<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS
This prospectus describes interests under flexible payment deferred variable
and fixed annuity contracts, known as Kemper Gateway Elite Contracts, issued
either on a group basis or as individual contracts by Allmerica Financial Life
Insurance and Annuity Company ("the Company") to individuals and businesses in
connection with retirement plans which may or may not qualify for special
federal income tax treatment. (For information about the tax status when used
with a particular type of plan, see "FEDERAL TAX CONSIDERATIONS"). Participation
in a group contract will be accounted for by the issuance of a certificate
describing the individual's interest under the group contract. Participation in
an individual contract will be evidenced by the issuance of an individual
contract. Certificates and individual contracts are collectively referred to
herein as the "Contracts." The following is a summary of information about these
Contracts. More detailed information can be found under the referenced captions
in this Prospectus.
Contract values may accumulate on a variable basis in the separate account
known as Separate Account KG (the "Variable Account"). The assets of the
Variable Account are divided into Sub-Accounts, each investing exclusively in
shares of one of the following Portfolios of Kemper Investors Fund ("KINF"):
<TABLE>
<S> <C>
MONEY MARKET PORTFOLIO INVESTMENT GRADE BOND PORTFOLIO
TOTAL RETURN PORTFOLIO VALUE PORTFOLIO
HIGH YIELD PORTFOLIO SMALL CAP VALUE PORTFOLIO
GROWTH PORTFOLIO VALUE+GROWTH PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO HORIZON 20+ PORTFOLIO
INTERNATIONAL PORTFOLIO HORIZON 10+ PORTFOLIO
SMALL CAP GROWTH PORTFOLIO HORIZON 5 PORTFOLIO
</TABLE>
In most jurisdictions, values may also be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account and during the
accumulation period to one or more of the Guarantee Period Accounts. Amounts
allocated to the Fixed Account earn interest at a guaranteed rate for one year
from the date allocated. Amounts allocated to a Guarantee Period Account earn a
fixed rate of interest for the duration of the applicable Guarantee Period, if
held for the entire Guarantee Period. If removed prior to the end of the
Guarantee Period the value may be increased or decreased by a Market Value
Adjustment. Amounts allocated to the Guarantee Period Accounts in the
accumulation phase are held in the Company's Separate Account GPA.
Additional information is contained in a Statement of Additional Information
dated , 1996 ("SAI"), filed with the Securities and Exchange
Commission and incorporated herein by reference. The Table of Contents of the
SAI is on page 3 of this Prospectus. The SAI is available upon request and
without charge through Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, Massachusetts 01653, 800-782-8380.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS OF
KINF. INVESTORS SHOULD RETAIN A COPY OF THIS PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE CONTRACTS ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. AND/OR KEMPER
DISTRIBUTORS, INC. AND ZKI AGENCY, INC. THE CONTRACTS ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT UNION. THE
CONTRACTS ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE CONTRACTS
ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND POSSIBLE
LOSS OF PRINCIPAL.
DATED , 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION........... 3
SPECIAL TERMS.......................................................... 4
SUMMARY................................................................ 5
ANNUAL AND TRANSACTION EXPENSES........................................ 10
PERFORMANCE INFORMATION................................................ 12
WHAT IS AN ANNUITY?.................................................... 14
RIGHT TO REVOKE IRA.................................................... 14
RIGHT TO REVOKE OR SURRENDER IN SOME STATES............................ 15
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, AND KEMPER
INVESTORS FUND....................................................... 15
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS...................... 17
VOTING RIGHTS.......................................................... 18
CHARGES AND DEDUCTIONS................................................. 18
A. Annual Charge Against Variable Account Assets.................... 18
B. Contract Fee..................................................... 19
C. Premium Taxes.................................................... 19
D. Contingent Deferred Sales Charge................................. 20
E. Transfer Charge.................................................. 24
DESCRIPTION OF THE CONTRACT............................................ 24
A. Payments......................................................... 24
B. Transfer Privilege............................................... 25
C. Dollar Cost Averaging and Automatic Rebalancing Options.......... 25
D. Surrender........................................................ 26
E. Withdrawals...................................................... 26
F. Death Benefit.................................................... 27
G. The Spouse of the Contract Owner as Beneficiary.................. 28
H. Assignment....................................................... 28
I. Electing the Form of Annuity and the Annuity Date................ 28
J. Description of Variable Annuity Options.......................... 29
K. Norris Decision.................................................. 30
L. Computation of Values and Annuity Benefit Payments............... 31
GUARANTEE PERIOD ACCOUNTS.............................................. 33
FEDERAL TAX CONSIDERATIONS............................................. 35
A. Qualified and Non-Qualified Contracts............................ 35
B. Taxation of the Contracts in General............................. 36
C. Tax Withholding and Penalties.................................... 37
D. Provisions Applicable to Qualified Employer Plans................ 37
E. Qualified Employee Pension and Profit Sharing Trusts and
Qualified Annuity Plans......................................... 37
F. Self-Employed Individuals........................................ 38
G. Individual Retirement Account Plans.............................. 38
H. Simplified Employee Pensions..................................... 39
I. Public School Systems and Certain Tax-Exempt Organizations....... 39
J. Texas Optional Retirement Program................................ 40
K. Section 457 Plans for State Governments and Tax-Exempt
Entities........................................................ 40
L. Non-individual Owners............................................ 40
REPORTS................................................................ 40
</TABLE>
2
<PAGE>
TABLE OF CONTENTS (continued)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
LOANS (QUALIFIED CONTRACTS ONLY)....................................... 41
CHANGES IN OPERATION OF THE VARIABLE ACCOUNT........................... 41
DISTRIBUTION........................................................... 41
LEGAL MATTERS.......................................................... 42
FURTHER INFORMATION.................................................... 42
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT................. 43
APPENDIX B -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT........ 44
APPENDIX C -- THE DEATH BENEFIT........................................ 47
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY........................................ 2
TAXATION OF THE VARIABLE ACCOUNT AND THE COMPANY....................... 3
SERVICES............................................................... 3
UNDERWRITERS........................................................... 3
ANNUITY PAYMENTS....................................................... 4
PERFORMANCE INFORMATION................................................ 6
TAX DEFERRED ACCUMULATION.............................................. 8
FINANCIAL STATEMENTS................................................... 8
</TABLE>
THE CONTRACTS OFFERED BY THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY SECURITIES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE OR SOLICIT AN OFFER IN THAT STATE.
