1.19%
VIST High Income Bond .70% .50% 1.20%
VIST U.S. Government Bond .60% .25% .85%
Federated Prime Money Fund II .55% .25% .80%
</TABLE>
First Variable Advisory Services Corp., the investment adviser to VIST, has
agreed through April 1, 1999 to reimburse VIST for operating expenses (exclusive
of management fees) in excess of .50% of a VIST Portfolio's average daily net
assets (.25% in the case of the VIST U.S. Government Bond Portfolio). Had this
investment adviser not reimbursed expenses of the VIST Portfolios, for the year
ended December 31, 1997, the VIST annual expenses, as a percentage of the
Portfolio's average assets, would have been 1.79% for the VIST Small Cap Growth
Portfolio; 1.47% for the VIST World Equity Portfolio; 1.54% for the VIST Matrix
Equity Portfolio; 1.60% for the VIST Growth & Income Portfolio; 1.21% for the
VIST Multiple Strategies Portfolio; 1.64% for the VIST High Income Bond
Portfolio; and 1.73% for the VIST U.S. Government Bond Portfolio. Federated
Advisors, the investment adviser for Federated has voluntarily agreed to waive
any portion of its fee and/or reimburse certain operating expenses of Federated
in excess of .80% of the Federated Prime Money Fund II Portfolio's average net
assets, but can modify or terminate this voluntary agreement at any time at its
sole discretion. Had this investment adviser not waived expenses and/or
reimbursed expenses of the Federated Prime Money Fund II Portfolio for the year
ended December 31, 1997, the annual expenses, as a percentage of the Portfolio's
average assets, would have been 1.00%.
The managment fees and other expenses are more fully described in the
prospectuses for each of the underlying Funds.
THE COMPANY
First Variable Life Insurance Company (the "Company") is a stock life insurance
company which was organized under the laws of the State of Arkansas in 1968. The
Company is principally engaged in the business of variable life insurance,
variable annuities, and fixed annuities. The Company is licensed in 49 states,
the District of Columbia and the U.S. Virgin Islands. The Company is a
wholly-owned subsidiary of Irish Life of North America, Inc. ("ILoNA") which, in
turn, is beneficially owned by Irish Life plc ("Irish Life"). ILoNA also owns
Interstate Assurance Company of Des Moines, Iowa and Guarantee Reserve Life
Insurance Company of Calumet City, Illinois. Irish Life was formed in 1939
through a consolidation of a number of Irish and British Life offices
transacting business in Ireland. In terms of assets, Irish Life controls over
50% of the Irish domestic life insurance market. As Ireland's leading
institutional investor, it owns in excess of 10% of the leading Irish publicly
traded stocks. Irish Life, through its international subsidiaries, conducts
business in Ireland, the United Kingdom, the United States, and France. As of
the end of 1997, the Irish Life consolidated group had in excess of $14 billion
in assets. ILoNA is a Delaware corporation, incorporated as Carrig
International, Inc. in 1986.
The Company has an A- (Excellent) rating from A.M. Best, an independent firm
that analyzes insurance carriers. This rating is assigned to companies that have
a strong ability to meet obligations to Contract holders over a long period of
time. The Company also has an AA- rating from Standard and Poor's and an AA
rating from Duff & Phelps Credit Rating Co. on claims paying ability. The
financial strength of the Company may be relevant with respect to the Company's
ability to satisfy its Fixed Account obligations under the Contracts.
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THE SEPARATE ACCOUNT
The Company authorized the establishment of Separate Account VL (the "Separate
Account") as a segregated asset account pursuant to Arkansas insurance law on
March 6, 1987. The Separate Account is registered with the Securities and
Exchange Commission ("SEC") as a unit investment trust pursuant to the
provisions of the Investment Company Act of 1940. Such registration does not
involve supervision by the SEC of the management of the Separate Account or the
Company.
The assets of the Separate Account are the property of the Company. However, the
assets of the Separate Account, equal to the reserves and other contract
liabilities with respect to the Separate Account, are not chargeable with
liabilities arising out of any other business the Company may conduct. Income,
gains and losses, whether or not realized, are, in accordance with the
Contracts, credited to or charged against the Separate Account without regard to
other income, gains or losses of the Company. The Company's general account also
supports all of the Company's obligations, including those arising under the
Contracts.
The Separate Account is divided into Sub-Accounts, with the assets of each
Sub-Account invested in one Portfolio of a selected Fund. Owners bear the
complete investment risk for premium payments and Account Value allocated or
transferred to a Sub-Account. Account Values fluctuate in accordance with the
investment performance of the Sub-Account(s) and reflect the imposition of the
fees and charges assessed under a Contract.
CONTRACT OPTIONS
Owners of a Contract may allocate premium payments and Account Value to one or
more Sub-Accounts of the Separate Account and to the Fixed Account.
Each Sub-Account invests exclusively in a Portfolio of a selected Fund. A brief
summary of the Funds and the investment objectives of the currently available
Portfolios is set forth below. More comprehensive information, including a
discussion of potential risks, is found in the current prospectuses for the
Funds, which are included with this prospectus. The prospectuses for the Funds
may describe other portfolios that are not available under a Contract. THERE IS
NO ASSURANCE THAT THE AVAILABLE PORTFOLIOS WILL ACHIEVE THEIR STATED OBJECTIVES.
Investors should read this prospectus and the prospectuses for the Funds
carefully before investing.
VARIABLE INVESTORS SERIES TRUST
Variable Investors Series Trust ("VIST") is an open-end management investment
company that was formed as a series trust to provide funding options for
variable life insurance and variable annuity contracts. Effective April 1, 1994,
VIST retained First Variable Advisory Services Corp. ("FVAS") to manage its
assets. FVAS is a wholly-owned subsidiary of the Company and retains the
services of sub-advisers under agreements to manage the assets of the VIST
Portfolios. The sub-advisers for the VIST Portfolios currently available under a
Contract are: Value Line, Inc. with respect to VIST Growth and VIST Multiple
Strategies Portfolios; Warburg Pincus Asset Management, Inc. with respect to
VIST Growth & Income Portfolio; Federated Investment Counseling with respect to
VIST High Income Bond Portfolio; Pilgrim Baxter & Associates, Ltd. with respect
to VIST Small Cap Growth Portfolio; State Street Bank and Trust Company with
respect to VIST Matrix Equity Portfolio; Strong Capital Management, Inc. with
respect to VIST U.S. Government Bond Portfolio; and Keystone Investment
Management Company with respect to VIST World Equity Portfolio.
Each Portfolio has a distinct investment objective and Contract. The investment
objectives of the Portfolios available under a Contract are:
VIST Small Cap Growth. The investment objective of this Portfolio is to seek
capital appreciation. The Portfolio will invest, under normal conditions, at
least 65% of its total assets in securities of companies with small
capitalization (market capitalization or annual revenues under $1 billion at the
time of purchase).
VIST World Equity. The investment objective of this Portfolio is to maximize
long-term total return by investing primarily in common stocks, and securities
convertible into common stocks, traded in securities markets located in
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countries around the world, including the United States. See "Foreign
Investments" under "Contracts and Techniques Applicable to all Portfolios" in
the VIST prospectus for a discussion of the risks involved in investing in
foreign securities.
VIST Growth. The investment objective of this Portfolio is capital growth, which
it seeks to achieve through a Contract of investing primarily in a diversified
portfolio of common stocks and securities convertible into or exchangeable for
common stock. The secondary objective is current income, when consistent with
its primary objective.
VIST Matrix Equity. The investment objective of this Portfolio is capital
appreciation and current income. The Portfolio will seek to achieve its
investment objective by investing in a diversified portfolio that is selected by
the Sub-Adviser on the basis of its proprietary analytical model. Sector weights
are normally maintained at a similar level to that of the S&P 500 Index. The
Portfolio will invest at least 65% of its total assets in equity securities.
VIST Growth & Income. The investment objectives of this Portfolio are to provide
current income and growth of capital. The Portfolio seeks to achieve its
objectives by investing in equity securities, fixed income securities and money
market instruments. The portion of the Portfolio invested at any given time in
each of these asset classes will vary depending on market conditions, and there
may be extended periods when the Portfolio is primarily invested in one of them.
In addition, the amount of income derived from the Portfolio will fluctuate
depending on the composition of the Portfolio's holdings and will tend to be
lower when a higher portion of the Portfolio is invested in equity securities.
The Portfolio may also purchase without limitation dollar-denominated American
Depository Receipts ("ADRs"). ADRs are issued by domestic banks and evidence
ownership of underlying foreign securities.
VIST Multiple Strategies. The investment objective of this Portfolio is to seek
as high a level of total return over an extended period of time as is considered
consistent with prudent investment risk by investing in equity securities,
bonds, and money market instruments in varying proportions.
VIST High Income Bond. The investment objective of this Portfolio is to obtain
as high a level of current income as is believed to be consistent with prudent
investment management. As a secondary objective, the Portfolio seeks capital
appreciation when consistent with its primary objective. The Portfolio seeks to
achieve its investment objectives by investing primarily in fixed income
securities rated lower than A. Many of the high yield securities in which the
Portfolio may invest are commonly referred to as "junk bonds." For special risks
involved with investing in such securities (including among others, risk of
default and illiquidity) see "Investment Objectives and Contracts of the
Portfolios -- High Income Bond Portfolio" in the VIST prospectus.
VIST U.S. Government Bond. The investment objective of this Portfolio is to seek
current income and preservation of capital through investment primarily in
securities issued or guaranteed as to principal and interest by the U.S.
Government or by its agencies, authorities, or instrumentalities.
FEDERATED INSURANCE SERIES
Federated Insurance Series ("Federated") is an open-end investment management
company that was formed as a series trust to provide funding options for
variable life insurance and variable annuity contracts. Pursuant to an
investment advisory contract, investment decisions for Federated are made by
Federated Advisers, an affiliate of Federated Investment Counseling. Federated
Securities Corp. is the principal distributor for shares of Federated Prime
Money Fund Portfolio.
Federated Prime Money Fund II. The investment objective of the Portfolio is to
provide current income consistent with stability of principal and liquidity. The
Portfolio pursues its investment objective by investing exclusively in money
market instruments maturing in 397 days or less. An investment in the Federated
Prime Money Fund II Portfolio is neither insured nor guaranteed by the U.S.
Government.
FIXED ACCOUNT OPTION
This Prospectus is generally intended to describe the Contract and Separate
Account. Because of certain exemptive and exclusionary provisions, interests in
the Fixed Account are not registered under the Securities Act of 1933 and
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<PAGE> 13
the Fixed Account is not registered as an investment company under the
Investment Company Act of 1940. Accordingly, neither the Fixed Account nor any
interests therein are generally subject to the provisions of these Acts, and the
Company has been advised that the staff of the SEC has not reviewed the
disclosures in the Prospectus relating to the Fixed Account.
The Company guarantees that it will credit interest to Account Values in the
Fixed Account at a minimum effective rate of 3% per year. Additional amounts of
"current" interest may be credited by the Company in its sole discretion.
Additional premium payments allocated to the Fixed Account may receive a
different current interest rate than the current interest rate credited to
amounts transferred from the Separate Account. New premium payments and
transfers from the Separate Account or Loan Account to the Fixed Account may
each receive different current interest rate(s) than the current interest
rate(s) credited to Account Value existing in the Fixed Accounts. The Company
determines current interest rates in advance, and credits interest daily to
Fixed Account Value.
TRANSFERS AMONG CONTRACT OPTIONS
General Requirements. An Owner may transfer Account Value among Contract Options
by written request or telephone authorization. The minimum amount which may be
transferred is the lesser of (a) $1,000; or (b) the Owner's entire interest in
the applicable Sub-Account or Fixed Account. A written request to transfer
Account Value, or to reallocate future premium payments should be sent or
telecopied to the Variable Service Center. To request a transfer or reallocation
by telephone, the Owner should contact his or her sales representative or
contact the Variable Service Center at 1-800-228-1035. Requests for transfers or
reallocations by telephone will be automatically permitted. The Company will use
reasonable procedures such as requiring certain identifying information from the
caller, tape recording the telephone instructions, and providing written
confirmation of the transaction, in order to confirm that instructions
communicated by telephone are genuine. Any telephone instructions reasonably
believed by the Company to be genuine will be the Owner's responsibility,
including losses arising from any errors in the communication of instructions.
As a result of this, the Owner will bear the risk of loss. If the Company does
not employ reasonable procedures to confirm that instructions communicated by
telephone are genuine, the Company may be liable for any losses due to
dishonored or fraudulent instructions. (See "Telephone Transactions.")
Any transfer instruction must clearly specify the amount which is to be
transferred and the Contract Options which are to be affected. All Sub-Account
transfer requests made at the same time will be treated as a single request. The
transfer will be effective as of the end of the Valuation Period in which the
Company receives the transfer request at its Variable Service Center.
Unless otherwise permitted by the Company, Account Value to be transferred from
the Fixed Account to other Contract Options in any Contract Year may only be
requested within 30 days of the Contract Anniversary and may not be entirely
transferred in less than 4 Contract Years. For example, only 25% of the Fixed
Account Value on the Contract Date may be transferred to other Contract Options
during the first Contract Year. After the first Contract Year, transfers during
a Contract Year may not exceed the greater of:
- - 25% of the Fixed Account Value on the immediately preceding Contract
Anniversary; or
- - 100% of the Fixed Account Value transferred to other Contract Options
during the immediately preceding Contract Year.
A transaction fee may be imposed if the Owner makes more than 12 "free"
transfers in a Contract Year. The Company may from time to time increase the
permitted number of free transfers. (See "Charges and Deductions.")
Systematic Transfers - Dollar Cost Averaging. The Company permits systematic
transfers, such as dollar cost averaging, that an Owner may initiate by
telephone or by written request to the Company at its Variable Service Center.
Through systematic transfers, designated amounts are transferred on the last
Business Day of each pre-selected period from a selected Contract Option to
other pre-selected Contract Options. The Owner may select from among the
following periods, or any other period acceptable to the Company: monthly,
quarterly, semi-annually or annually. The dollar cost averaging program permits
transfers from the Prime Money Fund Sub-Account or the Fixed Account to other
Sub-Account(s) on a regular scheduled basis. Through use of systematic
transfers, instead of transfers of the total Account Value at one particular
time, an Owner may be less susceptible to the impact of market fluctuations.
Systematic transfers may prevent investing too much when the price of shares is
high and too
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<PAGE> 14
little when the price of shares is low. However, since systematic transfers,
such as dollar cost averaging involve continuous investment regardless of
fluctuating price levels, the purchaser should consider his ability to continue
purchases through periods of low price levels. The minimum amount which may be
transferred at any time is $100. The Company requires $1,200 of Account Value to
be in the Prime Money Fund II Sub-Account or the Fixed Account, as applicable,
before a "dollar cost averaging" program may begin. Transfers from the Fixed
Account are also subject to the restrictions described above in General
Requirements, except that 100% of amounts in the Fixed Account may be
systematically transferred within one year if transfers are made monthly.
Systematic transfers under the dollar cost averaging program are not subject to
the transaction fee on transfers, and are not taken into account for purposes of
determining the number of "free" transfers within a year. The Company does not
currently charge for enrolling in the dollar cost averaging program, but
reserves the right to do so. (See "Special Service Fees.")
Asset Rebalancing Program. The Company administers an asset rebalancing program
that an Owner may initiate by telephone or by written request to the Company at
its Variable Service Center. The asset rebalancing program enables the Owner to
indicate to the Company the percentage levels of Account Value he or she would
like to maintain in particular Contract Options. On the last Business Day of
each pre-selected period, the Account Value will be automatically rebalanced to
maintain the indicated percentages by transfers among the Contract Options. The
Owner may select from among the following periods, or any other period
acceptable to the Company: quarterly, semi-annually or annually. All Account
Value allocated to the Separate Account Contract Options must be included in the
asset rebalancing program. Asset rebalancing involving transfers from the Fixed
Account are subject to the restrictions described above in General Requirements.
Other investment programs, such as systematic transfers and systematic
withdrawals, or other transfers or withdrawals may not work in concert with the
asset rebalancing program. Therefore, Owners should monitor their use of these
programs and other transfers or withdrawals while the asset rebalancing program
is being used.
Transfers under the asset rebalancing program are not subject to the transaction
fee on transfers, and are not taken into account for purposes of determining the
number of "free" transfers within a year. The Company does not currently charge
for enrolling in the asset rebalancing program, but reserves the right to do so.
(See "Special Service Fees.")
Restrictions on Transfers. Programmed or other frequent requests to transfer
among Contract Options by, or on behalf of, an Owner may have a detrimental
effect on the Fund share values held in the Separate Account. The Company may
therefore limit the number of permitted transfers in any Contract Year, or
refuse to honor any transfer request for an Owner or a group of Owners if it is
informed that the purchase or redemption of shares of one or more of the
Portfolios is to be restricted because of excessive trading, or if a specific
transfer or group of transfers is deemed to have a detrimental effect on AUV or
Portfolio share prices.
The Company may also at any time suspend or cancel its acceptance of third party
authorizations on behalf of an Owner; or restrict the Contract Options that will
be available for such transfers. Notice will be provided to the third party in
advance of the restrictions. The restrictions will not be imposed, however, if
the Company is given satisfactory evidence that: (a) the third party has been
appointed by the Owner to act on the Owner's behalf for all financial affairs;
or (b) the third party has been appointed by a court of competent jurisdiction
to act on the Owner's behalf.
The Company reserves the right at any time and without prior notice to any party
to modify, suspend or terminate the transfer privileges including, but not
limited to, the description in "Suspension of Payments and Transfers."
Automatic Transfers of Small Accounts. The Company reserves the right, subject
to any applicable law, to transfer Contract Value from any Contract Option if
less than $250, to the Contract Option with the highest Contract Value. (See
"The Contract--Minimum Value Contract Requirements.")
CHANGES IN CONTRACT OPTIONS
New Sub-Accounts may be established and additional portfolios or mutual funds
may be made available by the Company when, in its sole discretion, it determines
that conditions so warrant. Any new Sub-Accounts may be made available to
existing Owners on a basis to be determined by the Company. Each additional
Sub-Account will purchase shares in another portfolio of a Fund, or in another
mutual fund or investment vehicle.
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<PAGE> 15
The Company does not guarantee that continued purchase of Portfolio shares will
remain appropriate in view of the purposes of the Separate Account. If shares of
a Portfolio are no longer available for investment by the Separate Account or
if, in the judgment of the Company, further investment in the shares should
become inappropriate in view of the purpose of the Contracts, the Company may
substitute shares of another portfolio, or mutual fund for shares already
purchased or to be purchased in the future. The Company also may, in its
discretion, remove Portfolios for transfers or new investments. No substitution
of securities may take place without prior approval of the SEC and in compliance
with any requirements the SEC may impose.
MIXED AND SHARED FUNDING
Shares of VIST and Federated Prime Money Fund II are sold to the Company for
allocation to the Separate Account in connection with the Contracts, and for
allocation to other separate accounts funding variable annuity contracts and
other variable life insurance contracts issued, or to be issued, by the Company.
