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NYLIAC CORPORATE SPONSORED VARIABLE UNIVERSAL LIFE SEPARATE ACCOUNT-I
PROSPECTUS DATED MAY 1, 1997
FOR
CORPORATE SPONSORED VARIABLE
UNIVERSAL LIFE INSURANCE POLICIES
OFFERED BY
NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION
(A DELAWARE CORPORATION)
51 MADISON AVENUE, NEW YORK, NEW YORK 10010
This prospectus describes a flexible premium corporate sponsored variable
universal life insurance policy offered by New York Life Insurance and
Annuity Corporation ("NYLIAC"). The policy provides insurance protection for
group or sponsored arrangements. Group arrangements include those in which a
trustee or an employer, for example, purchases policies covering a group of
individuals on a group basis. Sponsored arrangements include those in which
an employer allows us to sell policies to its employees or retirees on an
individual basis. The policy offers flexible premium payments, a choice of
two death benefit options, loan privileges, increases and decreases to the
policy's face amount of insurance and a choice of funding options, including
a guaranteed interest option and eighteen variable investment options. The
variable investment options invest in a corresponding portfolio of a mutual
fund, as specified below:
MAINSTAY VP SERIES FUND, INC.
o MainStay VP Capital Appreciation
o MainStay VP Cash Management
o MainStay VP Convertible
o MainStay VP Government
o MainStay VP High Yield Corporate Bond
o MainStay VP International Equity
o MainStay VP Total Return
o MainStay VP Value
o MainStay VP Bond
o MainStay VP Growth Equity
o MainStay VP Indexed Equity
THE ALGER AMERICAN FUND
o Alger American Small Capitalization
ACACIA CAPITAL CORPORATION
o Calvert Socially Responsible
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
o Fidelity VIP II: Contrafund
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
o Fidelity VIP: Equity-Income
JANUS ASPEN SERIES
o Janus Aspen Balanced
o Janus Aspen Worldwide Growth
MORGAN STANLEY UNIVERSAL FUNDS, INC.
o Morgan Stanley Emerging Markets Equity
We do not guarantee the investment performance of these investment options,
which involve varying degrees of risk.
The death benefit may, and the cash surrender value of a policy will, vary
up or down depending on the performance of the investment options. There is
no guaranteed minimum cash surrender value for a policy. However, a policy's
death benefit will never be less than its face amount, less outstanding
policy debt. Although premiums are flexible, additional premiums may be
required to keep the policy in effect. The policy may terminate if its cash
surrender value (net of any policy debt) is too small to pay the policy's
monthly charges, or if there is an excess loan and a late period expires
without sufficient payment.
You can borrow against or withdraw money from the policy, within limits.
Loans and withdrawals will reduce the policy's death benefit and cash
surrender value. You can also surrender the policy. A surrender charge will
apply if you surrender the policy during the first nine policy years. This
charge may also apply if you request a reduction of the face amount or if the
policy terminates.
You may examine the policy for a limited period and cancel it for a full
refund of the greater of the cash value or premiums paid. Replacing existing
insurance with this policy may not be to your advantage.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
This prospectus should be read and retained for further reference; it
contains information that should be known before investing in a NYLIAC
corporate sponsored variable universal life insurance policy. This prospectus
is valid only when accompanied by the prospectuses of the MainStay VP Series
Fund, Inc., The Alger American Fund, the Acacia Capital Corporation, the
Fidelity Variable Insurance Products Fund II, the Fidelity Variable Insurance
Products Fund, the Janus Aspen Series and the Morgan Stanley Universal Funds,
Inc.
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TABLE OF CONTENTS
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SECTION I: DEFINITION OF TERMS........... 4
SECTION II: BASIC QUESTIONS AND ANSWERS
ABOUT US AND OUR POLICY ................ 7
1.What are NYLIAC and New York Life? .. 7
2.What variable life insurance policy
are we offering? .................... 7
3.How is the Policy available? ........ 7
4.What is the Cash Value of the Policy? 7
5.What are the Investment Divisions of
the Separate Account? ............... 8
6.How is the value of an Accumulation
Unit determined?..................... 8
7.What is the Fixed Account? .......... 8
8.Does the Policy have a Cash Surrender
Value? .............................. 9
9.How long will the Policy remain in
force? .............................. 9
10.Is the amount of the Death Benefit
guaranteed? ........................ 9
11.Is the Death Benefit subject to
income taxes? ...................... 9
12.What is a modified endowment
contract? .......................... 9
13.Can the Policy become a modified
endowment contract? ................ 10
14.What are planned Premiums? ......... 10
15.What are unplanned Premiums?........ 10
16.What happens when the first Premium
is paid? ........................... 10
17.When are subsequent Premiums put
into the Fixed Account and the
Separate Account? .................. 10
18.How are Net Premiums allocated among
the Allocation Alternatives? ....... 10
19.What are the current charges against
the Policy? ........................ 11
20.Are loans available under the
Policy? ............................ 11
21.Do I have a right to cancel? ....... 11
22.Can the Policy be exchanged? ....... 11
23.How is a person's age calculated?... 12
SECTION III: CHARGES UNDER
THE POLICY ............................. 12
Deductions from Premiums .............. 12
Sales Expense Charge ................. 12
Premium Tax Charge ................... 12
Federal Tax Charge ................... 12
Deductions from Accumulation Value and
Fixed Account Value ................. 12
Monthly Contract Charge .............. 12
Cost of Insurance Charge ............ 13
Deductions from the Separate Account .. 13
Mortality and Expense Risk Charge ... 13
Other Charges for Federal Income
Taxes .............................. 13
Fund Charges........................... 13
Surrender Charge ...................... 15
How the Policy Works .................. 16
SECTION IV: THE SEPARATE ACCOUNT, THE
FUNDS AND THE FIXED ACCOUNT ............ 17
The Separate Account .................. 17
Your Voting Rights ................... 17
Our Rights ........................... 18
MainStay VP Series Fund, Inc. ......... 18
The Alger American Fund................ 19
Acacia Capital Corporation ............ 19
Fidelity Variable Insurance Products
Fund and Fidelity Variable Insurance
Products Fund II..................... 19
Janus Aspen Series..................... 20
Morgan Stanley Universal Funds, Inc. .. 20
The Portfolios ........................ 21
The Fixed Account ..................... 24
Interest Crediting .................. 25
Transfers to Investment Divisions ... 25
Investment Return ..................... 25
SECTION V: GENERAL PROVISIONS OF THE
POLICY .................................. 26
Premiums .............................. 26
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PAGE
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Termination ........................... 26
Death Benefit Under the Policy ........ 26
Selection of Life Insurance
Benefit Table ........................ 27
Corridor Table ....................... 27
CVAT Table ........................... 28
The Effect of Investment
Performance on the Death
Benefit .............................. 29
Face Amount Changes .................. 29
Life Insurance Benefit Option Changes . 30
Cash Value and Cash Surrender Value . 30
Cash Value .......................... 30
Cash Surrender Value ................ 30
Transfers............................... 30
Partial Withdrawals .................... 31
Loans .................................. 31
Loan Account ........................ 31
Loan Interest ....................... 32
Repayment ........................... 32
Free Look Provision .................... 32
Exchange Privilege ..................... 32
SECTION VI: ADDITIONAL INFORMATION ..... 34
Directors and Principal Officers of
NYLIAC ................................ 34
Federal Income Tax Considerations ...... 36
Tax Status of NYLIAC and the Separate
Account ............................. 36
Charges for Taxes .................. 36
Diversification Standards and
Control Issues .................... 36
Life Insurance Status of Policy .... 37
Modified Endowment Contract Status 38
Surrenders and Partial Withdrawals 38
Loans and Interest Deductions ...... 39
Corporate Alternative Minimum Tax .. 39
Exchanges or Assignments of
Policies .......................... 40
Other Tax Issues ................... 40
Withholding ........................ 40
Reinstatement Option ................... 40
Additional Benefits Available by Rider 41
Adjustable Term Insurance Rider ...... 41
Payment Options ........................ 41
Payees .............................. 41
Proceeds at Interest Options
(Options 1A and 1B) ................ 42
Life Income Option (Option 2) ....... 42
Beneficiary ............................ 42
Change of Ownership .................... 43
Assignment ............................. 43
Limits on Our Rights to Challenge the
Policy ................................ 43
Misstatement of Age or Sex ............. 43
Suicide ................................ 43
When We Pay Proceeds ................... 43
Records and Reports..................... 44
Sales and Other Agreements.............. 44
Legal Proceedings....................... 44
Independent Accountants................. 45
Experts................................. 45
APPENDIX A: ILLUSTRATIONS ............... A-1
APPENDIX B: SURRENDER
CHARGE PREMIUM RATES PER THOUSAND .... B-1
FINANCIAL STATEMENTS..................... F-1
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THE POLICY IS NOT AVAILABLE IN ALL JURISDICTIONS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE. NYLIAC DOES NOT AUTHORIZE ANY INFORMATION OR
REPRESENTATIONS REGARDING THE OFFERING DESCRIBED IN THIS PROSPECTUS OTHER
THAN AS CONTAINED IN THIS PROSPECTUS OR ANY ATTACHED SUPPLEMENT THERETO OR IN
ANY SUPPLEMENTAL SALES MATERIAL AUTHORIZED BY NYLIAC.
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SECTION I:
DEFINITION OF TERMS
ACCUMULATION UNITS: Accumulation Units are the accounting units used to
calculate the value in the Investment Divisions. Net Premiums and transfers
that are allocated to the Investment Divisions purchase Accumulation Units in
those Investment Divisions.
ACCUMULATION VALUE: The dollar value of the sum of the Accumulation Units in
all of the Investment Divisions.
ALLOCATION ALTERNATIVES: The 18 Investment Divisions of the Separate Account
and the Fixed Account.
BENEFICIARY: The person(s) and/or entity(ies) named by the Policyowner to
receive the Death Benefit after the Insured dies.
BUSINESS DAY: Generally, any day on which NYLIAC is open and the New York
Stock Exchange is open for trading. We are closed on national holidays,
the day after Christmas, Martin Luther King, Jr. Day and the Friday after
Thanksgiving. Our Business Day ends at 4:00 p.m. Eastern Time or the
closing of the New York Stock Exchange, if earlier. Policy transactions such
as Loans, Premium payments, Face Amount changes, Partial Withdrawals,
Surrenders and transfers of Cash Value among Allocation Alternatives are
processed on Business Days.
CASH SURRENDER VALUE: An amount equal to the Cash Value less any surrender
charges.
CASH VALUE: The sum of (a) the Accumulation Value, (b) the Fixed Account
Value and (c) the Loan Account Value of the Policy.
CODE: The Internal Revenue Code of 1986, as amended.
DEATH BENEFIT: The amount payable to the named Beneficiary when the Insured
dies. The Death Benefit is equal to the amount calculated under the
applicable Life Insurance Benefit Option, plus any Death Benefit payable
under a Policy rider, less any Policy Debt.
FACE AMOUNT: The initial face amount shown on page 2 of the Policy, plus or
minus any changes made to the face amount, plus the face amount of any riders
in effect.
FIXED ACCOUNT: The Allocation Alternative that pays interest at guaranteed
fixed rates and is part of our General Account.
FIXED ACCOUNT VALUE: The dollar value of the sum of the Net Premiums and
transfers allocated to the Fixed Account, plus interest credited, less
amounts withdrawn, deductions and charges taken and/or amounts transferred
from the Fixed Account.
FREE LOOK PERIOD: The period commencing on the Policy Delivery Date and
ending 20 days later (10 days later in New York). The Free Look Period will
exceed 20 days if required by state law.
FUNDS (EACH, INDIVIDUALLY, A "FUND"): The MainStay VP Series Fund, Inc.
("MainStay VP Series Fund" and, formerly, "New York Life MFA Series Fund,
Inc."), The Alger American Fund ("The Alger American Fund"), the Acacia
Capital Corporation ("Acacia Fund"), the Fidelity Variable Insurance Products
Fund and the Fidelity Variable Insurance Products Fund II (collectively, the
"Fidelity Variable Insurance Products Funds" or the "Fidelity Funds"), the
Janus Aspen Series and the Morgan Stanley Universal Funds, Inc. ("Morgan
Stanley Fund").
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GENERAL ACCOUNT: An account representing all of NYLIAC's assets, liabilities,
capital and surplus, income, gains or losses that are not included in the
Separate Account or any other NYLIAC separate account.
INSURED: The person whose life the Policy insures.
INVESTMENT DIVISIONS: The 18 divisions of the Separate Account that are
available as Allocation Alternatives under the Policy.
ISSUE DATE: The date we issue the Policy, as shown on page 2 of the Policy.
LOAN ACCOUNT: The account that holds a portion of Cash Value for the purpose
of securing Policy Debt. It is part of our General Account.
LOAN ACCOUNT VALUE: The dollar value of the amounts transferred to the Loan
Account plus interest credited, less amounts transferred out of the Loan
Account.
LIFE INSURANCE BENEFIT OPTION: Two Life Insurance Benefit Options are
available under the Policy:
OPTION 1--Provides a life insurance benefit equal to the greater of (a) the
Face Amount or (b) the Cash Value times the percentage in the appropriate
Code Section 7702 table.
OPTION 2--Provides a life insurance benefit equal to the greater of (a) the
Face Amount plus the Cash Value or (b) the Cash Value times the percentage in
the appropriate Code Section 7702 table.
MINIMUM BASE FACE AMOUNT: $25,000.
MONTHLY DEDUCTION DAY: The date as of which the monthly contract charge, the
cost of insurance charge and a rider charge for the cost of any additional
riders are deducted from the Cash Value. The first Monthly Deduction Day will
be the Policy Date, and subsequent Monthly Deduction Days will be on each
monthly anniversary of the Policy Date.
NET PREMIUM: Premium paid less the sales expense, premium tax and federal tax
charges.
NON-QUALIFIED POLICIES: Policies that do not qualify for special federal
income tax treatment.
PARTIAL WITHDRAWAL: A withdrawal of a portion of the Cash Value by the
Policyowner.
POLICY: The flexible premium corporate sponsored variable universal life
insurance policy offered by NYLIAC that is described in this prospectus.
POLICY ANNIVERSARY: The anniversary of the Policy Date.
POLICYOWNER: The person(s) and/or entity(ies) who own(s) the Policy and have
(has) all rights of ownership in the Policy while the Insured is living.
POLICY DATE: The date shown on page 2 of the Policy, which is the starting
point for determining Policy Anniversaries, Policy Years and Monthly
Deduction Days.
POLICY DEBT: The amount of any outstanding loans under the Policy, including
accrued interest.
POLICY DELIVERY DATE: The date the Policy is signed for and received by the
Policyowner, as indicated on the Policy delivery receipt.
POLICY YEAR: The twelve-month period commencing with the Policy Date, and
each twelvemonth period thereafter.
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PORTFOLIOS: The available mutual fund Portfolios of the Funds. The MainStay
VP Series Fund currently has eleven Portfolios available for investment by
the Investment Divisions of the Separate Account: the MainStay VP Capital
Appreciation, MainStay VP Cash Management, MainStay VP Convertible, MainStay
VP Government, MainStay VP High Yield Corporate Bond, MainStay VP
International Equity, MainStay VP Total Return, MainStay VP Value, MainStay
VP Bond, MainStay VP Growth Equity and MainStay VP Indexed Equity Portfolios.
The Alger American Fund has one Portfolio available to the Separate Account:
the Alger American Small Capitalization Portfolio. The Acacia Fund has one
Portfolio available to the Separate Account: the Calvert Responsibly Invested
Balanced Portfolio ("Calvert Socially Responsible Portfolio"). The Fidelity
Funds have two Portfolios available to the Separate Account: the Contrafund
Portfolio of the Fidelity Variable Insurance Products Fund II ("Fidelity VIP
II: Contrafund Portfolio") and the Equity-Income Portfolio of the Fidelity
Variable Insurance Products Fund ("Fidelity VIP: Equity-Income Portfolio").
The Janus Aspen Series has two Portfolios available to the Separate Account:
the Balanced Portfolio ("Janus Aspen Balanced Portfolio") and the Worldwide
Growth Portfolio ("Janus Aspen Worldwide Growth Portfolio"). The Morgan
Stanley Fund has one Portfolio available to the Separate Account: the
Emerging Markets Equity Portfolio of the Morgan Stanley Universal Funds, Inc.
("Morgan Stanley Emerging Markets Equity Portfolio").
PREMIUM: A dollar amount contributed to the Policy.
PREMIUM REMITTANCE CENTER: New York Life Insurance and Annuity Corporation
Department 0652
P.O. Box 419263
Kansas City, MO 64193-0652
SEC: The Securities and Exchange Commission.
SEPARATE ACCOUNT: NYLIAC Corporate Sponsored Variable Universal Life
Separate Account-I, a segregated asset account established by NYLIAC to
receive and invest Premiums paid under Policies.
SERVICE OFFICE: New York Life Insurance and Annuity Corporation
NYLIFE Distributors Inc.
Attention: Executive Benefits
920 Main Street, Suite 2100
Kansas City, MO 64105
Telephone: (816) 889-4000
SURRENDER: A surrender by the Policyowner of all rights under the Policy in
exchange for the Policy's Cash Surrender Value, less any Policy Debt.
VALUATION DATE: Any day on which the New York Stock Exchange is open for
trading.
VALUATION PERIOD: The period, consisting of one or more days, from one
Valuation Time to the next succeeding Valuation Time.
VALUATION TIME: The time of the close of the New York Stock Exchange
(currently 4:00 p.m. Eastern Time) on any Valuation Date.
WE OR US: NYLIAC.
YOU: The Policyowner.
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SECTION II:
BASIC QUESTIONS AND ANSWERS ABOUT US AND OUR POLICY
1. WHAT ARE NYLIAC AND NEW YORK LIFE?
New York Life Insurance and Annuity Corporation ("NYLIAC") is a stock life
insurance company incorporated in Delaware in 1980. NYLIAC is licensed to
sell life, accident and health insurance and annuities in all states and the
District of Columbia. NYLIAC is the issuer of the Policies and the depositor
of the Separate Account. In addition to the Policies described in this
prospectus, NYLIAC issues other life insurance policies and annuities and is
the depositor for their respective separate accounts. NYLIAC's Financial
Statements are included herein.
NYLIAC is a wholly-owned subsidiary of New York Life Insurance Company
("New York Life"), a mutual insurance company founded in New York in 1845.
New York Life had consolidated total assets amounting to $78.8 billion at the
end of 1996, and is authorized to do business in all states, the District of
Columbia and the Commonwealth of Puerto Rico. New York Life has invested in
NYLIAC, and may, in order to maintain capital and surplus in accordance with
state requirements, occasionally make additional contributions to NYLIAC.
2. WHAT VARIABLE LIFE INSURANCE POLICY ARE WE OFFERING?
In this prospectus we are offering a flexible premium corporate sponsored
variable universal life insurance policy. We issue the Policy to provide for
a Death Benefit, Cash Surrender Value, loan privileges and flexible Premiums.
It is called "flexible" because the Policyowner may select the timing and
amount of Premiums and adjust the Death Benefit by increasing or decreasing
the Face Amount (subject to certain restrictions). It is called "variable"
because, unlike the fixed benefits of a traditional whole life policy, the
Death Benefits may, and Cash Surrender Values will, vary up or down depending
on the performance of the Investment Division(s) to which Cash Value has been
allocated.
The Policy is a legal contract between the Policyowner and NYLIAC. The
entire contract consists of the Policy, the application for the Policy and
any riders to the Policy.
3. HOW IS THE POLICY AVAILABLE?
The Policy is available as a Non-Qualified Policy. The Minimum Base Face
Amount of a Policy is $25,000. Increases are subject to our underwriting
rules in effect at the time of the request. The Insured may not be older than
age 85 as of the Policy Date or the date of any increase in Face Amount.
Before issuing any Policy we will require satisfactory evidence of
insurability. For certain eligible groups, the Policy may be issued based on
guaranteed issue or simplified underwriting rules and procedures as defined
by us.
In Massachusetts and Montana, the Policy is issued only on a unisex basis,
and we may issue on this basis in other states as well. For Policies issued
on a unisex basis, any reference in this prospectus that makes a distinction
based on the gender of the Insured shall be disregarded.
4. WHAT IS THE CASH VALUE OF THE POLICY?
The Cash Value is determined by the amount, frequency and timing of
Premiums, the investment experience of the Investment Divisions chosen by the
Policyowner, the interest
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earned on amounts in the Fixed Account and the Loan Account, and any Partial
Withdrawals or charges imposed in connection with the Policy. The Policyowner
bears the investment risk of any depreciation in value of the underlying
assets of the Investment Divisions, but he or she also reaps the benefit of
any appreciation in their value.
5. WHAT ARE THE INVESTMENT DIVISIONS OF THE SEPARATE ACCOUNT?
You may allocate Net Premiums to, or transfer amounts among, a total of
nineteen Allocation Alternatives, the Fixed Account and eighteen Investment
Divisions of the Separate Account--the MainStay VP Capital Appreciation
Division, the MainStay VP Cash Management Division, the MainStay VP
Convertible Division, the MainStay VP Government Division, the MainStay VP
High Yield Corporate Bond Division, the MainStay VP International Equity
Division, the MainStay VP Total Return Division, the MainStay VP Value
Division, the MainStay VP Bond Division, the MainStay VP Growth Equity
Division, the MainStay VP Indexed Equity Division, the Alger American Small
Capitalization Division, the Calvert Socially Responsible Division, the
Fidelity VIP II: Contrafund Division, the Fidelity VIP: Equity-Income
Division, the Janus Aspen Balanced Division, the Janus Aspen Worldwide Growth
Division and the Morgan Stanley Emerging Markets Equity Division. Each
Investment Division invests only in the shares of a corresponding Portfolio
of the relevant Fund. Because amounts allocated to the Investment Divisions
are invested in mutual funds, investment return and principal will fluctuate
and your Accumulation Units may be worth more or less than their original
cost when redeemed.
6. HOW IS THE VALUE OF AN ACCUMULATION UNIT DETERMINED?
The value of an Accumulation Unit on any Valuation Date is determined by
multiplying the value of that unit on the immediately preceding Valuation
Date by the net investment factor for the Valuation Period. The net
investment factor used to calculate the value of an Accumulation Unit in any
Investment Division for the Valuation Period is determined by dividing (a) by
(b) and subtracting (c) from the result, where:
(a) is the sum of:
(1) the net asset value of a Portfolio share held in the Separate
Account for that Investment Division determined at the end of the
current Valuation Period, plus
(2) the per share amount of any dividends or capital gain
distributions made by the Portfolio for shares held in the Separate
Account for that Investment Division if the ex-dividend date occurs
during the Valuation Period.