3
<PAGE>
SPECIAL TERMS
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the
Sub-Accounts and of the value of all accumulations in the Fixed Account and
Guarantee Period Accounts then credited to the Contract, on any date before the
Annuity Date.
ACCUMULATION UNIT: a measure of the Contract Owner's interest in a Sub-Account
before annuity benefit payments begin.
ANNUITANT: the person designated in the Contract upon whose life annuity
benefit payments are to be made.
ANNUITY DATE: the date on which annuity benefit payments begin as specified
pursuant to the Contract.
ANNUITY UNIT: a measure of the value of the periodic annuity benefit payments
under the Contract.
FIXED ACCOUNT: the part of the Company's General Account that guarantees
principal and a fixed minimum interest rate and to which all or a portion of a
payment or transfer under this Contract may be allocated.
FIXED ANNUITY PAYOUT: an Annuity in the payout phase providing for annuity
benefit payments which remain fixed in an amount throughout the annuity benefit
payment period selected.
GUARANTEED INTEREST RATE: the annual effective rate of interest after daily
compounding credited to a Guarantee Period Account.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited.
GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period and is supported by assets in a
non-unitized separate account.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
MARKET VALUE ADJUSTMENT: a positive or negative adjustment assessed if any
portion of a Guarantee Period Account is withdrawn or transferred prior to the
end of its Guarantee Period.
SUB-ACCOUNT: a subdivision of the Variable Account. Each Sub-Account available
under the Contracts invests exclusively in the shares of a corresponding
portfolio of Kemper Investors Fund.
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee, contingent deferred sales charge, and Market
Value Adjustment.
UNDERLYING PORTFOLIOS: Money Market, Total Return, High Yield, Growth,
Government Securities, International, Small Cap Growth, Investment Grade Bond,
Value, Small Cap Value, Value+Growth, Horizon 20+, Horizon 10+, and Horizon 5
Portfolios of the Kemper Investors Fund.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Portfolios is determined and unit values of the Sub-Accounts are determined.
Valuation dates currently occur on each day on which the New York Stock Exchange
is open for trading as well as each day otherwise required.
VARIABLE ACCOUNT: Separate Account KG, one of the Company's separate accounts,
consisting of assets segregated from other assets of the Company. The investment
performance of the assets of the Variable Account is determined separately from
the other assets of the Company and are not chargeable with liabilities arising
out of any other business which the Company may conduct.
VARIABLE ANNUITY PAYOUT: Annuity in the payout phase providing for payments
varying in amount in accordance with the investment experience of certain of the
Portfolios.
4
<PAGE>
SUMMARY
WHAT IS THE KEMPER GATEWAY ELITE VARIABLE ANNUITY?
The Kemper Gateway Elite variable annuity contract ("Contract") is an
insurance contract designed to help you accumulate assets for your retirement or
other important financial goals on a tax-deferred basis. The Contract combines
the concept of professional money management with the attributes of an annuity
contract. Features available through the Contract include:
- A customized investment portfolio
- 14 KINF Portfolios
- 1 Fixed Account
- 9 Guarantee Period Accounts
- Experienced professional portfolio managers
- Tax deferral on earnings
- Guarantees that can protect your beneficiaries during the accumulation
phase
- Income that can be guaranteed for life
The Contract has two phases, an accumulation phase and an annuity payout
phase. During the accumulation phase, your initial payment and any additional
payments you choose to make may be allocated to the combination of portfolios of
securities ("Portfolios") under your Contract, to the Guarantee Period Accounts,
and to the Fixed Account. Your Contract's Accumulated Value is based on the
investment performance of the Portfolios and accumulations in the Guarantee
Period Accounts and the Fixed Account. No income taxes are paid on any earnings
under the Contract unless and until accumulated values are withdrawn.