Shares of VIST and Federated Prime Money Fund II may also be sold to other
insurance companies, either affiliated or unaffiliated with the Company, for the
same purpose. It is conceivable that, in the future, it may be disadvantageous
for variable life insurance separate accounts and variable annuity separate
accounts to invest in one or more of the VIST Portfolios or Federated Prime
Money Fund II simultaneously if the interests of variable life insurance and
variable annuity contract owners differ. The boards of trustees of VIST and
Federated Prime Money Fund II and the participating insurance companies intend
to monitor events to identify any material irreconcilable conflicts which may
arise and to determine what action, if any, should be taken in response.
CHARGES AND DEDUCTIONS
Various charges and deductions are made from the Account Value and the Separate
Account. These are:
MONTHLY DEDUCTIONS
On the first day of each Contract month, a monthly deduction will be made by
reducing a Contract's Fixed Account Value and/or canceling Accumulation Units
from each Sub-Account to which any of the Contract's Account Value is then
allocated. The deductions will be in the ratio that the value of each Contract
Option bears to the Account Value, or by any other method selected by the Owner
and acceptable to the Company. The amount of the monthly deduction will vary
from month to month.
The monthly deductions are comprised of the following charges:
Administrative Charge. The monthly administrative charge is made at an effective
rate that is equal, on an annual basis, to 0.40% of Account Value.
Maintenance Fee. The monthly maintenance fee is $2.50 for a Contract with less
than $100,000 in Account Value.
Distribution Charge. During the first 10 Contract Years, a monthly distribution
charge is made at an effective rate that is equal, on an annual basis, to 0.20%
of Account Value
Premium Tax Charge. During the first 10 Contract Years, a monthly premium tax
charge is made to offset the average premium tax the Company is expected to pay
to various states and local jurisdictions. The charge will not necessarily equal
the premium taxes paid by the Company with respect to a particular Contract.
This charge is made at an effective rate that is equal, on an annual basis, to
0.25% of Account Value. The Company expects to pay an average premium tax of
approximately $2,500 on $100,000 of premiums for all states, although such tax
rates can generally range from 0% to 4%.
Federal Tax Charge. During the first 10 Contract Years, a monthly federal tax
charge is made to compensate the Company for the increase in federal tax
liability from the application of Section 848 of the Code. This charge is made
at an effective rate that is equal, on an annual basis, to 0.20% of Account
Value.
Cost of Insurance. This is a charge for the cost of providing life insurance
coverage for the Insured. This charge is guaranteed not to exceed the maximum
cost of insurance charge determined on the basis of the mortality table
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<PAGE> 16
guaranteed in the Contract, calculated, for standard risk Insureds, using the
1980 Commissioner's Standard Ordinary Mortality tables, Age Last Birthday ("1980
CSO"). These mortality tables are sex distinct and the guaranteed cost of
insurance charge may vary by the attained age, sex and underwriting class of the
Insured. The maximum cost of insurance charge for substandard risk Insureds are
based on multiples or additives to the guaranteed standard rates established by
the 1980 CSO.
Currently, a cost of insurance charge is taken that is less than the maximum
cost of insurance charge where an Insured is determined by the Company to be a
standard nonsmoker underwriting risk. This monthly charge is equal to an
effective annual rate of 0.40% of Account Value and is not guaranteed. For
Contract Years 11 and later, this monthly charge is anticipated to be increased
to an annual effective rate of 0.55% of Account Value.
DAILY DEDUCTIONS
Each Business Day, the Company will deduct a mortality and expense risk charge,
which is equal to a percentage of the net assets in each Sub-Account of the
Separate Account for this class of Contract. The mortality and expense risk
charge is equal to 0.90%, on an annual basis, of the average daily net assets in
each Sub-Account.
TRANSFER FEE
If more than 12 transfers have been made in a Contract Year, the Company will
deduct a Transfer Fee of $10 per transfer. Systematic transfers of Account Value
approved by the Company are not taken into account in determining any Transfer
Fee. (See "Systematic Transfers - Dollar Cost Averaging.") The charge is taken
pro rata from the Account Value in each Contract Option prior to a transfer, or
by any other method selected by the Owner and approved by the Company in advance
of the transfer.
WITHDRAWAL CHARGES
A withdrawal charge may be assessed if a Contract is surrendered, or if a
withdrawal of Account Value is made during the first 9 Contract Years.
The withdrawal charge consists of two separate components: one for a sales
charge and one for an unreimbursed premium tax charge. The Withdrawal Charges
are calculated by separately multiplying the applicable percentage shown in the
tables below for the sales charge component and the unreimbursed premium tax
component charge by the premium deemed surrendered, withdrawn or applied to an
optional annuity payment option and totaling the results. The Withdrawal Charges
will vary depending on the number of Contract Years that have elapsed since the
Contract Date. An additional premium payment during this period will result in a
new level of Withdrawal Charges based on that payment. The level of the
additional Withdrawal Charge will be determined by reference to the Contract
Date, and will not apply beyond the tenth Contract Year. For purposes of
computing withdrawal charges, premium payments are deemed to be withdrawn in the
order in which they are received by the Company without regard to any earnings
or losses attributable to the payment. The amount of any withdrawal charge
deducted from the Account Value will be determined by subtracting values from
the Fixed Account and/or canceling Accumulation Units from each applicable
Sub-Account in the ratio that the value of each Sub-Account bears to the total
Account Value, unless another method is requested and the Company approves the
request in advance of the transaction.
Application of the Withdrawal Charges. No Withdrawal Charges will be assessed
upon any withdrawal unless the amount withdrawn exceeds the Free Withdrawal
Amount for that year. The annual Free Withdrawal Amount is an amount equal to
15% of the amount of cumulative premium(s) paid and not previously withdrawn or
loaned during that Contract Year. These 15% withdrawals do not reduce premium
payments for purposes of computing the Withdrawal Charges. The Withdrawal
Charges will apply to the amount withdrawn or surrendered in any Contract Year
that exceeds 15% of premium payments. The unused portion of the Free Withdrawal
Amount for one Contract Year will not be carried over to the next Contract Year.
The Free Withdrawal Amount is not available on withdrawal requests that fail to
meet the minimum remaining Account Value requirements for a partial withdrawal.
(See "Partial Withdrawals.")
Waiver of Withdrawal Charges. The Company will waive the Withdrawal Charges:
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- - after the first Contract Year and subject to state availability, if the
Insured or the Insured's spouse is confined in an approved nursing home
for 90 days;
- - if any Death Benefits are paid; or
- - if the Account Value is applied after five Contract Years to an optional
annuity payment option. (See "Optional Annuity Payment Options.")
To qualify for a waiver of the Withdrawal Charges based upon confinement in a
qualified nursing home, the Insured or the Insured's spouse must never have been
confined in a qualifying nursing home on or before the date the application for
the Contract was signed. The Company may require evidence satisfactory to it for
any of these conditions. Owners should review their Contract carefully for a
complete description of these waivers.
Sales Charge Component. The sales charge component is expressed as a percentage
of cumulative premiums paid. The rate decreases each year:
Contract Year of Surrender or Withdrawal
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2 3 4 5 6 7 8 9 10+
Sales
Charge 7.5% 7.5% 7.25% 6.5% 5.75% 5% 4.25% 3.5% 2.75% 0%
Unreimbursed Premium Tax Charge Component. The unreimbursed premium tax charge
component is expressed as a percentage of premiums. The rate decreases each
year:
<CAPTION>
Contract Years of Surrender or Withdrawal
1 2 3 4 5 6 7 8 9 10+
Premium Tax
Charge 2.25% 2% 1.75% 1.5% 1.25% 1% 0.75% 0.5% 0.25% 0%
</TABLE>
Fund Expenses. Underlying shares of the Portfolios of Variable Investors Series
Trust ("VIST") and Federated Insurance Series ("Federated") are purchased at net
asset value, which reflects investment management fees, other operating expenses
and any expense reimbursement paid by an investment adviser to the applicable
Portfolio. (See "Highlights.")
OTHER CHARGES AND DEDUCTIONS
Income Taxes. While the Company is not currently reducing Account Value for
federal income taxes of the Separate Account, the Company reserves the right to
do so if it determines, in its sole discretion, that it will incur a tax as a
result of the operation of the Separate Account. The Company will make
deductions for any income taxes incurred by it as a result of the operation of
the Separate Account whether or not there was a Company reserve for taxes and
whether or not it was sufficient.
The Company will make deductions for any withholding taxes required by
applicable law when amounts are distributed from a Contract. (See "Tax
Withholding.")
Special Service Fees. The Company may charge Owners for special services, such
as additional reports, and dollar cost averaging. As of the date of this
prospectus, it does not charge for these special services.
Elimination or Reduction of Charges and Expenses. The charges and expenses on a
Contract may be reduced or eliminated, in whole or in part, when sales of
Contracts are made to individuals or to group and sponsored arrangements in a
manner that results in expected savings of sales, administration, or other
expenses or in a reduction in the level of risk the Company expects to assume
under the Contracts. (Such groups and arrangements are described below under
"Group and Sponsored Arrangements.") Any reduction will be determined by the
Company after examination of relevant factors such as:
- - the size and type of group to which sales are to be made, because
expenses for a larger group are generally less than for a smaller group
since large numbers of Contracts may be implemented and administered;
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<PAGE> 18
- - the total amount of premium payments to be received, because expenses are
likely to be less on larger premium payments than on smaller ones;
- - any prior or existing relationship with the Company, because of the
likelihood of implementing the Contract with fewer contacts; and other
circumstances, of which the Company is not presently aware, which could
result in reduced expenses; and
- - after a Contract is issued, in the event anticipated expenses for later
Contract Years are anticipated to be less than initially projected.
Charges may also be eliminated or reduced when a Contract is issued to an
officer, director, employee or agent of the Company or any of its affiliates. No
adjustment is guaranteed by the Company, and any adjustment may vary by group.
All adjustments will be made under the Company's administrative rules then in
effect and in no event will reductions or elimination of the charges be
permitted where reductions or elimination will be unfairly discriminatory to any
person.
Group and Sponsored Arrangements. Group arrangements include those in which a
trustee, employer, an association or similar entity purchases individual
Contracts covering a group of individuals on a group basis. An example of such
an arrangement is a non-tax qualified deferred compensation plan. Sponsored
arrangements include those in which an employer, an association or similar
entity permits the Company to offer Contracts to its employees or members on an
individual basis.
The United States Supreme Court has held that certain insurance contracts
providing values and benefits that vary with the sex of the insured may not be
used to fund certain employee benefit programs. Therefore, the Company may offer
Contracts for use in connection with certain employee benefit programs where the
cost of insurance does not vary with the sex of the insured. The Company
recommends that any employer proposing to offer the Contracts to employees under
a group or sponsored arrangement consult its attorney before doing so.
PURPOSES OF CONTRACT CHARGES
The charges under the Contracts are designed to cover, in the aggregate, the
Company's direct and indirect costs of selling, administering and providing
benefits under the Contracts. They are also designed, in the aggregate, to
compensate the Company for the risks it assumes pursuant to the Contracts. These
include mortality risks (such as the risk that insured persons will, on average,
die before the Company expects, thereby increasing the amount of claims the
Company must pay); investment risks (such as the risk that adverse investment
performance will make it more costly to provide the transfer rights under the
Contracts or reduce the amount of the Company's asset-based fee revenues below
what the Company anticipates); sales risks (such as the risk that the number of
Contracts sold and the premiums received (net of withdrawals) are less than the
Company expects thereby depriving the Company of expected economies of scale);
regulatory risks (such as the risk that tax or other regulations may be changed
in ways adverse to issuers of variable life insurance policies); and expense
risks (such as the risk that the costs of administrative services that the
Company must provide will exceed what the Company currently projects).
If, as expected, the charges that the Company collects from the contracts exceed
its total costs in connection with the Contracts, the Company will earn a
profit. Otherwise it will incur a loss. The current and maximum rates of certain
of the Company's charges have been set with reference to estimates of the amount
of specific types of expenses or risks that the Company will incur. In some
cases, this prospectus identifies such expenses or risks in the name of the
charge: e.g., the administrative charge, cost of insurance charge, distribution
charge and mortality and expense risk charge. However, the fact that any charge
bears the name of a particular expense or risk does not mean that the amount the
Company collects from that charge will never be more than the amount of such
expense or risk, or that the Company may not also be compensated for such
expense or risk out of any other charges the Company is permitted to deduct by
the terms of the Contracts.
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<PAGE> 19
THE CONTRACTS
APPLICATION AND ISSUANCE OF A CONTRACT
An application must be submitted to the Company at its Variable Service Center
by anyone wishing to purchase a Contract. If a premium payment is made with the
application, the Contract Date will be the later of the date the Company
approves the application or the date of receipt of the premium payment. Only one
premium payment may be made before the Contract is issued. Applicants between
the ages of 0 and 80 are eligible for simplified underwriting without a medical
examination under the Company's current underwriting rules, which are subject to
change. The Company will review an application under its underwriting rules, and
may request additional information or reject an application. The Company
generally will not issue a Contract to employee benefit plans qualified under
Section 401 of the Code.
If a Contract is issued, monthly Contract charges will begin as of the Contract
Date, even if the Contract's issuance was delayed due to underwriting
requirements. If the Company declines an application, it will refund the premium
payment made.
If the premium is paid upon delivery of the Contract, the Contract will have a
Contract Date which is generally five days after issue. Monthly Contract charges
will begin on the Contract Date. Insurance coverage under the Contract will
begin upon receipt of the premium.
Under limited circumstances, the Company may backdate a Contract, upon request,
by assigning a Contract Date earlier than the date the application is signed.
Backdating may be desirable, for example, so that the Cost of Insurance rate for
the initial Death Benefit amount is lower, based on the Insured's insurance age.
Free Look Right. An Owner has the right to review a Contract during an initial
inspection period specified in the Contract and, if dissatisfied, to return it
to the Company or to the agent through whom it was purchased. When the Contract
is returned to the Company during the permitted period, it will be voided as if
it had never been in force. The Company will ordinarily refund the Account Value
(which may be greater or less than the premium payments received) on a Contract
returned during the permitted period, unless a different amount is required by
state law. The "free look" period is typically 10 days, and may be greater
depending on state requirements.
PREMIUMS
The Contracts are designed for a large single premium to be paid by the Owner on
or before the Contract Date. Generally, the minimum initial premium the Company
requires for a Contract is $10,000. The initial premium is used to determine the
initial Death Benefit under the Contract (See "Death Benefits.")
The Contract is primarily intended to be a single premium Contract with a
limited ability to make additional premium payments. Additional premium payments
under the Contract are permitted under the following circumstances:
- - an additional premium payment is required to keep the Contract in force
(See "Lapse and Reinstatement"); or
- - an additional premium is paid equal to the lesser of (i) $5,000; or (ii)
5% of the initial premium.
Payment of additional premiums may increase the Death Benefit. However, the
Company reserves the right to require satisfactory evidence of insurability
before accepting an additional premium payment in excess of the lesser of (a)
$5,000 or (b) 5% of the initial premium. The Company may require that any
Contract loans be repaid prior to accepting any additional premium payments.
The Company will not accept any additional premium payment which would result in
the total premiums paid exceeding the premium limitation prescribed by Internal
Revenue Service to qualify the Contract as a life insurance contract, unless the
Insured qualifies for an additional amount of life insurance. (See "Death
Benefit--Impact of Additional Premium Payments.")
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<PAGE> 20
ALLOCATION OF PREMIUMS
Premium payments are allocated to the appropriate Sub-Account(s) within the
Separate Account that invest in the selected Portfolio(s), or to the Fixed
Account, in accordance with an Owner's instructions. For each Sub-Account,
premium payments are converted to Accumulation Units. The number of Accumulation
Units credited to a Contract is determined by dividing the amount allocated to
the Sub-Account by the value of the applicable Accumulation Unit as of the
Valuation Period during which the premium payment is allocated to the
Sub-Account. Premium payments allocated to the Fixed Account are credited in
dollars.
Premium payments are generally allocated to the Sub-Accounts or the Fixed
Account as of the later of the Contract Date or the date the premium is
received.
Delayed Investment Allocation Date. Initial premium payments are allocated to
the Sub-Accounts or to the Fixed Account as selected by the Owner. On the date
of this Prospectus, the Company does not delay investment start dates and will
allocate premium payments to the selected Contract Options upon issuance of a
Contract. The Company reserves the right, however, to allocate initial premium
payments to the Prime Money Fund II Sub-Account for an investment delay period
before they will be invested (together with any investment gain) in any other
Sub-Account(s) designated by the Owner. If the Company elects to delay such
initial investments in Sub-Accounts, the delay would apply where a Contract is
issued subject to a requirement that premium payments be refunded upon the
exercise of a `free look' right. Allocation to the Sub-Account(s) designated by
the Owner would be made at the end of the "free look" inspection period. The
investment delay period would be measured from the date a Contract is issued
from the Variable Service Center and would include up to 5 extra days in
addition to the applicable `free look' inspection period to provide time for
mail or other delivery of the Contract to the Owner.
Should the Company elect to delay investment allocation dates, it will so advise
prospective investors in a Contract.
TELEPHONE TRANSACTIONS
An Owner may initiate various transactions by telephone. The Variable Service
Center (1-800-228-1035) is available for telephone transfers of Account Value,
notification of change of address, change of premium allocations among Contract
Options, partial withdrawal requests and Contract loans.
The Company's automated information line (1-800-59-FUNDS) is available for
current information on Accumulation Unit Values, current Account Value, and for
telephone transfers of Account Value.
If there are joint owners of a Contract, unless the Company is informed to the
contrary, instructions will be accepted from either one of the joint owners.
Requests for transfers or reallocations by telephone will be automatically
permitted. The Company will use reasonable procedures such as requiring certain
identifying information from the caller, tape recording the telephone
instructions, and providing written confirmation of the transaction, in order to
confirm that instructions communicated by telephone are genuine. Any telephone
instructions reasonably believed by the Company to be genuine will be the
Owner's responsibility, including losses arising from any errors in the
communication of instructions. As a result of this, the Owner will bear the risk
of loss. If the Company does not employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, the Company may be liable
for any losses due to dishonored or fraudulent instructions.
CONTRACT VALUES AND BENEFITS
DEATH BENEFIT
When an application for a Contract is approved, the Company determines the Face
Amount of insurance and then issues a Contract. The Death Benefit on the
Contract Date is the Face Amount, and any additional benefit riders elected. The
Death Benefit may change as a result of additional premium payments, an increase
or decrease in Account Value, or in the event of partial withdrawals.