(b) is the net asset value of a Portfolio share held in the Separate
Account for that Investment Division determined as of the end of the
immediately preceding Valuation Period.
(c) is a factor representing the mortality and expense risk charge. This
factor accrues daily and is currently equal, on an annual basis, to .70%
of the value of each Investment Division's assets (for Policy Years one
through ten) or .30% of the value of each Investment Division's assets
(for Policy Years eleven and later).
7. WHAT IS THE FIXED ACCOUNT?
In addition to the Investment Divisions, you may allocate or transfer
amounts to the Fixed Account. Net Premiums applied to and any amounts
transferred to the Fixed Account are
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credited with interest using a fixed interest rate that we will set in
advance at least annually. This rate will never be less than 4% per year.
Interest accrues daily and is credited on each Monthly Deduction Day. All Net
Premiums applied to, or amounts transferred to, the Fixed Account receive the
interest rate in effect at that time.
8. DOES THE POLICY HAVE A CASH SURRENDER VALUE?
The Policyowner may surrender the Policy at any time and receive its Cash
Surrender Value less any Policy Debt. Partial Withdrawals are also allowed
subject to certain restrictions. See "Section V: General Provisions of the
Policy--Cash Value and Cash Surrender Value." The Cash Surrender Value of a
Policy fluctuates with the investment performance of the Investment Divisions
in which the Policy has Cash Value and the amounts held in the Fixed Account
and the Loan Account. It may increase or decrease daily.
For federal income tax purposes, the Policyowner usually is not taxed on
increases in the Cash Surrender Value until he or she actually surrenders the
Policy. However, in connection with certain Partial Withdrawals and loans on
the Policy, the Policyowner may be taxed on all or a part of the amount
distributed. See "Section V: General Provisions of the Policy--Cash Value and
Cash Surrender Value" and "Section VI: Additional Information--Federal Income
Tax Considerations."
9. HOW LONG WILL THE POLICY REMAIN IN FORCE?
The Policy does not automatically terminate for failure to pay planned
Premiums. Payment of these Premiums, however, does not guarantee the Policy
will remain in force. The Policy terminates only when the Cash Surrender
Value less any Policy Debt is insufficient to pay the charges deducted on
each Monthly Deduction Day or where there is an excess loan, and a late
period expires without sufficient payment.
10. IS THE AMOUNT OF THE DEATH BENEFIT GUARANTEED?
As long as the Policy remains in force, the proceeds payable under the
Policy will be based on the Life Insurance Benefit Option in effect on the
date of death. Death Benefit proceeds will, however, be reduced by any
outstanding Policy Debt, and/or increased by any additional Death Benefits
added by rider.
11. IS THE DEATH BENEFIT SUBJECT TO INCOME TAXES?
A Death Benefit paid under our Policies may be fully excludable from the
gross income of the Beneficiary for federal income tax purposes. See "Section
VI: Additional Information--Federal Income Tax Considerations."
12. WHAT IS A MODIFIED ENDOWMENT CONTRACT?
A modified endowment contract, as defined in the Code, is a life insurance
policy under which the cumulative premiums paid during the first seven policy
years exceed the cumulative premiums payable under a hypothetical policy
providing for guaranteed benefits upon the payment of seven level annual
premiums. Certain changes to a policy can subject it to retesting for a new
seven-year period. If your Policy is determined to be a modified endowment
contract, any distributions, including collateral assignments, loans and
Partial Withdrawals, are taxable to the extent that such distributions
represent income. In addition you may incur a penalty tax if you are not yet
age 59 1/2 and no other exceptions, as set forth in the Code, are applicable.
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13. CAN THE POLICY BECOME A MODIFIED ENDOWMENT CONTRACT?
Since the Policy permits flexible Premium payments, it may become a
modified endowment contract. NYLIAC currently tests a Policy at issue to
determine whether it will be classified as a modified endowment contract.
This at-issue test examines the Policy for the first seven Policy Years,
based on the Policy application and the first Premium requested, and based on
the assumption that there are no increases in Premiums or decreases in
benefits during the period. NYLIAC has also instituted procedures to monitor
whether a Policy may become a modified endowment contract after issue. See
"Section VI: Additional Information--Federal Income Tax
Considerations--Modified Endowment Contract Status."
14. WHAT ARE PLANNED PREMIUMS?
The amount and interval of any planned Premiums are shown on page 2 of the
Policy. A planned Premium does not have to be paid to keep the Policy in
force if the Cash Surrender Value, less any Policy Debt, is sufficient to
cover the charges made on the Monthly Deduction Day. The amount of any
planned Premium may be increased or decreased subject to the limits we set.
The frequency of Premiums may also be changed subject to our minimum Premium
rules. Planned Premiums end on the Policy Anniversary on which the Insured is
age 95.
15. WHAT ARE UNPLANNED PREMIUMS?
While the Insured is living, you may make unplanned Premium payments at
any time prior to the Policy Anniversary on which the Insured is age 95. If
an unplanned Premium would result in an increase in the Death Benefit greater
than the increase in the Cash Value, we reserve the right to require proof of
insurability before accepting that payment and applying it to the Policy. We
also reserve the right to limit the number and amount of any unplanned
Premiums. See "Section V: General Provisions of the Policy--Premiums."
16. WHAT HAPPENS WHEN THE FIRST PREMIUM IS PAID?
The first Premium (and any other Premiums received on or before the last
day of the Free Look Period) will be allocated to the General Account. Sales
expense, premium tax and federal tax charges are deducted from Premiums on
the Issue Date; however, deductions made on the Issue Date will be calculated
as of the later of the Policy Date or the date the Premium is received. Also,
the monthly contract charge, cost of insurance charge and cost for any riders
are deducted as of the Policy Date and as of each subsequent Monthly
Deduction Day. The Net Premium less the monthly charges will remain in the
General Account through the last day of the Free Look Period. Amounts in the
General Account will be credited with interest commencing on the later of the
Policy Date or the date we receive such amounts and ending on the last day of
the Free Look Period. The rate of interest is set by us and can change
monthly. Net Premiums less the monthly charges plus interest will then be
allocated to the Investment Divisions or to the Fixed Account in accordance
with the Policyowner's instructions.
17. WHEN ARE SUBSEQUENT PREMIUMS PUT INTO THE FIXED ACCOUNT AND THE
SEPARATE ACCOUNT?
Upon receipt, Net Premiums will be applied to the Separate Account at the
Accumulation Unit value determined at the end of the Valuation Period, and to
the Fixed Account in accordance with your allocation election in effect at
that time, and before any other charges that may be due are deducted.
18. HOW ARE NET PREMIUMS ALLOCATED AMONG THE ALLOCATION ALTERNATIVES?
You may maintain Accumulation Value in all 19 Allocation Alternatives.
Moreover, you may raise or lower the percentages of the Net Premium (which
must be in whole number percentages) allocated to each Allocation Alternative
at any time.
10
<PAGE>
19. WHAT ARE THE CURRENT CHARGES AGAINST THE POLICY?
Three charges are deducted from each Premium, whether planned or
unplanned. A sales expense charge of 2.25% is used to partially cover sales
expenses. Deductions of 2% and 1.25% are also made for premium tax and
federal tax charges, respectively.
In addition, on each Monthly Deduction Day, the following deductions are
made:
(a) a monthly contract charge equal to $7.50 ($90.00 annually);
(b) a monthly cost of insurance charge; and
(c) the monthly cost for any riders attached to the Policy.
A deduction may also be made for any temporary flat extras as set forth on
page 2 of the Policy. A temporary flat extra is a charge per $1,000 of Face
Amount made against the Cash Value for the amount of time specified on the
Policy data page. It is designed to cover the risk of substandard mortality
experience which is not permanent in nature.
The Monthly Deduction Day for the Policy is shown on page 2 of the Policy.
The first Monthly Deduction Day is the Policy Date. All monthly deductions
are made from each of the Investment Divisions and the Fixed Account in
proportion to the amount in each.
Also, a mortality and expense risk charge is made on a daily basis against
the assets of each Investment Division. For Policy Years one through ten,
this charge is calculated at an effective annual rate of .70% of the value of
each Investment Division's assets. For Policy Years eleven and later, the
mortality and expense risk charge is calculated at an effective annual rate
of .30% of the value of each Investment Division's assets. The mortality and
expense risk charge may be changed at NYLIAC's option subject to a maximum
annual effective rate of .90%.
Currently, we are not making any charges for income taxes, but we may make
charges in the future against the Separate Account for federal income taxes
attributable to it.
Additionally, upon a surrender or a requested decrease in Face Amount
during the first nine Policy years, a surrender charge is assessed. Partial
Withdrawals of Cash Value are subject to a charge equal to the lesser of $25
or 2% of the amount withdrawn.
See "Section III: Charges Under the Policies" and "Section VI: Additional
Information--Federal Income Tax Considerations."
20. ARE LOANS AVAILABLE UNDER THE POLICY?
Using the Policy as sole security, you can borrow any amount up to the
loan value of the Policy. The loan value on any given date is equal to 90% of
the Cash Surrender Value, less any Policy Debt.
21. DO I HAVE A RIGHT TO CANCEL?
The Policy contains a provision that permits you to cancel the Policy at
any time during the Free Look Period and receive a refund. The Policy may be
returned to our Service Office or to the registered representative who sold
you the Policy. See "Section V: General Provisions of the Policy--Free Look
Provision."
22. CAN THE POLICY BE EXCHANGED?
You have the right during the first 24 months following the Issue Date to
exchange the Policy for a permanent plan of life insurance offered by us for
this purpose. See "Section V: General Provisions of the Policy--Exchange
Privilege."
11
<PAGE>
23. HOW IS A PERSON'S AGE CALCULATED?
When we refer to a person's age on any date, we mean his or her age on the
nearest birthday. However, the Cost of Insurance will be based on the prior
Policy Anniversary.
SECTION III:
CHARGES UNDER THE POLICY
Certain charges are deducted to compensate for providing the insurance
benefits under the Policy, for any riders, for administering the Policy, for
assuming certain risks and for incurring certain expenses in distributing the
Policy.
DEDUCTIONS FROM PREMIUMS
When we receive a Premium, whether planned or unplanned, we will deduct a
sales expense charge, a premium tax charge and a federal tax charge.
SALES EXPENSE CHARGE.
The sales expense charge is 2.25% of any Premium. We reserve the right to
increase this charge in the future, but it will never exceed 4.5% of
Premiums. The amount of the sales expense charge in a Policy Year is not
necessarily related to our actual sales expenses for that particular year. To
the extent that sales expenses are not covered by the sales expense charge
and the surrender charge, they will be recovered from NYLIAC surplus,
including any amounts derived from the mortality and expense risk charge and
the cost of insurance charge.
PREMIUM TAX CHARGE.
Various states and jurisdictions impose a tax on premiums received by
insurance companies. Premium tax rates vary from state to state and currently
range from 0.75% to 3.00%. We deduct 2% of each Premium to cover state
premium taxes. Two percent represents the approximate average of the premium
taxes assessed by the states, and will be assessed uniformly to all Policies.
NYLIAC reserves the right to increase this charge consistent with changes in
applicable law.
FEDERAL TAX CHARGE.
NYLIAC's federal tax obligations will increase based upon Premiums
received under the Policies. We deduct 1.25% of each Premium to cover this
federal tax charge. NYLIAC reserves the right to increase this charge
consistent with changes in applicable law.
DEDUCTIONS FROM ACCUMULATION VALUE AND FIXED ACCOUNT VALUE
On each Monthly Deduction Day, a monthly contract charge, a cost of
insurance charge, and a rider charge for the cost of any additional riders
are deducted from the Investment Divisions and the Fixed Account in
proportion to the amount in each.
MONTHLY CONTRACT CHARGE.
There is a monthly charge currently equal to $7.50 ($90.00 annually) that
compensates NYLIAC for costs incurred in providing certain administrative
services including Premium collection, recordkeeping, processing claims and
communicating with Policyowners. This charge is not designed to produce a
profit. If the cost of providing these administrative services increases, we
reserve the right to increase this charge, subject to a maximum of $9.00
monthly ($108.00 annually).
12
<PAGE>
COST OF INSURANCE CHARGE.
A charge for the cost of insurance is deducted on each Monthly Deduction
Day. Maximum cost of insurance rates are set forth on page 2.2 of your Policy
and are based on the gender, smoker class, duration, underwriting class and
issue age of the Insured. The cost of insurance charge for any month will
equal (1) multiplied by the result of (2) minus (3) where: (1) is the
applicable cost of insurance rate (2) is the number of thousands of Death
Benefit as of the Monthly Deduction Day divided by 1.0032737, and (3) is the
number of thousands of Cash Value as of the Monthly Deduction Day (before
this cost of insurance charge, but after the monthly contract charge and any
charges for riders and flat extras are deducted). In rated cases, an
additional charge may be assessed as part of the cost of insurance charge.
Charges for any flat extras and optional benefits added by rider will also be
deducted on each Monthly Deduction Day.
DEDUCTIONS FROM THE SEPARATE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE.
We charge the Investment Divisions for the mortality and expense risks we
assume. For Policy Years one through ten, we deduct a daily charge at an
effective annual rate of .70% of the value of each Investment Division's
assets. For Policy Years eleven and later, we deduct a daily charge at an
effective annual rate of .30% of the value of each Investment Division's
assets. The mortality and expense risk charge may be changed at NYLIAC's
option, subject to a maximum of .90%.
The mortality risk we assume is that the group of lives insured under our
Policies may, on average, live for shorter periods of time than we estimated.
The expense risk we assume is that our costs of issuing and administering
Policies may be more than we estimated.
If these charges are insufficient to cover actual costs and assumed risks,
the loss will be deducted from the NYLIAC surplus. Conversely, if the charge
proves more than sufficient, any excess will be added to the NYLIAC surplus.
OTHER CHARGES FOR FEDERAL INCOME TAXES.
We reserve the right to make a charge for Separate Account federal income
tax liabilities, should the law change to require the taxation of separate
accounts. See "Section VI: Additional Information--Federal Income Tax
Considerations."
FUND CHARGES
The Investment Divisions purchase shares of the relevant Funds at net
asset value. The price reflects management fees, administration fees and
other expenses that have already been deducted from the assets of the Funds.
The Funds do not impose a sales charge. Fund charges incurred in 1996 are set
forth in the following table.
<TABLE>
<CAPTION>
MAINSTAY VP MAINSTAY VP
CAPITAL CASH MAINSTAY VP MAINSTAY VP
APPRECIATION MANAGEMENT CONVERTIBLE GOVERNMENT
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
FUND ANNUAL
EXPENSES AFTER
REIMBURSEMENT (as
a % of average net
assets)
Management Fees..... 0.36% 0.25% 0.36% 0.30%
Administration
Fees............... 0.20% 0.20% 0.20% 0.20%
Other Expenses...... 0.19%(a) 0.19%(a) 0.17%(b) 0.21%(a)
Total Fund Annual
Expenses........... 0.75%(a) 0.64%(a) 0.73%(b) 0.71%(a)
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
MAINSTAY VP
HIGH YIELD MAINSTAY VP MAINSTAY VP
CORPORATE INTERNATIONAL TOTAL MAINSTAY VP MAINSTAY VP
BOND EQUITY RETURN VALUE BOND
------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
FUND ANNUAL
EXPENSES AFTER
REIMBURSEMENT (as
a % of average net
assets)
Management Fees..... 0.30% 0.60% 0.32% 0.36% 0.25%
Administration
Fees............... 0.20% 0.20% 0.20% 0.20% 0.20%
Other Expenses...... 0.17%(b) 0.17%(b) 0.19%(a) 0.17%(b) 0.13%(a)
Total Fund Annual
Expenses........... 0.67%(b) 0.97%(b) 0.71%(a) 0.73%(b) 0.58%(a)
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
MAINSTAY VP MAINSTAY VP ALGER AMERICAN CALVERT
GROWTH INDEXED SMALL SOCIALLY
EQUITY EQUITY CAPITALIZATION RESPONSIBLE
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
FUND ANNUAL
EXPENSES AFTER
REIMBURSEMENT (as
a % of average net
assets)
Management Fees..... 0.25% 0.10% 0.85% 0.71%(c)
Administration
Fees............... 0.20% 0.20% -- --
Other Expenses...... 0.13%(a) 0.20%(a) 0.03% 0.13%(c)
Total Fund Annual
Expenses........... 0.58%(a) 0.50%(a) 0.88% 0.84%(c)
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
FIDELITY VIP: JANUS ASPEN MORGAN STANLEY
FIDELITY VIP II: EQUITY- JANUS ASPEN WORLDWIDE EMERGING
CONTRAFUND INCOME BALANCED GROWTH MARKETS EQUITY
---------------- ------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
FUND ANNUAL
EXPENSES AFTER
REIMBURSEMENT (as
a % of average net
assets)
Management Fees..... 0.61% 0.51% 0.79% 0.66% 0.85%
Administration
Fees............... -- -- -- -- 0.25%
Other Expenses...... 0.13% 0.07% 0.15% 0.14% 0.65%
Total Fund Annual
Expenses........... 0.74%(d) 0.58%(d) 0.94%(e) 0.80%(e) 1.75%(f)
</TABLE>
- ------------
(a) An expense reimbursement agreement which limited "Other Expenses" to
0.17% annually was in effect until December 31, 1996. "Other Expenses"
and "Total Fund Annual Expenses" have been restated to reflect values
as if this limitation were not in effect during 1996.
(b) These numbers reflect an expense reimbursement agreement effective
through December 31, 1997 limiting "Other Expenses" to 0.17% annually.
In the absence of the expense reimbursement arrangement, the "Total
Fund Annual Expenses" for the year ended December 31, 1996 would have
been 1.46%, 0.71%, 1.51% and 0.79% for the MainStay VP Convertible,
MainStay VP High Yield Corporate Bond, MainStay VP International Equity
and MainStay VP Value Portfolios, respectively. Numbers for the
MainStay VP Convertible Portfolio have been annualized based on the
period from October 1, 1996 (the date of inception) to December 31,
1996.
(c) "Other Expenses" are based on expenses for fiscal year 1996, and have
been restated to reflect an increase in transfer agency expenses of
0.03% expected to be incurred in 1997. The "Advisory Fee" includes a
performance adjustment which could cause the fee to be as high as 0.85%
or as low as 0.55%, depending on performance. "Other Expenses" reflect
an indirect fee of 0.03%. "Total Fund Annual Expenses" after reductions
for fees paid indirectly would have been 0.81%.
(d) A portion of the brokerage commissions that these Portfolios pay was
used to reduce the Portfolios' annual expenses. In addition, these
Portfolios have entered into arrangements with their custodian and
transfer agent whereby interest earned on uninvested cash balances was
used to reduce custodian and transfer agent expenses. Including these
reductions, the "Total Fund Annual Expenses" would have been 0.71% for
the Fidelity VIP II: Contrafund Portfolio and 0.56% for the Fidelity
VIP: Equity-Income Portfolio.
(e) Janus Capital Corporation ("JCC") has agreed to reduce the advisory fee
for each Portfolio to the extent that such fee exceeds the effective
rate of the Janus retail fund corresponding to such Portfolio. JCC may
terminate this fee reduction at any time upon 90 days' notice to the
Board of Trustees of the Janus Aspen Series. Absent such reductions,
"Advisory Fees" and "Total Fund Annual Expenses" for the fiscal year
ended December 31, 1996 would have been 0.92% and 1.07%, respectively,
for the Janus Aspen Balanced Portfolio and 0.77% and 0.91%,
respectively, for the Janus Aspen Worldwide Growth Portfolio.
(f) "Other Expenses" for the Morgan Stanley Emerging Markets Equity
Portfolio are estimated for the current fiscal year. Morgan Stanley
Asset Management Inc. has agreed to a reduction in its management fees
and to reimburse the Portfolio if such fees would cause the "Total Fund
Annual Expenses" to exceed 1.75% of average daily net assets. Absent
such reductions, it is estimated that "Advisory Fees" and "Total Fund
Annual Expenses" would be 1.25% and 6.17%, respectively.
14
<PAGE>
SURRENDER CHARGE
During the first nine Policy Years, a surrender charge will be assessed on
a complete surrender or a requested decrease in Face Amount. The surrender
charge is based on the Policy Year in which the surrender or decrease in Face
Amount is made and will be deducted from the Investment Divisions and the
Fixed Account in proportion to the amount in each.
For a surrender, the maximum surrender charge is calculated by multiplying
the applicable percentage shown in the table below by the surrender charge
premium, which appears on page 2.1 of your Policy. A table of surrender
charge premium rates per thousand appears in Appendix B to this prospectus.
<TABLE>
<CAPTION>
PERCENTAGE OF
SURRENDER
POLICY YEAR CHARGE PREMIUM
- ----------- ----------------
<S> <C>
1-5................................... 32.5%
6..................................... 26.0%
7..................................... 19.5%
8..................................... 13.0%
9..................................... 6.5%
10+ .................................. 0%
</TABLE>
A requested decrease in Face Amount will result in the imposition of a
surrender charge equal to the difference between the surrender charge that
would have been payable on a complete surrender prior to the decrease and the
surrender charge that would be payable on a complete surrender after the
decrease. Requested decreases and increases in Face Amount will cause a
corresponding change in the amount of your surrender charge premium.
In no event will the surrender charge exceed 50% of Premiums paid to date,
less (i) any sales expense charges deducted from such Premium payments, less
(ii) any surrender charge previously deducted.
During the first two Policy Years, the surrender charge is further limited
to the sum of: (i) 30% of all Premium payments made during the first two
Policy Years up to one SEC guideline annual premium, plus (ii) 10% of all
Premium payments in the first two Policy Years in excess of one SEC guideline
annual premium, but not more than two SEC guideline annual premiums, plus
(iii) 9% of all Premium payments in the first two Policy Years in excess of
two SEC guideline annual premiums, less (iv) any sales expense charges
deducted from such Premium payments, less (v) any surrender charge previously
deducted. An SEC guideline annual premium is the level annual amount that
would be payable in each Policy Year under certain assumptions defined by the
SEC. These assumptions include cost of insurance charges based on the 1980
Commissioner's Standard Ordinary Mortality Tables, net investment earnings at
an annual rate of 5%, and the guaranteed fees and charges associated with the
Policy.