During the annuity payout phase, the Annuitant can receive income based on
several annuity options. These options include payment over a period of years or
for the rest of the Annuitant's life.
THE ACCUMULATION PHASE
During the accumulation phase, you select the investment options most
appropriate for your investment needs. The Contracts permit net payments to be
allocated among the Portfolios, the Guarantee Period Accounts, and the Fixed
Account. Each Portfolio is professionally managed by Zurich Kemper Investments,
Inc. and its affiliate, Dreman Value Advisors, Inc. All investment gains or
losses of the Portfolios will be reflected in the Accumulated Value under your
Contract.
The accumulation phase provides certain protection and guarantees for the
beneficiary if the Annuitant should die before the annuity phase begins. See
discussion below under "What happens upon death during the accumulation phase?"
THE ANNUITY PAYOUT PHASE
You choose the annuity options and the date for the annuity benefit payments
to begin. Annuity benefit payments may be on a variable basis (dependent upon
the performance of the Portfolios), on a fixed basis (with payment amounts
guaranteed), or on a combination variable and fixed basis. Among the income
options available during the annuity phase are:
5
<PAGE>
- Lump sum
- At regular intervals over a specified number of years; or
- At regular intervals for the rest of the Annuitant's life, regardless of
how long he or she lives.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you and us -- Allmerica Financial Life Insurance and
Annuity Company ("the Company"). Each Contract has a Contract Owner (or an Owner
and a Joint Owner, in which case one of the two must also be the Annuitant), an
Annuitant and a beneficiary. As Contract Owner, you make payments, choose
investment allocations and select the Annuitant and beneficiary. The Annuitant
is the individual to receive annuity benefit payments under the Contract. The
beneficiary is the person who receives any payment on death of the Contract
Owner or Annuitant.
CAN I EXAMINE THE CONTRACT?
Yes. Your Contract will be delivered to you after your purchase. If you
return the Contract to the Company during the first 10 days from the date you
received it, the Contract will be canceled. (There may be a longer period in
certain states; see the "Right to Examine" provision on the cover of your
Contract). If your Contract was issued as an IRA or provides for a full refund
of the initial payment under its "Right to Examine" provision, you will incur no
fees to cancel within the right-to-examine period and will receive the greater
of (1) your entire payment, or (2) the Accumulated Value of the Contract plus
any amounts deducted under the Contract or by the Portfolios for taxes, charges
or fees. If your Contract does not provide for a full refund of the initial
payment, you will receive upon cancellation the sum of (1) the difference
between the payment paid, including fees, and any amount allocated to the
Variable Account and (2) the Accumulated Value (on the date the cancellation
request is received by the Company) attributable to amounts allocated to the
Variable Account Sub-Account. See "RIGHT TO REVOKE CONTRACT."
WHAT ARE MY INVESTMENT CHOICES?
The Contract permits net payments to be allocated among the Sub-Accounts
investing in the Portfolios, the Guarantee Period Accounts, and the Fixed
Account. The Fixed Account is part of the General Account of the Company and
provides a guarantee by the Company of principal and a fixed interest rate for
one year from the date amounts are allocated to the account. Payments allocated
to a Guarantee Period Account are held in a separate account and earn a
guaranteed interest rate if held for the full duration of the Guarantee period.
The Fixed Account and/or the Guarantee Period Accounts may not be available in
all states.
VARIABLE ACCOUNT -- You have a choice of Sub-Accounts investing in the 14
Portfolios of KINF:
<TABLE>
<S> <C>
MONEY MARKET INVESTMENT GRADE BOND
TOTAL RETURN VALUE
HIGH YIELD SMALL CAP VALUE
GROWTH VALUE+GROWTH
GOVERNMENT SECURITIES HORIZON 20+
INTERNATIONAL HORIZON 10+
SMALL CAP GROWTH HORIZON 5
</TABLE>
This range of investment choices enables you to allocate your money among
the Portfolios to meet your particular investment needs. If your Contract was
issued as an IRA or provides for a full refund of the initial
6
<PAGE>
payment under its "Right to Examine" provision (see "RIGHT TO REVOKE CONTRACT"),
for the first 15 days from the date of issue, all Portfolio investments and
allocations to the Guarantee Period Accounts will be allocated to the Money
Market Portfolio. Thereafter, all amounts will be allocated according to your
investment choices. For a more detailed description of the Portfolios, see
"Kemper Investors Fund."