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<PAGE> 21
Upon receipt of proof of death of the Insured, the Company will pay the Death
Benefit Proceeds to the Beneficiary. The Owner or the Beneficiary may elect that
the Death Benefit Proceeds be paid in a single sum, in the form of a fixed
annuity, or that they be retained by the Company. The amount of the Death
Benefit is determined on the date the Company receives proof of the Insured's
death and will be the greater of (a) the Face Amount or (b) the Account Value
times the death benefit factor from the following table:
<TABLE>
<CAPTION>
Percentage of Percentage of Percentage of
Attained Age Account Value Attained Age Account Value Attained Age Account Value
<S> <C> <C> <C> <C> <C>
0-35 250 57 142 79 105
36 250 58 138 80 105
37 250 59 134 81 105
38 250 60 130 82 105
39 250 61 128 83 105
40 250 62 126 84 105
41 243 63 124 85 105
42 236 64 122 86 105
43 229 65 120 87 105
44 222 66 119 88 105
45 215 67 118 89 105
46 209 68 117 90 105
47 203 69 116 91 104
48 197 70 115 92 103
49 191 71 113 93 102
50 185 72 111 94 101
51 178 73 109 95 100
52 171 74 107 96 100
53 164 75 105 97 100
54 157 76 105 98 100
55 150 77 105 99 100
56 146 78 105
</TABLE>
Face Amount and Guidleine Single Premium - The Face Amount on the Contract Date
is determined by treating the initial premium as a "guideline single premium."
The "guideline single premium" is an amount necessary to keep the Contract in
force until the Maturity Date, using the Contract's guaranteed charges, and
assuming a 4% net investment return and other assumptions and calculations
required by the Code for a Contract to qualify as life insurance contract under
what is commonly referred to as the "guideline premium test." The "guideline
single premium" will vary by attained age, sex and underwriting risk class. This
will generally result in the same initial premium providing a Face Amount that
is higher for non-smokers than smokers, and a higher Face Amount for females
than for males.
Face Amount and Additional Premium Payments. Additional premium payments may
result in an increase in Death Benefit by an amount sufficient to permit a
Contract to remain within the definition of a "life insurance contract" under
Code section 7702. The Company may require additional evidence of the
insurability of the Insured before accepting the additional payments.
Adjustments to the Death Benefit Proceeds. The Death Benefit Proceeds actually
paid to the beneficiary are equal to the Death Benefit reduced by any
outstanding loan and accrued loan interest. The Death Benefit Proceeds will be
increased by any other rider benefits payable.
ACCELERATION OF DEATH BENEFIT RIDER
Subject to state availability, an accelerated death benefit rider is included in
a Contract. This rider permits an Owner to receive an advance of 50% of the
Death Benefit, less any indebtedness, up to a maximum of $50,000. The advance is
payable when the Insured has been diagonosed as having a terminal illness with a
life expectancy of 12 months or less.
21
<PAGE> 22
Amounts advanced under the rider generally will be considered death benefit for
income tax purposes. (See "Federal Tax Status - Life Insurance and Modified
Endowment Contract Definitions.")
Upon payment of an advance under the rider, the Contract's Fact Amount, Account
Value and Cash Surrender Value will be reduced by the percentage of Death
Benefit advanced to the Owner, and any Indebtedness will be reduced by the
portion of the Indebtedness deemed repaid when calculating the advance.
DETERMINATION OF ACCOUNT VALUE
Account Value and Cash Surrender Value. The Account Value under a Contract
includes its value in the Separate Account, in the Fixed Account and, if there
is any Indebtedness, in the Loan Account. The Account Value reflects premiums,
the Net Investment Experience of the Contract's Sub-Accounts, interest credited
on its Account Value in the Fixed Account and on amounts held in the Loan
Account, amounts deducted for Contract charges or any Withdrawal Charges that
apply to an Owner request to reduce the Face Amount and amounts withdrawn or
surrendered.
The Contract's Cash Surrender Value is the amount the Owner will receive upon
surrender of the Contract. The Cash Surrender Value is the Account Value reduced
by any outstanding Contract loan (and accrued interest) and by any applicable
Withdrawal Charges. (See "Preferred and Non-Preferred Loans" and "Withdrawal
Charges.")
The Contract's Cash Surrender Value in the Separate Account may increase or
decrease daily depending on the Net Investment Experience of the Contract's
Sub-Accounts. Unfavorable investment experience can reduce the Cash Surrender
Value to zero. Because there is no guaranteed minimum Account Value in the
Separate Account, the Owner bears the entire investment risk with respect to the
Account Value allocated to the Separate Account.
Net Investment Experience. The Net Investment Experience of the Contract's
Sub-Accounts will affect the Contract's Account Value, Cash Surrender Value,
and, in some circumstances, the Death Benefit. The Net Investment Experience of
the Sub-Accounts is determined as of the close of regular trading on the New
York Stock Exchange on each day when the Exchange is open for trading.
A Sub-Account's Net Investment Experience for any period reflects the investment
experience of the underlying Portfolio shares for the same period, reduced by
the charges against the Sub-Account for that period. (Currently the Sub-Accounts
are charged only for the Company's mortality and expense risk and administrative
expenses, but in the future the Company may impose a charge against the
Sub-Accounts for taxes if appropriate. See "Charges and Expenses" and "Taxation
of the Company and the Separate Account.")
The investment experience of Portfolio shares for any period is the increase or
decrease in their net asset value for the period invested reduced by the amount
of any dividends or capital gains distributions on the shares during the period.
Dividends and capital gains distributions on Portfolio shares are reinvested in
additional shares of the Fund and affect subsequent investment experience.
Owners who allocate Account Value to the Fixed Account will not share in the
actual investment experience of the Fixed Account. Instead, the Company
guarantees that Account Values in the Fixed Account will earn interest at an
effective annual rate of at least 3.0%. The Company may from time to time credit
interest at a higher rate than 3.0%, but it is under no obligation to do so. The
Company declares the current interest rate for the Fixed Account periodically.
Account Values that are in the Fixed Account will earn interest daily.
CONTRACT LOANS
The Owner may borrow all or part of the Contract's "loan value" at any time
after the initial free-look period. The Company will usually make money the loan
within 7 days of the date a loan request is received in writing or by telephone
at the Variable Service Center. (See "Telephone Transactions.")
The maximum amount available as a loan is equal to 90% of the excess of Account
Value over the sum of Withdrawal Charges and Indebtedness. The minimum amount
for each loan is $1,000. A loan reduces the Account Value in the Sub-Accounts
and Fixed Account by the amount of the loan. Account Value equal to
22
<PAGE> 23
amounts loaned are transferred to the Loan Account from the Fixed Account and
the Separate Account when the loans are made by the Company.
Interest on a contract loan will be charged interest at an effective annual loan
interest rate of 5%, and is payable in arrears on each Contract Anniversary. If
not paid when due, an amount equal to the unpaid interest will be deducted from
the Account Value in the Contract Options, transferred to the Loan Account, and
bear interest. A loan repayment increases the Account Value in the Sub-Accounts
and Fixed Account by the amount of the repayment. Unless the Owner requests
otherwise, loans and loan repayments are attributed to the Sub-Accounts and the
Fixed Account in proportion to the Account Value in each. The Company may
disapprove any such request.
Immediate Loan Repayment. If the Cash Surrender Value on the first Business Day
of any Contract month is not sufficient to pay the Monthly Deduction, loan
interest then due and unpaid, and/or any other Contract charges then due, a 61
day Grace Period will be provided. The Cash Surrender Value is the Account Value
reduced by any Contract loans and accrued interest and any applicable Withdrawal
Charges. (See "Withdrawal Charges.") The Company will notify the Owner that the
Contract is going to terminate. The Contract will terminate without value 61
days after the notice is mailed unless the amount due is paid to the Company
within that time.
Interest Credited on Loan Account. The Company credits interest to amounts held
in the Loan Account at a minimum annual effective rate of 3%. The amount of the
Loan Account that is less than or equal to a "preferred loan amount" may be
credited with interest at a higher rate shown in the Contract. The preferred
loan amount, equal to the excess of then existing Account Value over the Premium
Payments made, is determined on the Contract Date and on the first Business Day
of each Contract month.
The amount taken from the Contract's Sub-Accounts as a result of a loan does not
participate in the investment experience of the Sub-Accounts. Therefore, the
Death Benefit and Account Value of the Contract can be permanently affected by a
Contract loan, even if it is repaid. In addition, any proceeds payable under a
Contract are reduced by the amount of any Indebtedness.
On the date of this prospectus, the Company credits interest on preferred loan
amounts at an annual effective rate of 5%.
SURRENDER AND PARTIAL WITHDRAWALS
Surrender. The Owner may surrender a Contract for its Cash Surrender Value at
any time while the Insured is living by a signed written request conforming to
the Company's administrative procedures. The Cash Surrender Value of the
surrendered Contract will be determined as of the close of the Business Day when
a surrender request is received at the Company's Variable Service Center. The
Cash Surrender Value equals the Account Value reduced by any Contract loans and
accrued interest and by any applicable Withdrawal Charges. (See "Withdrawal
Charges.") The Owner may elect in writing to have all or may elect in writing or
by telephone to have part of the Cash Surrender Value applied to an optional
annuity payment option. (See "Optional Annuity Payment Options" and "Telephone
Transactions.")
Partial Withdrawals. The Owner may request in writing or by telephone a partial
withdrawal under the Contract to receive a portion of its Cash Surrender Value.
(See "Telephone Transactions.") A partial withdrawal will cause a reduction in
the Contract's Account Value and a proportionate reduction in a Contract's Face
Amount and Death Benefit. A partial withdrawal may not be made if it would
reduce the Death Benefit below that required to qualify the Contract as life
insurance; or if it would reduce the Account Value below $1,000, except with the
Company's consent.
Any Withdrawal Charges that apply to a partial withdrawal will be deducted pro
rata from the Contract's Account Value in the Sub-Accounts and the Fixed
Account. The Surrender Charge applied will reduce any remaining Withdrawal
Charges under a Contract.
Tax Impact of Modified Endowment Contract Status. Because the Contract will
generally be considered a "modified endowment contract" for federal income tax
purposes, a surrender or partial withdrawal may be subject to adverse tax
consequences. (See "Federal Tax Status - Income Tax Treatment of Contract
Benefits." )
23
<PAGE> 24
MATURITY PROCEEDS
If the Insured is living on the "Maturity Date" (the anniversary of the Contract
Date on which the Insured is age 100), on surrender of the Contract to the
Company, the Company will pay the Owner the Cash Surrender Value. In such case,
the Contract will terminate and the Company will have no further obligations
under the Contract.
LAPSE AND REINSTATEMENT
If the Cash Surrender Value in the Contract is insufficient to pay the monthly
deductions, loan interest, or other charges which become due but are unpaid, a
grace period of 61 days will be allowed for payment of sufficient premium to
continue the Contract in force. The Company will notify the Owner of the amount
required to continue the Contract in force. If the required premium amount is
not received within 61 days of the notice, the Contract will terminate without
value. If the Insured dies during the grace period, the Company will pay the
Death Benefit less any Indebtedness and unpaid Contract charges.
If the grace period ends and the Owner has neither paid the required premium nor
surrendered the Contract for its Cash Surrender Value, the Owner may reinstate
the Contract by (a) submitting a written request at any time within three years
after the end of the grace period and prior to the Maturity Date; (b) providing
evidence of insurability satisfactory to the Company; (c) paying a sufficient
premium to cover all charges that were due and unpaid during the grace period;
(d) paying an additional premium at least three times the guaranteed monthly
cost of insurance charge under the Contract and all other applicable charges;
and (e) repaying any indebtedness against the Contract that existed at the end
of the grace period.
The reinstatement will be effective on the first Business Day of the first
Contract Month that begins on or after the Company approves reinstatement. The
values under, and terms and conditions of, the reinstated Contract will be in
accordance with the Company's administrative procedures.
PAYMENT OF PROCEEDS
The Company ordinarily will pay any Cash Surrender Value, Contract loan value or
Death Benefit Proceeds from the Sub-Accounts within seven days after receipt by
the Variable Service Center of a request, or proof of death of the Insured in a
form satisfactory to the Company. However, the Company may delay payment or
transfers from the Sub-Accounts. (See "Suspension of Payments and Transfers.")
The Company may also delay payment if it considers it necessary to contest the
Contract. The Company will pay interest on the Death Benefit Proceeds from the
date they become payable to the date they are paid in one sum or, if an optional
annuity payment option was selected, to the effective date of the option. (See
"Optional Annuity Payment Options.")
TAX WITHHOLDING
All distributions or portions thereof which are includable in the gross income
of the Owner are subject to federal income tax withholding. The Company will
withhold federal taxes at the rate of 10% from each distribution. However, the
Owner may elect not to have taxes withheld or to have taxes withheld at a
different rate.
OPTIONAL ANNUITY PAYMENT OPTIONS
If no election has been previously made by the Owner, the Beneficiary may elect
that Death Benefit Proceeds be paid as a single sum, as a fixed annuity or
retained by the Company. (See "Death Benefits.") The Contract's Death Benefit
Proceeds and Cash Surrender Value can be paid in one sum, or the Owner or payee
can choose to receive all or part of the proceeds as fixed annuity payments
(payments which are guaranteed as to dollar amount by the Company). Other
payment options may also be made available, subject to applicable regulatory
requirements. The guaranteed mortality assumptions used in determining payment
levels will not vary based on sex.
Annuitization Bonus. Subject to state availability, the Company intends to
increase the amount applied to optional annuity payment options A, B, C, D and,
for specified periods greater than five years, E, by an "Annuitization Bonus".
The Annuitization Bonus Value will be calculated by the Company as of the
immediately preceding Business Day. The increase will be allocated pro rata to
the annuity payment options which the Owner has elected
24
<PAGE> 25
and will be deemed "income" on the Contract for federal income tax purposes.
(See "Income Tax Treatment of Contract Benefits.")
The "Annuitization Bonus" for a Contract will be determined by the Company at
the time of issuance of a Contract, but may be modified, reduced or eliminated
for Contracts subsequently issued. On the date of this prospectus, the
Annuitization Bonus is 3% of the amount applied to annuity payment options A, B,
C, D and, for specified periods greater than five years, E.
The following annuity payment options are available:
Option A. Life Annuity. An annuity payable monthly during the lifetime of the
payee. Annuity payments cease at the death of the payee.
Option B. Life Annuity with Period Certain of 60, 120, 180 or 240 Months. An
annuity payable monthly during the lifetime of the payee for 60, 120, 180 or 240
months certain as selected.
Option C. Joint and Survivor Annuity. An annuity payable monthly during the
joint lifetime of the payee and a designated second person. At the death of
either payee, annuity payments will continue to be made to the survivor payee.
The survivor's annuity payments will equal 100%, 75%, 66-2/3% or 50% of the
amount payable during the joint lifetime, as chosen.
Option D. Joint and Contingent Annuity. An annuity payable monthly during the
lifetime of the payee and continuing during the lifetime of a designated second
person after the payee's death. The second person's annuity payments will equal
100%, 75%, 66 2/3% or 50% of the amount payable, as chosen.
Option E. Fixed Payments for a Period Certain. Annuity payable monthly for a
fixed amount for any specific period (at least 5 years but not exceeding 30
years), as chosen.
If the payee dies during a period certain (Annuity Options B or E), the
remaining annuity payments will be made to the beneficiary. The beneficiary may
elect to receive the commuted value of the remaining annuity payments in a
single sum instead. If no beneficiary is designated, the commuted value of the
remaining annuity payments will be made to the payee's estate in a single sum.
The Company will determine the commuted value by discounting the remaining
annuity payments at its then current interest rate used for commutation.
RIGHT TO EXCHANGE FOR A FIXED BENEFIT CONTRACT
During the first 24 months after the Contract Date, if the Contract has not
lapsed, there is an unconditional right to transfer all of the Account Value in
the Sub-Accounts to the Fixed Account.
OTHER PROVISIONS OF THE CONTRACT
SUICIDE EXCLUSION
If the Insured commits suicide within two years from the Contract's date of
issue (or less if required by state law), the Death Benefit will be limited to
the premiums paid, reduced by any outstanding loan and accrued loan interest.
REPRESENTATIONS AND CONTESTABILITY
Generally, the Company can challenge the validity of the Owner's Contract or any
rider to the Owner's Contract during the Insured's lifetime for two years from
the date of issue, based on misrepresentations made in the application. The
Company can challenge the portion of the Death Benefit resulting from payment of
an underwritten additional premium payment for two years, during the Insured's
lifetime, from the date the additional premium payment was received. However,
the two year time limit on the Company's right to challenge all or part of the
Contract does not apply in the event that the Insured dies within the two year
period.
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<PAGE> 26
MISSTATEMENT OF AGE OR SEX
If the Insured's age or sex is misstated in the application, the Contract's
Account Value and Death Benefit will be what the premiums paid and unscheduled
premium payments made would have purchased, based on the Insured's correct age
or, if the Contract is sex-based, on the Insured's correct sex.
OWNER AND BENEFICIARY
The Owner is named in the application but may be changed from time to time. At
the death of the Owner, his or her estate will become the Owner unless a
successor Owner has been named. The Owner's rights as such terminate when the
Insured dies.
The beneficiary is also named in the application. The beneficiary of the
Contract (other than an irrevocably named beneficiary) may be changed at any
time before the death of the Insured. The beneficiary has no rights under the
Contract until the death of the Insured and must survive the Insured in order to
receive the Death Benefit Proceeds. If no named beneficiary survives the
Insured, the proceeds will be paid to the Owner.
A change of Owner or beneficiary must be in written form satisfactory to the
Company and must be dated and signed by the Owner making the change. The change
will be effective when it is signed, but be subject to all payments made and
actions taken by the Company under the Contract before the signed change form is
received by the Company at its Variable Service Center.
ASSIGNMENTS
The Owner may assign (transfer) the Owner's rights in the Contract to someone
else. An absolute assignment of the Contract designates the assignee as Owner
and beneficiary. A collateral assignment of the Contract does not change the
Owner or beneficiary, but their rights will be subject to the terms of the
assignment. All collateral assignees of record must consent to any full
surrender or partial withdrawal. The assignments must be in writing, signed by
the Owner and recorded by the Company at its Variable Service Center. The
Company is not responsible for any assignment not submitted for recording, nor
is the Company responsible for the sufficiency or validity of any assignment.
The assignment will be subject to any Indebtedness under a Contract before and
after the assignment was recorded. Because there may be unfavorable tax
consequences, including recognition of taxable income and the loss of income
tax-free treatment for any death benefit payable to the Beneficiary, an Owner
should consult a qualified tax adviser prior to transferring ownership or making
an assignment.
REPORTS AND RECORDS
The Company will mail to the Owner, at the last known address of record, an
annual statement showing current Account Values, transactions since the last
statement, Contract loan information and any other information required by
federal or state laws or regulations.
The Owner will also be sent annual and semi-annual reports containing the
financial statements of the Separate Account and the Fund or Portfolio.
In addition, Owners will receive statements of significant transactions, such as
changes in the Death Benefit, transfers among Contract Options, premium
payments, Contract loans, increases in Contract loan principal, Contract loan
repayments, unpaid Contract loan interest added to principal, reinstatement and
termination.