The percentages specified above and/or the year in which the surrender
charge is reduced may vary for individuals having a life expectancy of less
than 20 years either at the time that a Policy is issued or the Face Amount
is increased.
15
<PAGE>
HOW THE POLICY WORKS.
This example is based on the illustration for the first Policy Year from
page A-1, assuming a 6% hypothetical gross annual investment return and
current charges:
<TABLE>
<CAPTION>
<S> <C> <C>
Planned Annual Premium $7,500.00
less: Sales expense charge (2.25%) .............................. 168.75
Premium tax charge (2%) ................................... 150.00
Federal tax charge (1.25%) ................................ 93.75
-----------
equals: Net Premium ............................................... $7,087.50
less: Monthly contract charge
($7.50 per month).......................................... 90.00
less: Charges for cost of insurance
(varies monthly)........................................... 566.25
plus: Net investment performance
(varies monthly)........................................... 304.16
-----------
equals: Cash Value ................................................ $6,735.41
less: Surrender charge (a percentage of surrender charge
premium)................................................... 1,025.50
-----------
equals: Cash Surrender Value ...................................... $5,709.91
</TABLE>
16
<PAGE>
SECTION IV:
THE SEPARATE ACCOUNT, THE FUNDS AND THE FIXED ACCOUNT
THE SEPARATE ACCOUNT
The Separate Account was established under the laws of Delaware as of May
24, 1996, pursuant to resolutions of the NYLIAC Board of Directors. The
Separate Account is registered as a unit investment trust with the SEC under
the Investment Company Act of 1940 (the "1940 Act"), but such registration
does not signify that the SEC supervises the management, or the investment
practices or policies, of the Separate Account. The Separate Account meets
the definition of "separate account" under the federal securities laws.
Although the assets of the Separate Account belong to NYLIAC, they are
held separately from the other assets of NYLIAC, and are not chargeable with
liabilities incurred in any other business operations of NYLIAC (except to
the extent that assets in the Separate Account exceed the reserves and other
liabilities of that Account). The income, capital gains and capital losses
incurred on the assets of the Separate Account are credited to, or are
charged against, the assets of the Separate Account, without regard to the
income, capital gains or capital losses arising out of any other business
NYLIAC may conduct. NYLIAC may accumulate in the Separate Account the charge
for mortality and expense risks, monthly charges assessed against the Policy
and investment results applicable to those assets that are in excess of net
assets supporting the Policies.
The Separate Account currently has 18 Investment Divisions, each of which
invests solely in a corresponding Portfolio of the relevant Fund. The
Investment Divisions are: MainStay VP Capital Appreciation, MainStay VP Cash
Management, MainStay VP Convertible, MainStay VP Government, MainStay VP High
Yield Corporate Bond, MainStay VP International Equity, MainStay VP Total
Return, MainStay VP Value, MainStay VP Bond, MainStay VP Growth Equity,
MainStay VP Indexed Equity, Alger American Small Capitalization, Calvert
Socially Responsible, Fidelity VIP II: Contrafund, Fidelity VIP:
Equity-Income, Janus Aspen Balanced, Janus Aspen Worldwide Growth and Morgan
Stanley Emerging Markets Equity. Investment Divisions may, subject to any
required regulatory approvals, be added or deleted at the discretion of
NYLIAC.
YOUR VOTING RIGHTS.
As explained previously, contributions allocated to the Investment
Divisions are invested in shares of the corresponding Portfolios of the
relevant Fund. Since we own the assets of the Separate Account, we are the
legal owner of the shares and, as such, have the right to vote on certain
matters. Among other things, we may vote:
o to elect the Board of Directors of the Funds;
o to ratify the selection of independent auditors for the Funds; and
o on any other matters described in the Funds' current prospectuses or
requiring a vote by shareholders under the 1940 Act.
The Funds are not required to hold, and do not hold, annual shareholder
meetings. Whenever a shareholder vote is taken, we will give Policyowners the
opportunity to instruct us how to vote the number of shares attributable to
their Policies. If we do not receive instructions in time from all
Policyowners, we will vote the shares of a Portfolio for which no
instructions have been received in the same proportion as we vote shares of
that Portfolio for which we have received instructions.
17
<PAGE>
The Policyowner holds a voting interest in each Investment Division to
which Cash Value is allocated. The number of votes which are available to a
Policyowner will be calculated separately for each Investment Division and
will be determined by dividing the Accumulation Value attributable to an
Investment Division by the net asset value per share of the applicable
Portfolios.
OUR RIGHTS.
We reserve the right to take certain actions in connection with the
operation of the Separate Account. These actions will be taken in accordance
with applicable laws (including obtaining any required approval of the SEC).
If necessary, we will seek approval by Policyowners.
Specifically, we reserve the right to:
o substitute, add or remove any Investment Division;
o create new separate accounts;
o combine the Separate Account with one or more other separate accounts;
o operate the Separate Account as a management investment company under
the 1940 Act or in any other form permitted by law;
o deregister the Separate Account under the 1940 Act;
o manage the Separate Account under the direction of a committee or
discharge such committee at any time;
o transfer the assets of the Separate Account to one or more other
separate accounts; and
o restrict or eliminate any of the voting rights of Policyowners or other
persons who have voting rights as to the Separate Account.
MAINSTAY VP SERIES FUND, INC.
The Separate Account currently invests in eleven Portfolios of the
MainStay VP Series Fund, a "series" type of mutual fund established under the
laws of Maryland.
MacKay-Shields Financial Corporation ("MacKay-Shields") is the investment
adviser to the MainStay VP Capital Appreciation, MainStay VP Cash Management,
MainStay VP Convertible, MainStay VP Government, MainStay VP High Yield
Corporate Bond, MainStay VP International Equity, MainStay VP Total Return
and MainStay VP Value Portfolios. Monitor Capital Advisors, Inc. ("Monitor")
is the investment adviser to the MainStay VP Indexed Equity Portfolio, and
New York Life is the investment adviser to the MainStay VP Bond and MainStay
VP Growth Equity Portfolios. MacKay-Shields, Monitor and New York Life
provide investment advisory services to these Portfolios in accordance with
the policies, programs and guidelines established by the Board of Directors
of MainStay VP Series Fund. As compensation for such services, MainStay VP
Series Fund pays MacKay-Shields a fee in the form of a daily charge at an
annual rate of .36%, .25%, .36%, .30%, .30%, .60%, .32% and .36% of the
aggregate average daily net assets of the MainStay VP Capital Appreciation
Portfolio, the MainStay VP Cash Management Portfolio, the MainStay VP
Convertible Portfolio, the MainStay VP Government Portfolio, the MainStay VP
High Yield Corporate Bond Portfolio, the MainStay VP International Equity
Portfolio, the MainStay VP Total Return Portfolio, and the MainStay VP Value
Portfolio, respectively. MainStay VP Series Fund pays Monitor a fee in the
form of a daily
18
<PAGE>
charge at an annual rate of .10% of the average daily net assets of the
MainStay VP Indexed Equity Portfolio. MainStay VP Series Fund pays New York
Life a fee in the form of a daily charge at an annual rate of .25% of the
aggregate average daily net assets of each of the MainStay VP Bond and
MainStay VP Growth Equity Portfolios. See the prospectus for the MainStay VP
Series Fund which is attached to this Prospectus.
THE ALGER AMERICAN FUND
The Separate Account currently invests in the Alger American Small
Capitalization Portfolio of The Alger American Fund, a "series" type of
mutual fund established under the laws of Massachusetts. Currently, the Alger
American Small Capitalization Portfolio is the only Portfolio available
through The Alger American Fund for investment by the Separate Account.
Fred Alger Management, Inc. ("FAM") provides investment advisory services
to the Alger American Small Capitalization Portfolio in accordance with the
policies, programs and guidelines established by the Board of Trustees of The
Alger American Fund. As compensation for such services, The Alger American
Fund pays FAM a fee in the form of a daily charge at an annual rate of .85%
of the average daily net assets of the Portfolio. See the prospectus for The
Alger American Fund which is attached to this Prospectus.
ACACIA CAPITAL CORPORATION
The Separate Account currently invests in the Calvert Socially Responsible
Portfolio of Acacia Capital Corporation, a "series" type of mutual fund
established under the laws of Maryland. Currently, the Calvert Socially
Responsible Portfolio is the only Portfolio available through the Acacia Fund
for investment by the Separate Account.
Calvert Asset Management Company, Inc. ("CAM") provides investment
advisory services to the Calvert Socially Responsible Portfolio in accordance
with the policies, programs and guidelines established by the Board of
Directors of the Acacia Fund. As compensation for such services, the Acacia
Fund pays CAM a fee in the form of a daily charge at an annual rate of 0.70%
of the first $500 million of the average daily net assets of the Calvert
Socially Responsible Portfolio, 0.65% of the next $500 million of average
daily net assets of the Portfolio, and 0.60% of the average daily net assets
of the Portfolio in excess of $1 billion. This fee may be reduced or
increased by up to 0.15%, depending on the performance of the Calvert
Socially Responsible Portfolio relative to the Lipper Balanced Funds Index.
See the prospectus for the Acacia Capital Corporation which is attached to
this Prospectus.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND AND
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
The Separate Account currently invests in the Fidelity VIP II: Contrafund
and Fidelity VIP: Equity-Income Portfolios of the Fidelity Variable Insurance
Products Funds, both of which are "series" types of mutual funds established
under the laws of Massachusetts. Currently, the Fidelity VIP II: Contrafund
and Fidelity VIP: Equity-Income Portfolios are the only Portfolios available
through the Fidelity Funds for investment by the Separate Account.
Fidelity Management and Research Company ("FMR") provides investment
advisory services to the Fidelity VIP II: Contrafund and Fidelity VIP:
Equity-Income Portfolios in accordance with the policies, programs and
guidelines established by the Boards of Trustees of the Fidelity Variable
Insurance Products Funds. As compensation for such services, the
19
<PAGE>
Fidelity Funds pay FMR a monthly fee in the form of a charge, calculated on a
monthly basis by adding a group fee rate to an individual Portfolio fee rate,
and multiplying the result by the Portfolios' average net assets. The group
fee rate is based on the average net assets of all the mutual fund assets
advised by FMR, and cannot rise above .52%. FMR pays, at its own expense, FMR
U.K. and FMR Far East an annual fee equal to 50% of its management fee rate
with respect to the Fidelity VIP II: Contrafund Portfolio's investments that
each sub-advisor manages on a discretionary basis. See the prospectus for the
Fidelity Variable Insurance Products Funds which is attached to this
Prospectus.
JANUS ASPEN SERIES
The Separate Account currently invests in the Janus Aspen Balanced and
Janus Aspen Worldwide Growth Portfolios of the Janus Aspen Series, a "series"
type of mutual fund established under the laws of Delaware. Currently, the
Janus Aspen Balanced and Janus Aspen Worldwide Growth Portfolios are the only
Portfolios available through the Janus Aspen Series for investment by the
Separate Account.
Janus Capital Corporation ("JCC") provides investment advisory services to
the Janus Aspen Balanced and Janus Aspen Worldwide Growth Portfolios in
accordance with the policies, programs and guidelines established by the
Board of Trustees of the Janus Aspen Series. As compensation for such
services, the Janus Aspen Series pays JCC a management fee in the form of a
daily charge at an annual rate of 1.00% for the first $30 million of the
average daily net assets of each Portfolio, .75% of the next $270 million of
the average daily net assets of each Portfolio, .70% of the next $200 million
of the average daily net assets of each Portfolio, and .65% of an amount over
$500 million of the average daily net assets of each Portfolio. JCC has
agreed to reduce the advisory fee for each Portfolio to the extent that such
fee exceeds the effective rate of the Janus retail fund corresponding to such
Portfolio. JCC may terminate this fee reduction at any time upon 90 days'
notice to the Board of Trustees of the Janus Aspen Series. See the prospectus
for the Janus Aspen Series which is attached to this Prospectus.
MORGAN STANLEY UNIVERSAL FUNDS, INC.
The Separate Account currently invests in the Morgan Stanley Emerging
Markets Equity Portfolio of the Morgan Stanley Universal Funds, Inc., a
"series" type of mutual fund established under the laws of Maryland.
Currently, the Morgan Stanley Emerging Markets Equity Portfolio is the only
Portfolio available through the Morgan Stanley Fund for investment by the
Separate Account.
Morgan Stanley Asset Management Inc. ("MSAM") provides investment advisory
services to the Morgan Stanley Emerging Markets Equity Portfolio in
accordance with the policies, programs and guidelines established by the
Board of Directors of the Morgan Stanley Fund. As compensation for such
services, the Morgan Stanley Fund pays MSAM a quarterly management fee in the
form of a daily charge at an annual rate of 1.25% for the first $500 million
of the average daily net assets of the Portfolio, 1.20% of the next $500
million of the average daily net assets of the Portfolio, and 1.15% of the
average daily net assets of the Portfolio in excess of $1 billion. MSAM has
agreed to a reduction in their management fees and to reimburse the Portfolio
if such fees would cause the total annual operating expenses of the Portfolio
to exceed 1.75% of average daily net assets. See the prospectus for the
Morgan Stanley Universal Funds, Inc. which is attached to this Prospectus.
20
<PAGE>
THE PORTFOLIOS
The assets of each Portfolio are separate from the others and each such
Portfolio has different investment objectives and policies. As a result, each
Portfolio operates as a separate investment fund and the investment
performance of one Portfolio has no effect on the investment performance of
any other Portfolio.
THE MAINSTAY VP CAPITAL APPRECIATION PORTFOLIO
The MainStay VP Capital Appreciation Portfolio seeks long-term growth of
capital. It seeks to achieve its primary investment objective by maintaining
a flexible approach towards investing in various types of companies as well
as types of securities depending upon the economic environment and the
relative attractiveness of the various securities markets. Generally, the
Portfolio will seek to invest in securities issued by companies with
investment characteristics such as participation in expanding markets,
increasing unit sales volume, growth in revenues and earnings per share
superior to that of the average common stocks comprising indices such as the
Standard & Poor's 500 Composite Price Index ("S&P 500") and increasing return
on investment. Dividend income, if any, is a consideration incidental to the
Portfolio's objective of growth of capital.
THE MAINSTAY VP CASH MANAGEMENT PORTFOLIO
The MainStay VP Cash Management Portfolio seeks as high a level of current
income as is consistent with preservation of capital and maintenance of
liquidity. It invests primarily in short-term U.S. Government Securities,
obligations of banks, commercial paper, short-term corporate obligations and
obligations of U.S. and non-U.S. issuers denominated in U.S. dollars. An
investment in the MainStay VP Cash Management Portfolio is neither insured
nor guaranteed by the U.S. Government, and there can be no assurance that the
Portfolio will be able to maintain a stable net asset value of $1.00 per
share.
THE MAINSTAY VP CONVERTIBLE PORTFOLIO
The MainStay VP Convertible Portfolio seeks capital appreciation together
with current income. The Portfolio will invest primarily in convertible
securities consisting of bonds, debentures, corporate notes, preferred stocks
or other securities which are convertible into common stocks. Certain of the
Portfolio's investments have speculative characteristics, as further
discussed in the MainStay VP Series Fund prospectus.
THE MAINSTAY VP GOVERNMENT PORTFOLIO
The MainStay VP Government Portfolio seeks a high level of current income,
consistent with safety of principal. It will invest primarily in U.S.
Government Securities which include U.S. Treasury obligations and obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. The U.S. Government securities purchased for this
Portfolio, but not the shares of the Portfolio themselves, are issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
THE MAINSTAY VP HIGH YIELD CORPORATE BOND PORTFOLIO
The MainStay VP High Yield Corporate Bond Portfolio seeks maximum current
income through investment in a diversified portfolio of high yield, high risk
debt securities. This Portfolio seeks to achieve its primary objective by
investment in a diversified portfolio of high yield debt
21
<PAGE>
securities which are ordinarily in the lower rating categories of recognized
rating agencies that is, rated Baa to B by Moody's Investors Services, Inc.
("Moody's") or BBB to B by Standard & Poor's ("S&P"). Securities rated lower
than Baa by Moody's or BBB by S&P, or, if not rated, of equivalent quality,
are sometimes referred to as "high yield" securities or "junk bonds." The
potential for high yield is accompanied by higher risk. Certain of the
Portfolio's investments have speculative characteristics, as further
discussed in the MainStay VP Series Fund Prospectus. Capital appreciation is
a secondary objective which will be sought only when consistent with this
Portfolio's primary objective.
THE MAINSTAY VP INTERNATIONAL EQUITY PORTFOLIO
The MainStay VP International Equity Portfolio seeks long-term growth of
capital by investing in a portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective. In pursuing its
investment objective, the Portfolio will seek to invest in securities that
provide the potential for strong return but that do not, in MacKay-Shields'
judgment, present undue or imprudent risk. The Portfolio pursues its
objectives by investing its assets in a diversified portfolio of common
stocks, preferred stocks, warrants and comparable equity securities. Foreign
investing involves certain risks which are discussed in greater detail in the
MainStay VP Series Fund prospectus.
THE MAINSTAY VP TOTAL RETURN PORTFOLIO
The MainStay VP Total Return Portfolio seeks to realize current income
consistent with reasonable opportunity for future growth of capital and
income. The Portfolio maintains a flexible approach by investing in a broad
range of securities, which may be diversified by company, by industry and by
type. The Portfolio may invest in common stocks, convertible securities,
warrants and fixed-income securities, such as bonds, preferred stocks and
other debt obligations, including money market instruments.
THE MAINSTAY VP VALUE PORTFOLIO
The MainStay VP Value Portfolio seeks maximum long-term total return from
a combination of capital growth and income. It seeks to achieve this
objective by following flexible investment policies emphasizing investment in
common stocks which are, in the opinion of MacKay-Shields, undervalued at the
time of purchase. This Portfolio will normally invest in dividend-paying
common stocks that are listed on a national securities exchange or traded in
the over-the-counter market, but may also invest in non-dividend paying
stocks in accordance with MacKay-Shields' judgment.
THE MAINSTAY VP BOND PORTFOLIO
The MainStay VP Bond Portfolio seeks the highest income over the long-term
consistent with preservation of principal. It will invest primarily in
fixed-income debt securities of an investment grade, but may also invest in
lower-rated securities, convertible debt, and preferred and convertible
preferred stock.
THE MAINSTAY VP GROWTH EQUITY PORTFOLIO
The MainStay VP Growth Equity Portfolio seeks long-term growth of capital,
with income as a secondary consideration. It will invest principally in
common stock (and securities convertible into, or with rights to purchase,
common stock) of well-established, well-managed companies which appear to
have better than average growth potential.
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<PAGE>
THE MAINSTAY VP INDEXED EQUITY PORTFOLIO
The MainStay VP Indexed Equity Portfolio seeks to provide investment
results that correspond to the total return performance (reflecting
reinvestment of dividends) of common stocks in the aggregate, as represented
by the S&P 500. Using a full replication method, the Portfolio invests in all
500 stocks in the S&P 500 in the same proportion as their representation in
the S&P 500. The S&P 500 is an unmanaged index considered representative of
the U.S. stock market. The MainStay VP Indexed Equity Portfolio is neither
sponsored by nor affiliated with the S&P 500.
THE ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO
The Alger American Small Capitalization Portfolio seeks long-term capital
appreciation. Except during temporary defensive periods, the Portfolio
invests at least 65% of its total assets in equity securities of companies
that, at the time of purchase of the securities, have total market
capitalization within the range of companies included in the Russell 2000
Growth Index or the S&P Small Capitalization 600 Index, updated quarterly.
Both indexes are broad indexes of small capitalization stocks. The Portfolio
may invest up to 35% of its total assets in equity securities of companies
that, at the time of purchase, have total market capitalization outside this
combined range and in excess of that amount (up to 100% of its assets) during
temporary defensive periods.
THE CALVERT SOCIALLY RESPONSIBLE PORTFOLIO
The Calvert Socially Responsible Portfolio seeks to achieve a total return
above the rate of inflation through an actively managed nondiversified
portfolio of common and preferred stocks, bonds and money market instruments
which offer income and capital growth opportunity and that satisfy the social
concern criteria established for this Portfolio.
THE FIDELITY VIP II: CONTRAFUND PORTFOLIO
The Fidelity VIP II: Contrafund Portfolio seeks long term capital
appreciation. The Portfolio will normally invest in common stock or
securities convertible into common stock of companies believed to be
undervalued due to an overly pessimistic appraisal by the public. This
Portfolio also has the flexibility to invest in any type of security that may
produce capital appreciation.
THE FIDELITY VIP: EQUITY-INCOME PORTFOLIO
The Fidelity VIP: Equity-Income Portfolio seeks reasonable income by
investing primarily in income producing equity securities. Its goal is to
achieve a yield in excess of the composite yield of the S&P 500. At least 65%
of this Portfolio will be invested in income producing common or preferred
stock. The remainder will normally be invested in convertible and
non-convertible debt obligations.
THE JANUS ASPEN BALANCED PORTFOLIO
The Janus Aspen Balanced Portfolio seeks long-term capital growth,
consistent with preservation of capital and balanced by current income. It is
a diversified Portfolio that, under normal circumstances, pursues its
objective by investing 40 to 60% of its assets in securities selected
primarily for their growth potential and 40 to 60% of its assets in
securities selected primarily for their income potential. The Portfolio
normally invests at least 25% of its assets in fixed-income senior
securities, which include debt securities and preferred stock.
23
<PAGE>
THE JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
The Janus Aspen Worldwide Growth Portfolio seeks long-term growth of
capital in a manner consistent with the preservation of capital. It invests
in a diversified portfolio of common stocks of foreign and domestic issuers.
The Portfolio has the flexibility to invest on a worldwide basis in companies
and organizations of any size, regardless of country of organization or place
of principal business activity. The Portfolio normally invests in issuers
from at least five different countries, including the United States. The
Portfolio may at times invest in fewer than five countries or even in a
single country.
THE MORGAN STANLEY EMERGING MARKETS EQUITY PORTFOLIO
The Morgan Stanley Emerging Markets Equity Portfolio seeks long-term
capital appreciation by investing primarily in common and preferred stocks,
convertible securities, rights and warrants to purchase common stocks,
sponsored and unsponsored ADR's and other equity securities of emerging
market country issuers. Under normal circumstances, at least 65% of the
Portfolio's total assets will be invested in emerging market countries in
which the Portfolio's investment adviser believes the economies are
developing strongly and in which the markets are becoming more sophisticated.