GUARANTEE PERIOD ACCOUNTS -- Assets supporting the guarantees under the
Guarantee Period Accounts are held in the Company's Separate Account GPA, a
non-unitized insulated separate account. However, values and benefits calculated
on the basis of Guarantee Period Account allocations are obligations of the
Company's General Account. Amounts allocated to a Guarantee Period Account earn
a Guaranteed Interest Rate declared by the Company. The level of the Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company currently makes available nine Guarantee Periods ranging from two to
ten years in duration. Once declared, the Guaranteed Interest Rate will not
change during the duration of the Guarantee Period. If amounts allocated to a
Guarantee Period Account are transferred, surrendered or applied to any annuity
option at any time other than the day following the last day of the applicable
Guarantee Period, a Market Value Adjustment will apply that may increase or
decrease the account's value. For more information about the Guarantee Period
Accounts and the Market Value Adjustment, see "Guarantee Period Accounts."
FIXED ACCOUNT -- The Fixed Account is part of the General Account, which
consists of all the Company's assets other than those allocated to the Variable
Account and any other separate account. Allocations to the Fixed Account are
guaranteed as to principal and a minimum rate of interest. Additional excess
interest may be declared periodically at the Company's discretion. Furthermore,
the initial rate in effect on the date an amount is allocated to the Fixed
Account will be guaranteed for one year from that date. For more information
about the Fixed Account see Appendix A, "MORE INFORMATION ABOUT THE FIXED
ACCOUNT."
WHO ARE THE PORTFOLIO MANAGERS?
Zurich Kemper Investments, Inc. ("ZKI"), is the investment manager of each
Portfolio of KINF other than the Value and Small Cap Value Portfolios which are
managed by Dreman Value Advisors, Inc. ("DVA"), a wholly owned subsidiary of
ZKI. ZKI and DVA provide each Portfolio with continuous professional investment
supervision. DVA is also the sub-adviser for the Value+Growth, Horizon 20+,
Horizon 10+, and Horizon 5 Portfolios. Under the terms of its Sub-Advisory
Agreement with ZKI, DVA will manage the value portion of each of these
Portfolios and will provide such other investment advice, research and
assistance as ZKI may, from time to time, reasonably request. Zurich Investment
Management, Inc. ("ZIM"), a wholly-owned subsidiary of ZKI, is the investment
manager of the Guarantee Period Accounts pursuant to an investment advisory
agreement between the Company and ZIM.
CAN I MAKE TRANSFERS AMONG THE ACCOUNTS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts
investing in the Portfolios, the Guarantee Period Accounts, and the Fixed
Account. You will incur no current taxes on transfers while your money remains
in the Contract. You may also elect Automatic Account rebalancing to ensure
assets remain allocated according to a desired mix or choose automatic dollar
cost averaging to gradually move money into one or more portfolios. See
"TRANSFER PRIVILEGE."
HOW MUCH CAN I INVEST AND HOW OFTEN?
The number and frequency of your payments are flexible, subject to the
minimum and maximum payments stated in "PAYMENTS."
7
<PAGE>
WHAT IF I NEED MY MONEY BEFORE MY ANNUITY PAYOUT PHASE BEGINS?
You can withdraw the greater of 100% of cumulative earnings or 15% of the
total Accumulated Value per calendar year without a surrender charge. You may
surrender your Contract or make additional withdrawals any time before your
annuity payout phase begins subject to the restrictions discussed in
"SURRENDER," "WITHDRAWALS," and "MARKET VALUE ADJUSTMENT." Certain charges may
apply, see "CHARGES AND DEDUCTIONS," and there may be a tax-penalty assessed
under the Internal Revenue Code (the "Code"). See "FEDERAL TAX CONSIDERATIONS."
WHAT HAPPENS UPON DEATH DURING MY ACCUMULATION PHASE?
If the Annuitant, Contract Owner or Joint Owner should die before the
Annuity Date, a death benefit will be paid to the beneficiary. Upon the death of
the Annuitant (or an Owner who is also an Annuitant), the death benefit is equal
to the GREATEST of:
- The Accumulated Value increased by any positive Market Value Adjustment;
- Gross payments, with interest accumulating daily at an annual rate of 5%
starting on the date each payment was applied, reduced proportionately to
reflect withdrawals (for each withdrawal, the proportionate reduction is
calculated as the death benefit under this option immediately prior to the
withdrawal, multiplied by the withdrawal amount, and divided by the
Accumulated Value immediately prior to the withdrawal); or
- The death benefit that would have been payable on the most recent Contract
Anniversary, increased for subsequent payments and reduced proportionately
to reflect withdrawals after that date.
If an Owner who is not also the Annuitant dies during the Accumulation
phase, the death benefit will equal the Accumulated Value of the Contract
increased by any positive Market Value Adjustment. If the Annuitant dies after
the Annuity Date but before all guaranteed annuity benefit payments have been
made, the remaining payments will be paid to the beneficiary at least as rapidly
as under the annuity option in effect. See "Death Benefit."
WHAT ARE MY ANNUITY OPTIONS UNDER THE CONTRACT?
You may choose variable annuity benefit payments based on the investment
performance of certain Portfolios, fixed-amount annuity benefit payments, or a
combination of fixed-amount and variable annuity benefit payments. Fixed-amount
payments are guaranteed by the Company. See "DESCRIPTION OF THE CONTRACT" for
information about annuity benefit payment options, selecting the Annuity Date,
and how annuity benefit payments are calculated.