VOTING RIGHTS
In accordance with its view of present applicable law, the Company will vote the
shares of the Portfolios held by the Separate Account Sub-Accounts at regular or
special meetings of the shareholders in accordance with instructions received
from Owners having the voting interest in the affected Portfolio(s). The number
of votes that an Owner has the right to instruct for a particular Sub-Account is
determined by dividing the Owner's Account Value in the Sub-Account by the net
asset value per share of the corresponding Portfolio. The Company will vote
shares held in
26
<PAGE> 27
the Sub-Account for which it has not received instructions, as well as shares
held in the Sub-Account that are attributable to it, in the same proportion as
it votes shares held in the Sub-Account for which it has received instructions.
On the date of this prospectus, the Funds are not required to hold routine
annual meetings of shareholders.
The number of shares which an Owner has a right to vote will be determined as of
a date to be chosen by the Company not more than 60 days prior to a shareholder
meeting of a Fund. Each Owner having a voting interest will receive proxy
material, annual reports and any other materials relating to the appropriate
Portfolio.
The Company may disregard voting instructions under limited circumstances
prescribed by SEC rule. If the Company does disregard voting instructions, a
summary of that action and the reasons for it will be included in the next
semiannual report to Owners.
SUSPENSION OF PAYMENTS AND TRANSFERS
The Company reserves the right to suspend or postpone payments of Death Benefit
proceeds and for surrenders, withdrawals and Contract loans or transfers from
the Sub-Accounts for any period when:
- - the New York Stock Exchange is closed for trading;
- - trading on the New York Stock Exchange is restricted by the SEC;
- - an emergency exists as a result of which disposal of securities held in
the applicable Sub-Accounts is not reasonably practicable or it is not
reasonably practicable to determine the value of the applicable
Sub-Account's net assets; or
- - during any other period when the SEC, by order, permits such suspension.
The Company also reserves the right to defer payment for a surrender,withdrawal
and Contract loan or transfer from the Fixed Account for the period permitted by
law but not for more than six months after written election is received by the
Company. The Company will pay interest in accordance with state insurance law
requirements on payments that are delayed.
NONPARTICIPATION IN COMPANY DIVIDENDS
The Contracts are nonparticipating. This means that they do not participate in
any dividend distribution of the Company's surplus.
DISTRIBUTION AND OTHER AGREEMENTS
First Variable Capital Services, Inc. ("FVCS"), 2122 York Road, Oak Brook, IL
60523, acts as distributor of the Contracts. FVCS, a wholly owned subsidiary of
the Company, is registered with the SEC under the Securities Exchange Act of
1934 and is a member of the National Association of Securities Dealers, Inc. The
Contract is offered on a continuous basis.
The Company and FVCS have agreements with various broker/dealers under which the
Contracts will be sold by registered representatives of broker/dealers. The
registered representatives are required to be authorized under applicable state
regulations to sell variable life insurance contracts. The commissions payable
to a broker/dealer for sales of the Contract pursuant to the sales agreement is
not expected to exceed 8.50% of the first year premium payment. Broker/dealers
may receive expense allowances, wholesaler fees, bonuses and training fees.
Under a Services Agreement between the Company and FVCS, the Company performs
underwriting, issuance and other administrative services for the Contracts.
SAFEKEEPING OF ASSETS
The Company serves as the custodian of the assets of the Variable Account.
27
<PAGE> 28
MANAGEMENT OF THE COMPANY
The directors and executive officers of the Company and their principal business
experience during the past five years, are:
<TABLE>
<CAPTION>
Position with Principal Occupation
Name and Address the Company During Past 5 Years
- ---------------- ----------- -------------------
<S> <C> <C>
Ronald M. Butkiewicz Chairman and Director President and Chief Executive Officer,
2211 York Road, Suite 202 Irish Life of North America, Inc.; Chairman
Oak Brook, IL 60523 and Chief Executive Officer, Interstate
Assurance Company
Michael J. Corey Director Managing Director, Insurance Practice
401 East Host Drive Group, Ward Howell Intl., Inc.; President,
Lake Geneva, WI 53147 CSG International Inc.
Norman A. Fair Director Vice President, Treasurer, & Asst. Sec.,
2211 York Road, Suite 202 Irish Life of North America, Inc.; prior to
Oak Brook, IL 60523 1994, Senior Vice President and Chief
Financial Officer, Interstate Assurance
Company
Michael R. Ferrari Director President, Drake University
25th & University Avenue
Des Moines, IA 50311
Stephen Shone Director Chief Financial Officer, Irish Life plc
Lower Abbey Street
Dublin 1, Ireland
T. David Kingston Director Prior to April 1, 1998, Managing Director,
Lower Abbey Street Irish Life plc
Dublin 1, Ireland
John M. Soukup President and Director President and Director of the Company;
2122 York Road prior to July, 1997, Market Development
Oak Brook, IL 60523 Officer, Fortis Financial Group
Jeff S. Liebmann Director Partner, Dewey Ballantine
1301 Avenue of the Americas
New York, NY 10019
Kenneth R. Meyer Director Managing Director, Lincoln Capital
200 South Wacker Drive, Suite 2100 Management Co.
Chicago, IL 60606
Shane W. Gleeson Director Executive Vice President, Irish Life of North
2211 York Road, Suite 202 America, Inc.; prior to December 1997, President,
Oak Brook, IL 60523 Interstate Assurance Company; prior to November
1994, Senior Vice President and Chief Operating
Officer, Interstate Assurance Company.
Philip R. O'Connor Director Principal of Coopers & Lybrand LLP/Palmer
111 West Washington, Suite 1247 Bellevue Corp.
Chicago, IL 60602
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C> <C>
Arnold R. Bergman Vice President, General Vice President, General Counsel and
2122 York Road Counsel and Secretary Secretary of the Company; prior to
Oak Brook, IL 60523 February 1995, Counsel, Aetna Life
Insurance and Annuity Company.
Martin Sheerin Vice President and Chief Vice President and Chief Actuary of the
2122 York Road Actuary Company; prior to October, 1994, Vice
Oak Brook, IL 60523 President, Irish Life of North America, Inc.
Thomas Gualdoni Vice President - Sales Vice President of the Company; prior to
2122 York Road December 1997, Vice President, Sales,
Oak Brook, IL 60523 Fortis Benefits Insurance Company.
Constance Graves Assistant Vice President Assistant Vice President and Assistant
10 Post Office Square and Assistant Controller Controller of the Company; prior to
Boston, MA 02109 December, 1993, Statutory Accountant,
Allmerica Financial Services.
</TABLE>
FEDERAL TAX STATUS
GENERAL
BECAUSE OF THE COMPLEXITY OF THE LAWS AND BECAUSE TAX RESULTS WILL VARY
ACCORDING TO THE STATUS OF THE OWNER, LEGAL AND TAX ADVICE MAY BE NEEDED BY A
PERSON, EMPLOYER OR OTHER ENTITY CONTEMPLATING THE PURCHASE OF A CONTRACT.
It should be understood that any detailed description of the federal income tax
consequences regarding the purchase of these Contracts cannot be made in this
prospectus and that special tax rules may be applicable with respect to
purchases not discussed herein. In addition, no attempt is made to consider any
applicable state, local, gift, inheritance, estate, foreign or other tax laws.
This discussion assumes that the Owner is a natural person and a U.S. citizen
and resident. This discussion of federal tax status is based upon the Company's
understanding of current federal income tax laws as they are currently
interpreted. These laws and the related regulations and interpretations can
change, and such changes can be retroactive.
TAXATION OF THE COMPANY AND THE SEPARATE ACCOUNT
Under current federal income tax law, no tax is imposed on the Company as a
result of the operations of the Separate Account and the Fixed Account. Thus, no
charge is currently imposed for Company federal income taxes. The Company
reserves the right to charge the Separate Account or Fixed Account for Company
federal income taxes, if there are changes in federal tax law.
Under current laws the Company may incur state and local taxes (in addition to
premium taxes) in several states. At present, these taxes are not significant
and, accordingly, the Company is not currently imposing a charge for them. If
they increase, however, a charge for such taxes attributable to the Separate
Account and/or Fixed Account may be imposed.
INCOME TAX TREATMENT OF CONTRACT BENEFITS
Life Insurance. Section 7702 of the Code provides that if certain tests are met,
a Contract will be treated as life insurance for federal tax purposes. The
Company will monitor compliance with these tests. As a result, the Company
believes Owners will not be taxed on increases in Account Value under the
Contracts unless and until they are distributed. Furthermore, the Company
believes the Death Benefits received under the Contracts are generally
excludable from the gross income of the Beneficiary pursuant to the provisions
of Section 101 of the Code.
29
<PAGE> 30
Acceleration of Death Benefits Rider. Section 101(g) of the Code provides that
amounts received under a life insurance contract on the life of an insured who
is a terminally ill individual, as defined, may be treated as an amount paid by
reason of the death of the insured. The Company believes that under this
provision, accelerated death benefit payments are generally excluded from the
Owner's gross income. This exclusion does not apply, however, to amounts paid to
someone other than the Insured, if the payee has an insurable interest in the
Insured's life because the Insured is a director, officer or employee of the
payee or by reason of the Insured being financially interested in any trade or
business carried on by the payee. (See "Acceleration of Death Benefit Rider" for
more information regarding the rider.)
Modified Endowment Contracts. Section 7702A of the Code contains provisions
affecting the tax treatment of any loan, assignment or other pre-death
distribution from a life insurance Contract which is also a "modified endowment
contract." It is expected that most of the Contracts offered by this prospectus
will be modified endowment contracts.
A modified endowment contract is a life insurance contract where cumulative
premiums paid under the contract at any time during the first seven contract
years exceed the sum of the net level premiums that would have been paid on or
before such time if the contract provided for paid up future benefits after the
payment of seven level annual premiums ("7-pay test"). (The amount of premiums
payable under the 7-pay test is calculated based upon certain assumptions
regarding the contract's earnings and the use of a reasonable mortality charge.
Riders to the a contract are considered part of thecontract for purposes of
applying the 7-pay test.)
Whenever there is a "material change" under a Contract, the Contract will
generally be (a) treated as a new Contract for purposes of determining whether
the Contract is a modified endowment and (b) subjected to a new seven-pay period
and a new seven-pay premium limit. The new seven-pay limit would be determined
taking into account, under a prescribed formula, the Account Value of the
Contract at the time of such change. A materially changed Contract would be
considered a modified endowment Contract if it failed to satisfy the new
seven-pay limit. A material change for these purposes could occur as a result of
a change inDeath Benefit amount, election of additional rider benefits, an
increase in a Contract's Face Amount and certain other changes.
If a Contract's benefits are reduced during the first seven Contract years (or
within seven years after a material change), the seven-pay premium limit will be
redetermined based on the reduced level of benefits and applied retroactively
for purposes of the seven-pay test. (Such a reduction in benefits could include,
for example, a partial withdrawal.) If the premiums previously paid are greater
than the recalculated seven-pay limit, the Contract will become a modified
endowment Contract.
Any contract received in exchange for a modified endowment contract will also be
a modified endowment contract. However, an exchange under Section 1035 of the
Code of a life insurance contract entered into before June 21, 1988 will not
cause the new contract to be treated as a modified endowment contract if no
additional premiums are paid and there is no increase in benefits as a result of
the exchange.
Other Tax Effects of Contract Changes. Changes made to a Contract (for example,
a decrease in benefits under or a lapse or reinstatement of a Contract) may also
have other tax effects on the Contract. Such effects may include impacting the
maximum amount of premiums that can be paid under the Contract, as well as the
maximum amount of Account Value that may be maintained under the Contract.
Taxation of Pre-Death Distributions from a Contract that is a Modified Endowment
Contract. If the Contract falls within the definition of a modified endowment
contract, the following rules will apply to pre-death distributions under such
Contract:
(a) Distributions, such as withdrawals, will be included in the recipient's
gross income to the extent the Account Value of the Contract exceeds the
investment in the Contract (i.e. will be treated as income first). Any
additional amounts received, other than Contract loans, will be treated as
a return of capital to the Owner and will reduce the Owner's investment in
the Contract.
(b) Loans are considered distributions, including any increase in the amount of
the loan to pay interest. The Owner's investment in the Contract for tax
purposes will be increased by the amount of any prior loan that was
included in the Owner's gross income.
30
<PAGE> 31
(c) A Contract assignment is treated as a distribution. For example, a
collateral assignment is a distribution which will subject any gain that
accrues in the Contract to taxation.
(d) For purposes of determining the amount of the distribution which is
included in gross income, all modified endowment contracts issued by the
Company and its affiliates to the same Owner during any calendar year must
be treated as one modified endowment contract.
Any taxable distribution from a Contract that is a modified endowment will be
subject to an additional tax equal to 10% of the taxable amount of the
distribution unless the distribution is:
(a) made on or after the date when the Owner attains Age 59 1/2;
(b) is attributable to the Owner becoming disabled (as defined in the Code);
or
(c) is part of a series of substantially equal periodic payments made no less
frequently than annually for the life (or life expectancy) or for the joint
lives (or life expectancies) of the Owner or the Beneficiary.
If a Contract terminates after a grace period while there is a Contract loan,
the cancellation of such loan and accrued loan interest will be treated as a
distribution to the extent not previously treated as such and could be subject
to tax, including the 10% penalty tax, as described above. In addition, on the
Maturity Date and upon a full surrender, any excess of the proceeds (including
any amounts the Company uses to discharge any loan and accrued loan interest)
over the Owner's investment in the Contract, will be subject to federal income
tax and, unless an exception applies, the 10% penalty tax.
Taxation of Pre-Death Distributions from a Contract that is not a Modified
Endowment Contract. As long as a Contract remains in force as a non-modified
endowment, a Contract loan will be treated as indebtedness, and no part of the
loan proceeds will be subject to current federal income tax. Interest on the
loan generally will not be tax deductible.
After the first 15 Contract Years, the proceeds from a withdrawal will not be
subject to federal income tax except to the extent such proceeds exceed the
Owner's "investment" in the Contract. (The "investment" generally will equal the
premiums paid, less the amount of any previous distributions from the Contract
that were not taxable.) During the first 15 Contract Years, certain withdrawals
that reduce the Death Benefit could be subject to federal income tax to the
extent that the Contract's Account Value exceeds the Owner's investment in the
Contract.
On the Maturity Date or upon full surrender, any excess of the amount of
proceeds (including amounts the Company uses to discharge any Contract loan and
accrued loan interest) over the Owner's investment in the Contract, will be
subject to federal income tax. In addition, if a Contract terminates after a
grace period while there is a Contract loan, the cancellation of such loan and
accrued loan interest will be treated as a distribution and could be subject to
tax under the above rules. Finally, if the Owner makes an assignment of rights
or benefits under a Contract, the Owner may be deemed to have received a
distribution from the Contract, all or part of which may be taxable.
Distributions that occur during a Contract year in which a Contract becomes a
modified endowment and during any subsequent Contract years, will be taxed as
described in the preceding paragraphs. In addition, distributions from a
Contract within two years before it becomes a modified endowment also will be
subject to tax in this manner. This means that a distribution made from a
Contract that is not a modified endowment could later become taxable as a
distribution from a modified endowment.
DIVERSIFICATION REQUIREMENTS
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable life insurance policies. The Code provides that a
variable life insurance Contract will not be treated as a life insurance
contract under Section 7702 for any period (and any subsequent period) for which
the investments are not, in accordance with regulations prescribed by the United
States Treasury Department ("Treasury Department"), adequately diversified.
Failure to comply with the diversification requirements may result in the
Contract not qualifying as life insurance. If the Contract does not qualify as
life insurance, Owners may be subject to immediate taxation on the increases in
Account Value of their Contracts plus the cost of insurance protection for the
year. This treatment would apply for the period of non-compliance and
subsequently, unless and until the Company received a
31
<PAGE> 32
settlement of the matter with the Internal Revenue Service. The Company has no
legal obligation to seek or agree to any such settlement, however.
The Company intends that all Portfolios of the Funds underlying the Contracts
will be managed by the Fund or its investment adviser to comply with the
diversification requirements set forth in Section 817(h) of the Code and Treas.
Reg. 1.817-5 promulgated thereunder.
The Treasury Department has indicated that the diversification regulations do
not provide guidance regarding the circumstances in which Owners may direct
their investments to Sub-Accounts of the Separate Account without being
considered the owners of the assets of the Separate Account. At this time it
cannot be determined whether additional guidance will be provided and what
standards may be contained in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situation addressed in published rulings
issued by the Internal Revenue Service ("IRS") in which it was held that the
Contract owner was not the owner of the assets of the separate account. It is
unknown whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available, would
cause the Owner to be considered the owner of the assets of the Separate
Account. To the extent the Owner is treated as owner of the assets of the
Separate Account attributable to the Owner's Contract, the Owner would be liable
for federal income tax on the earnings allocable to the Contract prior to
receipt of payments under the Contract.
In the event any forthcoming guidance or ruling by the IRS is considered to set
forth a new position, such guidance or ruling will generally be applied only
prospectively. However, if such ruling or guidance was not considered to set
forth a new position, it may be applied retroactively, resulting in the Owner
being retroactively determined to be the owner of the assets of the Separate
Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contract in an attempt to maintain favorable tax treatment.
ADVERTISING PRACTICES
The Company may from time to time receive endorsements of the Contracts from
professional organizations. The Company may use such endorsements in
advertisements or sales material for the Contracts. The Company may also pay the
professional organization making the endorsement for the use of its customer or
mailing lists in order to distribute promotional materials regarding the
Contracts. An endorsement of the Contracts by a third party is not necessarily
indicative of the future performance or results which may be obtained by persons
who purchase the Contracts.
From time to time, articles discussing the Separate Account's investment
experience, performance rankings and other characteristics may appear in
national publications. Some or all of these publishers or ranking services
(including, but not limited to, Lipper Analytical Services Inc. and Morningstar,
Inc.) may publish their own rankings or performance reviews of variable contract
separate accounts, including the Separate Account. References to, reprints or
portions of reprints of such articles or rankings may be used by the Company as
sales literature or advertising material and may include rankings that indicate
the names of other variable contract separate accounts and their investment
experience.
Articles and releases, developed by the Company, the Funds and other parties,
about the Separate Account or the Funds regarding individual Portfolio, Fund and
Fund Group asset levels and sales volumes, statistics and analyses of industry
sales volume and asset levels, and other characteristics may appear in various
publications. References to or reprints of such articles may be used in
promotional literature for the Contracts or the Separate Account. Such
literature may refer to personnel of the adviser, or personnel of the
sub-advisers, who have investment management responsibility, and their
investment style. The reference may allude to or include excerpts from articles
appearing in the media.
The advertising and sales literature for the Contracts and the Separate Account
may refer to historical, current and prospective economic trends. In addition
sales literature may be published concerning topics of general investor interest
for the benefit of registered representatives and prospective Owners. These
materials may include, but are
32
<PAGE> 33
not limited to, discussions of college planning, retirement planning, reasons
for investing and historical examples of the investment performance of various
classes of securities, securities markets and indices.