---------
Additional information concerning the Funds, investment objectives and
policies of the Portfolios, the risks associated with such objectives and
policies, investment advisory services and charges can be found in the
current prospectuses for the Funds, each of which is attached to this
prospectus. The prospectuses of the Funds should be read carefully before any
decision is made concerning the allocation of Premiums to an Investment
Division.
The Funds' shares may also be available to certain separate accounts
funding variable life insurance policies offered by NYLIAC. This is called
"mixed funding." Shares of The Alger American Fund, the Acacia Fund, the
Fidelity Funds, the Janus Aspen Series and the Morgan Stanley Fund may also
be available to separate accounts of insurance companies unaffiliated with
NYLIAC and, in certain instances, to qualified plans. This is called "shared
funding." Although we do not anticipate any inherent difficulties arising
from mixed and shared funding, it is theoretically possible that, due to
differences in tax treatment or other considerations, the interests of owners
of various contracts participating in the Funds might at some time be in
conflict. The Board of Directors/Trustees of each Fund, each Fund's
investment advisers and NYLIAC are required to monitor events to identify any
material conflicts that arise from the use of the Funds for mixed and shared
funding. For more information about the risks of mixed and shared funding,
please refer to the relevant Fund prospectus.
NYLIAC retains the right, subject to any applicable law, to make additions
to, deletions from, or substitutions for, the Portfolio shares held by any
Investment Division. NYLIAC reserves the right to eliminate the shares of any
of the Portfolios and to substitute shares of another portfolio of the Funds,
or of another registered open-end management investment company, if the
shares of the Portfolios are no longer available for investment or, if in
NYLIAC's judgment, investment in any Portfolio would become inappropriate in
view of the purposes of the Separate Account. To the extent required by the
1940 Act, substitutions of shares attributable to a Policyowner's interest in
an Investment Division will not be made until the Policyowner has been
notified of the change.
THE FIXED ACCOUNT
The Fixed Account is supported by the assets in the General Account.
NYLIAC has sole discretion to invest the assets of the Fixed Account subject
to applicable law. An interest in the
24
<PAGE>
Fixed Account is not registered under the Securities Act of 1933, and the
Fixed Account is not registered as an investment company under the 1940 Act.
Accordingly, neither the Fixed Account nor any interests therein are
generally subject to the provisions of these statutes, and NYLIAC has been
advised that the staff of the SEC has not reviewed the disclosures in this
prospectus relating to the Fixed Account. These disclosures regarding the
Fixed Account may, however, be subject to certain applicable provisions of
the federal securities laws relating to the accuracy and completeness of
statements made in prospectuses.
INTEREST CREDITING.
Any amounts in the Fixed Account are credited with interest using a fixed
interest rate, which we declare periodically. We will set this rate in
advance at least annually. This rate will never be less than 4% per year.
Interest accrues daily and is credited on each Monthly Deduction Day. All Net
Premiums applied to, and amounts transferred to, the Fixed Account receive
the rate in effect at that time.
TRANSFERS TO INVESTMENT DIVISIONS.
In each Policy Year, you may make one transfer from the Fixed Account to
the Investment Divisions, subject to the following three conditions:
1. Maximum Transfer. An amount not greater than 10% of the Fixed Account
Value at the beginning of the Policy Year may be transferred during
that Policy Year. During the retirement year only, however, (the Policy
Year following the Insured's 65th birthday, the date you indicate in
the application or another date if we approve), the 10% maximum
transfer limitation does not apply.
2. Minimum Transfer. The minimum amount that may be transferred is $500,
unless we agree otherwise.
3. Minimum Remaining Value. The Fixed Account Value remaining after the
transfer must be at least $500. If the remaining Fixed Account Value
would be less than $500, that amount must be included in the transfer.
Transfer requests must be in writing on a form approved by NYLIAC.
INVESTMENT RETURN
The investment return of a Policy is based on:
o the Accumulation Units held in each Investment Division for that
Policy;
o the investment experience of each Investment Division as measured by
its actual net rate of return;
o the interest rate credited on amounts held in the Fixed Account; and
o the interest rate credited on amounts held in the Loan Account, if any.
The investment experience of an Investment Division reflects increases or
decreases in the net asset value of the shares of the underlying Portfolio,
any dividend or capital gains distributions declared by the Funds, and any
charges against the assets of the Investment Division. This investment
experience is determined at the end of each Valuation Period.
25
<PAGE>
SECTION V:
GENERAL PROVISIONS OF THE POLICY
This section of the prospectus describes the general provisions of the
Policy, and is subject to the terms of the Policy. You may review a copy of
the Policy upon request.
PREMIUMS
While the Policy is in force, Premiums may be paid at any time while the
Insured is living and before the Policy Anniversary on which the Insured is
age 95. Subject to certain restrictions, Premiums can be paid at any interval
and by any method we make available. Premiums should be sent to our Premium
Remittance Center or to the address indicated for payment on the notice. The
Policyowner selects a Premium schedule in the Application and this amount,
along with the amount of the first Premium, is set forth on page 2 of the
Policy. You may elect not to make a planned Premium payment at any time.
You may also make other Premium payments that are not planned. If an
unplanned Premium payment would result in an increase in the Death Benefit
greater than the increase in the Cash Value, we reserve the right to require
proof of insurability before accepting that payment and applying it to the
Policy. We also reserve the right to limit the number and amount of any
unplanned Premiums.
There is no penalty if a planned Premium is not paid, since Premiums,
other than the first Premium, are not specifically required. Paying planned
Premiums, however, does not guarantee coverage for any period of time.
Instead, the duration of the Policy depends upon the Policy's Cash Surrender
Value, less any Policy Debt.
TERMINATION
If, on a Monthly Deduction Day, the Cash Surrender Value less any Policy
Debt is less than the amount of the charges to be deducted on the next
Monthly Deduction Day, the Policy will go into default status and will
continue for a late period of 62 days commencing with the current Monthly
Deduction Day. If we do not receive a Premium sufficient to take your Policy
out of default status before the end of the late period, the Policy will
lapse and there will be no Cash Value or Death Benefit.
NYLIAC will mail a notice to you at your last known address, and a copy to
the last known assignee on our records, at least 31 days before the end of
the late period. During the late period, the Policy remains in force. If the
Insured dies during the late period, we will pay the Death Benefit. However,
these proceeds will be reduced by the amount of any unpaid loan and the
amount of the charges to be deducted on each Monthly Deduction Day from the
beginning of the late period through the Policy month in which the Insured
dies.
DEATH BENEFIT UNDER THE POLICY
The Death Benefit is the amount payable to the named Beneficiary when the
Insured dies. Upon receiving due proof of death at our Service Office, we
will pay the Beneficiary the Death Benefit determined as of the date the
Insured dies. All or part of the Death Benefit can be paid in cash or applied
under one or more of our payment options described under "Section VI:
Additional Information--Payment Options."
The amount of the Death Benefit is determined by whether you have chosen
Life Insurance Benefit Option 1 or Life Insurance Benefit Option 2. See "Life
Insurance Benefit Options" under Definition of Terms. Added to the amount
determined by the selected Life
26
<PAGE>
Insurance Benefit Option is the value of any additional benefits provided by
rider. We pay interest on the Death Benefit from the date of death to the
date the Death Benefit is paid or a payment option becomes effective. The
interest rate equals the rate determined under the Interest Payment Option as
described in "Section VI: Additional Information--Payment Options." We
subtract any outstanding Policy Debt and any charges incurred but not yet
deducted, and then credit the interest.
Beginning on the Policy Anniversary on which the Insured is age 95, the
Face Amount, as shown on page 2 of the Policy, will no longer apply. Instead,
the life insurance benefit under the Policy will equal the Cash Value, less
outstanding Policy Debt. Also, no further monthly deductions will be made for
cost of insurance.
SELECTION OF LIFE INSURANCE BENEFIT TABLE.
Under either Life Insurance Benefit Option, the Death Benefit cannot be
less than the Policy's Cash Value times a percentage determined from the
appropriate Code Section 7702 table. The Policyowner may choose either the
"Corridor" table or the "CVAT" table, which are described below, before the
Policy is issued. The Death Benefit will vary depending on which table is
selected. If the Policyowner does not choose a table, the Corridor table will
be used. Once the Policy is issued, the Policyowner may not change to a
different table.
Under Code Section 7702, a Policy will be treated as life insurance for
federal tax purposes if at all times it meets either (1) a "cash value
accumulation" test or (2) both a "guideline premium" test and a "cash value
corridor" test. The CVAT table is designed to meet the cash value
accumulation test, while the Corridor table is designed to meet the cash
value corridor test. A Policy using the Corridor table must also satisfy the
"guideline premium" test of Code Section 7702. This test limits the amount of
Premiums that may be paid into the Policy.
CORRIDOR TABLE
<TABLE>
<CAPTION>
INSURED'S AGE INSURED'S AGE
ON POLICY % OF ON POLICY % OF
ANNIVERSARY CASH VALUE ANNIVERSARY CASH VALUE
- --------------- ------------ --------------- ------------
<S> <C> <C> <C>
0-40 250 61 128
41 243 62 126
42 236 63 124
43 229 64 122
44 222 65 120
45 215 66 119
46 209 67 118
47 203 68 117
48 197 69 116
49 191 70 115
50 185 71 113
51 178 72 111
52 171 73 109
53 164 74 107
54 157 75-90 105
55 150 91 104
56 146 92 103
57 142 93 102
58 138 94 101
59 134 95 & Over 100
60 130
</TABLE>
27
<PAGE>
CVAT TABLE
<TABLE>
<CAPTION>
INSURED'S AGE INSURED'S AGE
ON POLICY % OF ON POLICY % OF
ANNIVERSARY CASH VALUE ANNIVERSARY CASH VALUE
- ------------- -------------------------- ------------- --------------------------
MALE FEMALE UNISEX MALE FEMALE UNISEX
------ -------- -------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
18 691 830 715 57 207 240 213
19 671 803 694 58 202 233 207
20 652 778 674 59 196 226 202
21 634 753 654 60 191 220 197
22 615 729 635 61 187 214 192
23 597 705 616 62 182 208 187
24 579 683 597 63 178 202 182
25 564 661 579 64 173 197 178
26 544 639 561 65 169 191 174
27 527 618 543 66 166 186 170
28 511 598 526 67 162 182 166
29 494 579 509 68 159 177 162
30 478 560 493 69 155 172 159
31 463 541 477 70 152 168 155
32 448 524 461 71 149 164 152
33 433 507 446 72 146 160 149
34 419 490 432 73 143 156 146
35 405 474 417 74 141 152 143
36 392 458 404 75 138 149 141
37 380 443 391 76 136 146 138
38 367 429 378 77 134 143 136
39 356 415 366 78 132 140 134
40 344 402 354 79 130 137 132
41 333 389 343 80 128 134 130
42 323 377 332 81 126 132 128
43 313 365 322 82 125 130 126
44 303 354 312 83 123 127 124
45 294 343 303 84 122 125 123
46 285 333 293 85 120 123 121
47 276 323 285 86 119 121 120
48 268 313 276 87 118 119 118
49 260 303 268 88 116 118 117
50 253 294 260 89 115 116 115
51 245 286 252 90 113 114 114
52 238 277 245 91 112 112 112
53 231 269 238 92 110 110 110
54 225 261 231 93 107 108 108
55 219 254 225 94 104 104 104
56 213 247 219 95 & Over 100 100 100
</TABLE>
28
<PAGE>
THE EFFECT OF INVESTMENT PERFORMANCE ON THE DEATH BENEFIT.
Positive investment experience in the Investment Divisions may result in a
Death Benefit that will be greater than the Face Amount, but negative
investment experience will never result in a Death Benefit that will be less
than the Face Amount, so long as the Policy remains in force.
Example 1: The following example shows how the Death Benefit varies as a
result of investment performance on a Policy, assuming that Life Insurance
Benefit Option 1 and the Corridor Table have been selected, and assuming age
at death is 45:
<TABLE>
<CAPTION>
POLICY A POLICY B
---------- ----------
<S> <C> <C>
Face Amount ................................ $100,000 $100,000
Cash Value on Date of Death ................ $ 50,000 $ 40,000
Code Section 7702 Life Insurance Percentage
on Date of Death .......................... 215% 215%
</TABLE>
The Death Benefit will equal the greater of the $100,000 Face Amount or the
Cash Value times the Code Section 7702 Life Insurance Percentage. For Policy
A, the Death Benefit will equal $107,500. For Policy B, the Death Benefit
will equal the $100,000 Face Amount.
Example 2: The following example shows how the Death Benefit varies as a
result of investment performance on a Policy, assuming that Life Insurance
Benefit Option 1 and the CVAT Table have been selected and that the
Policyowner is a male, and assuming age at death is 45:
<TABLE>
<CAPTION>
POLICY A POLICY B
---------- ----------
<S> <C> <C>
Face Amount ................................ $100,000 $100,000
Cash Value on Date of Death ................ $ 50,000 $ 30,000
Code Section 7702 Life Insurance Percentage
on Date of Death .......................... 294% 294%
</TABLE>
The Death Benefit will equal the greater of the $100,000 Face Amount or the
Cash Value times the Code Section 7702 Life Insurance Percentage. For Policy
A, the Death Benefit will equal $147,000. For Policy B, the Death Benefit
will equal the $100,000 Face Amount.
FACE AMOUNT CHANGES.
You can apply in writing to have the Face Amount of your Policy increased.
In addition, on or after the first Policy Anniversary, you can apply in
writing to have the Face Amount of your Policy decreased. Face Amount changes
may be made while the Insured is living, but only if your Policy will
continue to qualify as life insurance under Code Section 7702 after the
change is made. Requested decreases and increases in Face Amount will cause a
corresponding change in the amount of your surrender charge premium.
The amount of an increase in Face Amount is subject to NYLIAC's maximum
retention limits. Evidence of insurability which is satisfactory to us is
required for an increase. If this evidence results in a change of
underwriting class, a new Policy will be issued for the amount of the
increase. We reserve the right to limit increases. Any increase will take
effect on the Monthly Deduction Day on or after the Business Day we approve
your request for the increase. An increase in Face Amount may increase the
cost of insurance charge.
Decreases in coverage may be requested. The Face Amount will be reduced
and the appropriate surrender charge will be deducted from the Cash Value.
See "Section III: Charges Under the Policy--Surrender Charge." A decrease in
Face Amount is effective on the Monthly Deduction Day on or after the
Business Day we receive your request for the decrease. Decreases are subject
to the Minimum Base Face Amount of $25,000.
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<PAGE>
LIFE INSURANCE BENEFIT OPTION CHANGES.
On or after the first Policy Anniversary, you can change the Life
Insurance Benefit Option of the Policy. Any change of Option will take effect
on the Monthly Deduction Day on or after the Business Day we approve your
signed request. If you change from Option 1 to Option 2, the Face Amount of
the Policy will be decreased by the Cash Value. No surrender charge will
apply to this automatic decrease in Face Amount. If you change from Option 2
to Option 1, the Face Amount of the Policy will be increased by the Cash
Value. The surrender charge premium will not be affected by changes in the
Life Insurance Benefit Option. See "Section III: Charges Under the
Policy--Surrender Charge."
CASH VALUE AND CASH SURRENDER VALUE
CASH VALUE.
After the Free Look Period, the Cash Value of the Policy is the sum of the
Accumulation Value in the Separate Account, the Fixed Account Value and the
Loan Account Value. Subsequent Net Premiums are allocated among the Fixed
Account and the Investment Divisions according to the allocation percentages
requested in the Application, or as subsequently changed by the Policyowner.
A portion of your Cash Value is allocated to the Loan Account if you take a
loan under your Policy. See "Section V: General Provisions of the
Policy--Loans." The Cash Value also reflects various charges. See "Section
III: Charges Under the Policy."
CASH SURRENDER VALUE.
The Policy may be surrendered for its Cash Surrender Value, less any
Policy Debt, at any time before the Insured dies. Unless a later effective
date is selected, the surrender is effective on the Business Day we receive
the Policy and a signed surrender request in proper form at our Service
Office. The Cash Surrender Value is the Cash Value, less any surrender
charges.
TRANSFERS
All or part of the Cash Value may be transferred among Investment
Divisions or from an Investment Division to the Fixed Account. Transfers may
also be made from the Fixed Account to the Investment Divisions in certain
situations. See "Section IV: The Separate Account, the Funds and the Fixed
Account--The Fixed Account."
The minimum amount that may be transferred from one Investment Division to
another Investment Division or to the Fixed Account, is the lesser of (i)
$500 or (ii) the value of the Accumulation Units in the Investment Division
from which the transfer is being made. If, after the transfer, the value of
the remaining Accumulation Units in an Investment Division or the Fixed
Account Value would be less than $500, that amount will be included in the
transfer. There is no charge for the first twelve transfers in any one Policy
Year. NYLIAC reserves the right to charge $30 for each transfer in excess of
twelve per year. This charge will be applied on a pro-rata basis to the
Allocation Alternatives to which the transfer is being made.
Transfer requests must be made in writing on a form approved by NYLIAC.
Transfers to or from Investment Divisions will be made based on the
Accumulation Unit values on the Business Day on which NYLIAC receives the
transfer request.
30
<PAGE>
PARTIAL WITHDRAWALS
The owner of a Policy may make a Partial Withdrawal of the Policy's Cash
Value, at any time while the Insured is living. The minimum Partial
Withdrawal is $500, and at least $500 of Cash Surrender Value, plus any
Policy Debt, must remain following the withdrawal. The Partial Withdrawal
will be made from the Fixed Account and the Investment Divisions in
proportion to the amount in each, or only from the Investment Divisions in an
amount or ratio that you tell us. There will be a processing charge equal to
the lesser of $25 or 2% of the amount withdrawn applied to any Partial
Withdrawal. This fee will be deducted from the remaining balance of the Fixed
Account and/or Investment Divisions based on the withdrawal allocation or, if
the fee amount exceeds the remaining balance, it will be deducted from the
Fixed Account and/or Investment Divisions in proportion to the amount in
each.
A Partial Withdrawal will be prohibited if it would cause the Face Amount
to drop below $25,000. If Life Insurance Benefit Option 1 is in effect, the
Face Amount will be reduced by the amount of the Partial Withdrawal. If Life
Insurance Benefit Option 2 is in effect, the Face Amount will not be changed
by the amount of the Partial Withdrawal. A Partial Withdrawal will not be
permitted during the first Policy Year if Life Insurance Benefit Option 1 is
in effect.
LOANS
Using the Policy as sole security, you can borrow up to the loan value of
the Policy. The loan value on any given date is equal to 90% of the Cash
Surrender Value, less any Policy Debt.
LOAN ACCOUNT.
The Loan Account secures Policy Debt and is part of our General Account.
When a loan is requested, an amount is transferred to the Loan Account from
the Investment Divisions and the Fixed Account (on a pro-rata basis unless
you request otherwise) equal to: (1) the requested loan amount; plus (2) any
Policy Debt; plus (3) the interest to the next Policy Anniversary on the
requested loan amount and on any Policy Debt; minus (4) the amount in the
Loan Account. On each Policy Anniversary, the Loan Account will be increased
by an amount equal to the loan interest to the next Policy Anniversary on any
Policy Debt. The effective date of the loan is the Business Day we make
payment.
The Loan Account Value will never be less than (a) plus (b) minus (c),
where (a) is the amount in the Loan Account on the prior Policy Anniversary,
(b) is the amount of any loan taken since the prior Policy Anniversary and
(c) is any loan amount repaid since the prior Policy Anniversary. On each
Policy Anniversary, if the amount in the Loan Account exceeds the amount of
any outstanding loans plus interest to the next Policy Anniversary, the
excess will be transferred from the Loan Account to the Investment Divisions
and to the Fixed Account. Amounts transferred will first be transferred to
the Fixed Account up to an amount equal to the total amounts transferred from
the Fixed Account to the Loan Account. Any subsequent amounts transferred
will be allocated according to your Premium allocation in effect at the time
of transfer unless you tell us otherwise.
The Loan Account Value earns interest at a rate of not less than the
greater of 4% per year and the effective annual loan interest rate less 2%.
Interest accrues daily and is credited on each Monthly Deduction Day.
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LOAN INTEREST.
Unless we set a lower rate for any period, the effective annual loan
interest rate is 6%, payable in arrears. Loan interest accrues each day and
is compounded annually. Loan interest not paid as of the Policy Anniversary
becomes part of the loan. An amount may need to be transferred to the Loan
Account to cover this increased loan amount.
On the date of death, the date the Policy ends, the date of a loan
repayment or on any other date we specify, we will make any adjustment in the
loan that is required to reflect any interest paid for any period beyond that
date.
If we have set a rate lower than 6% per year, any subsequent increase in
the interest rate shall be subject to the following conditions:
(1) The effective date of any increase in the interest rate for loans
shall not be earlier than one year after the effective date of the
establishment of the previous rate.
(2) The amount by which the interest rate may be increased shall not
exceed one percent per year, but the interest shall in no event ever
exceed 6%.
(3) We will give notice of the interest rate in effect when a loan is made
and when sending notice of loan interest due.
(4) If a loan is outstanding 40 days or more before the effective date of
an increase in the interest rate, we will notify you of that increase
at least 30 days prior to the effective date of the increase.
(5) We will give notice of any increase in the interest rate when a loan
is made during the 40 days before the effective date of the increase.
REPAYMENT.
All or part of an unpaid loan can be repaid before the Insured's death or
before the Policy is surrendered. Excess amounts in the Loan Account
(resulting from either loan repayments or interest accrued) will be
transferred in accordance with the procedures set forth in "Loan Account"
above.
If a loan is outstanding when the life insurance or surrender proceeds
become payable, we will deduct the amount of any Policy Debt from these
proceeds. In addition, if an unpaid loan exceeds the Cash Surrender Value of
the Policy, we will mail a notice to you at your last known address, and a
copy to the last known assignee on our records. All insurance will end 31
days after the date on which we mail that notice to you if the excess of the
unpaid loan over the Cash Surrender Value is not paid within that 31 days.