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
At each Contract anniversary and upon surrender, if the Accumulated Value is
less than $50,000, the Company will deduct a $35 Contract Fee from your
Contract. There will be no Contract Fee if the Accumulated Value is $50,000 or
more. The Contract Fee is waived for Contracts issued to and maintained by a
Trustee of a 401(k) plan.
Should you decide to surrender your Contract, make withdrawals, or receive
payments under certain annuity options, you may be subject to a contingent
deferred sales charge. If applicable, this charge will be between 2% and 7% of
payments withdrawn, based on when the payments were made.
8
<PAGE>
Depending upon the state you live in, a deduction for state and local
premium taxes, if any, may be made as described under "PREMIUM TAXES."
Currently, the Company makes no charge for processing transfers. The first
twelve (12) transfers in a Contract year are guaranteed to be free of a transfer
charge. For each subsequent transfer in a contract year, the Company reserves
the right to assess a charge which is guaranteed never to exceed $25.
The Company will deduct on a daily basis, an annual Mortality and Expense
Risk Charge and Administrative Expense Charge equal to 1.25% and 0.15%,
respectively, of the average daily net assets invested in each Portfolio. The
Portfolios will incur certain management fees and expenses which are more fully
described in "OTHER CHARGES" and in the KINF prospectus which accompanies this
Prospectus.
For more information, see "CHARGES AND DEDUCTIONS."
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
There are several changes you can make after receiving your Contract:
- You may assign your ownership to someone else, except under certain
qualified plans.
- You may change the beneficiary, unless you have designated a beneficiary
irrevocably.
- You may change the allocation of payments, with no tax consequences under
current law.
- You may make transfers of Contract value among your current investments.
- You may cancel your Contract within 10 days of delivery, as discussed
above.
- You may select the form and timing of annuity benefit payments.
9
<PAGE>
ANNUAL AND TRANSACTION EXPENSES
The following tables show charges under your Contract, expenses of the
Sub-Accounts, and expenses of the Portfolios. In addition to the charges and
expenses described below, premium taxes are applicable in some states and
deducted as described under "PREMIUM TAXES."
CONTRACT CHARGES
<TABLE>
<CAPTION>
YEARS FROM DATE
OF PAYMENT CHARGE
---------------- ---------
<S> <C> <C>
CONTINGENT DEFERRED SALES CHARGE: 0-1 7.0%
This charge may be assessed upon surrender, withdrawal or annuitization 2 6.0%
under any commutable period certain option or a noncommutable period 3 5.0%
certain option of less than 10 years. The charge is a percentage of 4 4.0%
payments applied to the amount surrendered (in excess of any amount 5 3.0%
that is free of charge) within the indicated time periods. 6 2.0%
Thereafter 0.0%
TRANSFER CHARGE: None
The Company currently makes no charge for processing transfers. The Company guarantees that
the first twelve transfers in a Contract Year will not be subject to a transfer charge. For
each subsequent transfer, the Company reserves the right to assess a charge, guaranteed
never to exceed $25, to reimburse the Company for the costs of processing the transfer.
CONTRACT FEE: $ 35
The Fee is deducted annually and upon surrender prior to the annuity date when the
Accumulated Value is less than $50,000. The fee is waived for contracts issued to and
maintained by the Trustee of a 401(k) plan.
SUB-ACCOUNT EXPENSES
(on annual basis as percentage of average daily net assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.15%
---------
Total Asset Charge: 1.40%
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO EXPENSES
- -----------------------------------------------------------
<S> <C> <C> <C>
(annual basis as percentage of average daily net assets)
<CAPTION>
MANAGEMENT OTHER TOTAL
PORTFOLIO FEE EXPENSES EXPENSES
- ----------------------------------------------------------- --------------- ----------- -----------
<S> <C> <C> <C>
Money Market............................................... 0.50% 0.05% 0.55%
Total Return............................................... 0.55% 0.05% 0.60%
High Yield................................................. 0.60% 0.05% 0.65%
Growth..................................................... 0.60% 0.04% 0.64%
Government Securities...................................... 0.55% 0.10% 0.65%
International.............................................. 0.75% 0.17% 0.92%
Small Cap Growth........................................... 0.65% 0.22% 0.87%
Investment Grade Bond...................................... 0.60% 0.15%* 0.75%
Value...................................................... 0.75% 0.15%* 0.90%
Small Cap Value............................................ 0.75% 0.15%* 0.90%
Value+Growth............................................... 0.75% 0.15%* 0.90%
Horizon 20+................................................ 0.60% 0.15%* 0.75%
Horizon 10+................................................ 0.60% 0.15%* 0.75%
Horizon 5.................................................. 0.60% 0.15%* 0.75%
</TABLE>
*Estimated First-Year Expenses
10
<PAGE>
EXAMPLES. The following examples demonstrate the cumulative expenses which
would be paid by the Contract Owner at 1-year, 3-year, 5-year and 10-year
intervals under certain contingencies. Each example assumes a $1,000 investment
in a Sub-Account and a 5% annual return on assets, as required by rules of the
Securities and Exchange Commission. Because the expenses of the Portfolios
differ, separate examples are used to illustrate the expenses incurred by a
Contract Owner on an investment in the various Sub-Accounts.