LEGAL MATTERS
STATE REGULATION
The Company is subject to the laws of the State of Arkansas governing insurance
companies and to regulation by the Arkansas Insurance Department. An annual
statement in a prescribed form is filed with the Insurance Department each year
covering the operation of the Company for the preceding year and its financial
condition as of the end of such year. Regulation by the Insurance Department
includes periodic examination to determine the Company's Contract liabilities
and reserves so that the Insurance Department may certify the items are correct.
The Company's books and accounts are subject to review by the Insurance
Department at all times and full examination of its operations is conducted
periodically by the National Association of Insurance Commissioners. Such
regulation does not, however, involve any supervision of management or
investment practices or policies. In addition, the Company is subject to
regulation under the insurance laws of other jurisdictions in which it may
operate. As a result, various time periods and other terms and conditions
described in this prospectus may vary depending on where the Owner resides.
These variations will be reflected in the Contract and riders, or related
endorsements.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Separate Account,
the Distributor or the Company are a party.
COUNSEL
Legal matters in connection with the Contracts have been reviewed by the
Company's Legal Department. Freedman, Levy, Kroll & Simmonds, of Washington, DC,
has advised the Company on certain matters relating to the federal securities
and tax laws.
EXPERTS
The consolidated financial statements of First Variable Life Insurance Company
at December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997 and the financial statements of First Variable Life
Insurance Company--Separate Account VL at December 31, 1997 and for the period
then ended appearing in this prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
appearing elsewhere herein, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
REGISTRATION STATEMENT
A registration statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended. This prospectus omits
certain information contained in the Registration Statement. Copies of such
additional information may be obtained from the SEC upon payment of the
prescribed fee.
33
<PAGE> 34
APPENDIX: A
ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES,
CASH SURRENDER VALUES AND ACCUMULATED VALUE OF THE PREMIUM
The tables in Appendix A illustrate the way the Contracts operate. They show how
the Death Benefit, Cash Surrender Value and Account Value change over an
extended period of time assuming hypothetical gross rates of return (i.e.
investment income and capital gains, realized or unrealized) for the Separate
Account equal to constant after-tax annual rates of 0%, 6% and 12%. The tables
are based on an initial premium of $30,000 to provide insurance coverage on
females aged 55 and males aged 65. The insureds are assumed to be in the
nonsmoker standard risk classification. The tables are first given based on
current (i.e., non-guaranteed) cost of insurance rates, and other charges the
Company makes under a Contract on a daily or monthly basis. The next tables are
based on the guaranteed cost of insurance rates, as well as such other charges
and deductions stated above.
The Death Benefits, Cash Surrender Values and Account Values shown in the tables
also reflect a simple average of the investment advisory fees and operating
expenses incurred by the Portfolios, at an annual rate of 1.12% of the average
daily net assets of the Portfolios. This average reflects a voluntary cap on the
investment advisory fees. If the investment adviser discontinues these caps, the
values illustrated on the following pages could be less. (See "Highlights.")
Taking account of the charges for mortality and expense risks and administrative
expense in the Separate Account and the average investment advisory fee and
operating expenses of the Portfolios, the gross current annual rates of return
of 0%, 6% and 12% correspond to net investment experience at constant annual
rates of (2.02)%, 3.98% and 9.98%, respectively. The hypothetical rates of
return shown in the tables do not reflect any tax charges attributable to the
Separate Account since no such charges are currently made. If any such charges
are imposed in the future, the gross annual rate of return would have to exceed
the rates shown by an amount sufficient to cover the tax charges, in order to
produce the Death Benefits, Cash Surrender Values and Account Values
illustrated. (See "Taxation of the Company and the Separate Account.")
The second column of each table shows the amount which would accumulate if the
initial premium were invested to earn interest, after taxes, of 5% per year,
compounded annually.
34
<PAGE> 35
$30,000 INITIAL PREMIUM
$96,753 SPECIFIED AMOUNT
FEMALE NONSMOKER: AGE 55
CURRENT RATES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
HYPOTHETICAL GROSS INVESTMENT RETURN
-----------------------------------------------------------------------------------------
End PREMIUM 0% 6% 12%
of PAID PLUS --------------------------- -------------------------- -----------------------------
Contract INTEREST Account Surr. Death Account Surr. Death Account Surr. Death
Year AT 5% Value Value Benefit Value Value Benefit Value Value Benefit
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 31,500 28,941 26,016 96,753 30,714 27,789 96,753 32,487 29,562 96,753
- ------------------------------------------------------------------------------------------------------------------
2 33,075 27,919 25,069 96,753 31,446 28,596 96,753 35,184 32,334 96,753
- ------------------------------------------------------------------------------------------------------------------
3 34,729 26,931 24,231 96,753 32,196 29,496 96,753 38,106 35,406 96,753
- ------------------------------------------------------------------------------------------------------------------
4 36,465 25,978 23,578 96,753 32,965 30,565 96,753 41,274 38,874 96,753
- ------------------------------------------------------------------------------------------------------------------
5 38,288 25,057 22,957 96,753 33,753 31,653 96,753 44,708 42,608 96,753
- ------------------------------------------------------------------------------------------------------------------
6 40,203 24,167 22,367 96,753 34,560 32,760 96,753 48,430 46,630 96,753
- ------------------------------------------------------------------------------------------------------------------
7 42,213 23,309 21,809 96,753 35,388 33,888 96,753 52,465 50,965 96,753
- ------------------------------------------------------------------------------------------------------------------
8 44,324 22,479 21,279 96,753 36,236 35,036 96,753 56,838 55,638 96,753
- ------------------------------------------------------------------------------------------------------------------
9 46,540 21,679 20,779 96,753 37,105 36,205 96,753 61,579 60,679 96,753
- ------------------------------------------------------------------------------------------------------------------
10 48,867 20,905 20,905 96,753 37,995 37,995 96,753 66,718 66,718 96,753
- ------------------------------------------------------------------------------------------------------------------
15 62,368 17,862 17,862 96,753 43,878 43,878 96,753 102,190 102,190 118,540
- ------------------------------------------------------------------------------------------------------------------
20 79,599 15,242 15,242 96,753 50,696 50,696 96,753 156,797 156,797 167,773
- ------------------------------------------------------------------------------------------------------------------
25 101,591 12,985 12,985 96,753 58,598 58,598 96,753 240,586 240,586 252,615
- ------------------------------------------------------------------------------------------------------------------
30 129,658 11,042 11,042 96,753 67,758 67,758 96,753 369,149 369,149 387,607
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED REPRESENTATIVE OF PAST
OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING INVESTMENT
ALLOCATIONS MADE BY AN OWNER, PREVAILING ECONOMIC CONDITIONS, PREVAILING RATES
AND RATES OF INFLATION. THE DEATH BENEFIT AND ACCOUNT VALUE WOULD BE DIFFERENT
FROM THOSE SHOWN IF THE ACTUAL RATES AVERAGED 0%, 6% AND 12% OVER A PERIOD OF
YEARS BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CONTRACT
YEARS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN
BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
35
<PAGE> 36
$30,000 INITIAL PREMIUM
$96,753 SPECIFIED AMOUNT
FEMALE NONSMOKER: AGE 55
GUARANTEED RATES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
HYPOTHETICAL GROSS INVESTMENT RETURN
-------------------------------------------------------------------------------------------------
End PREMIUM 0% 6% 12%
of PAID PLUS ---------------------------- ----------------------------- --------------------------------
Contract INTEREST Account Surr. Death Account Surr. Death Account Surr. Death
Year AT 5% Value Value Benefit Value Value Benefit Value Value Benefit
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 31,500 28,637 25,712 96,753 30,409 27,484 96,753 32,181 29,256 96,753
- -------------------------------------------------------------------------------------------------------------------------
2 33,075 27,275 24,425 96,753 30,800 27,950 96,753 34,537 31,687 96,753
- -------------------------------------------------------------------------------------------------------------------------
3 34,729 25,911 23,211 96,753 31,173 28,473 96,753 37,089 34,389 96,753
- -------------------------------------------------------------------------------------------------------------------------
4 36,465 24,555 22,155 96,753 31,535 29,135 96,753 39,861 37,461 96,753
- -------------------------------------------------------------------------------------------------------------------------
5 38,288 23,186 21,086 96,753 31,872 29,772 96,753 42,816 40,716 96,753
- -------------------------------------------------------------------------------------------------------------------------
6 40,203 21,804 20,004 96,753 32,181 30,381 96,753 45,950 44,150 96,753
- -------------------------------------------------------------------------------------------------------------------------
7 42,213 20,399 18,899 96,753 32,455 30,955 96,753 49,297 47,797 96,753
- -------------------------------------------------------------------------------------------------------------------------
8 44,324 18,960 17,760 96,753 32,685 31,485 96,753 52,865 51,665 96,753
- -------------------------------------------------------------------------------------------------------------------------
9 46,540 17,456 16,556 96,753 32,846 31,946 96,753 56,647 55,747 96,753
- -------------------------------------------------------------------------------------------------------------------------
10 48,867 15,878 15,878 96,753 32,928 32,928 96,753 60,654 60,654 96,753
- -------------------------------------------------------------------------------------------------------------------------
15 62,368 6,989 6,989 96,753 33,140 33,140 96,753 87,474 87,474 101,470
- -------------------------------------------------------------------------------------------------------------------------
20 79,599 -- -- 96,753 29,384 29,384 96,753 125,075 125,075 133,831
- -------------------------------------------------------------------------------------------------------------------------
25 101,591 -- -- 96,753 14,742 14,742 96,753 177,984 177,984 186,883
- -------------------------------------------------------------------------------------------------------------------------
30 129,658 -- -- 96,753 -- -- 96,753 251,073 251,073 263,627
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED REPRESENTATIVE OF PAST
OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING INVESTMENT
ALLOCATIONS MADE BY AN OWNER, PREVAILING ECONOMIC CONDITIONS, PREVAILING RATES
AND RATES OF INFLATION. THE DEATH BENEFIT AND ACCOUNT VALUE WOULD BE DIFFERENT
FROM THOSE SHOWN IF THE ACTUAL RATES AVERAGED 0%, 6% AND 12% OVER A PERIOD OF
YEARS BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CONTRACT
YEARS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN
BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
36
<PAGE> 37
$30,000 INITIAL PREMIUM
$58,176 SPECIFIED AMOUNT
MALE NONSMOKER: AGE 65
CURRENT RATES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
HYPOTHETICAL GROSS INVESTMENT RETURN
------------------------------------------------------------------------------------------------
End PREMIUM 0% 6% 12%
of PAID PLUS ----------------------------- ----------------------------- ------------------------------
Contract INTEREST Account Surr. Death Account Surr. Death Account Surr. Death
Year AT 5% Value Value Benefit Value Value Benefit Value Value Benefit
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 31,500 28,941 26,016 58,176 30,714 27,789 58,176 32,487 29,562 58,176
- ------------------------------------------------------------------------------------------------------------------------
2 33,075 27,919 25,069 58,176 31,446 28,596 58,176 35,184 32,334 58,176
- ------------------------------------------------------------------------------------------------------------------------
3 34,729 26,931 24,231 58,176 32,196 29,496 58,176 38,106 35,406 58,176
- ------------------------------------------------------------------------------------------------------------------------
4 36,465 25,978 23,578 58,176 32,965 30,565 58,176 41,274 38,874 58,176
- ------------------------------------------------------------------------------------------------------------------------
5 38,288 25,057 22,957 58,176 33,753 31,653 58,176 44,708 42,608 58,176
- ------------------------------------------------------------------------------------------------------------------------
6 40,203 24,167 22,367 58,176 34,560 32,760 58,176 48,430 46,630 58,176
- ------------------------------------------------------------------------------------------------------------------------
7 42,213 23,309 21,809 58,176 35,388 33,888 58,176 52,465 50,965 59,285
- ------------------------------------------------------------------------------------------------------------------------
8 44,324 22,479 21,279 58,176 36,236 35,036 58,176 56,838 55,638 63,091
- ------------------------------------------------------------------------------------------------------------------------
9 46,540 21,679 20,779 58,176 37,105 36,205 58,176 61,579 60,679 67,121
- ------------------------------------------------------------------------------------------------------------------------
10 48,867 20,905 20,905 58,176 37,995 37,995 58,176 66,718 66,718 71,388
- ------------------------------------------------------------------------------------------------------------------------
15 62,368 17,862 17,862 58,176 43,878 43,878 58,176 102,190 102,190 107,299
- ------------------------------------------------------------------------------------------------------------------------
20 79,599 15,242 15,242 58,176 50,696 50,696 58,176 156,797 156,797 164,637
- ------------------------------------------------------------------------------------------------------------------------
25 101,591 12,985 12,985 58,176 58,598 58,598 61,528 240,586 240,586 252,615
- ------------------------------------------------------------------------------------------------------------------------
30 129,658 11,042 11,042 58,176 67,758 67,758 68,435 369,149 369,149 372,841
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED REPRESENTATIVE OF PAST
OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING INVESTMENT
ALLOCATIONS MADE BY AN OWNER, PREVAILING ECONOMIC CONDITIONS, PREVAILING RATES
AND RATES OF INFLATION. THE DEATH BENEFIT AND ACCOUNT VALUE WOULD BE DIFFERENT
FROM THOSE SHOWN IF THE ACTUAL RATES AVERAGED 0%, 6% AND 12% OVER A PERIOD OF
YEARS BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CONTRACT
YEARS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN
BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
37
<PAGE> 38
$30,000 INITIAL PREMIUM
$58,176 SPECIFIED AMOUNT
MALE NONSMOKER: AGE 65
GUARANTEED RATES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
HYPOTHETICAL GROSS INVESTMENT RETURN
-----------------------------------------------------------------------------------------------
End PREMIUM 0% 6% 12%
of PAID PLUS ----------------------------- ------------------------------ ----------------------------
Contract INTEREST Account Surr. Death Account Surr. Death Account Surr. Death
Year AT 5% Value Value Benefit Value Value Benefit Value Value Benefit
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 31,500 28,102 25,177 58,176 29,823 26,898 58,176 31,545 28,620 58,176
- -----------------------------------------------------------------------------------------------------------------------
2 33,075 26,227 23,377 58,176 29,541 26,691 58,176 33,052 30,202 58,176
- -----------------------------------------------------------------------------------------------------------------------
3 34,729 24,383 21,683 58,176 29,151 26,451 58,176 34,502 31,802 58,176
- -----------------------------------------------------------------------------------------------------------------------
4 36,465 22,565 20,165 58,176 28,647 26,247 58,176 35,868 33,468 58,176
- -----------------------------------------------------------------------------------------------------------------------
5 38,288 20,664 18,564 58,176 28,019 25,919 58,176 37,115 35,015 58,176
- -----------------------------------------------------------------------------------------------------------------------
6 40,203 18,625 16,825 58,176 27,261 25,461 58,176 38,206 36,406 58,176
- -----------------------------------------------------------------------------------------------------------------------
7 42,213 16,415 14,915 58,176 26,441 24,941 58,176 39,209 37,709 58,176
- -----------------------------------------------------------------------------------------------------------------------
8 44,324 13,988 12,788 58,176 25,558 24,358 58,176 40,103 38,903 58,176
- -----------------------------------------------------------------------------------------------------------------------
9 46,540 11,291 10,391 58,176 24,583 23,683 58,176 40,875 39,975 58,176
- -----------------------------------------------------------------------------------------------------------------------
10 48,867 8,263 8,263 58,176 23,326 23,326 58,176 41,516 41,516 58,176
- -----------------------------------------------------------------------------------------------------------------------
15 62,368 -- -- 58,176 11,212 11,212 58,176 44,372 44,372 58,176
- -----------------------------------------------------------------------------------------------------------------------
20 79,599 -- -- 58,176 -- -- 58,176 45,935 45,935 58,176
- -----------------------------------------------------------------------------------------------------------------------
25 101,591 -- -- 58,176 -- -- 58,176 49,217 49,217 58,176
- -----------------------------------------------------------------------------------------------------------------------
30 129,658 -- -- 58,176 -- -- 58,176 54,850 54,850 58,176
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED REPRESENTATIVE OF PAST
OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING INVESTMENT
ALLOCATIONS MADE BY AN OWNER, PREVAILING ECONOMIC CONDITIONS, PREVAILING RATES
AND RATES OF INFLATION. THE DEATH BENEFIT AND ACCOUNT VALUE WOULD BE DIFFERENT
FROM THOSE SHOWN IF THE ACTUAL RATES AVERAGED 0%, 6% AND 12% OVER A PERIOD OF
YEARS BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CONTRACT
YEARS. NO REPRESENTATION CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN
BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
38
<PAGE> 39
APPENDIX: B
FINANCIAL STATEMENTS
The financial statements of the Company contained in this prospectus should be
considered to bear only upon the ability of the Company to meet its obligations
under the Contracts. They should not be considered as bearing upon the
investment experience of the Separate Account.
The following financial statements are included in this Appendix:
First Variable Life Insurance Company Separate Account VL
Financial Statements at December 31, 1997 and for the period then ended
First Variable Life Insurance Company
Consolidated Financial Statements at December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997
39
<PAGE> 40
First Variable Life Insurance Company -
First Variable Separate Account VL
Financial Statements
Period ended December 31, 1997
40
<PAGE> 41
Report of Independent Auditors
To the Board of Directors of First Variable Life Insurance Company
and Contract Owners of First Variable Separate Account VL
We have audited the accompanying statement of assets, liabilities and contract
owners' equity of First Variable Life Insurance Company--First Variable Separate
Account VL as of December 31, 1997, and the related statements of operations and
changes in contract owners' equity for the period from March 31, 1997
(commencement of operations) through December 31, 1997. These financial
statements are the responsibility of First Variable Life Insurance Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
Our procedures included confirmation of the securities owned as of December 31,
1997 by correspondence with Variable Investors Series Trust and Federated
Investors. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Variable Life Insurance
Company--First Variable Separate Account VL at December 31, 1997, and the
results of its operations and the changes in its contract owners' equity for the
period from March 31, 1997 through December 31, 1997, in conformity with
generally accepted accounting principles.
Boston, Massachusetts
January 30, 1998
41
<PAGE> 42
First Variable Life Insurance Company--
First Variable Separate Account VL
Statement of Assets, Liabilities and
Contract Owners' Equity
December 31, 1997
<TABLE>
<CAPTION>
HIGH U.S.