FREE LOOK PROVISION
The Policy contains a provision that permits cancellation by returning it
to our Service Office, or to the registered representative through whom it
was purchased, at any time during the Free Look Period. The Policyowner will
then receive from us the greater of the Policy's Cash Value as of the date
the Policy is returned or the Premiums paid, less loans and Partial
Withdrawals.
EXCHANGE PRIVILEGE
At any time within 24 months of the Issue Date, the Policyowner may
exchange the Policy for a policy on a permanent plan of life insurance on the
Insured which we are offering for this
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purpose. NYLIAC will not require evidence of insurability. Upon an exchange
of a Policy, all riders and benefits will end unless we agree otherwise or
unless required under state law. The replacement policy will have the same
Policy Date, issue age, risk classification and initial Face Amount as the
original Policy, but will not offer variable investment options such as the
Investment Divisions.
In order to exchange the Policy, we will require: (a) that the Policy be
in effect on the date of exchange; (b) repayment of any Policy Debt; and (c)
an adjustment, if any, for differences in premiums and cash values under the
Policy and the new policy. On the Business Day we receive a written request
for an exchange, the Accumulation Value of the Policy will be transferred
into the Fixed Account, where it will remain until these requirements are
met. The date of exchange will be the later of: (a) the Business Day you send
us the Policy along with a signed request; or (b) the Business Day we receive
at our Service Office, or such other location that we indicate to you in
writing, the necessary payment for the exchange, if any.
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SECTION VI:
ADDITIONAL INFORMATION
DIRECTORS AND PRINCIPAL OFFICERS OF NYLIAC
DIRECTORS: POSITIONS DURING LAST FIVE YEARS:
Seymour Sternberg ............. Chairman of the Board, Chief Executive
Officer and President of New York Life from
April 1997 to date; President and Chief
Operating Officer of New York Life from
October 1995 to April 1997; Vice Chairman
and President Elect from February 1995 to
October 1995; Executive Vice President prior
thereto. President of NYLIAC from November
1995 to date.
Jay S. Calhoun, III ........... Senior Vice President and Treasurer of New
York Life from March 1997 to date; Vice
President and Treasurer from November 1992
to March 1997; Vice President and Associate
Treasurer from March 1992 to November 1992;
Corporate Vice President prior thereto. Vice
President and Treasurer of NYLIAC from
January 1993 to date.
Richard M. Kernan, Jr. ........ Executive Vice President and Chief
Investment Officer of New York Life from
March 1991 to date.
Robert D. Rock ................ Senior Vice President in charge of the
Individual Annuity Department of New York
Life from March 1992 to date; Vice President
in charge of the Individual Annuity
Department from November 1991 to March 1992;
Vice President prior thereto. Senior Vice
President of NYLIAC from April 1992 to date;
Vice President prior thereto.
Frederick J. Sievert .......... Vice Chairman and Executive Vice President
of New York Life from January 1997 to date;
Executive Vice President from February 1995
to December 1996; Senior Vice President and
Chief Financial Officer--Individual
Operations prior thereto. Executive Vice
President of NYLIAC from November 1995 to
date; Senior Vice President from June 1992
to November 1995.
Stephen N. Steinig ............ Senior Vice President and Chief Actuary of
New York Life from February 1994 to date;
Chief Actuary and Controller prior thereto.
Senior Vice President and Chief Actuary of
NYLIAC from May 1991 to date.
OFFICERS:
Patrick G. Colloton ........... Vice President of New York Life from April
1996 to date. Vice President of NYLIAC from
November 1996 to date. Senior Vice
President, Individual Strategic Business
Unit, Business Men's Assurance Company,
prior thereto.
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Michael Gallo ................. Senior Vice President in charge of the
Individual Life Department of New York Life
from July 1995 to date; Senior Vice
President--Northeastern Agencies from
February 1994 to July 1995; Vice President
prior thereto. Senior Vice President of
NYLIAC from August 1995 to date.
Solomon Goldfinger ............ Senior Vice President in charge of Financial
Management of New York Life from July 1995
to date; Senior Vice President in charge of
the Individual Life Department from March
1992 to July 1995; Vice President and
Actuary in charge of the Individual Life
Department prior thereto. Senior Vice
President of NYLIAC from April 1992 to date;
Vice President from February 1992 to April
1992; Vice President and Actuary prior
thereto.
Maryann L. Ingenito ........... Vice President of New York Life from April
1990 to date. Vice President and Controller
(Principal Accounting Officer) of NYLIAC
from December 1994 to date; Vice President
and Assistant Controller prior thereto.
Lawrence R. Stoehr ............ Vice President of New York Life from March
1993 to date; Corporate Vice President prior
thereto. Vice President of NYLIAC from July
1994 to date; Corporate Vice President prior
thereto.
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FEDERAL INCOME TAX CONSIDERATIONS
THE DISCUSSION CONTAINED HEREIN IS GENERAL IN NATURE, IS NOT AN EXHAUSTIVE
DISCUSSION OF ALL TAX QUESTIONS THAT MIGHT ARISE UNDER THE POLICIES, AND IS
NOT INTENDED AS TAX ADVICE. NO ATTEMPT IS MADE TO CONSIDER ANY APPLICABLE
STATE OR OTHER TAX LAWS AND NO REPRESENTATION IS MADE AS TO THE LIKELIHOOD OF
CONTINUATION OF CURRENT FEDERAL INCOME TAX LAWS AND TREASURY REGULATIONS OR
OF CURRENT INTERPRETATIONS OF THE INTERNAL REVENUE SERVICE.
WHILE NYLIAC RESERVES THE RIGHT TO MAKE CHANGES IN THE POLICY TO ASSURE
THAT IT CONTINUES TO QUALIFY AS LIFE INSURANCE FOR TAX PURPOSES, NYLIAC
CANNOT MAKE ANY GUARANTEE REGARDING THE FUTURE TAX TREATMENT OF ANY POLICY.
FOR COMPLETE INFORMATION ON THE IMPACT OF CHANGES WITH RESPECT TO THE POLICY
AND FEDERAL AND STATE CONSIDERATIONS, A QUALIFIED TAX ADVISOR SHOULD BE
CONSULTED.
The ultimate effect of federal income taxes on values under the Policy and
on the economic benefit to the Policyowner or Beneficiary depends upon
NYLIAC's tax status, upon the terms of the Policy and upon the tax status of
the individual concerned.
TAX STATUS OF NYLIAC AND THE SEPARATE ACCOUNT.
NYLIAC is taxed as a life insurance company under Subchapter L of the
Code. The Separate Account is not a separate taxable entity from NYLIAC and
its operations are taken into account by NYLIAC in determining its income tax
liability. All investment income and realized net capital gains on the assets
of the Separate Account are reinvested and taken into account in determining
Policy Cash Values and are automatically applied to increase the book
reserves associated with the Policies. Under existing federal income tax law,
neither the investment income nor any net capital gains of the Separate
Account are taxed to NYLIAC to the extent those items are applied to increase
reserves associated with the Policies.
CHARGES FOR TAXES.
NYLIAC imposes a Federal Tax Charge equal to 1.25% of Premiums received
under the Policy to compensate NYLIAC for the federal income tax liability it
incurs under Code Section 848 by reason of its receipt of Premiums under the
Policy. NYLIAC believes that this charge is reasonable in relation to the
increased tax burden it incurs as a result of Section 848. No other charge is
currently made to the Separate Account for federal income taxes of NYLIAC
that may be attributable to the Separate Account. Periodically, NYLIAC
reviews the appropriateness of charges to the Separate Account for NYLIAC's
federal income taxes, and in the future, a charge may be made for federal
income taxes incurred by NYLIAC that are attributable to the Separate
Account. In addition, depending on the method of calculating interest on
Policy Values allocated to the Fixed Account (see preceding section), a
charge may also be imposed for the Policy's share of NYLIAC's federal income
taxes attributable to the Fixed Account.
DIVERSIFICATION STANDARDS AND CONTROL ISSUES.
In addition to other requirements imposed by the Code, a Policy will
qualify as life insurance under the Code only if the diversification
requirements of Code Section 817(h) are satisfied by the Separate Account. To
assure that each Policy continues to qualify as life
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insurance for federal income tax purposes, NYLIAC intends to comply with Code
Section 817(h) and the Regulations thereunder for each Portfolio. To satisfy
these diversification standards, the Regulations generally require that on
the last day of each quarter of a calendar year: no more than 55% of the
value of a Separate Account's assets can be represented by any one
investment; no more than 70% can be represented by any two investments; no
more than 80% can be represented by any three investments; and no more than
90% can be represented by any four investments. For purposes of these rules,
all securities of the same issuer generally are treated as a single
investment, but each government agency or instrumentality is treated as a
separate issuer. In addition a "look-through" rule applies to treat a
pro-rata portion of each asset of each Portfolio as an asset of the Separate
Account.
The general diversification requirements of Code Section 817(h) are
modified with regard to assets of the Separate Account that are direct
obligations of the United States Treasury. Even if a separate account invests
only in United States Treasury Securities it will be treated as adequately
diversified under Code Section 817(h). In addition, for purposes of
determining whether its holdings of assets other than United States Treasury
Securities are adequately diversified, the generally applicable percentage
limitations are increased based on the value of a separate account's
investment in United States Treasury Securities. Notwithstanding this
modification of the general diversification requirements, however, the
investments of the Portfolios will be structured to comply with the general
diversification standards because they serve as investment vehicles for
certain variable annuity contracts that must comply with the general
standards.
In connection with its issuance of temporary regulations under Code
Section 817(h) in 1986, the Treasury Department announced that such temporary
regulations did not provide guidance concerning the extent to which
Policyowners could be permitted to direct their investments to particular
divisions of a separate account and that guidance on this issue would be
forthcoming. Regulations addressing this issue have not yet been issued or
proposed, and it is not clear, at this time, whether such regulations will
ever be issued or what such regulations might provide. If such regulations
were to be issued in the future, it is possible that the Policy might need to
be modified to comply with such regulations. For these reasons, NYLIAC
reserves the right to modify the Policy, as necessary, to prevent the
Policyowner from being considered the owner of the assets of the Separate
Account.
LIFE INSURANCE STATUS OF POLICY.
NYLIAC believes that the Policy meets the statutory definition of life
insurance under Code Section 7702 and that the Policyowner and Beneficiary of
any Policy will receive the same federal income tax treatment as that
accorded to owners and beneficiaries of fixed benefit life insurance
policies. Specifically, the Death Benefit under the Policy will be excludable
from the gross income of the Beneficiary subject to the terms and conditions
of Code Section 101(a)(1). (Death benefits under a "modified endowment
contract" as discussed below are treated in the same manner as death benefits
under life insurance contracts that are not so classified.)
In addition, unless the Policy is a "modified endowment contract," in
which case the receipt of any loan under the Policy may result in recognition
of income to the Policyowner, the Policyowner will not be deemed to be in
constructive receipt of the Cash Values, including increments thereon, under
the Policy until proceeds of the Policy are received upon a surrender of the
Policy or a Partial Withdrawal.
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MODIFIED ENDOWMENT CONTRACT STATUS.
A Policy will be a modified endowment contract if it satisfies the
definition of life insurance contained in the Internal Revenue Code, but it
either fails the additional "7-pay test" set forth in Code Section 7702A or
was received in exchange for a modified endowment contract. A Policy will
fail the 7-pay test if the accumulated amount paid under the contract at any
time during the first seven contract years exceeds the total premiums that
would have been payable under a policy providing for guaranteed benefits upon
the payment of seven level annual premiums. A Policy received in exchange for
a modified endowment contract will be taxed as a modified endowment contract
even if it would otherwise satisfy the 7-pay test.
While the 7-pay test is generally applied as of the time the policy is
issued, certain changes in the contractual terms of a Policy will require a
Policy to be retested to determine whether the change has caused the Policy
to become a modified endowment contract. For example, a reduction in death
benefits during the first seven contract years will cause the Policy to be
retested as if it had originally been issued with the reduced death benefit.
In addition, if a "material change" occurs at any time while the Policy is
in force, a new 7-pay test period will start and the Policy will need to be
retested to determine whether it continues to meet the 7-pay test. The term
"material change" generally includes increases in death benefits, but does
not include an increase in death benefits attributable to the payment of
premiums necessary to fund the lowest level of death benefits payable during
the first seven contract years, or which is attributable to the crediting of
interest with respect to such premiums.
Because the Policy provides for flexible Premiums, NYLIAC has instituted
procedures to monitor whether increases in the Death Benefit or additional
Premiums either cause the start of a new seven-year test period or cause the
Policy to be a modified endowment contract. All additional Premiums will be
considered in these determinations.
If you pay a Premium that exceeds the 7-pay limit, we will notify you and
give you the opportunity to prevent your Policy from becoming a modified
endowment contract by requesting that the excess Premium be returned to you.
If your Policy becomes a modified endowment contract, all distributions
(including loans) occurring in the year of failure and thereafter will be
subject to the rules for modified endowment contracts. A recapture provision
also applies to loans and distributions that are received in anticipation of
failing the 7-pay test. Under the Code, any distribution or loan made within
two years prior to the date that a Policy fails the 7-pay test is considered
to have been made in anticipation of the failure.
SURRENDERS AND PARTIAL WITHDRAWALS.
Upon a surrender of a Policy for its Cash Surrender Value, less any Policy
Debt, the Policyowner will recognize ordinary income for federal tax purposes
to the extent that the Cash Surrender Value exceeds the investment in the
contract (the total of all Premiums paid but not previously recovered plus
any other consideration paid for the Policy). The tax consequences of a
Partial Withdrawal from a Policy will depend upon whether the Partial
Withdrawal results in a reduction of future benefits under the Policy and
whether the Policy is a modified endowment contract.
If the Policy is not a modified endowment contract, the general rule is
that a Partial Withdrawal from a Policy is taxable only to the extent that it
exceeds the total investment in the contract. An exception to this general
rule applies, however, if a reduction of future benefits
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occurs during the first 15 years after a Policy is issued and there is a cash
distribution associated with that reduction. In such a case, Code Section
7702(f)(7) overrides the general rule and prescribes a formula under which
the Policyowner may be taxed on all or a part of the amount
distributed. After 15 years, the rule of Code Section 7702(f)(7) no longer
applies so that cash distributions from a Policy that is not a modified
endowment contract will not be subject to federal income tax, except to the
extent they exceed the total investment in the contract. NYLIAC suggests that
a Policyowner consult with a tax advisor in advance of a proposed decrease in
Face Amount or a Partial Withdrawal. In addition, any amounts distributed
under a "modified endowment contract" (including proceeds of any loan) are
taxable to the extent of any accumulated income in the Policy. In general,
the amount that may be subject to tax is the excess of the Cash Value (both
loaned and unloaned) over the previously unrecovered Premiums.
Under certain circumstances, a distribution under a modified endowment
contract (including a loan) may be taxable even though it exceeds the amount
of accumulated income in the Policy. This can occur because for purposes of
determining the amount of income received upon a distribution (or loan) from
a modified endowment contract, the Code requires the aggregation of all
modified endowment contracts issued to the same Policyowner by an insurer and
its affiliates within the same calendar year. Therefore, loans and
distributions from any one such Policy are taxable to the extent of the
income accumulated in all the modified endowment contracts required to be so
aggregated.
If any amount is taxable as a distribution of income under a modified
endowment contract (as a result of a policy surrender, a Partial Withdrawal
or a loan), it may also be subject to a 10% penalty tax under Code Section
72(v). Limited exceptions from the additional penalty tax are available for
certain distributions to individual Policyowners. The penalty tax will not
apply to distributions: (i) that are made on or after the date the taxpayer
attains age 59 1/2; or (ii) that are attributable to the taxpayer's becoming
disabled; or (iii) that are part of a series of substantially equal periodic
payments (made not less frequently than annually) made for the life or life
expectancy of the taxpayer.
LOANS AND INTEREST DEDUCTIONS.
NYLIAC also believes that under current law any loan received under the
Policy will be treated as Policy Debt of a Policyowner and that, unless the
Policy is a modified endowment contract, no part of any loan under a Policy
will constitute income to the Policyowner. If the Policy is a modified
endowment contract (see discussion above) loans will be fully taxable to the
extent of the income in the Policy (and in any other contracts with which it
must be aggregated) and could be subject to the additional 10 percent tax.
Code Section 264 imposes stringent limitations on the deduction of
interest paid or accrued on loans in connection with a Policy. In addition,
under the "personal" interest limitation provisions of Code Section 163, no
deduction is allowed for interest on any Policy loan if the proceeds are used
for personal purposes, even if the Policy and loan otherwise meet the
requirements of Code Section 264. The limitations on deductibility of
personal interest may not apply to disallow all or part of the interest
expense as a deduction if the loan proceeds are used for "trade or business"
or "investment" purposes. NYLIAC suggests consultation with a tax advisor for
further guidance.
CORPORATE ALTERNATIVE MINIMUM TAX.
Ownership of a Policy by a corporation may affect the Policyowner's
exposure to the corporate alternative minimum tax. In determining whether it
is subject to alternative minimum
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tax a corporate Policyowner must make two computations. First, the
corporation must take into account a portion of the current year's increase
in the "inside build up" or income on the contract gain in its
corporate-owned policies. Second, the corporation must take into account a
portion of the amount by which the Death Benefits received under any Policy
exceed the sum of (i) the premiums paid on that Policy in the year of death,
and (ii) the corporation's basis in the Policy (as measured for alternative
minimum tax purposes) as of the end of the corporation's tax year immediately
preceding the year of death.
EXCHANGES OR ASSIGNMENTS OF POLICIES.
A change of the Policyowner or the Insured or an exchange or assignment of
a Policy may have significant tax consequences depending on the
circumstances. For example, an assignment or exchange of a Policy may result
in taxable income to the transferring Policyowner. Further, Code Section
101(a) provides, subject to certain exceptions, that where a Policy has been
transferred for value, only the portion of the Death Benefit that is equal to
the total consideration paid for the Policy may be excluded from gross
income. For complete information with respect to Policy assignments and
exchanges, a qualified tax advisor should be consulted.
OTHER TAX ISSUES.
Federal estate and state and local estate, inheritance, and other tax
consequences of ownership or receipt of Policy proceeds depend on the
circumstances of each Policyowner or Beneficiary.
WITHHOLDING.
Under Code Section 3405, withholding is generally required with respect to
certain taxable distributions under insurance contracts. In the case of
periodic payments (payments made as an annuity or on a similar basis), the
withholding is at graduated rates (as though the payments were employee
wages). With respect to non-periodic distributions, the withholding is at a
flat rate of 10%. A policyholder can elect to have either non-periodic or
periodic payments made without withholding except where the Policyowner's tax
identification number has not been furnished to NYLIAC or the Internal
Revenue Service has notified NYLIAC that the tax identification number
furnished by the Policyowner is incorrect.
REINSTATEMENT OPTION
For a period of five years after termination, you can request that we
reinstate the Policy (and any riders) during the Insured's lifetime. We will
not reinstate the Policy if it has been returned for its Cash Surrender
Value. Note that a termination or reinstatement may cause the Policy to
become a modified endowment contract.
Before we will reinstate the Policy, we must receive the following:
o A payment in an amount that is sufficient to keep the Policy (and any
riders) in force for at least 2 months. This payment will be in lieu of
the payment of all Premiums in arrears.
o Any unpaid loan must also be repaid, together with loan interest at 6%
compounded once each year from the end of the late period to the date
of reinstatement. If a loan interest rate of less than 6% is in effect
when the Policy is reinstated, the interest rate for any unpaid loan at
the time of reinstatement will be the same as the loan rate.
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o Evidence of insurability satisfactory to us if the reinstatement is
requested more than 31 days after termination.
If we do reinstate the Policy, the Face Amount for the reinstated Policy
will be the same as it would have been if the Policy had not terminated. The
effective date of reinstatement will be the Monthly Deduction Day on or
following the date we approve the request for reinstatement.
ADDITIONAL BENEFITS AVAILABLE BY RIDER
The Policy can include additional benefits that we approve based on our
standards and limits for issuing insurance and classifying risks. None of
these benefits depends on the investment performance of the Separate Account
or the Fixed Account. An additional benefit is provided by a rider and is
subject to the terms of both the Policy and the rider. The following rider is
currently available.
ADJUSTABLE TERM INSURANCE RIDER.
This rider provides term insurance coverage on the Insured. The initial
term amount is shown on page 2 of your Policy. You can also elect to change
the term amount at any time. Evidence of insurability, satisfactory to us,
must be furnished in connection with any request to increase the term amount.
PAYMENT OPTIONS
Death Benefits will be paid in one sum or, if elected, all or part of the
Death Benefit can be placed under one or more of the options described in
this section. If we agree, the Death Benefit may be placed under some other
method of payment instead. Any Death Benefits paid in one sum will bear
interest compounded each year from the Insured's death to the date of
payment. We set the interest rate each year. This rate will be at least 3%
per year, and will not be less than required by law.
While the Insured is living, you can elect or change an option. You can
also elect or change one or more beneficiaries who will be the payee or
payees under that option. After the Insured dies, any person who is to
receive proceeds in one sum (other than an assignee) can instead elect a
payment option and name payees. The person who elects an option can also name
one or more successor payees to receive any amount remaining at the death of
the payee. Naming these payees cancels any prior choice of successor payees.
A payee who did not elect the option does not have the right to advance or
assign payments, take the payments in one sum, or make any other change.
However, the payee may be given the right to do one or more of these things
if the person who elects the option tells us in writing and we agree.
If we agree, a payee who has elected a payment option may later elect to
have any unpaid amount, or the present value of any elected payments, placed
under another option described in this section. When any payment under an
option would be less than $100, we may pay any unpaid amount or present value
in one sum.
PAYEES.
Only individuals who are to receive payments in their own behalf may be
named as payees or successor payees, unless we agree to some other payee. We
may require proof of the age or the survival of a payee.
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It may happen that when the last surviving payee dies, we still have an
unpaid amount, or there are some payments that remain to be made. If so, we
will pay the unpaid amount with interest to the date of payment, or pay the
present value of the remaining payments, to that payee's estate in one sum.
The present value of the remaining payments is based on the interest rate
used to compute them, and is always less than their sum.
PROCEEDS AT INTEREST OPTIONS (OPTIONS 1A AND 1B).
The Policy proceeds may be left with us at interest. We will set the
interest rate each year. This rate will be at least 3% per year.
For the Interest Accumulation Option (Option 1A), we credit interest each
year on the amount we still have. This amount can be withdrawn at any time in
sums of $100 or more. We pay interest to the date of withdrawal on sums
withdrawn.