THE INFORMATION GIVEN UNDER THE FOLLOWING EXAMPLES SHOULD NOT BE CONSIDERED
A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN.
(a) If, at the end of the applicable period, you surrender your Contract or
annuitize* under a commutable variable period certain option or a noncommutable
period certain option of less than 10 years, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
UNDERLYING PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Money Market............................................... $ 82 $ 109 $ 138 $ 233
Total Return............................................... $ 82 $ 111 $ 140 $ 238
High Yield................................................. $ 83 $ 112 $ 143 $ 244
Growth..................................................... $ 82 $ 112 $ 142 $ 243
Government Securities...................................... $ 83 $ 112 $ 143 $ 244
International.............................................. $ 85 $ 120 $ 156 $ 271
Small Cap Growth........................................... $ 85 $ 119 $ 153 $ 266
Investment Grade Bond...................................... $ 84 $ 115 $ 147 $ 254
Value...................................................... $ 85 $ 119 $ 155 $ 269
Small Cap Value............................................ $ 85 $ 119 $ 155 $ 269
Value+Growth............................................... $ 85 $ 119 $ 155 $ 269
Horizon 20+................................................ $ 84 $ 115 $ 147 $ 254
Horizon 10+................................................ $ 84 $ 115 $ 147 $ 254
Horizon 5.................................................. $ 84 $ 115 $ 147 $ 254
</TABLE>
(b) If, at the end of the applicable time period, you annuitize* under a
life option or a noncommutable period certain option of 10 years or longer, or
if you do not surrender or annuitize your Contract, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
UNDERLYING PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Money Market............................................... $ 20 $ 63 $ 108 $ 233
Total Return............................................... $ 21 $ 64 $ 111 $ 238
High Yield................................................. $ 21 $ 66 $ 113 $ 244
Growth..................................................... $ 21 $ 66 $ 113 $ 243
Government Securities...................................... $ 21 $ 66 $ 113 $ 244
International.............................................. $ 24 $ 74 $ 127 $ 271
Small Cap Growth........................................... $ 24 $ 73 $ 1124 $ 266
Investment Grade Bond...................................... $ 22 $ 69 $ 118 $ 254
Value...................................................... $ 24 $ 74 $ 126 $ 269
Small Cap Value............................................ $ 24 $ 74 $ 126 $ 269
Value+Growth............................................... $ 24 $ 74 $ 126 $ 269
Horizon 20+................................................ $ 22 $ 69 $ 118 $ 254
Horizon 10+................................................ $ 22 $ 69 $ 118 $ 254
Horizon 5.................................................. $ 22 $ 69 $ 118 $ 254
</TABLE>
As required in rules promulgated under the 1940 Act, the Contract Fee is
reflected in the examples by a method to show the "average" impact on an
investment in the Variable Account. The total Contract Fees collected are
divided by the total average net assets attributable to the Contracts. The
resulting percentage is 0.088%, and the amount of the Contract Fee is assumed to
be $0.88 in the examples.
*The Contract Fee is not deducted after annuitization. No contingent
deferred sales charge is assessed at the time of annuitization under an option
including a life contingency or under a noncommutable period certain option of
10 years or longer.
11
<PAGE>
PERFORMANCE INFORMATION
The Contracts are first being offered to the public in 1996. However, the
Company and KINF may advertise "Total Return" and "Average Annual Total Return"
performance information based on the periods that the Portfolios have been in
existence. The results for any period prior to the Contracts being offered will
be calculated as if the Contracts had been offered during that period of time,
with all charges assumed to be those applicable to the Sub-Accounts, the
Portfolios, and (in Table I) assuming that the Contract is surrendered at the
end of the applicable period.
The "Total Return" of a Sub-Account refers to the total of the income
generated by an investment in the Sub-Account and of the changes in the value of
the principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by certain charges, and expressed as a percentage of
the investment.
The "Average Annual Total Return" represents the average annual percentage
change in the value of an investment in a Sub-Account over a given period of
time. Average Annual Total Return represents averaged figures as opposed to the
actual performance of a Sub-Account, which will vary from year to year.
The "Yield" of the Sub-Account investing in the Money Market Portfolio
refers to the income generated by an investment in the Sub-Account over a
seven-day period (which period will be specified in the advertisement). This
income is then "annualized" by assuming that the income generated in the
specific week is generated over a 52-week period. This annualized Yield is shown
as a percentage of the investment. The "Effective Yield" calculation is similar,
but when annualized, the income earned by an investment in the Sub-Account is
assumed to be reinvested. Thus the "Effective Yield" will be slightly higher
than the "Yield" because of the compounding effect of this assumed reinvestment.