FEDERATED INCOME MULTIPLE MATRIX GOVERNMENT
PRIME MONEY GROWTH BOND STRATEGIES EQUITY BOND
TOTAL FUND II DIVISION DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in Variable Investors
Series Trust, at value (cost
$4,421,491) $4,108,154 $812,838 $775,603 $404,737 $247,969 $106,295
Investments in Federated Prime
Money Fund II, at value (cost
$58,464) 58,464 $58,464
Receivable from First Variable
Life Insurance Company 61,400 16,797
---------- ------- -------- -------- -------- -------- --------
Total assets $4,228,018 $58,464 $829,635 $775,603 $404,737 $247,969 $106,295
========== ======= ======== ======== ======== ======== ========
LIABILITIES
Payable to First Variable Life
Insurance Company $ 7,908 $ 209 $ 44 $ 2,669 $ 94 $ 30
CONTRACT OWNERS' EQUITY
Variable annuity contract
owners' equity 4,220,110 58,255 $829,635 775,559 402,068 247,875 106,265
---------- ------- -------- -------- -------- -------- --------
Total liabilities and contract
owners' equity $4,228,018 $58,464 $829,635 $775,603 $404,737 $247,969 $106,295
========== ======= ======== ======== ======== ======== ========
<CAPTION>
WORLD GROWTH & SMALL CAP
EQUITY INCOME GROWTH
DIVISION DIVISION DIVISION
--------------------------------
<S> <C> <C> <C>
ASSETS
Investments in Variable Investors
Series Trust, at value (cost
$4,421,491) $384,193 $791,364 $585,155
Investments in Federated Prime
Money Fund II, at value (cost
$58,464)
Receivable from First Variable
Life Insurance Company 35,041 9,562
-------- -------- --------
Total assets $384,193 $826,405 $594,717
======== ======== ========
LIABILITIES
Payable to First Variable Life
Insurance Company $ 4,862
CONTRACT OWNERS' EQUITY
Variable annuity contract
owners' equity 379,331 $826,405 $594,717
-------- -------- --------
Total liabilities and contract
owners' equity $384,193 $826,405 $594,717
======== ======== ========
</TABLE>
See accompanying notes.
42
<PAGE> 43
First Variable Life Insurance Company--
First Variable Separate Account VL
Statement of Operations
Period ended December 31, 1997
<TABLE>
<CAPTION>
HIGH U.S.
FEDERATED INCOME MULTIPLE MATRIX GOVERNMENT
PRIME MONEY GROWTH BOND STRATEGIES EQUITY BOND
TOTAL FUND II DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $ 318,972 $1,324 $ 55,535 $ 47,215 $ 29,289 $ 51,350 $ 6,135
Expenses:
Fees paid to First Variable Life
Insurance Company:
Risk and administrative charges 25,431 664 5,513 3,913 2,033 1,218 664
--------- ------ -------- -------- -------- -------- -------
Total expenses 25,431 664 5,513 3,913 2,033 1,218 664
--------- ------ -------- -------- -------- -------- -------
Net investment income 293,541 660 50,022 43,302 27,256 50,132 5,471
Realized and unrealized gain (loss)
on investments:
Realized gain on Variable
Investors Series Trust shares
redeemed 30,991 -- 6,149 4,237 4,035 1,214 115
Net unrealized depreciation on
investments during the period (313,337) -- (59,827) (38,178) (27,549) (46,673) (4,328)
--------- ------ -------- -------- -------- -------- -------
Net realized and unrealized loss on
investments (282,346) -- (53,678) (33,941) (23,514) (45,459) (4,213)
--------- ------ -------- -------- -------- -------- -------
Net increase (decrease) in contract
owners' equity resulting from
operations $ 11,195 $ 660 $ (3,656) $ 9,361 $ 3,742 $ 4,673 $ 1,258
========= ====== ======== ======== ======== ======== =======
<CAPTION>
WORLD GROWTH & SMALL CAP
EQUITY INCOME GROWTH
DIVISION DIVISION DIVISION
--------------------------------------
<S> <C> <C> <C>
Investment income:
Dividends $ 48,451 $ 61,509 $ 18,164
Expenses:
Fees paid to First Variable Life
Insurance Company:
Risk and administrative charges 2,723 4,778 3,925
-------- -------- --------
Total expenses 2,723 4,778 3,925
-------- -------- --------
Net investment income 45,728 56,731 14,239
Realized and unrealized gain (loss)
on investments:
Realized gain on Variable
Investors Series Trust shares
redeemed 1,148 9,851 4,242
Net unrealized depreciation on
investments during the period (56,711) (38,508) (41,563)
-------- -------- --------
Net realized and unrealized loss on
investments (55,563) (28,657) (37,321)
-------- -------- --------
Net increase (decrease) in contract
owners' equity resulting from
operations $ (9,835) $ 28,074 $(23,082)
======== ======== ========
</TABLE>
See accompanying notes.
43
<PAGE> 44
First Variable Life Insurance Company--
First Variable Separate Account VL
Statement of Changes in Contract Owners' Equity
Period ended December 31, 1997
<TABLE>
<CAPTION>
HIGH U.S.
FEDERATED INCOME MULTIPLE MATRIX GOVERNMENT
PRIME MONEY GROWTH BOND STRATEGIES EQUITY BOND
TOTAL FUND II DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C> <C> <C> <C>
Net investment income $ 293,541 $ 660 $ 50,022 $ 43,302 $ 27,256 $ 50,132 $ 5,471
Realized gain on Variable Investors
Series Trust shares redeemed 30,991 6,149 4,237 4,035 1,214 115
Net unrealized depreciation on
investments during the period (313,337) (59,827) (38,178) (27,549) (46,673) (4,328)
----------- --------- --------- --------- --------- --------- ---------
Net increase (decrease) in contract
owners' equity resulting from
operations 11,195 660 (3,656) 9,361 3,742 4,673 1,258
----------- --------- --------- --------- --------- --------- ---------
FROM CONTRACT OWNER TRANSACTIONS
Net proceeds from sale of
accumulation units 4,204,473 225,761 725,575 786,740 431,203 237,690 86,790
Cost of accumulation units
terminated and exchanged 4,442 (168,166) 107,716 (20,542) (32,877) 5,512 18,217
----------- --------- --------- --------- --------- --------- ---------
Increase in contract owners' equity
from contract owner transactions 4,208,915 57,595 833,291 766,198 398,326 243,202 105,007
----------- --------- --------- --------- --------- --------- ---------
Increase in contract owners' equity
and balance at end of period $ 4,220,110 $ 58,255 $ 829,635 $ 775,559 $ 402,068 $ 247,875 $ 106,265
=========== ========= ========= ========= ========= ========= =========
<CAPTION>
WORLD GROWTH & SMALL CAP
EQUITY INCOME GROWTH
DIVISION DIVISION DIVISION
--------------------------------------
<S> <C> <C> <C>
OPERATIONS
Net investment income $ 45,728 $ 56,731 $ 14,239
Realized gain on Variable Investors
Series Trust shares redeemed 1,148 9,851 4,242
Net unrealized depreciation on
investments during the period (56,711) (38,508) (41,563)
--------- --------- ---------
Net increase (decrease) in contract
owners' equity resulting from
operations (9,835) 28,074 (23,082)
--------- --------- ---------
FROM CONTRACT OWNER TRANSACTIONS
Net proceeds from sale of
accumulation units 414,940 808,742 487,032
Cost of accumulation units
terminated and exchanged (25,774) (10,411) 130,767
--------- --------- ---------
Increase in contract owners' equity
from contract owner transactions 389,166 798,331 617,799
--------- --------- ---------
Increase in contract owners' equity
and balance at end of period $ 379,331 $ 826,405 $ 594,717
========= ========= =========
</TABLE>
See accompanying notes.
44
<PAGE> 45
First Variable Life Insurance Company - First Variable Separate Account VL
Notes to Financial Statements
December 31, 1997
1. ORGANIZATION
First Variable Separate Account VL (the Fund), which began operations on March
31, 1997, is a segregated account of First Variable Life Insurance Company
(First Variable Life) and is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). Eight of the nine
investment divisions of the Fund are invested solely in the shares of the eight
corresponding portfolios of the Variable Investors Series Trust (the Trust), a
no-load, diversified, open-end, series management investment company registered
under the 1940 Act. The remaining investment division is invested in the
Federated Prime Money Fund II (Federated), a portfolio of Federated Insurance
Series Trust, an open-end management investment company. Under applicable
insurance law, the assets and liabilities of the Fund are clearly identified and
distinguished from the other assets and liabilities of First Variable Life. The
Fund cannot be charged with liabilities arising out of any other business of
First Variable Life.
First Variable Life is a wholly-owned subsidiary of Irish Life of North America,
Inc. (ILoNA), which is a wholly-owned subsidiary of Irish Life, plc. (Irish
Life) of Dublin, Ireland. First Variable Life is domiciled in the State of
Arkansas.
The assets of the Fund are not available to meet the general obligations of
First Variable Life or ILoNA and are held for the exclusive benefit of the
contract owners participating in the Fund.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in preparation of its financial statements. The policies
are in conformity with generally accepted accounting principles.
INVESTMENTS
The investments in shares of the Trust and Federated are stated at the net asset
value per share of the respective portfolios of the Trust and Federated.
Investment transactions are accounted for on the date the shares are purchased
or sold. The cost of shares sold and redeemed is determined on the first-in,
first-out method. Dividends and capital gain distributions received from the
Trust and Federated are reinvested in additional shares of the Trust and
Federated and are recorded as income by the Fund on the ex-dividend date.
FEDERAL INCOME TAXES
For federal income tax purposes, operations of the Fund are combined with those
of First Variable Life, which is taxed as a life insurance company. First
Variable Life anticipates no tax liability resulting from the operations of the
Fund. Therefore, no provision for income taxes has been charged against the
Fund.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
45
<PAGE> 46
First Variable Life Insurance Company - First Variable Separate Account VL
Notes to Financial Statements (continued)
3. INVESTMENTS
The following table presents selected data for investments in each of the
Portfolios of the Trust at December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF NET ASSET
SHARES COST VALUE
-----------------------------------------------
<S> <C> <C> <C>
Federated Prime Money Fund II 58,464 $ 58,464 $ 58,464
Growth Portfolio 23,423 872,665 812,838
High Income Bond Portfolio 79,794 813,781 775,603
Multiple Strategies Portfolio 28,588 432,286 404,737
Matrix Equity Portfolio 17,370 294,642 247,969
U.S. Government Bond Portfolio 10,461 110,623 106,295
World Equity Portfolio 27,278 440,904 384,193
Growth & Income Portfolio 54,325 829,872 791,364
Small Cap Growth Portfolio 37,563 626,718 585,155
----------------------------
Totals $4,479,955 $4,166,618
============================
</TABLE>
4. CONTRACT OWNERS' EQUITY
Variable life contract owners' equity at December 31, 1997 consists of the
following:
<TABLE>
<CAPTION>
ACCUMULATION ACCUMULATION
UNITS UNIT VALUE EQUITY
-----------------------------------------------
<S> <C> <C> <C>
Federated Prime Money Fund II 5,668 10.278 $ 58,255
Growth Division 66,852 12.410 829,635
High Income Bond Division 70,186 11.050 775,559
Multiple Strategies Division 33,163 12.124 402,068
Matrix Equity Division 20,241 12.246 247,875
U.S. Government Bond Division 9,750 10.899 106,265
World Equity Division 34,254 11.074 379,331
Growth & Income Division 66,991 12.336 826,405
Small Cap Growth Division 49,589 11.993 594,717
----------
Totals $4,220,110
==========
</TABLE>
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of Trust and Federated shares by the
Fund during the period ended December 31, 1997 are shown below:
<TABLE>
<CAPTION>
PURCHASES SALES
----------------------------
<S> <C> <C>
Federated Prime Money Fund II $ 315,220 $ 256,756
Growth Portfolio 957,871 91,355
High Income Bond Portfolio 1,057,385 247,841
Multiple Strategies Portfolio 638,810 210,559
Matrix Equity Portfolio 326,291 32,863
U.S. Government Bond Portfolio 190,319 79,811
World Equity Portfolio 566,117 126,361
Growth & Income Portfolio 972,137 152,116
Small Cap Growth Portfolio 686,076 63,600
----------------------------
Totals $5,710,226 $1,261,262
============================
</TABLE>
46
<PAGE> 47
First Variable Life Insurance Company - First Variable Separate Account VL
Notes to Financial Statements (continued)
6. EXPENSES
First Variable Life charges the Fund, based on the value of the Fund, at an
annual rate of 0.90% for mortality risks, 0.20% for distribution expense risks,
.40% for administrative expense risks, .25% for premium taxes and .20% for
federal taxes. Total charges to the Fund for all the policy forms for the year
ended December 31, 1997 were $25,431.
7. DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code, a variable
life contract, other than a contract issued in connection with certain types of
employee benefits plans, will not be treated as a life contract for federal tax
purposes for any period for which the investments of the segregated asset
account on which the contract is based are not adequately diversified. The Code
provides that the "adequately diversified" requirement may be met if the
underlying investments satisfy either a statutory safe harbor test or
diversification requirements set forth in regulations issued by the Secretary of
Treasury.
The Internal Revenue Service has issued regulations under section 817(h) of the
Code. First Variable Life believes that the Fund satisfies the current
requirements of the regulations, and it intends that the Fund will continue to
meet such requirements.
8. PRINCIPAL UNDERWRITER AND GENERAL DISTRIBUTOR
First Variable Capital Services, Inc., a wholly-owned subsidiary of First
Variable Life, is principal underwriter and general distributor of the contracts
issued through the Fund.
9. YEAR 2000 ISSUES (UNAUDITED)
Like other investment funds and financial and business organizations around the
world, the Fund could be adversely affected if the computer systems of First
Variable Life and those of its service providers do not properly process and
calculate date-related information and data from and after January 1, 2000.
First Variable Life has completed an assessment of the Year 2000 impact on its
systems, procedures, customers and business processes. At December 31, 1997,
management of First Variable Life is satisfied that their main operating systems
are Year 2000 compliant. First Variable Life is reviewing its general office
systems and will be contacting its service providers during 1998. First Variable
Life believes it will complete the Year 2000 project not later than December 31,
1998, which is prior to any anticipated impact on its operating systems.
The date on which First Variable Life believes it will complete the Year 2000
project is based on its management's best estimates. Although there can be no
guarantee that these estimates will be achieved, its management does not at this
time believe that actual results will differ materially from those anticipated.
Specific factors that might cause such material differences would most likely
result from First Variable Life's service providers.
47
<PAGE> 48
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
First Variable Life Insurance Company
We have audited the accompanying consolidated balance sheets of First Variable
Life Insurance Company (the Company) as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholder's equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Variable Life Insurance Company at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 6, 1998
48
<PAGE> 49
First Variable Life Insurance Company
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------
<S> <C> <C>
ASSETS
Investments (Note 3):
Fixed maturities-available-for-sale, at
fair value (amortized cost:
1997-$274,439,000; 1996-$278,305,000) $294,961,000 $294,195,000
Option contracts 1,057,000 94,000
Equity securities-available-for-sale, at
fair value (cost: $684,000 in 1997 and 1996) 825,000 691,000
Policy loans 267,000 --
------------------------------
Total investments 297,110,000 294,980,000
Cash and cash equivalents 3,029,000 2,433,000
Accrued investment income 5,744,000 5,636,000
Deferred policy acquisition costs 7,520,000 5,486,000
Value of insurance in force acquired (Note 4) 16,939,000 19,494,000
Property and equipment, less allowances for depreciation
of $773,000 in 1997 and $508,000 in 1996 445,000 649,000
Goodwill, less accumulated amortization of $475,000
in 1997 and $329,000 in 1996 2,448,000 2,594,000
Other assets 732,000 2,273,000
Assets held in separate accounts 219,807,000 176,306,000
------------------------------
Total assets $553,774,000 $509,851,000
==============================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits for annuity and life products $233,988,000 $239,509,000
Unearned revenue reserve 282,000 52,000
Supplementary contracts without life contingencies 21,711,000 21,008,000
Deferred income tax liability (Note 5) 6,692,000 5,642,000
Other liabilities 2,837,000 938,000
Liabilities related to separate accounts 219,807,000 176,306,000
------------------------------
Total liabilities 485,317,000 443,455,000
Commitments and contingencies (Note 8)
Stockholder's equity:
Capital stock, par value $1.00 per share-authorized
3,500,000 shares, issued and outstanding
2,500,000 shares 2,500,000 2,500,000
Additional paid-in capital 53,104,000 53,104,000
Net unrealized investment gains (Note 3) 9,066,000 7,324,000
Retained earnings 3,787,000 3,468,000
------------------------------
Total stockholder's equity 68,457,000 66,396,000
------------------------------
Total liabilities and stockholder's equity $553,774,000 $509,851,000
==============================
</TABLE>
See accompanying notes.
49
<PAGE> 50
First Variable Life Insurance Company
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Revenues:
Annuity and life product charges $ 3,141,000 $ 2,408,000 $ 1,786,000
Net investment income 22,597,000 23,458,000 23,465,000
Realized gains on investments 1,227,000 972,000 900,000
Other income 1,368,000 1,114,000 829,000
---------------------------------------------
Total revenues 28,333,000 27,952,000 26,980,000
Benefits and expenses:
Annuity and life benefits 14,856,000 16,336,000 16,694,000
Underwriting, acquisition and insurance
expenses 9,915,000 7,275,000 6,600,000
Management fee paid to parent 480,000 480,000 480,000
Other expenses 2,610,000 1,421,000 1,269,000
---------------------------------------------
Total benefits and expenses 27,861,000 25,512,000 25,043,000
---------------------------------------------
Income before income taxes 472,000 2,440,000 1,937,000
Income taxes 153,000 836,000 666,000
---------------------------------------------
Net income $ 319,000 $ 1,604,000 $ 1,271,000
=============================================
</TABLE>
See accompanying notes.
50
<PAGE> 51
First Variable Life Insurance Company
Consolidated Statements of Changes in Stockholder's Equity
<TABLE>
<CAPTION>
NET
UNREALIZED
ADDITIONAL INVESTMENT TOTAL
CAPITAL PAID-IN GAINS RETAINED STOCKHOLDER'S
STOCK CAPITAL (LOSSES) EARNINGS EQUITY
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $2,500,000 $48,104,000 $(3,308,000) $ 593,000 $47,889,000
Contribution from parent -- 5,000,000 -- -- 5,000,000
Net income for 1995 -- -- -- 1,271,000 1,271,000
Change in net unrealized
investment gains/losses -- -- 16,497,000 -- 16,497,000
---------------------------------------------------------------------------------
Balance at December 31, 1995 2,500,000 53,104,000 13,189,000 1,864,000 70,657,000
Net income for 1996 -- -- -- 1,604,000 1,604,000
Change in net unrealized
investment gains/losses -- -- (5,865,000) -- (5,865,000)
---------------------------------------------------------------------------------
Balance at December 31, 1996 2,500,000 53,104,000 7,324,000 3,468,000 66,396,000
Net income for 1997 -- -- -- 319,000 319,000
Change in net unrealized
investment gains/losses -- -- 1,742,000 -- 1,742,000
---------------------------------------------------------------------------------
Balance at December 31, 1997 $2,500,000 $53,104,000 $ 9,066,000 $ 3,787,000 $68,457,000
=================================================================================
</TABLE>
See accompanying notes.