For the Interest Payment Option (Option 1B), we pay interest once each
month, every 3 months, every 6 months, or once each year, as chosen, based on
the amount we still have.
LIFE INCOME OPTION (OPTION 2) (NOT AVAILABLE IN MASSACHUSETTS AND MONTANA).
We make equal payments each month during the lifetime of the payee or
payees. We determine the amount of the monthly payment by applying the Death
Benefit to purchase a corresponding single premium life annuity contract that
is being issued when the first payment is due. Payments are based on the
appropriately adjusted annuity premium rate in effect at that time, but will
not be less than the corresponding minimum amount shown in the Option 2
Table, which appears in Section 9 of your Policy. These minimum amounts are
based on the 1983 Table "a" with Projection Scale G and with interest
compounded each year at 3%.
Upon request, we will state in writing what the minimum amount of each
monthly payment would be under this option. It is based on the sex and
adjusted age of the payee or payees. To find the adjusted age in the year the
first payment is due, we increase or decrease the payee's age at that time,
as follows:
<TABLE>
<CAPTION>
1996 AND 2036 AND
EARLIER 1997-2005 2006-2015 2016-2025 2026-2035 LATER
- ---------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
+2 +1 0 -1 -2 -3
</TABLE>
We make a payment each month while the payee is living. Payments do not
change, and are guaranteed for 10 years, even if both payees die sooner.
BENEFICIARY
A Beneficiary is any person or entity named by the Policyowner to receive
the Death Benefit after the Insured dies. You name the Beneficiary when you
apply for the Policy. There may be different classes of Beneficiaries, such
as primary and secondary. These classes set the order of payment. There may
be more than one Beneficiary in a class.
The Beneficiary may be changed during the Insured's lifetime by writing to
our Service Office or such other location that we indicate to you in writing.
Generally, the change will take effect as of the date the request is signed.
If no Beneficiary is living when the Insured dies, unless provided otherwise,
the Death Benefit is paid to the Policyowner or, if deceased, the
Policyowner's estate.
42
<PAGE>
CHANGE OF OWNERSHIP
A successor Policyowner can be named in the application, or in a signed
notice that gives us the facts we need. The successor Policyowner will become
the new Policyowner when you die, if you die before the Insured. If no
successor Policyowner survives you and you die before the Insured, your
estate becomes the new Policyowner.
You can also change the Policyowner in a signed notice that gives us the
facts we need. When this change takes effect, all rights of ownership in this
Policy will pass to the new Policy owner.
When we record a change of Policyowner or successor Policyowner, these
changes will take effect as of the date of the Policyowner's signed notice,
subject to any payments we made or action we took before recording these
changes. We may require that these changes be endorsed in the Policy.
Changing the Policyowner or naming a new successor Policyowner cancels any
prior choice of Policyowner or successor Policyowner, respectively, but does
not change the Beneficiary.
ASSIGNMENT
While the Insured is living, the Policy may be assigned as collateral for
a loan or other obligation. For an assignment to be binding on us, we must
receive a signed copy of it at our Service Office or such other location that
we indicate to you in writing. We are not responsible for the validity of any
assignment.
LIMITS ON OUR RIGHTS TO CHALLENGE THE POLICY
Except for any increases in Face Amount, other than one due solely to a
change in the Life Insurance Benefit Option, we must bring any legal action
to contest the validity of a Policy within two years from its Issue Date.
After that we cannot contest its validity, except for failure to pay Premiums
or unless the Insured died within that two year period. For any increase in
the Face Amount, other than one due solely to a change in the Life Insurance
Benefit Option, we must bring legal action to contest that increase within
two years from the effective date of the increase.
MISSTATEMENT OF AGE OR SEX
If the Insured's age or sex is misstated in the Policy application, the
Death Benefit payable under the Policy will be adjusted based on what the
Policy would provide according to the most recent mortality charge for the
correct date of birth or correct sex.
SUICIDE
If the Insured commits suicide within two years from the Issue Date or
less where required by law (or, with respect to an increase in Face Amount,
the effective date of the increase), and while the Policy is in force, the
Policy will end, and the only amount payable to the Beneficiary will be the
Premiums paid, less any Policy Debt and any Partial Withdrawals.
WHEN WE PAY PROCEEDS
If the Policy has not terminated, payment of the Cash Surrender Value,
Partial Withdrawal, loan proceeds or the Death Benefit are made within 7 days
after we receive all requirements at our Service Office or such other
location that we indicate to you in writing. However, we can delay payment of
the Cash Surrender Value or any Partial Withdrawal from the Separate
43
<PAGE>
Account, loan proceeds attributable to the Separate Account, or the Death
Benefit during any period that: (1) it is not reasonably practicable to
determine the amount because the New York Stock Exchange is closed (other
than customary weekend and holiday closings), trading is restricted by the
SEC, or the SEC declares that an emergency exists; or (2) the SEC, by order,
permits us to delay payment in order to protect our Policyowners.
Amounts payable from the Fixed Account may be deferred for up to 6 months
from the date the request is received at our Service Office.
We can delay payment of the entire Death Benefit if payment is contested.
We investigate all death claims arising within the two-year limit on our
right to challenge the Policy. Upon receiving the information from a
completed investigation, we generally make a determination within 5 days as
to whether the claim should be authorized for payment. Payments are made
promptly after authorization. If payment of a Cash Surrender Value or Partial
Withdrawal is delayed for 30 days or more, we add interest at an annual rate
of 3%. We add interest to a Death Benefit from the date of death to the date
of payment at the same rate as is paid under the Interest Payment Option. See
"Section VI: Additional Information --Payment Options."
RECORDS AND REPORTS
All records and accounts relating to the Separate Account and the Fixed
Account are maintained by New York Life or NYLIAC. Each year we will mail you
a report showing the Cash Value and Policy Debt as of the latest Policy
Anniversary. This report contains any additional information required by
applicable law or regulation.
SALES AND OTHER AGREEMENTS
NYLIFE Distributors Inc., ("NYLIFE Distributors"), member, National
Association of Securities Dealers, 51 Madison Avenue, New York, New York
10010 is the principal underwriter and the distributor of the Policies and is
an indirect wholly-owned subsidiary of New York Life. NYLIFE Distributors is
engaged in the business of underwriting and distributing units of the
Separate Account and shares of open-end investment companies, including The
MainStay Funds and MainStay Institutional Funds Inc.
The commissions paid to registered representatives of broker-dealers who
have entered into dealer agreements with NYLIFE Distributors during a
Policy's first year will not exceed 35% of the Premiums paid up to a Policy's
surrender charge premium (5% in Policy Years two through ten) plus 3% of
Premiums paid in excess of such amount. Commissions paid in Policy Years
eleven and beyond are 2% of Premiums paid. A table of surrender charge
premium rates per thousand appears in Appendix B to this prospectus.
LEGAL PROCEEDINGS
In 1995, NYLIAC and New York Life settled a class action related to the
sale of whole life and universal life insurance policies from 1982 through
1994. In entering into the settlement, NYLIAC specifically denied any
wrongdoing. The settlement was approved by the judge, and has now been upheld
on appeal, including a recent refusal by the New York State Court of Appeals
to permit a discretionary appeal from the Appellate Division. The lone
appellant has recently filed two motions in the trial court seeking to enjoin
implementation of the settlement and to renew his objections to the
settlement. The lone appellant may file a writ of certiorari in the United
States Supreme Court during the prescribed statutory period.
44
<PAGE>
There are also actions in various jurisdictions by individual policyowners
who either did or did not exclude themselves from the settlement of the
nationwide class action; and in each of two jurisdictions a purported class
action claiming to include numerous policyowners who excluded themselves from
the settlement of the nationwide class action; and in one jurisdiction a
purported class action claiming to include numerous policyowners who did not
exclude themselves from the class action. Most of these actions seek
substantial or unspecified compensatory and punitive damages.
NYLIAC is also a defendant in other individual and alleged class actions
arising from its insurance investment and/or operations, including actions
involving retail sales practices. Most of these actions also seek substantial
or unspecified compensatory and punitive damages. NYLIAC is also from time to
time involved as a party in various governmental, administrative and
investigative proceedings and inquiries.
Given the uncertain nature of litigation and regulatory inquiries, the
outcome of the above and other actions pending against NYLIAC cannot be
predicted. NYLIAC nevertheless believes that the ultimate outcome of all
pending litigation should not have a material adverse effect on NYLIAC's
financial position; however, it is possible that settlements or adverse
determinations in one or more actions or other proceedings in the future
could have a material adverse effect on NYLIAC's operating results for a
given year.
INDEPENDENT ACCOUNTANTS
The financial statements of NYLIAC have been included herein in reliance
upon the report of Price Waterhouse LLP, independent accountants, given on
the authority of that firm as experts in accounting and auditing.
The financial statements of NYLIAC included herein should be considered
only as bearing upon the ability of NYLIAC to meet its obligations under the
Policy.
EXPERTS
Actuarial matters in this prospectus have been examined by Frederick J.
Garland, Jr., Actuary. An opinion on actuarial matters is filed as an exhibit
to the registration statement we have filed with the SEC.
45
<PAGE>
APPENDIX A
ILLUSTRATIONS
The following tables demonstrate the way in which your Policy works. The
tables are based on the age, initial Death Benefit and Premium as follows:
The table is for a Policy issued to a male, non-smoker, age 45, on a
medically underwritten basis, with a scheduled annual Premium of $7,500 and
an initial Death Benefit of $350,000. It assumes that Life Insurance Benefit
Option 1 and Code Section 7702 Corridor Table have been selected.
The table shows how the Cash Value, Cash Surrender Value and Death Benefit
would vary over an extended period of time assuming hypothetical gross rates
of return equivalent to a constant annual rate of 0%, 6% or 12%. The table
will assist in the comparison of the Death Benefit, Cash Value and Cash
Surrender Value of the Policy with other corporate sponsored variable
universal life insurance plans.
The Death Benefit, Cash Value and Cash Surrender Value for a Policy would
be different from the amounts shown if the actual gross rates of return
averaged 0%, 6% or 12%, but varied above and below those averages for the
period. They would also be different depending on the allocation of the Cash
Value among the Investment Divisions of the Separate Account, the Fixed
Account and the Loan Account, if the actual gross rate of return for all
Investment Divisions averaged 0%, 6% or 12%, but varied above or below that
average for individual Investment Divisions. They would also differ if any
Policy loans or Partial Withdrawals were made during the period of time
illustrated.
The illustration reflects all charges under the Policy and assumes that
the cost of insurance charges are based on our guaranteed maximum cost of
insurance rates and reflect the deduction of all charges from the Cash Value
at their guaranteed maximum levels. They also reflect a daily mortality and
expense risk charge assessed against the assets of the Separate Account
equivalent to an annual charge of 0.70% (on a current basis for Policy Years
one through ten); 0.30% (on a current basis for Policy Years eleven and
later); and 0.90% (on a guaranteed basis for all Policy Years).
The illustration also reflects total assumed fees and expenses incurred by
the Funds of 0.78% of the average daily net assets of the Funds. The total is
based upon (a) 0.47% of average daily net assets, which is an average of the
management fees of each Portfolio; (b) 0.14% of average daily net assets,
which is an average of the administrative fees for each Portfolio; and (c)
0.18% of average daily net assets, which is an average of the other expenses
after expense reimbursement for each Portfolio. Actual fees and expenses of
the Funds may be more or less than the amounts illustrated and will depend on
the allocations made by the Policyowner.
An expense reimbursement agreement which limited "Other Expenses" to 0.17%
annually was in effect until December 31, 1996 for the MainStay VP Capital
Appreciation, MainStay VP Cash Management, MainStay VP Government, MainStay
VP Total Return, MainStay VP Bond, MainStay VP Growth Equity and MainStay VP
Indexed Equity Portfolios. "Other Expenses" and "Total Fund Annual Expenses"
have been restated to reflect the absence of the limitation in 1996. "Other
Expenses" and "Total Fund Annual Expenses" for the MainStay VP Convertible,
MainStay VP High Yield Corporate Bond, MainStay VP International Equity and
MainStay VP Value Portfolios reflect an expense reimbursement agreement
effective through December 31, 1997 limiting "Other Expenses" to 0.17%
annually. In the absence of the expense reimbursement arrangement the "Total
Fund Annual Expenses" for the year ended December 31, 1996
A-1
<PAGE>
would have been 1.46%, 0.71%, 1.51% and 0.79% for the MainStay VP
Convertible, MainStay VP High Yield Corporate Bond, MainStay VP International
Equity and MainStay VP Value Portfolios, respectively. Numbers for the
MainStay VP Convertible Portfolio have been annualized based on the period
October 1, 1996 (the date of inception) to December 31, 1996.
For the Calvert Socially Responsible Portfolio, "Other Expenses" are based
on expenses for fiscal year 1996, and have been restated to reflect an
increase in transfer agency expenses of 0.03% expected to be incurred in
1997. The "Advisory Fee" includes a performance adjustment which could cause
the fee to be as high as 0.85% or as low as 0.55%, depending on performance.
"Other Expenses" reflect an indirect fee of 0.03%. "Total Fund Annual
Expenses" after reductions for fees paid indirectly would have been 0.81%.
A portion of the brokerage commissions that Fidelity VIP II: Contrafund
and Fidelity VIP: Equity-Income Portfolios pay was used to reduce the
Portfolios' annual expenses. In addition, these Portfolios have entered into
arrangements with their custodian and transfer agent whereby interest earned
on uninvested cash balances was used to reduce custodian and transfer agent
expenses. Including these reductions, the "Total Fund Annual Expenses" would
have been 0.71% for the Fidelity VIP II: Contrafund Portfolio and 0.56% for
the Fidelity VIP: Equity-Income Portfolio.
Janus Capital Corporation ("JCC") has agreed to reduce the advisory fee
for both Janus Portfolios to the extent that such fee exceeds the effective
rate of the Janus retail fund corresponding to such Portfolio. JCC may
terminate this fee reduction at any time upon 90 days' notice to the Board of
Trustees of the Janus Aspen Series. Absent such reductions, "Advisory Fees"
and "Total Fund Annual Expenses" for the fiscal year ended December 3, 1996
would have been: 0.92% and 1.07%, respectively, for the Janus Aspen Balanced
Portfolio and 0.77% and 0.91%, respectively, for the Janus Aspen Worldwide
Growth Portfolio.
"Other Expenses" for the Morgan Stanley Emerging Markets Equity Portfolio
are estimated for the current fiscal year. Morgan Stanley Asset Management
Inc. has agreed to a reduction in its management fees and to reimburse the
Morgan Stanley Emerging Markets Equity Portfolio if such fees would cause the
"Total Fund Annual Expenses" to exceed 1.75% of average daily net assets.
Absent such reductions, it is estimated that "Advisory Fees" and "Total Fund
Annual Expenses" for the current fiscal year would be 1.25% and 6.17%,
respectively.
Taking into account the assumed charges for mortality and expense risks in
the Separate Account and the average fees and expenses of the Funds, the
gross rates of return of 0%, 6% and 12% would correspond to actual net
investment returns of -1.48%, 4.52% and 10.52%, respectively, based on the
current charge for mortality and expense risks, applicable to Policy Years
one through ten; -1.08%, 4.92% and 10.92%, respectively, based on the current
charge for mortality and expense risks, applicable to Policy Years eleven and
later; and -1.68%, 4.32% and 10.32%, respectively, based on the guaranteed
maximum charge for mortality and expense risks, applicable to all Policy
Years.
The second column of the tables show the amount which would accumulate if an
amount equal to the first Premium were invested and earned interest, after
taxes, at 5% per year, compounded annually.
NYLIAC will furnish upon request a comparable illustration using the age,
sex and underwriting classification of an Insured for any initial Death
Benefit and Premium requested. In addition to an illustration assuming Policy
charges at their maximum, we will furnish an illustration assuming current
Policy charges and current cost of insurance rates.
A-2
<PAGE>
CORPORATE SPONSORED VARIABLE UNIVERSAL LIFE INSURANCE POLICY
MALE ISSUE AGE: 45, NON-SMOKER, MEDICALLY UNDERWRITTEN CLASS
SCHEDULED ANNUAL PREMIUM: $7,500
INITIAL FACE AMOUNT: $350,000
SECTION 7702 CORRIDOR TABLE/LIFE INSURANCE BENEFIT OPTION 1
ASSUMING CURRENT CHARGES
<TABLE>
<CAPTION>
END OF YEAR DEATH BENEFIT(2)
TOTAL PREMIUMS PAID ASSUMING HYPOTHETICAL GROSS
PLUS INTEREST AT 5% ANNUAL INVESTMENT RETURN OF
AS OF END OF YEAR ---------------------------------
POLICY YEAR (1) 0% 6% 12%
- ------------- ------------------- --------- --------- ----------
<S> <C> <C> <C> <C>
1 7,875 350,000 350,000 350,000
2 16,144 350,000 350,000 350,000
3 24,826 350,000 350,000 350,000
4 33,942 350,000 350,000 350,000
5 43,514 350,000 350,000 350,000
6 53,565 350,000 350,000 350,000
7 64,118 350,000 350,000 350,000
8 75,199 350,000 350,000 350,000
9 86,834 350,000 350,000 350,000
10 99,051 350,000 350,000 350,000
15 169,931 350,000 350,000 350,000
20 260,394 350,000 350,000 526,186
30 523,206 350,000 431,364 1,407,756
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
END OF YEAR
END OF YEAR CASH VALUE(2) CASH SURRENDER VALUE(2)
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
--------------------------------- --------------------------------
POLICY YEAR 0% 6% 12% 0% 6% 12%
- ------------- --------- --------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 6,331 6,735 7,140 5,306 5,710 6,115
2 12,483 13,688 14,942 11,457 12,662 13,917
3 18,492 20,904 23,516 17,466 19,878 22,490
4 24,347 28,383 32,931 23,322 27,357 31,905
5 30,054 36,141 43,283 29,028 35,116 42,257
6 35,605 44,185 54,666 34,786 43,366 53,847
7 40,987 52,514 67,183 40,371 51,898 66,567
8 46,083 61,027 80,846 45,674 60,618 80,437
9 51,113 69,950 95,997 50,907 69,743 95,790
10 56,075 79,299 112,796 56,075 79,299 112,796
15 79,413 133,860 231,278 79,413 133,860 231,278
20 97,443 201,321 431,300 97,443 201,321 431,300
30 114,197 403,144 1,315,660 114,197 403,144 1,315,660
</TABLE>
- ------------
(1) All premiums are illustrated as if made at the beginning of the Policy
Year.
(2) Assumes no Policy loan or Partial Withdrawal has been made.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN
ABOVE ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION 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 THE
INVESTMENT ALLOCATIONS MADE BY THE POLICYOWNER AND THE INVESTMENT EXPERIENCE
OF THE PORTFOLIOS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER VALUE FOR
A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES
OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. THEY WOULD ALSO BE
DIFFERENT IF ANY POLICY LOANS OR PARTIAL WITHDRAWALS WERE MADE. NO
REPRESENTATIONS CAN BE MADE BY NEW YORK LIFE INSURANCE AND ANNUITY
CORPORATION OR THE SEPARATE ACCOUNT OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER A PERIOD
OF TIME.
A-3
<PAGE>
CORPORATE SPONSORED VARIABLE UNIVERSAL LIFE INSURANCE POLICY
MALE ISSUE AGE: 45, NON-SMOKER, MEDICALLY UNDERWRITTEN CLASS
SCHEDULED ANNUAL PREMIUM: $7,500
INITIAL FACE AMOUNT: $350,000
SECTION 7702 CORRIDOR TABLE/LIFE INSURANCE BENEFIT OPTION 1
ASSUMING GUARANTEED CHARGES
<TABLE>
<CAPTION>
END OF YEAR DEATH BENEFIT(2)
TOTAL PREMIUMS PAID ASSUMING HYPOTHETICAL GROSS
PLUS INTEREST AT 5% ANNUAL INVESTMENT RETURN OF
AS OF END OF YEAR ---------------------------------
POLICY YEAR (1) 0% 6% 12%
- ------------- ------------------- --------- --------- -----------
<S> <C> <C> <C> <C>
1 7,875 350,000 350,000 350,000
2 16,144 350,000 350,000 350,000
3 24,826 350,000 350,000 350,000
4 33,942 350,000 350,000 350,000
5 43,514 350,000 350,000 350,000
6 53,565 350,000 350,000 350,000
7 64,118 350,000 350,000 350,000
8 75,199 350,000 350,000 350,000
9 86,834 350,000 350,000 350,000
10 99,051 350,000 350,000 350,000
15 169,931 350,000 350,000 350,000
20 260,394 350,000 350,000 384,562
30 523,206 0 350,000 980,236
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
END OF YEAR
END OF YEAR CASH VALUE(2) CASH SURRENDER VALUE(2)
ASSUMING HYPOTHETICAL GROSS ASSUMING HYPOTHETICAL GROSS
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
------------------------------ ------------------------------
POLICY YEAR 0% 6% 12% 0% 6% 12%
- ------------- -------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1 5,147 5,508 5,871 4,121 4,483 4,846
2 10,109 11,156 12,250 9,083 10,131 11,224
3 14,893 16,955 19,196 13,867 15,930 18,170
4 19,465 22,876 26,735 18,439 21,850 25,709
5 23,831 28,930 34,940 22,805 27,905 33,915
6 27,998 35,132 43,893 27,179 34,313 43,074
7 31,935 41,455 53,648 31,319 40,839 53,032
8 35,611 47,877 64,269 35,202 47,468 63,860
9 39,034 54,413 75,871 38,828 54,207 75,665
10 42,174 61,043 88,548 42,174 61,043 88,548
15 53,096 95,464 173,225 53,096 95,464 173,225
20 53,725 131,536 315,215 53,725 131,536 315,215
30 0 201,961 916,108 0 201,961 916,108
</TABLE>
- ------------
(1) All premiums are illustrated as if made at the beginning of the Policy
Year.
(2) Assumes no Policy loan or Partial Withdrawal has been made.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN
ABOVE ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION 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 THE
INVESTMENT ALLOCATIONS MADE BY THE POLICYOWNER AND THE INVESTMENT EXPERIENCE
OF THE PORTFOLIOS. THE DEATH BENEFIT, CASH VALUE AND CASH SURRENDER VALUE FOR
A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL GROSS ANNUAL RATES
OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. THEY WOULD ALSO BE
DIFFERENT IF ANY POLICY LOANS OR PARTIAL WITHDRAWALS WERE MADE. NO
REPRESENTATIONS CAN BE MADE BY NEW YORK LIFE INSURANCE AND ANNUITY
CORPORATION OR THE SEPARATE ACCOUNT OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER A PERIOD
OF TIME.