The Total Return, Yield, and Effective Yield figures are adjusted to reflect
the Sub-Account's asset charges. The total return figures also reflect the $35
annual Contract Fee and the contingent deferred sales charge which would be
assessed if the investment were completely surrendered at the end of the
specified period.
The Company and KINF may also advertise supplemental total return
performance information. Supplemental total return refers to the total of the
income generated by an investment in the Sub-Account and of the changes in value
of the principal invested (due to realized and unrealized capital gains or
losses), adjusted by the Sub-Account's annual asset charges, and expressed as a
percentage of the investment. Because it is assumed that the investment is NOT
surrendered at the end of the specified period, the contingent deferred sales
charge is NOT included in the calculation of supplemental total return.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S & P
500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman Aggregate Bond
Index or other unmanaged indices so that investors may compare the Sub-Account
results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities markets in general; (ii) other
groups of variable annuity variable accounts or other investment products
tracked by Lipper Analytical Services, a widely used independent research firm
which ranks mutual funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons, such as Morningstar, Inc., who rank such investment
products on overall performance or other criteria; or (iii) the Consumer Price
Index (a measure for inflation) to assess the real rate of return from an
investment in the Sub-Account. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS ONLY THE PERFORMANCE OF
A HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE PARTICULAR TIME PERIOD
ON WHICH THE CALCULATIONS ARE BASED. PERFORMANCE INFORMATION SHOULD BE
CONSIDERED IN LIGHT OF THE INVESTMENT OBJECTIVES AND POLICIES, CHARACTERISTICS
AND QUALITY OF THE INVESTMENT PORTFOLIO OF THE PORTFOLIO IN WHICH THE
SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING THE GIVEN TIME PERIOD, AND
SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT MAY BE ACHIEVED IN THE
FUTURE.
12
<PAGE>
TABLE I
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1995
(ASSUMING COMPLETE SURRENDER OF INVESTMENT)
<TABLE>
<CAPTION>
10 YEARS
YEAR (OR SINCE
ENDED: 5 INCEPTION
UNDERLYING PORTFOLIO 12/31/95 YEARS IF LESS)
- ------------------------------------------------------------------------------------ ---------- --------- ---------
<S> <C> <C> <C>
Money Market........................................................................ -2.20% 2.24% 4.36%
Total Return........................................................................ 17.10% 10.32% 10.15%
High Yield.......................................................................... 8.77% 17.68% 9.83%
Growth.............................................................................. 24.00% 17.23% 11.56%
Government Securities............................................................... 10.24% 6.44% 6.86%
International....................................................................... 4.54% N/A 7.04%
Small Cap Growth.................................................................... 21.14% N/A 14.98%
Investment Grade Bond............................................................... N/A N/A N/A
Value............................................................................... N/A N/A N/A
Small Cap Value..................................................................... N/A N/A N/A
Value+Growth........................................................................ N/A N/A N/A
Horizon 20+......................................................................... N/A N/A N/A
Horizon 10+......................................................................... N/A N/A N/A
Horizon 5........................................................................... N/A N/A N/A
</TABLE>
TABLE II
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1995
(ASSUMING N0 SURRENDER OF INVESTMENT)
<TABLE>
<CAPTION>
10 YEARS
YEAR (OR SINCE
ENDED: 5 INCEPTION
UNDERLYING PORTFOLIO 12/31/95 YEARS IF LESS)
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Money Market......................................................................... 3.99% 2.77% 4.36%
Total Return......................................................................... 24.10% 10.72% 10.15%
High Yield........................................................................... 15.65% 18.00% 11.56%
Growth............................................................................... 31.00% 17.54% 11.56%
Government Securities................................................................ 17.21% 6.90% 6.86%
International........................................................................ 11.15% N/A 7.87%
Small Cap Growth..................................................................... 28.14% N/A 18.28%
Investment Grade Bond................................................................ N/A N/A N/A
Value................................................................................ N/A N/A N/A
Small Cap Value...................................................................... N/A N/A N/A
Value+Growth......................................................................... N/A N/A N/A
Horizon 20+.......................................................................... N/A N/A N/A
Horizon 10+.......................................................................... N/A N/A N/A
Horizon 5............................................................................ N/A N/A N/A
</TABLE>
*The inception dates for the Portfolios are: 3/5/82 for Money Market, Total
Return and High Yield; 12/9/83 for Growth; 9/3/87 for Government Securities;
1/6/92 for International; 5/2/94 for the Small Cap Growth; 5/1/96 for Investment
Grade Bond, Value, Small Cap Value, Value+Growth, Horizon 20+, Horizon 10+, and
Horizon 5.
13
<PAGE>
WHAT IS AN ANNUITY?
In general, an annuity is an insurance contract designed to provide a
retirement income in the form of periodic payments for the lifetime of the
purchaser or an individual chosen by the purchaser. The retirement income
payments are called "annuity benefit payments" and the individual receiving the
payments is called the "Annuitant." Annuity benefit payments begin on the
annuity date.