51
<PAGE> 52
First Variable Life Insurance Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 319,000 $ 1,604,000 $ 1,271,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Adjustments related to interest-sensitive
products:
Annuity benefits 14,856,000 16,336,000 16,694,000
Annuity product charges (3,141,000) (2,408,000) (1,786,000)
Realized gains on investments (1,227,000) (972,000) (900,000)
Policy acquisition costs deferred (3,208,000) (2,800,000) (3,693,000)
Amortization of deferred policy acquisition costs 594,000 360,000 132,000
Provision for depreciation and other amortization 937,000 524,000 481,000
Provision for deferred income taxes 153,000 836,000 666,000
Other 3,560,000 (1,949,000) (6,765,000)
-----------------------------------------------
Net cash provided by operating activities 12,843,000 11,531,000 6,100,000
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities-available-for-sale 24,657,000 21,770,000 19,378,000
Equity securities -- -- 1,807,000
-----------------------------------------------
24,657,000 21,770,000 21,185,000
Acquisition of investments:
Fixed maturities-available-for-sale (19,142,000) (7,517,000) (74,567,000)
Equity securities -- -- (1,500,000)
Option contracts (963,000) (94,000) --
-----------------------------------------------
(20,105,000) (7,611,000) (76,067,000)
Policy loans and other (267,000) (193,000) (252,000)
-----------------------------------------------
Net cash provided (used) by investing activities 4,285,000 13,966,000 (55,134,000)
</TABLE>
52
<PAGE> 53
First Variable Life Insurance Company
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Receipts from interest-sensitive products credited
to policyholder account balances $ 64,181,000 $ 58,175,000 $ 67,063,000
Return of policyholder account balances on
interest-sensitive products (80,713,000) (86,824,000) (72,196,000)
Contribution from parent -- -- 5,000,000
--------------------------------------------------
Net cash used in financing activities (16,532,000) (28,649,000) (133,000)
--------------------------------------------------
Net increase (decrease) in cash and cash equivalents 596,000 (3,152,000) (49,167,000)
Cash and cash equivalents at beginning of year 2,433,000 5,585,000 54,752,000
--------------------------------------------------
Cash and cash equivalents at end of year $ 3,029,000 $ 2,433,000 $ 5,585,000
==================================================
</TABLE>
See accompanying notes.
53
<PAGE> 54
First Variable Life Insurance Company
Notes to Consolidated Financial Statements
December 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS
First Variable Life Insurance Company (the Company), a life insurance company
domiciled in the State of Arkansas, is a wholly-owned subsidiary of Irish Life
of North America, Inc. (ILoNA), which is owned by Irish Life, plc (Irish Life)
of Dublin, Ireland. The Company is licensed in 49 states and sells variable and
fixed annuity products and variable universal life products through regional
wholesalers and insurance brokers.
CONSOLIDATION
The consolidated financial statements include the Company and its wholly-owned
subsidiaries, First Variable Advisory Services Corp. and First Variable Capital
Services, Inc. All significant intercompany transactions have been eliminated.
INVESTMENTS
Fixed Maturities and Equity Securities
Fixed-maturity securities (bonds) may be categorized as "available-for-sale,"
"held for investment" or "trading." Fixed-maturity securities which may be sold
are designated as "available-for-sale." Available-for-sale securities are
reported at market value, and unrealized gains and losses on these securities
are included directly in stockholder's equity, net of certain adjustments (see
Note 3). Fixed-maturity securities that the Company has the positive intent and
ability to hold to maturity are designated as "held-for-investment."
Held-for-investment securities are reported at cost adjusted for amortization of
premiums and discounts. Changes in the market value of these securities, except
for declines that are other than temporary, are not reflected in the Company's
financial statements. Securities that are bought and held principally for the
purpose of selling them in the near term are designated as "trading securities."
Unrealized gains and losses on trading securities are included in current
earnings. At December 31, 1997 and 1996, all of the Company's fixed-maturity
securities are designated as available-for-sale, although the Company is not
precluded from designating fixed-maturity securities as held-for-investment or
trading at some future date.
54
<PAGE> 55
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Option contracts are carried at unamortized premium paid for the contract
adjusted for increases in their intrinsic value from increases in the S&P 500
index.
Policy loans are carried at unpaid principal balances.
Premiums and discounts on investments are amortized/accrued using methods which
result in a constant yield over the securities' expected lives.
Amortization/accrual of premiums and discounts on mortgage and asset-backed
securities incorporates a prepayment assumption to estimate the securities'
expected lives.
Equity securities (common stocks) are designated as available for sale and are
reported at fair value. The change in unrealized gain and loss of equity
securities (net of related deferred income taxes, if any) is included directly
in stockholder's equity.
REALIZED GAINS AND LOSSES ON INVESTMENTS
The carrying values of all the Company's investments are reviewed on an ongoing
basis for credit deterioration, and if this review indicates a decline in market
value that is other than temporary, the Company's carrying value in the
investment is reduced to its estimated realizable value (the sum of the
estimated nondiscounted cash flows) and a specific write-down is taken. Such
reductions in carrying value are recognized as realized losses and charged to
income. Realized gains and losses on sales are determined on the basis of
specific identification of investments. If the Company expects that an issuer of
a security will modify its payment pattern from contractual terms but no
write-down is required, future investment income is recognized at the rate
implicit in the calculation of net realizable value under the expected payment
pattern.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
55
<PAGE> 56
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED POLICY ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE ACQUIRED
To the extent recoverable from future policy revenues and gross profits, certain
costs of acquiring new insurance business, principally commissions and other
expenses related to the production of new business, have been deferred. The
value of insurance in force acquired is an asset that arose at the date the
Company was acquired by ILoNA. The initial value was determined by an actuarial
study using expected future gross profits as a measurement of the net present
value of the insurance acquired. Interest accrues on the current unamortized
balance at 7%.
For variable universal life insurance and investment products, these costs are
being amortized generally in proportion to expected gross profits from surrender
charges and investment, mortality and expense margins. That amortization is
adjusted retrospectively when estimates of current or future gross profits
(including the impact of investment gains and losses) to be realized from a
group of products are revised.
PROPERTY AND EQUIPMENT
Property and equipment are reported at cost less allowances for depreciation.
Depreciation expense is computed primarily using the straight-line method over
the estimated useful lives of the assets.
GOODWILL
Goodwill represents the excess of the fair value of assets exchanged over the
net assets acquired. Goodwill is being amortized on a straight-line basis over a
period of twenty years.
The carrying value of goodwill is regularly reviewed for indications of
impairment in value which, in the view of management, are other than temporary.
If facts and circumstances suggest that goodwill is impaired, the Company
assesses the fair value of the underlying business and reduces goodwill to an
amount that results in the book value of the underlying business approximating
fair value. The Company has not recorded any such write-downs during the periods
ended December 31, 1997, 1996 or 1995.
56
<PAGE> 57
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FUTURE POLICY BENEFITS
Future policy benefit reserves for annuity and variable universal life products
are computed under a retrospective deposit method and represent policy account
balances before applicable surrender charges. Policy benefits and claims that
are charged to expense include benefit claims incurred in the period in excess
of related policy account balances. Interest crediting rates for annuity
products ranged from 4.5% to 6.5% in 1997 and 1996, and 4.5% to 6.8% in 1995.
DEFERRED INCOME TAXES
Deferred income tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. Deferred income tax expenses or credits are
based on the changes in the related asset or liability from period to period.
SEPARATE ACCOUNTS
The separate account assets and liabilities reported in the accompanying
consolidated balance sheets represent funds that are separately administered,
principally for the benefit of certain policyholders who bear the investment
risk. The separate account assets and liabilities are carried at fair value.
Revenues and expenses related to the separate account assets and liabilities, to
the extent of benefits paid or provided to the separate account policyholders,
are excluded from the amounts reported in the accompanying consolidated
statements of income.
RECOGNITION OF PREMIUM REVENUES AND COSTS
Revenues for annuity and variable universal life products consist of policy
charges for the cost of insurance, administration charges and surrender charges
assessed against policyholder account balances during the period. Expenses
related to these products include interest credited to policyholder account
balances and benefit claims incurred in excess of policyholder account balances.
57
<PAGE> 58
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Approximately 42%, 68% and 49% of the direct business written (as measured by
premiums received) during the periods ended December 31, 1997, 1996 and 1995,
respectively, were written through three wholesalers. The Company's management
believes that other broker/dealers could generate the same level of sales on
comparable terms. Direct premiums are not concentrated in any geographical area.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities, at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Significant estimates and assumptions are utilized in the calculation of
deferred policy acquisition costs, policyholder liabilities and accruals,
postretirement benefits, guaranty fund assessment accruals and valuation
allowances on investments. It is reasonably possible that actual experience
could differ from the estimates and assumptions utilized which could have a
material impact on the consolidated financial statements.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" (SFAS 130), which is effective for years beginning after December 15,
1997. SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS 130 will require that enterprises (a) classify items
of other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of the
balance sheet. SFAS 130 will not have any impact on the Company's consolidated
results of operations, financial position or cash flows.
58
<PAGE> 59
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures About
Fair Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
consolidated balance sheet, for which it is practicable to estimate that value.
In cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
SFAS No. 107 also excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements and allows companies to forego the
disclosures when those estimates can only be made at excessive cost.
Accordingly, the aggregate fair value amounts presented herein are limited by
each of these factors and do not purport to represent the underlying value of
the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Fixed-Maturity Securities: Fair values for fixed-maturity securities have
been determined by the Company's outside investment manager and are based
on quoted market prices, when available, or price matrices for securities
which are not actively traded, developed using yield data and other
factors relating to instruments or securities with similar
characteristics.
Option Contracts: The fair values for option contracts are based on
settlement values, quoted market prices of comparable instruments and
fees currently charged to enter into similar loans offered to borrowers
with similar credit ratings. Similar characteristics are aggregated for
the purposes of the calculations.
Equity Securities: The fair values for equity securities are based on
quoted market prices.
Policy Loans and Other Loans Receivable: The Company has not determined
the fair values associated with its policy loans and other loans
receivable as management believes any differences between the Company's
carrying value and the fair values afforded these instruments are
immaterial to the Company's financial position and, accordingly, the cost
to provide such disclosure would exceed the benefit derived. At December
31, 1997, the interest rate related to the outstanding policy loans is
5%.
59
<PAGE> 60
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Cash and Cash Equivalents: The carrying amounts reported in the
consolidated balance sheets for these instruments approximate their fair
values.
Assets and Liabilities of Separate Accounts: Separate account assets and
liabilities are reported at estimated fair value in the Company's
consolidated balance sheets.
Future Policy Benefits for Annuity and Life Products and Supplementary
Contracts Without Life Contingencies: Fair values of the Company's
liabilities under contracts not involving significant mortality or
morbidity risks (principally deferred annuities) are stated at the cost
the Company would incur to extinguish the liability; i.e., the cash
surrender value. The Company is not required to and has not estimated
fair value of its liabilities under other contracts.
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of SFAS No. 107 at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------------------ ------------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities-
available-for-sale $294,961,000 $294,961,000 $294,195,000 $294,195,000
Option contracts 1,057,000 1,057,000 94,000 94,000
Equity securities 825,000 825,000 691,000 691,000
Policy loans 267,000 267,000 -- --
Cash and cash equivalents 3,029,000 3,029,000 2,433,000 2,433,000
Assets held in separate
accounts 219,807,000 219,807,000 176,306,000 176,306,000
LIABILITIES
Future policy benefits for
annuity and life products 233,988,000 233,988,000 239,509,000 239,562,000
Supplementary contracts
without life
contingencies 21,711,000 21,711,000 21,008,000 21,008,000
Liabilities related to
separate accounts 219,807,000 219,807,000 176,306,000 176,306,000
</TABLE>
60
<PAGE> 61
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT OPERATIONS
FIXED MATURITIES AND EQUITY SECURITIES
The following tables contain amortized cost and market value information on
fixed maturities (bonds) and equity securities (common stocks) at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
---------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Fixed maturities-available-for-sale:
United States Government and agencies:
Mortgage and asset-backed securities $ 24,133,000 $ 730,000 $(283,000) $ 24,580,000
Other 23,546,000 1,391,000 (138,000) 24,799,000
State, municipal and other governments 3,991,000 250,000 -- 4,241,000
Public utilities 69,972,000 8,299,000 (303,000) 77,968,000
Industrial and miscellaneous 152,797,000 10,758,000 (182,000) 163,373,000
---------------------------------------------------------------
Total fixed maturities-available-for-sale $274,439,000 $21,428,000 $(906,000) $294,961,000
===============================================================
Equity securities $ 684,000 $ 141,000 $ -- $ 825,000
===============================================================
DECEMBER 31, 1996
Fixed maturities-available-for-sale:
United States Government and agencies:
Mortgage and asset-backed securities $ 25,641,000 $ 1,315,000 $(105,000) $ 26,851,000
Other 22,483,000 1,109,000 (20,000) 23,572,000
State, municipal and other governments 3,994,000 270,000 -- 4,264,000
Public utilities 81,053,000 6,224,000 (44,000) 87,233,000
Industrial and miscellaneous 145,134,000 7,406,000 (265,000) 152,275,000
---------------------------------------------------------------
Total fixed maturities-available-for-sale $278,305,000 $16,324,000 $(434,000) $294,195,000
===============================================================
Equity securities $ 684,000 $ 7,000 $ -- $ 691,000
===============================================================
</TABLE>
61
<PAGE> 62
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investment Operations (continued)
The amortized cost and estimated market value of the Company's portfolio of
fixed-maturity securities at December 31, 1997, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
MARKET
AMORTIZED COST VALUE
-------------------------------
<S> <C> <C>
Due in one year or less $ 4,969,000 $ 4,999,000
Due after one year through five years 71,798,000 74,535,000
Due after five years through ten years 97,448,000 104,134,000
Due after ten years 76,091,000 86,713,000
Mortgage and asset-backed securities 24,133,000 24,580,000
-------------------------------
$274,439,000 $294,961,000
===============================
</TABLE>
The unrealized gain or loss on fixed-maturity and equity securities
available-for-sale is reported as a separate component of stockholder's equity,
reduced by adjustments to deferred policy acquisition costs and value of
insurance in force acquired that would have been required as a charge or credit
to income had such amounts been realized and a provision for deferred income
taxes. Net unrealized investment gains (losses) as reported were comprised of
the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------
<S> <C> <C>
Unrealized appreciation on fixed-maturity and equity
securities available-for-sale $20,663,000 $15,897,000
Adjustments for assumed changes in amortization pattern of:
Deferred policy acquisition costs (1,780,000) (1,200,000)
Value of insurance in force acquired (5,157,000) (3,600,000)
Provision for deferred income tax benefit (4,660,000) (3,773,000)
--------------------------
Net unrealized investment gains $ 9,066,000 $ 7,324,000
==========================
</TABLE>
62
<PAGE> 63
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT OPERATIONS (CONTINUED)
NET INVESTMENT INCOME
Components of net investment income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Income from:
Fixed maturities-available-for-sale $22,183,000 $23,364,000 $22,635,000
Cash and cash equivalents 225,000 288,000 1,051,000
Option contracts 474,000 -- --
---------------------------------------------
22,882,000 23,652,000 23,686,000
Less investment expenses (285,000) (194,000) (221,000)
-----------------------------------------------
Net investment income $22,597,000 $23,458,000 $23,465,000
===============================================
REALIZED AND UNREALIZED GAINS AND LOSSES
Realized gains (losses) and the change in unrealized gain (loss) on investments
are summarized below:
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
REALIZED
Fixed maturities-available-for-sale $1,227,000 $ 972,000 $ 593,000
Equity securities -- -- 307,000
----------------------------------------------
Realized gains on investments $1,227,000 $ 972,000 $ 900,000
UNREALIZED
Fixed maturities-available-for-sale $4,632,000 $(12,756,000) $33,437,000
Equity securities 134,000 369,000 (133,000)
----------------------------------------------
Change in unrealized
appreciation/depreciation of investments $4,766,000 $(12,387,000) $33,304,000
==============================================
</TABLE>
63
<PAGE> 64
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT OPERATIONS (CONTINUED)
An analysis of sales, maturities and principal repayments of the Company's fixed
maturities portfolio (all classified as available-for-sale) for the periods
ended December 3l, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED REALIZED REALIZED
COST GAINS LOSSES PROCEEDS
----------------------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1997
Scheduled principal repayments
and calls $11,636,000 $ 447,000 -- $12,083,000
Sales 11,795,000 851,000 $ (72,000) 12,574,000
----------------------------------------------------------------
Total $23,431,000 $1,298,000 $ (72,000) $24,657,000
================================================================
Year ended December 31, 1996
Scheduled principal repayments
and calls $13,416,000 $ 329,000 $ (8,000) $13,737,000
Sales 7,382,000 715,000 (64,000) 8,033,000
----------------------------------------------------------------
Total $20,798,000 $1,044,000 $ (72,000) $21,770,000
================================================================
December 31, 1995
Scheduled principal repayments
and calls $ 6,448,000 $ 117,000 $ (38,000) $ 6,527,000
Sales 12,337,000 635,000 (121,000) 12,851,000
----------------------------------------------------------------
Total $18,785,000 $ 752,000 $(159,000) $19,378,000
================================================================
</TABLE>
Income taxes during the periods ended December 31, 1997, 1996 and 1995 include a
provision of $416,000, $331,000 and $306,000, respectively, for the tax effect
of realized gains.
64
<PAGE> 65
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT OPERATIONS (CONTINUED)
OTHER
At December 31, 1997, fixed maturities with a carrying value of $8,281,000 were
held on deposit with state agencies to meet regulatory requirements.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States Government) exceeded 10% of stockholder's equity
at December 3l, 1997.
The Company has acquired call option contracts relating to its equity-indexed
annuity product to hedge increases in the S&P 500 index. The options are
purchased concurrently with the issuance of these annuity contracts and expire,
if not utilized, at the end of the annuities' term. The Company pays, at the
beginning of the option contract, a premium for transferring the risk of
unfavorable changes in the S&P 500 index. The carrying value of the option
contracts is based upon the unamortized premium paid for the contract adjusted
for increases in its intrinsic value from increases in the S&P 500 index. The
carrying value of these contracts was $1,057,000 and $94,000 at December 31,
1997 and 1996, respectively.
CONCENTRATIONS OF CREDIT RISK
The Company's investment in public utility bonds at December 31, 1997 represents
26% of total investments and 14% of total assets. The holdings of public utility
bonds are widely diversified and all issues met the Company's investment
policies and credit standards when purchased.
65
<PAGE> 66
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. VALUE OF INSURANCE IN FORCE ACQUIRED
The value of insurance in force acquired is an asset that represents the present
value of future profits on business acquired. An analysis of the value of
insurance in force acquired for the periods ended December 31, 1997 and 1996 is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
Excluding impact on net unrealized investment gains
and losses:
Balance at beginning of period $23,094,000 $23,833,000
Accretion of interest during the period 1,582,000 1,642,000
Amortization of asset (2,580,000) (2,381,000)
-----------------------------
Balance prior to impact of net unrealized investment
gains and losses 22,096,000 23,094,000
Offset against net unrealized investment gains and
losses (5,157,000) (3,600,000)
-----------------------------
Balance at end of period $16,939,000 $19,494,000
=============================
</TABLE>
Amortization of the value of insurance in force acquired for the next five years
ending December 31 is expected to be as follows: 1998-$1,113,000;
1999-$1,280,000; 2000-$1,430,000; 2001-$1,384,000 and 2002-$1,340,000.