A-4
<PAGE>
APPENDIX B
SURRENDER CHARGE PREMIUM RATES PER THOUSAND
The surrender charge premium for the Policy at the time of issue is equal
to (a X b) / 1000 where (a) is the surrender charge premium rates per
thousand applicable to the age of the Insured on the Policy Date, as set
forth in the table below, and (b) is the initial Face Amount.
<TABLE>
<CAPTION>
SURRENDER CHARGE
PREMIUM RATES
AGE PER THOUSAND
- ----- ----------------
<S> <C>
18 2.60
19 2.80
20 3.00
21 3.20
22 3.40
23 3.60
24 3.80
25 4.00
26 4.20
27 4.40
28 4.60
29 4.80
30 5.00
31 5.20
32 5.40
33 5.60
34 5.80
35 6.00
36 6.30
37 6.60
38 6.90
39 7.20
40 7.50
41 7.80
42 8.10
43 8.40
44 8.70
45 9.00
46 9.60
47 10.20
48 10.80
49 11.40
50 12.00
51 12.60
52 13.20
53 13.80
54 14.40
55 15.00
56 16.40
57 17.80
58 19.20
59 20.60
60 22.00
61 23.60
62 25.20
63 26.80
64 28.40
65 30.00
66 31.80
67 33.60
68 35.40
69 37.20
70 39.00
71 41.40
72 43.80
73 46.20
74 48.60
75 51.00
76 54.00
77 57.00
78 60.00
79 63.00
80 66.00
81 69.60
82 73.20
83 76.80
84 80.40
85 84.00
</TABLE>
B-1
<PAGE>
NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF NEW YORK LIFE INSURANCE COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Fixed maturities
Available for sale, at fair value.......................... $11,854 $12,237
Held to maturity, at amortized cost........................ 647 566
Equity securities........................................... 70 70
Mortgage loans.............................................. 1,113 1,003
Real estate................................................. 151 141
Policy loans................................................ 464 435
Other long-term investments................................. 17 17
--------- ---------
Total investments.......................................... 14,316 14,469
Cash and cash equivalents................................... 236 326
Deferred policy acquisition costs........................... 691 511
Other assets................................................ 252 236
Separate account assets..................................... 2,445 1,444
--------- ---------
Total assets............................................... $17,940 $16,986
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Policyholders' account balances............................. $13,163 $12,853
Future policy benefits...................................... 251 233
Policy claims............................................... 57 81
Deferred income taxes....................................... 47 156
Other liabilities........................................... 333 591
Separate account liabilities................................ 2,403 1,396
--------- ---------
Total liabilities.......................................... 16,254 15,310
STOCKHOLDER'S EQUITY
Capital stock--par value $10,000 (20,000 shares authorized,
2,500 issued and outstanding).............................. 25 25
Additional paid in capital.................................. 480 480
Net unrealized gains on investments......................... 68 227
Retained earnings........................................... 1,113 944
--------- ---------
Total stockholder's equity................................. 1,686 1,676
--------- ---------
Total liabilities and stockholder's equity................. $17,940 $16,986
========= =========
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF NEW YORK LIFE INSURANCE COMPANY)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Universal life and annuity fees............ $ 234 $ 224 $ 194
Net investment income ..................... 1,048 1,012 1,014
Net realized investment gains (losses) .... 65 38 (41)
Other income............................... 58 71 57
------- ------- -------
Total revenues............................ 1,405 1,345 1,224
------- ------- -------
EXPENSES
Interest credited to policyholders'
account balances.......................... 723 742 609
Policyholder benefits...................... 117 168 154
Operating expenses......................... 299 239 278
------- ------- -------
Total expenses............................ 1,139 1,149 1,041
------- ------- -------
Income before Federal income taxes.......... 266 196 183
Federal income taxes:
Current.................................... 121 84 97
Deferred................................... (24) (8) (10)
------- ------- -------
Total Federal income taxes................ 97 76 87
Net income.................................. $ 169 $ 120 $ 96
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF NEW YORK LIFE INSURANCE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- -------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Statutory capital and surplus, beginning of year as
previously reported ............................... $ -- $ -- $ 780
Cumulative effect of comprehensive change in basis
of accounting (Note 2)............................. -- -- 532
-------- -------- -------
Stockholder's equity, beginning of year as
adjusted........................................... 1,676 1,141 1,312
Net income.......................................... 169 120 96
Change in unrealized gains and losses on
investments........................................ (159) 415 (197)
Dividends paid to stockholder....................... -- -- (70)
-------- -------- -------
Stockholder's equity, end of year................... $1,686 $1,676 $1,141
======== ======== =======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION
(a wholly owned subsidiary of New York Life Insurance Company)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income................................................. $ 169 $ 120 $ 96
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization............................. (18) (26) (43)
Capitalization of deferred policy acquisition costs ...... (151) (126) (111)
Amortization of deferred policy acquisition costs ........ 107 86 139
Policyholder expense charge............................... (188) (183) (168)
Interest credited to policyholders' account balances ..... 723 742 609
Net realized investment (gains) losses.................... (65) (38) 41
Deferred income taxes..................................... (24) (8) (10)
Decrease in net separate account assets................... 6 17 2
(Increase) decrease in other assets and other
liabilities............................................. (127) 308 (179)
(Decrease) increase in policy claims...................... (24) 8 19
Increase (decrease) in future policy benefits............. 18 (80) 33
--------- --------- ---------
Net cash provided by operating activities................ 426 820 428
--------- --------- ---------
Cash Flows from Investing Activities:
Proceeds from sale of available for sale fixed maturities . 5,787 2,370 3,120
Proceeds from maturity of available for sale fixed
maturities................................................ 1,505 930 1,266
Proceeds from maturity of held to maturity fixed
maturities................................................. 141 103 160
Proceeds from sale of equity securities.................... 47 40 25
Proceeds from repayment of mortgage loans.................. 143 244 138
Proceeds from sale of real estate.......................... 55 13 16
Proceeds from other invested assets........................ 4 31 --
Cost of available for sale fixed maturities acquired ...... (7,447) (4,320) (4,605)
Cost of held to maturity fixed maturities acquired ........ (95) (162) (135)
Cost of equity securities acquired......................... (43) (12) (1)
Cost of mortgage loans acquired............................ (280) (320) (139)
Cost of real estate acquired............................... (35) (14) (54)
Cost of other invested assets acquired..................... (8) (5) (16)
Policy loans............................................... (29) (25) (31)
Securities sold under agreements to repurchase (net) ...... (37) (168) 105
--------- --------- ---------
Net cash used in investing activities.................... (292) (1,295) (151)
--------- --------- ---------
Cash Flows from Financing Activities:
Policyholders' account balances:
Deposits.................................................. 1,069 1,252 1,153
Withdrawals............................................... (562) (751) (793)
Net transfers to the separate accounts.................... (733) (238) (172)
Other, net................................................. -- (52) (70)
--------- --------- ---------
Net cash (used in) provided by financing activities ..... (226) 211 118
--------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents................................................ 2 (1) 1
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ....... (90) (265) 396
Cash and cash equivalents, beginning of year................ 326 591 195
--------- --------- ---------
Cash and cash equivalents, end of year...................... $ 236 $ 326 $ 591
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF NEW YORK LIFE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 -- NATURE OF OPERATIONS
New York Life Insurance and Annuity Corporation ("NYLIAC") is a direct,
wholly owned subsidiary of New York Life Insurance Company ("New York Life").
NYLIAC offers a wide variety of interest sensitive insurance and annuity
products to a large cross section of the insurance market. NYLIAC markets its
products in all 50 of the United States, the District of Columbia and Taiwan,
primarily through its agency force. In addition, NYLIAC markets Corporate
Owned Life Insurance through independent brokers and brokerage general
agents.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP"). The preparation of
financial statements of life insurance enterprises requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements. Actual results may
differ from estimates.
COMPREHENSIVE CHANGE IN BASIS OF ACCOUNTING
In 1996, NYLIAC adopted Financial Accounting Standards Board ("FASB")
Interpretation No. 40 "Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises," as amended by
Statement of Financial Accounting Standards ("SFAS") No. 120 "Accounting and
Reporting by Mutual Insurance Enterprises and by Insurance Enterprises for
Certain Long-Duration Participating Contracts," effective for fiscal years
beginning after December 15, 1995. Prior to the effective date of the
Interpretation, NYLIAC, consistent with industry practice, issued financial
statements in accordance with statutory accounting practices which were
considered GAAP for mutual life insurance companies and their life insurance
subsidiaries. Interpretation No. 40 establishes a new definition of GAAP for
mutual life insurance companies and their life insurance subsidiaries. Under
the Interpretation, financial statements of mutual life insurance companies
and their life insurance subsidiaries which are prepared on the basis of
statutory accounting practices, are no longer characterized as in conformity
with GAAP.
As a result, NYLIAC has prepared financial statements for the year ended
December 31, 1996 in accordance with GAAP. Financial statements for the years
ended December 31, 1995, 1994 and 1993, which were previously prepared on the
basis of statutory accounting, have been restated in accordance with GAAP.
The cumulative effect of the comprehensive change in basis of accounting of
$532 million has been recorded as an increase in the beginning of year equity
for the year ended December 31, 1994, the earliest year presented herein (See
Note 14 for a reconciliation of NYLIAC's statutory surplus and statutory net
income with stockholder's equity and net income on a GAAP basis).
INVESTMENTS
Fixed maturity investments, which NYLIAC has both the ability and the
intent to hold to maturity, are stated at amortized cost. Investments
identified as available for sale are reported at fair value. Unrealized gains
and losses on available for sale securities are reported in equity, net of
deferred taxes and related adjustments. The cost basis of fixed maturities is
adjusted for impairments in value deemed to be other
F-5
<PAGE>
INVESTMENTS (CONTINUED)
than temporary, with the associated realized loss reported in net income.
Equity securities are carried at fair value. Unrealized gains and losses
related to such securities are reflected in equity, net of deferred taxes and
related adjustments. Realized losses are recognized in net income for other
than temporary declines in fair value. Mortgage loans are carried at unpaid
principal balances, net of impairment allowances, and are generally secured.
Investment real estate, which NYLIAC has the intent to hold for the
production of income, is carried at depreciated cost net of write-downs for
other than temporary declines in fair value. Properties held for sale are
carried at the lower of cost or fair value less estimated selling costs.
Policy loans are stated at the aggregate balance due. The carrying amount
approximates fair value since loans on policies have no defined maturity date
and reduce amounts payable at death or surrender. Cash equivalents include
investments that have maturities of 90 days or less at date of purchase and
are carried at amortized cost, which approximates fair value. Short-term
investments are included in fixed maturities on the balance sheet, and are
carried at amortized cost, which approximates fair value.
Derivative financial instruments used by NYLIAC to hedge exposure to
interest rate and foreign currency fluctuations are accounted for on an
accrual basis. Realized gains and losses related to contracts that are
effective hedges on specific assets are deferred and recognized in net income
in the same period as gains and losses on the hedged assets. Amounts payable
or receivable under interest rate, currency and commodity swap agreements and
interest rate floor agreements are recognized as investment income or expense
when earned. Premiums paid for interest rate floor agreements are amortized
into interest expense over the life of the agreement. Unamortized premiums
are included in other assets in the balance sheet. Unrealized gains and
losses on foreign currency forward exchange contracts are reported in equity.
Realized gains and losses are recognized in net income upon termination or
maturity of the contracts.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business and certain costs of issuing policies
that vary with and are primarily related to the production of new business
have been deferred and recorded as an asset in the balance sheet. These
consist primarily of commissions, certain expenses of underwriting and
issuing contracts, and certain agency expenses. Acquisition costs for
universal life and annuity contracts are amortized in proportion to estimated
gross profits over the effective life of these contracts, which is assumed to
be 25 years for universal life contracts and 15 years for annuities. Changes
in assumptions are reflected in the current year's amortization.
The carrying amount of the deferred policy acquisition cost asset is
adjusted at each balance sheet date as if the unrealized gains or losses on
investments associated with these insurance contracts had been realized and
included in the gross profits used to determine current period amortization.
The increase or decrease in the deferred policy acquisition cost asset due to
unrealized gains or losses is recorded in stockholder's equity.
RECOGNITION OF INCOME AND RELATED EXPENSES
Amounts received under universal life and annuity contracts are reported
as deposits to policyholders' account balances. Revenues from these contracts
consist of amounts assessed during the period for mortality and expense risk,
policy administration and surrender charges. Policy benefits and claims that
are charged to expense include benefit claims incurred in the period in
excess of related policyholders' account balances.
POLICYHOLDERS' ACCOUNT BALANCES
Policyholders' account balances on universal life and annuity contracts
are equal to cumulative deposits plus credited interest less withdrawals and
charges.
F-6
<PAGE>
FEDERAL INCOME TAXES
NYLIAC is a member of a group which files a consolidated Federal income
tax return with New York Life. The consolidated income tax provision or
benefit is allocated among the members of the group in accordance with a tax
allocation agreement. The tax allocation agreement provides that each member
of the group is allocated its share of the consolidated tax provision or
benefit determined on a separate company basis. Current Federal income taxes
are charged or credited to operations based upon amounts estimated to be
payable or recoverable as a result of taxable operations for the current
year. Adjustments to such estimates are recorded in net income. Deferred
income tax assets and liabilities are recognized for the future tax
consequence of temporary differences between financial statement carrying
amounts and income tax bases of assets and liabilities.
Current Federal income taxes include a provision for NYLIAC's allocable
share of the equity base tax applicable to mutual life insurance companies
and their subsidiaries. The amount recorded is based on NYLIAC's estimate of
the differential earnings rate used to compute the equity base tax.
REINSURANCE
NYLIAC enters into reinsurance agreements in the normal course of its
insurance business to reduce overall risk. NYLIAC remains liable for
reinsurance ceded if the reinsurer fails to meet its obligation on the
business it has assumed. NYLIAC evaluates the financial condition of its
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies.
SEPARATE ACCOUNTS
NYLIAC has established separate accounts with varying investment
objectives which are segregated from NYLIAC's general account and are
maintained for the benefit of separate account contractholders and NYLIAC.
Separate account assets are stated at market value. The liability for
separate accounts represents contractholders' interests in the separate
account assets, including accumulated net investment income and realized and
unrealized gains and losses on those assets.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of various assets and liabilities are included throughout the
notes to financial statements. Specifically, fair value disclosure of fixed
maturities, short-term investments, cash equivalents, equity securities and
mortgage loans is reported in Note 2 -- Significant Accounting Policies and
Note 3 -- Investments. Fair values for policyholders' account balances are
reported in Note 5 -- Insurance Liabilities. Fair values for derivative
financial instruments are included in Note 10 -- Derivative Financial
Instruments and Risk Management. Fair values for repurchase agreements are
included in Note 11 -- Commitments and Contingencies.
BUSINESS RISKS AND UNCERTAINTIES
The development of liabilities for future policy benefits and deferred
policy acquisition costs for NYLIAC's products requires management to make
estimates and assumptions regarding mortality, morbidity, lapse, expense and
investment experience. Such estimates are primarily based on historical
experience and future expectations of mortality, morbidity, expense,
persistency and investment assumptions. Actual results could differ from
those estimates. Management monitors actual experience, and where
circumstances warrant, revises its assumptions and the related estimates for
liabilities for future policy benefits and deferred policy acquisition costs.
NYLIAC's investments are primarily comprised of fixed maturities and
mortgage loans. Significant changes in prevailing interest rates and
geographic conditions may adversely affect the timing and amount of cash
flows on such investments, as well as their related values. A significant
decline in the market value of these investments could have an adverse affect
on NYLIAC's balance sheet.
F-7
<PAGE>
BUSINESS RISKS AND UNCERTAINTIES (CONTINUED)
NYLIAC regularly invests in mortgage-backed securities and other
securities subject to prepayment and call risk. Significant changes in
prevailing interest rates may adversely affect the timing and amount of cash
flows on such securities. In addition, the amortization of market premium and
accretion of market discount for mortgage-backed securities is based on
historical experience and estimates of future payment experience on the
underlying mortgage loans. Actual prepayment speeds will differ from original
estimates and may result in material adjustments to amortization or accretion
recorded in future periods.
As a subsidiary of a mutual life insurance company, NYLIAC is subject to a
tax on its equity base. The rates applied to NYLIAC's equity base are
determined annually by the Internal Revenue Service ("IRS") after comparison
of mutual life insurance company earnings for the year to the average
earnings of the 50 largest stock life insurance companies for the prior three
years. Due to the timing of earnings information, estimates of the current
year's tax must be made by management. The ultimate amounts of equity base
tax incurred may vary considerably from the original estimates.
NOTE 3 -- INVESTMENTS
FIXED MATURITIES
For publicly traded fixed maturities, estimated fair value is determined
using quoted market prices. For fixed maturities without a readily
ascertainable market value, NYLIAC has determined an estimated fair value
using either a discounted cash flow approach (including provisions for credit
risk, generally based upon the assumption such securities will be held to
maturity) or a proprietary matrix pricing model.
At December 31, 1996 and 1995, the maturity distribution of fixed
maturities was as follows (in millions):
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
----------- ------------ ----------- ------------
AVAILABLE FOR SALE
- ------------------
<S> <C> <C> <C> <C>
Due in one year or less ............... $ 489 $ 491 $ 755 $ 762
Due after one year through five years . 3,019 3,039 2,782 2,850
Due after five years through ten
years................................. 2,122 2,151 1,642 1,736
Due after ten years.................... 2,030 2,091 1,795 1,967
Asset-backed securities:
Government or government agency ...... 2,866 2,916 4,089 4,233
Other................................. 1,168 1,166 657 689
----------- ------------ ----------- ------------
Total Available for Sale.............. $11,694 $11,854 $11,720 $12,237
=========== ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
----------- ------------ ----------- ------------
HELD TO MATURITY
- ----------------
<S> <C> <C> <C> <C>
Due in one year or less ............... $ 24 $ 24 $ 29 $ 29
Due after one year through five years . 192 194 232 237
Due after five years through ten
years................................. 235 241 208 221
Due after ten years.................... 100 105 67 75
Asset-backed securities................ 96 96 30 31
----------- ------------ ----------- ------------
Total Held to Maturity ............... $647 $660 $566 $593
=========== ============ =========== ============
</TABLE>
F-8
<PAGE>
FIXED MATURITIES (CONTINUED)
At December 31, 1996 and 1995, the distribution of gross unrealized gains
and losses on investments in fixed maturities was as follows (in millions):
<TABLE>
<CAPTION>
1996
-----------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------ ------------ ------------
AVAILABLE FOR SALE
- ------------------
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government
corporations and agencies......... $ 1,243 $ 24 $ 7 $ 1,260
U.S. agencies, state and
municipal......................... 2,561 64 15 2,610
Foreign governments................ 191 13 1 203
Corporate.......................... 6,531 131 47 6,615
Other.............................. 1,168 19 21 1,166
----------- ------------ ------------ ------------
Total Available for Sale.......... $11,694 $251 $91 $11,854
=========== ============ ============ ============
HELD TO MATURITY
- ----------------
Corporate.......................... $ 551 $ 15 $ 2 $ 564
Asset-backed securities............ 96 -- -- 96
----------- ------------ ------------ ------------
Total Held to Maturity............ $ 647 $ 15 $ 2 $ 660
=========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------ ------------ ------------
AVAILABLE FOR SALE
- ------------------
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government
corporations and agencies......... $ 1,840 $ 82 $ 2 $ 1,920
U.S. agencies, state and
municipal......................... 3,563 150 8 3,705
Foreign governments................ 318 26 1 343
Corporate.......................... 5,342 249 11 5,580
Other.............................. 657 33 1 689
----------- ------------ ------------ ------------
Total Available for Sale.......... $11,720 $540 $23 $12,237
=========== ============ ============ ============
HELD TO MATURITY
- ----------------
Corporate.......................... $ 536 $ 26 $-- $ 562
Asset-backed securities............ 30 1 -- 31
----------- ------------ ------------ ------------
Total Held to Maturity............ $ 566 $ 27 $-- $ 593
=========== ============ ============ ============
</TABLE>
EQUITY SECURITIES
Estimated fair value for equity securities, substantially all of which
have a readily ascertainable market value, has been determined using quoted
market prices.
At December 31, 1996 and 1995, the distribution of gross unrealized gains
and losses on equity securities is as follows (in millions):
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1996... $63 $ 8 $1 $70
1995... $45 $28 $3 $70
</TABLE>
F-9
<PAGE>
MORTGAGE LOANS
NYLIAC's mortgage loans are diversified by property type, location and
borrower. Mortgage loans are collateralized by the related property and
generally approximate 75% of the property's value at the time the original
loan is made. The carrying value of mortgage loans was $1,113 million and
$1,003 million at December 31, 1996 and 1995, respectively.
The fair market value of the mortgage loan portfolio at December 31, 1996
and 1995, is estimated to be $1,194 million and $1,103 million, respectively.
Market values are determined by discounting the projected cash flow for each
individual loan to determine the current net present value. The discount rate
used approximates the current rate for new mortgages with comparable
characteristics and similar remaining maturities.
At December 31, 1996, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $25 million,
all at a fixed market rate of interest. These commitments are diversified by
property type and geographic region.
Allowances related to mortgage loans were $20 million at December 31, 1996
and 1995. The activity in the allowances as of December 31, 1996 and 1995, is
summarized below (in millions):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Beginning balance .... $20 $19
Charged to net loss . (1) (5)
Principal write-offs 1 6
------ ------
Ending balance........ $20 $20
====== ======
</TABLE>
Impaired mortgage loans along with specific allowances for losses as of
December 31, 1996 and 1995, were as follows (in millions):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Impaired mortgage loans with
provisions for losses....... $ 39 $ 51
Provision for losses......... (14) (13)
------ ------
Net impaired mortgage loans . $ 25 $ 38
====== ======
</TABLE>
NYLIAC accrues interest income on impaired loans to the extent it is
deemed collectible (delinquent less than 90 days) and the loan continues to
perform under its original or restructured contractual terms. Interest income
on problem loans is generally recognized on a cash basis. Cash payments on
loans in the process of foreclosure are generally treated as a return of
principal.
F-10
<PAGE>
MORTGAGE LOANS (CONTINUED)
At December 31, 1996 and 1995, the distribution of the mortgage loan
portfolio by property type and geographic region was as follows (in
millions):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Property Type:
Office building .. $ 643 $ 639
Retail............ 235 184
Apartments........ 179 151
Other............. 56 29
-------- --------
Total............ $1,113 $1,003
======== ========
Geographic Region:
Central........... $ 246 $ 207
Pacific........... 133 131
Middle Atlantic .. 377 365
South Atlantic ... 307 273
New England....... 33 12
Other............. 17 15
-------- --------
Total............ $1,113 $1,003
======== ========
</TABLE>
REAL ESTATE
At December 31, 1996 and 1995, NYLIAC's real estate portfolio consisted of
the following (in millions):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Investment ................... $105 $101
Acquired through foreclosure 39 40
Real estate joint ventures .. 7 --
------ ------
Total real estate .......... $151 $141
====== ======
</TABLE>
Accumulated depreciation on real estate was $5 million at December 31,
1996 and 1995. Depreciation expense for 1996, 1995 and 1994, totaled $3
million, $3 million and $2 million, respectively.
NOTE 4 -- INVESTMENT INCOME AND CAPITAL GAINS AND LOSSES
The components of net investment income for the years ended December 31,
1996, 1995 and 1994, were as follows (in millions):
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Fixed maturities........ $ 920 $ 904 $ 890
Equity securities....... 3 3 5
Mortgage loans.......... 93 82 86
Real estate............. 21 19 16
Policy loans............ 37 35 31
Other................... 6 4 13
--------- --------- --------
Gross investment
income................ 1,080 1,047 1,041
Investment expenses .... (32) (35) (27)
--------- --------- --------
Net investment
income............... $1,048 $1,012 $1,014
========= ========= ========
</TABLE>
F-11
<PAGE>
NOTE 4 -- INVESTMENT INCOME AND CAPITAL GAINS AND LOSSES (CONTINUED)
For the years ended December 31, 1996, 1995 and 1994, realized investment
gains and losses computed under the specific identification method are as
follows (in millions):
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
GAINS LOSSES GAINS LOSSES GAINS LOSSES
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities.............. $100 $ (64) $ 62 $ (32) $ 98 $(132)
Equity securities............. 22 (1) 16 (7) 5 (1)
Mortgage loans................ 15 (19) 15 (19) 1 (5)
Real estate................... 6 (3) 1 (1) 1 (4)
Derivative instruments........ 46 (41) 102 (102) 4 (14)
Other......................... 7 (3) 9 (6) 7 (1)
------- -------- ------- -------- ------- --------
Subtotal.................... $196 $(131) $205 $(167) $116 $(157)
------- -------- ------- -------- ------- --------
Net realized investment gains
(losses) .................... $65 $38 $(41)
=== === =====
</TABLE>
Stockholder's equity at December 31, 1996 and 1995, includes net
unrealized gains and losses as follows (in millions):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Net unrealized gains on investments before
adjustments................................. $163 $ 535
Related adjustments:
Deferred policy acquisition costs........... (60) (196)
Policyholder liabilities.................... 2 9
Deferred Federal income taxes............... (37) (121)
------ -------
(95) (308)
Net unrealized gains on investments included
in stockholder's equity..................... $ 68 $ 227
====== =======
</TABLE>
Changes in net unrealized gains and losses on investments were as follows
(in millions):
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Net unrealized gains (losses) on investments
before adjustments:
Beginning of year........................... $ 535 $ (477)
End of year................................. 163 535
------- ---------
Net change.................................. (372) 1,012
Change in related adjustments:
Deferred policy acquisition costs........... 136 (391)
Policyholder liabilities.................... (7) 17
Deferred Federal income taxes............... 84 (223)
------- ---------
Change in unrealized gains on investments .. (159) 415
Net unrealized gains (losses) on investments
at beginning of year........................ 227 (188)
------- ---------
Net unrealized gains on investments at end
of year..................................... $ 68 $ 227
======= =========
</TABLE>
F-12
<PAGE>
NOTE 5 -- INSURANCE LIABILITIES
POLICYHOLDERS' ACCOUNT BALANCES
NYLIAC's annuity contracts are primarily deferred annuities. The carrying
value, which approximates fair value, of NYLIAC's liabilities for deferred
annuities at December 31, 1996 and 1995, was $7,345 million and $7,559
million, respectively.
NOTE 6 -- SEPARATE ACCOUNTS
NYLIAC maintains seven non-guaranteed, registered separate accounts for
its variable deferred annuity and variable life products with assets of
$2,445 million and $1,444 million at December 31, 1996 and 1995,
respectively. NYLIAC maintains investments in the registered separate
accounts of $42 million and $48 million at December 31, 1996 and 1995,
respectively. The assets of the separate accounts, which are carried at
market value, represent investments in shares of the New York Life sponsored
MainStay VP Series Fund and seven nonproprietary funds.
NOTE 7 -- DEFERRED POLICY ACQUISITION COSTS
An analysis of deferred policy acquisition costs for the years ended
December 31, 1996, 1995 and 1994, is as follows (in millions):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year before adjustment for
unrealized (gains) losses on investments ........ $ 707 $ 667 $ 695
Current year deferral ............................. 151 126 111
Amortized during year ............................. (107) (86) (139)
------- ------- -------
Balance at end of year before adjustment for
unrealized (gains) losses on investments ........ 751 707 667
Adjustment for unrealized (gains) losses on
investments ...................................... (60) (196) 195
------- ------- -------
Balance at end of year ............................ $ 691 $ 511 $ 862
======= ======= =======
</TABLE>
NOTE 8 -- FEDERAL INCOME TAXES
The components of the net deferred income tax liability as of December 31,
1996 and 1995, are as follows (in millions):
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Deferred tax assets:
Future policy benefits........... $114 $ 105
Employee benefits................ 26 43
Other............................ 36 9
-------- -------
Gross deferred tax assets ...... 176 157
-------- -------
Deferred tax liabilities:
Deferred policy acquisition
costs........................... 161 110
Investments...................... 54 191
Other............................ 8 12
-------- -------
Gross deferred tax liabilities . 223 313
-------- -------
Net deferred tax liability ..... $ (47) $(156)
======== =======
</TABLE>
F-13
<PAGE>
NOTE 8 -- FEDERAL INCOME TAXES (CONTINUED)
The gross deferred tax asset relates to temporary differences that are
expected to reverse as net ordinary deductions. Management believes that
NYLIAC's taxable income in future years will be sufficient to realize the
deferred tax benefits and therefore, no valuation allowance has been
recorded.
Set forth below is a reconciliation of the Federal income tax rate to the
effective tax rate for 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Statutory Federal income tax rate . 35.0% 35.0% 35.0%
Equity base tax .................... 3.2 -- 11.7
Investments in employee stock
option loans ...................... (.7) (1.3) (1.4)
Other .............................. (.9) 5.2 3.3
------- ------- -------
Effective tax rate ................. 36.6% 38.9% 48.6%
======= ======= =======
</TABLE>
NYLIAC's Federal income tax returns are routinely audited by the IRS and
provisions are made in the financial statements in anticipation of the
results of these audits. The IRS has completed audits through 1990. There
were no material effects on NYLIAC's results of operations as a result of
these audits. NYLIAC believes that its recorded income tax liabilities are
adequate for all open years.
NOTE 9 -- REINSURANCE
A group reinsurance agreement between NYLIAC and New York Life was
approved by the New York State Insurance Department in 1981 and was
terminated effective December 31, 1995. Under the terms of the agreement,
NYLIAC assumed the liabilities for group health long-term disability policies
issued by New York Life. Cash settlements were made between the companies as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ -------- --------
<S> <C> <C> <C>
Premiums due .................. $-- $ (32) $ (33)
Benefit reimbursement ......... 22 20 18
Experience refund ............. 4 8 16
------ -------- --------
Net settlement paid (received)
by NYLIAC .................... $26 $ (4) $ 1
====== ======== ========
</TABLE>
As a result of the termination of the group reinsurance agreement between
NYLIAC and New York Life, NYLIAC transferred $119 million in fixed maturities
to New York Life during 1996 as payment for the policy liabilities related to
disability claims covered under the group reinsurance contract. At December
31, 1995, NYLIAC had established a liability of $119 million for this
payment.
NOTE 10 -- DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
NYLIAC uses derivative financial instruments to manage interest rate,
currency and market risk. These derivative financial instruments include
foreign currency forward exchange contracts, interest rate floors, and
interest rate and commodity swaps. NYLIAC does not engage in derivative
financial instrument transactions for the purpose of trading.
Notional or contractual amounts of derivative financial instruments
provide only a measure of involvement in these types of transactions and they
do not represent the amounts exchanged between the parties engaged in the
transaction. The amounts exchanged are determined by reference to the
notional amounts and other terms of the derivative financial instruments
which relate to interest rates, exchange rates, or other financial indices.
F-14
<PAGE>
INTEREST RATE RISK MANAGEMENT
NYLIAC enters into various types of interest rate contracts primarily to
minimize exposure of specific assets held by NYLIAC to fluctuations in
interest rates.
The following table summarizes the notional amounts and credit exposures
of interest rate related derivative transactions (in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
NOTIONAL CREDIT NOTIONAL CREDIT
AMOUNT EXPOSURE AMOUNT EXPOSURE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest Rate
Swaps.............. $ 57,000 $992 $ 50,000 --
Floors ............. $150,000 $120 $150,000 --
</TABLE>
Interest rate swaps are agreements with other parties to exchange, at
specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed upon notional amount.
Swap contracts outstanding at December 31, 1996 are between eight years,
eight months and fourteen years, four months in maturity. At December 31,
1995 such contracts were between ten months and eight years, seven months in
maturity. NYLIAC does not act as an intermediary or broker in interest rate
swaps.
The following table shows the type of swaps used by NYLIAC and the
weighted average interest rates. Average variable rates are based on the
rates which determine the last payment received or paid on each contract;
those rates may change significantly, affecting future cash flows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Receive--fixed swaps--Notional amount (in thousands) . $57,000 $15,000
Average receive rate ................................. 7.19% 7.93%
Average pay rate...................................... 5.92% 7.39%
Pay--fixed swaps--Notional amount (in thousands) -- $35,000
Average pay rate...................................... -- 7.46%
Average receive rate.................................. -- 6.02%
</TABLE>
During the term of the swap, net settlement amounts are recorded as
investment income or expense when earned. Fair values of interest rate swaps
were $569,000 and ($2,000,000) at December 31, 1996 and 1995, respectively,
based on quoted market prices.
Interest rate floor agreements entitle NYLIAC to receive amounts from
counterparties based upon the difference between a strike price and current
interest rates. Such agreements serve as hedges against declining interest
rates on a portfolio of assets. Amounts received during the term of interest
rate floor agreements are recorded as investment income.
At December 31, 1996 and 1995, unamortized premiums on interest rate
floors amounted to $522,000 and $597,000, respectively. Fair values of such
agreements were $120,000 and $395,000 at December 31, 1996 and 1995,
respectively, based on quoted market prices.
NYLIAC is exposed to credit-related losses in the event that a
counterparty fails to perform its obligations under contractual terms. The
credit exposure of derivative financial instruments is represented by the sum
of fair values of contracts with each counterparty, if the net value is
positive, at the reporting date.
NYLIAC deals with highly rated counterparties and does not expect the
counterparties to fail to meet their obligations. NYLIAC has controls in
place to monitor credit exposures by limiting transactions with specific
counterparties within specified dollar limits and assessing the future
creditworthiness of counterparties. NYLIAC uses master netting agreements and
adjusts transaction levels, when appropriate, to minimize risk.
F-15
<PAGE>
FOREIGN EXCHANGE RISK MANAGEMENT
NYLIAC enters into foreign currency forward exchange contracts and foreign
currency swaps primarily as a portfolio hedge against foreign currency
fluctuations. The purpose of NYLIAC's foreign currency hedging activities is
to protect it from the risk that the value of foreign currency denominated
investments will be adversely affected by changes in exchange rates.
NYLIAC's foreign currency forward exchange contracts involve the exchange
of two currencies at a specified future date and at a specified price. The
average term of the contracts is three to six months.
The table below summarizes, by major currency, the contractual amounts of
NYLIAC's foreign currency forward exchange contracts. The amounts represent
the U.S. dollar equivalent of commitments to buy and sell foreign currencies,
translated at December 31, 1996 and 1995 exchange rates (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------- ----------------
BUY SELL BUY SELL
-------- --------- ----- ---------
<S> <C> <C> <C> <C>
Japanese Yen .. $ -- $14,000 $-- $ 49,000
Italian Lire ... -- 9,000 -- 21,000
French Francs .. -- 8,000 -- 24,000
Other........... 4,000 43,000 -- 107,000
-------- --------- ----- ---------
$4,000 $74,000 $-- $201,000
======== ========= ===== =========
</TABLE>
The fair values of foreign currency forward exchange contracts at December
31, 1996 and 1995 were $1 million and $(3) million, respectively, based on
current market rates.
NYLIAC is exposed to credit-related losses in the event of non-performance
by counterparties, which could result in an unhedged position. NYLIAC deals
with highly rated counterparties and does not expect the counterparties to
fail to meet their obligations under the contracts. For contracts with
counterparties where no master netting arrangement exists, in the event of
default on the part of the counterparty, credit exposure is defined as the
fair value of contracts in a gain position at the reporting date. Credit
exposure to counterparties, where a master netting arrangement is in place in
the event of default is defined as the net fair value, if positive, of all
outstanding contracts with each specific counterparty. The credit exposure of
NYLIAC's foreign currency forward exchange contracts at December 31, 1996 and
1995 was $1,000,000 and $137,000, respectively.
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
LITIGATION
In 1995, NYLIAC and New York Life settled a class action related to the
sale of whole life and universal life insurance policies from 1982 through
1994. In entering into the settlement, NYLIAC specifically denied any
wrongdoing. The settlement was approved by the judge, and has now been upheld
on appeal, including a recent refusal by the New York State Court of Appeals
to permit a discretionary appeal from the Appellate Division. The lone
appellant has recently filed two motions in the trial court seeking to enjoin
implementation of the settlement and to renew his objections to the
settlement. The lone appellant may file a writ of certiorari in the United
States Supreme Court during the prescribed statutory period.
There are also actions in various jurisdictions by individual policyowners
who excluded themselves from the settlement of the nationwide class action;
and in each of two jurisdictions a purported class action claiming to include
numerous policyowners who excluded themselves from the settlement of the
nationwide class action. Most of these actions seek substantial or
unspecified compensatory and punitive damages.
F-16
<PAGE>
LITIGATION (CONTINUED)
NYLIAC is also a defendant in other individual and alleged class actions
arising from its insurance, investment and/or other operations, including
actions involving retail sales practices. Most of these actions also seek
substantial or unspecified compensatory and punitive damages. NYLIAC is also
from time to time involved as a party in various governmental,
administrative, and investigative proceedings and inquiries.
Given the uncertain nature of litigation and regulatory inquiries, the
outcome of the above cannot be predicted. NYLIAC nevertheless believes that
the ultimate liability that could result from such litigation and proceedings
would not have a material adverse effect on NYLIAC's financial position;
however, it is possible that settlements or adverse determinations in one or
more actions or other proceedings in the future could have a material adverse
effect on NYLIAC's operating results for a given year.
LOANED SECURITIES AND REPURCHASE AGREEMENTS
NYLIAC participates in a secured lending program for the purpose of
enhancing income on securities held. At December 31, 1996, $826 million
($1,222 million at December 31, 1995) of NYLIAC's bonds were on loan to
others, but were fully collateralized in an account held in trust for NYLIAC.
Such assets reflect the extent of NYLIAC's involvement in securities lending,
not its risk of loss.
NYLIAC enters into agreements to sell and repurchase securities for the
purpose of enhancing income on securities held. Under these agreements,
NYLIAC obtains the use of funds from a broker for approximately one month.
The liability reported in the balance sheet at December 31, 1996 of $50
million ($86 million at December 31, 1995) is considered to be fair value.
The investments acquired with the funds received from the securities sold are
primarily included in cash and cash equivalents in the balance sheet.
NOTE 12 -- RELATED PARTY TRANSACTIONS
No dividends were declared or paid to New York Life in 1996 or 1995. In
1994, NYLIAC declared and paid a dividend of $70 million to New York Life.
This dividend was paid from current year earnings, as permitted by the
Delaware Insurance Department.
New York Life provides NYLIAC with services and facilities for the sale of
insurance and other activities related to the business of insurance. NYLIAC
reimburses New York Life for the identified costs associated with these
services and facilities under the terms of a Service Agreement between New
York Life and NYLIAC. Such costs, amounting to $191 million for the year
ended December 31, 1996 ($166 million for 1995 and $147 million for 1994) are
reflected in operating expenses and net investment income in the accompanying
Statement of Income.
NOTE 13 -- SUPPLEMENTAL CASH FLOW INFORMATION
As a result of the reinsurance agreement with New York Life discussed in
Note 9, NYLIAC transferred $119 million in fixed maturities to New York Life
during 1996.
Federal income taxes paid were $146 million, $57 million, and $105 million
during 1996, 1995 and 1994, respectively.
Interest paid was $3 million, $2 million and $2 million during 1996, 1995
and 1994, respectively.
NOTE 14 -- RECONCILIATIONS BETWEEN STATUTORY ACCOUNTING AND GAAP
Accounting practices used to prepare statutory financial statements for
regulatory filings of life insurance companies differ in certain instances
from GAAP. The following chart reconciles NYLIAC's statutory capital and
surplus determined in accordance with accounting practices prescribed by the
F-17
<PAGE>
NOTE 14 -- RECONCILIATIONS BETWEEN STATUTORY ACCOUNTING AND GAAP (CONTINUED)
Delaware Insurance Department with stockholder's equity on a GAAP basis, and
the cumulative effect of adopting GAAP as of January 1, 1994 (in millions):
<TABLE>
<CAPTION>
YEAR ENDED CUMULATIVE EFFECT
DECEMBER 31, OF ADOPTING GAAP
------------------------------- -----------------
1996 1995 1994 JANUARY 1, 1994
--------- --------- --------- -----------------
<S> <C> <C> <C> <C>
Statutory Capital and Surplus .... $ 998 $ 878 $ 845 $ 780
--------- --------- --------- -----------------
Adjustments:
Deferred policy acquisition
costs........................... 691 511 862 694
Asset valuation reserve.......... 164 137 105 79
Investment related............... 151 511 (490) (7)
Interest maintenance reserve .... 35 26 20 55
Non-admitted assets.............. 31 26 23 17
Policyholder liabilities......... (262) (187) (203) (184)
Deferred income taxes............ (47) (156) 59 (55)
Employee benefit liabilities .... (63) (61) (61) (60)
Other............................ (12) (9) (19) (7)
--------- --------- --------- -----------------
Total adjustments............... 688 798 296 532
--------- --------- --------- -----------------
Total GAAP Stockholder's Equity . $1,686 $1,676 $1,141 $1,312
========= ========= ========= =================
</TABLE>
The following chart reconciles NYLIAC's statutory net income determined in
accordance with accounting practices prescribed by the Delaware Insurance
Department with net income on a GAAP basis (in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Statutory Net Income.............. $148 $ 95 $166
------- ------- -------
Adjustments:
Deferred policy acquisition
costs........................... 44 40 (28)
Deferred income taxes............ 24 8 10
Interest maintenance reserve .... 9 6 (35)
Investment related .............. 1 (11) --
Policyholder liabilities......... (54) (4) (14)
Other............................ (3) (14) (3)
------- ------- -------
Total Adjustments............... 21 25 (70)
------- ------- -------
GAAP Net Income.................. $169 $120 $ 96
======= ======= =======
</TABLE>
Financial statements prepared on the statutory basis of accounting vary
from those prepared under GAAP, primarily as follows: (1) the costs related
to acquiring business, principally commissions and certain policy issue
expenses are charged to income in the year incurred, whereas under GAAP they
would be deferred and amortized over the periods benefitted; (2) funds
received under deposit-type contracts are reported as premium income, whereas
under GAAP, such funds are recorded as a liability; (3) life insurance
reserves are based on different assumptions than they are under GAAP; (4)
life insurance companies are required to establish an Asset Valuation Reserve
("AVR") by a direct charge to surplus to offset potential investment losses,
whereas, under GAAP, the AVR is not recognized and any allowances for losses
on investments would be deducted from the assets to which they relate and
would be charged to income; (5) investments in fixed maturities are generally
carried at amortized cost or values prescribed by the National Association of
Insurance Commissioners ("NAIC"); under GAAP, investments in fixed
maturities, which are available for sale or held for trading, are generally
carried at
F-18
<PAGE>
NOTE 14 -- RECONCILIATIONS BETWEEN STATUTORY ACCOUNTING AND GAAP (CONTINUED)
market value, with changes in market value charged against equity or
reflected in earnings; (6) realized gains and losses resulting from changes
in interest rates on fixed income investments are deferred in the interest
maintenance reserve ("IMR") and amortized into investment income over the
remaining life of the investment sold, whereas under GAAP, the gains and
losses are recognized in income at the time of sale; and (7) deferred Federal
income taxes are not provided for as they are under GAAP.
The New York State Insurance Department recognizes only statutory
accounting practices for determining and reporting the financial condition
and results of operations of an insurance company, and for determining its
solvency under the New York Insurance Law. No consideration is given by the
Department to financial statements prepared in accordance with generally
accepted accounting principles in making such determinations.
At December 31, 1996 and 1995, admitted assets on a statutory basis were
$17,099 million and $15,977 million, respectively, and total liabilities were
$16,101 million and $15,099 million, respectively, which included policy
reserves of $13,099 million and $12,821 million, respectively.
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
New York Life Insurance and Annuity Corporation
In our opinion, the accompanying balance sheets and the related statements of
income, of changes in stockholder's equity and of cash flows present fairly,
in all material respects, the financial position of New York Life Insurance
and Annuity Corporation at December 31, 1996 and 1995, and the results of its
operations and its cash flows for the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
As discussed in Note 2, the Company changed its accounting policies to adopt
pronouncements of the Financial Accounting Standards Board in 1996.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
April 16, 1997
F-20