5. FEDERAL INCOME TAXES
The Company and its subsidiaries each file separate federal income tax returns.
Deferred income taxes have been established by the Company and its subsidiaries
based upon the temporary differences, the reversal of which will result in
taxable or deductible amounts in future years when the related asset or
liability is recovered or settled, within each entity.
66
<PAGE> 67
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. FEDERAL INCOME TAXES (CONTINUED)
Income tax expenses (credits) are included in the consolidated financial
statements as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Taxes provided in consolidated
statements of income on income
before income taxes-deferred $ 153,000 $ 836,000 $ 666,000
---------------------------------------------
153,000 836,000 666,000
Taxes provided in consolidated
statements of changes in
stockholder's equity:
Amounts attributable to change in
net unrealized investment
gains/losses during year-deferred 897,000 (3,022,000) 8,499,000
---------------------------------------------
$1,050,000 $(2,186,000) $9,165,000
=============================================
</TABLE>
The effective tax rate on income before income taxes is different from the
prevailing federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Income before income taxes $ 472,000 $2,440,000 $1,937,000
==========================================
Income tax at federal statutory rate (34%) $ 160,000 $ 830,000 $ 659,000
Tax effect (decrease) off:
Other (7,000) 6,000 7,000
------------------------------------------
Income tax expense $ 153,000 $ 836,000 $ 666,000
==========================================
</TABLE>
67
<PAGE> 68
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. FEDERAL INCOME TAXES (CONTINUED)
The tax effect of temporary differences giving rise to the Company's deferred
income tax assets and liabilities at December 3l, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------
<S> <C> <C>
Deferred tax assets:
Future policy benefits $ 1,969,000 $ 1,524,000
Operating loss carryforwards 2,590,000 2,245,000
Other 124,000 20,000
------------------------------
4,683,000 3,789,000
Deferred tax liabilities:
Fixed-maturity and equity securities (5,946,000) (4,702,000)
Deferred policy acquisition costs (2,523,000) (1,908,000)
Value of insurance in force acquired (2,533,000) (2,453,000)
Other (373,000) (368,000)
------------------------------
(11,375,000) (9,431,000)
------------------------------
Deferred income tax liability $ (6,692,000) $(5,642,000)
==============================
</TABLE>
The Company has federal net operating loss carryforwards reportable on its
federal tax return aggregating $7,619,000 at December 31, 1997 which expire from
2009 to 2012.
6. RETIREMENT AND COMPENSATION PLANS
Substantially all full-time employees of the Company are covered by a
non-contributory defined benefit pension plan sponsored by ILoNA. The benefits
are based on years of service and the employee's compensation. In addition,
effective January 1, 1996, ILoNA adopted a nonqualified supplemental plan to
provide benefits in excess of limitations established by the Internal Revenue
Code. The Company records its required contributions as pension expense related
to these plans. There were no material contributions to the plan during the
periods ended December 31, 1997, 1996 or 1995.
68
<PAGE> 69
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. RETIREMENT AND COMPENSATION PLANS (CONTINUED)
Employees of the Company also are eligible to participate in a contributory
defined contribution plan sponsored by ILoNA which is qualified under section
401(k) of the Internal Revenue Code. The plan covers substantially all full-time
employees of the Company. Employees can contribute up to 15% of their annual
salary (with a maximum contribution of $9,500 in 1997) to the plan. The Company
contributes an additional amount, subject to limitations, based on the voluntary
contribution of the employee. Further, the plan provides for additional employer
contributions based on the discretion of the Board of Directors of ILoNA.
Pension expense related to this plan was $37,000, $27,000 and $24,000 for the
periods ended December 31, 1997, 1996 and 1995, respectively.
The Company also has certain other benefit and incentive plans. These plans are
considered immaterial to the consolidated financial statements.
7. STOCKHOLDER'S EQUITY
STATUTORY LIMITATIONS ON DIVIDENDS
The ability of the Company to pay dividends to ILoNA is restricted because prior
approval of insurance regulatory authorities is normally required for payment of
dividends to the stockholder which exceed an annual limitation. During 1998,
this annual limitation aggregates $3,360,000; however, pursuant to a directive
received from the Arkansas Insurance Department in 1991, any proposed payment of
a dividend currently requires its approval. Also, the amount ($34,900,000 at
December 31, 1997) by which stockholder's equity stated in conformity with
generally accepted accounting principles exceeds statutory capital and surplus
as reported is restricted and cannot be distributed.
STATUTORY ACCOUNTING POLICIES
The financial statements of the Company included herein differ from related
statutory-basis financial statements principally as follows: (a) the bond
portfolio is designated as available-for-sale and carried at fair value rather
than generally being carried at amortized cost; (b) acquisition costs of
acquiring new business are deferred and amortized over the life of the policies
rather than charged to operations as incurred; (c) future policy benefit
reserves on certain annuity products are based on full account values, rather
than
69
<PAGE> 70
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDER'S EQUITY (CONTINUED)
discounting methodologies utilizing statutory interest rates; (d) deferred
income taxes are provided for the differences between the financial statement
and income tax bases of assets and liabilities; (e) net realized gains or losses
attributed to changes in the level of interest rates in the market are
recognized as gains or losses in the consolidated statements of income when the
sale is completed rather than deferred and amortized over the remaining life of
the fixed maturity security; (f) declines in the estimated realizable value of
investments are charged to the consolidated statements of income for declines in
value, when such declines in value are judged to be other than temporary rather
than through the establishment of a formula-determined statutory investment
reserve (carried as a liability), changes in which are charged directly to
surplus; (g) agents' balances and certain other assets designated as
"nonadmitted assets" for statutory purposes are reported as assets rather than
being charged to surplus; (h) revenues for annuity products consist of policy
charges for the cost of insurance, policy administration charges and surrender
charges assessed rather than premiums received; (i) pension expense is
recognized in accordance with SFAS No. 87, Employers' Accounting for Pensions,
rather than in accordance with rules and regulations permitted by the Employee
Retirement Income Security Act of 1974; (j) the financial statements of
subsidiaries are consolidated with those of the Company and (k) assets and
liabilities are restated to fair values when a change in ownership occurs that
is accounted for as a purchase, with provisions for goodwill and other
intangible assets, rather than continuing to be presented at historical cost.
Net loss for the Company, as determined in accordance with statutory accounting
practices, was $1,240,000, $1,507,000 and $1,460,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. Total statutory capital and
surplus was $33,556,000 at December 31, 1997 and $33,096,000 at December 31,
1996.
The National Association of Insurance Commissioners currently is in the process
of codifying statutory accounting practices, the result of which is expected to
constitute the only source of "prescribed" statutory accounting practices. That
project, which is expected to be completed in 1998, will likely change, to some
extent, statutory accounting practices. The codification may result in changes
to the permitted or prescribed accounting practices that the Company uses to
prepare its statutory-basis Financial statements.
70
<PAGE> 71
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES
The Company leases its home office space and certain other equipment under
operating leases which expire through 2001. During the periods ended
December 31, 1997, 1996 and 1995, rent expense totaled $228,000, $206,000 and
$419,000, respectively. At December 31, 1997, minimum rental payments due under
all noncancelable operating leases with initial terms of one year or more are:
<TABLE>
<S> <C>
Year ending December 31:
1998 $230,000
1999 238,000
2000 241,000
2001 61,000
--------
$770,000
========
</TABLE>
The Company is involved in litigation where amounts are alleged that are
substantially in excess of contractual policy benefits or certain other
agreements. Management and its legal counsel do not believe any of these claims
will result in a material loss to the Company.
Assessments are, from time to time, levied on the Company by life and health
guaranty associations in most states in which the Company is licensed to cover
losses of policyholders of insolvent or rehabilitated companies. In some states,
these assessments can be partially recovered through a reduction in future
premium taxes. Assessments have not been material to the Company's financial
statements in the past. However, the economy and other factors have caused a
number of failures of substantially larger companies since that time. At
December 31, 1997 and 1996, the Company has accrued $0 and $180,000,
respectively, for guaranty fund assessments based on its historical experience
and information available from those making guaranty fund assessments.
9. RELOCATION OF COMPANY
In December 1997, management decided to relocate the operations of the Company
from Boston to Illinois. As a result, at December 31, 1997, the Company accrued
a liability of $1,200,000, which relates to benefits for involuntarily
terminated employees, and certain other costs, including office and other lease
cancellations and write-down of furniture and equipment. The relocation is
expected to be completed by June 1998.
71
<PAGE> 72
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. YEAR 2000 ISSUES (UNAUDITED)
Like other financial and business organizations around the world, the Company
could be adversely affected if its computer systems and those of its service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. The Company has completed an assessment of
the Year 2000 impact on its systems, procedures, customers and business
processes. At December 31, 1997, management is satisfied that their main
operating systems are Year 2000 compliant. The Company is reviewing its general
office systems and will be contacting its service providers during 1998. The
Company believes it will complete the Year 2000 project not later than
December 31, 1998, which is prior to any anticipated impact on its operating
systems.
The date on which the Company believes it will complete the Year 2000 project is
based on management's best estimates. Although there can be no guarantee that
these estimates will be achieved, management does not at this time believe that
actual results will differ materially from those anticipated. Specific factors
that might cause such material differences would most likely result from the
Company's service providers.
72
<PAGE> 73
PART II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section.
UNDERTAKING REGARDING INDEMNIFICATION
Insofar as indemnification for liability arising under the Securities Act of
1933 ("Act") may be permitted to directors and officers and controlling persons
of the Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
Contract 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 Contract as expressed in the Act
and will be governed by the final adjudication of such issue.
REPRESENTATION PURSUANT TO SECTION 26(e) OF THE INVESTMENT COMPANY
ACT OF 1940
In accordance with section 26(e) of the Investment Company Act of 1940, First
Variable Life Insurance Company represents that the fees and charges deducted
under the Contracts described in this Registration Statement on Form S-6, in the
aggregate, are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by First Variable Life Insurance
Company. First Variable Life Insurance Company bases its representation on its
assessment of all the facts and circumstances, including such relevant factors
as: the nature and extent of such services, expenses and risks, the need for
First Variable Life Insurance Company to earn a profit, the degree to which the
Contracts include innovative features, and regulatory standards for the grant of
exemptive relief under the Investment Company Act of 1940 used prior to October
1996, including the range of industry practice. This representation applies to
all Contracts sold pursuant to this Registration Statement, including those sold
on the terms specifically described in the prospectus contained herein, or in
any variations thereof based on supplements, endorsements, or riders to any
Contracts or prospectus, or otherwise.
73
<PAGE> 74
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
Cross-Reference Sheet.
The prospectus consisting of ____________ pages.
The undertaking to file reports.
The undertaking regarding indemnification.
The representation pursuant to Section 26(e) of the Investment Company Act of
1940.
The signatures.
Written consents of the following persons:
Martin Sheerin (See Exhibit 6)
Ernst & Young LLP (See Exhibit 7)
The following exhibits:
1.A. (1) Resolution of the Board of Directors of the Company authorizing
the establishment of the Separate Account.*
(2) Not Applicable.
(3) (a) Underwriting Agreement.#
(b) Broker-Dealer Agreement.#
(c) Form of Sales Agreement.**
(4) Not Applicable.
(5) (c) Specimen Variable Life Insurance Contract.*
(d) Specimen Accelerated Death Benefit Endorsement.#
(6) (a) Articles of Incorporation of First Variable
Life Insurance Company.###
(b) By-Laws of First Variable Life Insurance Company.***
(7) Not Applicable.
(8) Form of Participation Agreement.**
(9) Not Applicable.
(10) Specimen Single Premium Variable Life Insurance Application.*
2. Opinion and consent of Arnold R. Bergman, Vice President, General Counsel
and Secretary of First Variable Life Insurance Company as to securities
being registered.***
3. Not Applicable.
74
<PAGE> 75
4. Not Applicable.
5. Not Applicable.
6. Opinion and Consent of Actuary##
7. Consent of Ernst & Young LLP, Independent Auditors##
8. Powers of Attorney.### - of the following individuals appointing John M.
Soukup or Arnold R. Bergman their attorney-in-fact to act for them in
their capacities as Directors of the Company or otherwise, to do all
things necessary to comply with the provisions and intent of the
Securities Act of 1933 and the Investment Company Act of 1940 with
respect to variable life insurance policies and variable annuity
contracts:
Ronald M. Butkiewicz Shane W. Gleeson Kenneth R. Meyer
Michael J. Corey T. David Kingston Philip R. O'Connor
Michael R. Ferrari Jeff S. Liebmann Stephen Shone
-----------------
* Incorporated herein by reference to the Form S-6 Registration
Statement of First Variable Life Insurance Company and Separate
Account VL, filed electronically with the Securities and Exchange
Commission on June 3, 1996 (File No. 333-05053).
** Incorporated herein by reference to Post-Effective Amendment No.
22 to the Form N-4 Registration Statement of First Variable Life
Insurance Company and First Variable Annuity Fund E, filed
electronically with the Securities and Exchange Commission on
September 18, 1996 (File No. 333-12197).
*** Incorporated herein by reference to Pre-Effective Amendment No. 1
to the Form S-6 Registration Statement of First Variable Life
Insurance Company and Separate Account VL, filed electronically
with the Securities and Exchange Commission on November 15, 1996
(File No. 333-05053).
# Incorporated herein by reference to Post-Effective Amendment No. 1
to the Form S-6 Registration Statement of First Variable Life
Insurance Company and Separate Account VL, filed electronically
with the Securities and Exchange Commission on April 30, 1997
(File No. 333-05053).
## Filed herewith.
### Incorporated by reference to Post-Effective Amendment No. 1 to the
Form S-6 Registration Statement of First Variable Life Insurance
Company Separate Account VL, filed electronically with the
Securities and Exchange Commission on or about April 27, 1998
(File No. 333-19193).
75
<PAGE> 76
Exhibit Index
Exhibit Sequentially
Number Description Numbered Page #
6. Opinion and Consent of Actuary
7. Consent of Ernst & Young LLP, Independent Auditors
# Appears in manually signed original only
76
<PAGE> 77
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the First Variable
Life Insurance Company has duly caused this Post-Effective Amendment No. 2 to
the Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, on the 24th day of April, 1998.
First Variable Life Insurance Company
By: /s/ John M. Soukup
---------------------------------
John M. Soukup
President
ATTEST:
/s/ Arnold R. Bergman
- ------------------------------
Arnold R. Bergman
Secretary
77
<PAGE> 78
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Separate Account VL of First Variable Life Insurance Company, certifies that it
meets the requirements of Securities Act Rule 485(b) for effectiveness of this
Registration Statement and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized, on the 24th
day of April, 1998.
Separate Account VL of First Variable
Life Insurance Company
(Registrant)
By: First Variable Life Insurance Company
(Depositor)
By: /s/ John M. Soukup
-------------------------------------
John M. Soukup
President
ATTEST:
/s/ Arnold R. Bergman
- ---------------------------------
Arnold R. Bergman
Secretary
78
<PAGE> 79
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 2 to the Registration Statement has been signed below by the
following persons in the capacities with First Variable Life Insurance Company,
on the 24th day of April, 1998.
PRINCIPAL EXECUTIVE OFFICER
/s/ John M. Soukup
- -------------------------------------
John M. Soukup
President
PRINCIPAL ACCOUNTING OFFICER
/s/ Norman A. Fair
- -------------------------------------
Norman A. Fair
Principal Accounting Officer
DIRECTORS
/s/ Ronald M. Butkiewicz*
- -------------------------------------
Ronald M. Butkiewicz
/s/ John M. Soukup
- -------------------------------------
John M. Soukup
/s/ Michael J. Corey*
- -------------------------------------
Michael J. Corey
/s/ Michael R. Ferrari*
- -------------------------------------
Michael R. Ferrari
/s/ Shane W. Gleeson*
- -------------------------------------
Shane w. Gleeson
/s/ T. David Kingston*
- -------------------------------------
T. David Kingston
/s/ Jeff S. Liebmann*
- -------------------------------------
Jeff S. Liebmann
/s/ Kenneth R. Meyer*
- -------------------------------------
Kenneth R. Meyer
/s/ Philip R. O'Connor*
- -------------------------------------
Philip R. O'Connor
/s/ Stephen Shone*
- -------------------------------------
Stephen Shone
/s/ Norman A. Fair
- -------------------------------------
Norman A. Fair
*By: /s/ Arnold R. Bergman
----------------------------------
Arnold R. Bergman
Attorney-in-Fact
79
<PAGE> 1
Exhibit 6
Opinion and Consent of Actuary
80
<PAGE> 2
Exhibit 6.
[FIRST VARIABLE LIFE INSURANCE COMPANY LOGO]
April 24, 1998
First Variable Life Insurance Company
10 Post Office Square, 12th Floor
Boston, MA 02109
Re: Registration of Contract Interests
Separate Account VL of First Variable Life Insurance Company
(File No. 333-05053)
Gentlemen:
In my capacity as Actuary of First Variable Life Insurance Company, I have
provided actuarial advice concerning:
- - The preparation of the captioned registration statement ("Registration
Statement") on Form S-6 filed by First Variable Life Insurance Company
and its Separate Account VL with the Securities and Exchange Commission
under the Securities Act of 1933 with respect to the variable universal
life insurance contract ("Contract") described therein; and
- - The preparation of the Contract forms for the Contract described in the
Registration Statement.
It is my professional opinion that:
1. The illustration of death benefits, account values, cash surrender values
and total premiums paid plus interest at 5% shown in the prospectus,
based on the assumptions stated in the illustration, are consistent with
the provisions of the Contract. The rate structure of the Contract
overall has not been designed so as to make the relationship between
premiums and benefits, as shown in the illustrations included, appear
more favourable to prospective buyers than other illustrations which
could have been provided at other combinations of ages, sex of the
insured, death benefit option and amount, premium class and premium
amounts.
2. All other numerical expamples shown in the prospectus are consistent with
the Contract and our practices and have not been designed to appear more
favourable to prospective buyers than other examples which could have
been provided.
I hereby consent to the filing of this opinion as an Exhibit to the Registration
Statement.
Sincerely
/s/ Martin Sheerin
- -------------------------------------
Martin Sheerin FSA, MAAA
81
<PAGE> 1
Exhibit 7
Consent of Ernst & Young LLP, Independent Auditors
82
<PAGE> 2
Exhibit 7
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 6, 1998 with respect to the consolidated
financial statements of First Variable Life Insurance Company and January 30,
1998 with respect to the financial statements of First Variable Life Insurance
Company---First Variable Separate Account VL, in Post Effective Amendment No. 2
to the Registration Statement (Form S-6 No. 333-05053) and related Prospectus
of First Variable Life Insurance Company.
/s/ Ernst & Young LLP
----------------------------------
ERNST & YOUNG LLP
Boston, Massachusetts
April 24, 1998