The Contract has two phases, an accumulation phase and an annuity payout
phase. During the accumulation phase, your initial payment and any additional
payments you choose to make may be allocated to the combination of portfolios of
securities ("Portfolios") under your Contract, to the Guarantee Period Accounts,
and to the Fixed Account.
During the annuity payout phase, the Annuitant can receive income based on
several annuity options. These options include payment over a period of years or
for the rest of the Annuitant's life.
Under an annuity contract, the insurance company assumes a mortality risk
and an expense risk. The mortality risk arises from the insurance company's
guarantee that annuity benefit payments will continue for the life of the
Annuitant, regardless of how long the Annuitant lives or how long all Annuitants
as a group live. The expense risk arises from the insurance company's guarantee
that charges will not be increased beyond the limits specified in the Contract,
regardless of actual costs of operations.
The Contract Owner's payments, less any applicable deductions, are invested
by the insurance company. After retirement, annuity benefit payments are paid to
the Annuitant for life or for such other period chosen by the Contract Owner. In
the case of a "fixed" annuity, the value of these annuity benefit payments is
guaranteed by the insurance company, which assumes the risk of making the
investments to enable it to make the guaranteed payments. For more information
about fixed annuities see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED
ACCOUNT." With a variable annuity, the value of the Contract and the annuity
benefit payments are not guaranteed but will vary depending on the investment
performance of a portfolio of securities. Any investment gains or losses are
reflected in the value of the Contract and in the annuity benefit payments. If
the portfolio increases in value, the value of the Contract increases. If the
portfolio decreases in value, the value of the Contract decreases.
RIGHT TO REVOKE IRA
An individual purchasing a Contract intended to qualify as an IRA may revoke
the Contract at any time within 10 days after receipt of the Contract and
receive a refund. In order to revoke the Contract, the Contract Owner must mail
or deliver the Contract to the agent through whom the Contract was purchased or
to the Principal Office of the Company at 440 Lincoln Street, Worcester,
Massachusetts 01653. Mailing or delivery must occur on or before 10 days after
receipt of the Contract for revocation to be effective.
Within seven days the Company will provide a refund equal to the greater of
(1) gross payments, or (2) the Accumulated Value plus any amounts deducted under
the Contract or by the Portfolios for taxes, charges or fees.
The liability of the Variable Account under this provision is limited to the
Contract Owner's Accumulated Value in the Sub-Accounts on the date of
cancellation. Any additional amounts refunded to the Contract Owner will be paid
by the Company.
14
<PAGE>
RIGHT TO REVOKE OR SURRENDER IN SOME STATES
In Georgia, Idaho, Indiana, Michigan, Missouri, North Carolina, Oklahoma,
Oregon, South Carolina, Texas, Utah, Washington and West Virginia, any Contract
Owner may revoke the Contract at any time within 10 days (20 days in Idaho)
after receipt of the Contract and receive a refund as described under "RIGHT TO
REVOKE IRA," above.
In all other states, a Contract Owner may return the Contract at any time
within 10 days (or the number of days required by state law if more than 10)
after receipt of the Contract. The Company will pay to the Contract Owner an
amount equal to the sum of (i) the difference between the payment paid,
including fees, and any amount allocated to the Variable Account and (ii) the
Accumulated Value of amounts allocated to the Variable Account as of the date
the request is received. If the Contract was purchased as an IRA, the IRA
revocation right described above may be utilized in lieu of the special
surrender right.
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
AND KEMPER INVESTORS FUND
THE COMPANY -- The Company is a life insurance company organized under the
laws of Delaware in July, 1974. Its Principal Office is located at 440 Lincoln
Street, Worcester, Massachusetts 01653, Telephone 800-782-8380. The Company is
subject to the laws of the State of Delaware governing insurance companies and
to regulation by the Commissioner of Insurance of Delaware. In addition, the
Company is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1995, the
Company had over $5 billion in assets and over $18 billion of life insurance in
force.
Effective October 1, 1995, the Company changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company. The
Company is an indirectly wholly-owned subsidiary of First Allmerica Financial
Life Insurance Company ("First Allmerica"), which in turn is a wholly-owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company on October 16, 1995 and adopted its
present name. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1995 First Allmerica and its subsidiaries (including
the Company) had over $11 billion in combined assets and over $35.2 billion in
life insurance in force.
VARIABLE ACCOUNT -- Separate Account KG ("Variable Account") is a separate
investment account of the Company with 14 Sub-Accounts. The assets used to fund
the variable portions of the Contracts are set aside in Sub-Accounts kept
separate from the general assets of the Company. Each Sub-Account invests in a
corresponding investment series ("Portfolio") of Kemper Investors Fund ("Fund").
Each Sub-Account is administered and accounted for as part of the general
business of the Company. However, the income, capital gains, or capital losses
of each Sub-Account are allocated to each Sub-Account, without regard to any
other income, capital gains, or capital losses of the Company. Under Delaware
law, the assets of the Variable Account may not be charged with any liabilities
arising out of any other business of the Company.
The Variable Account was authorized by vote of the Board of Directors of the
Company on June 13, 1996. The Variable Account meets the definition of "separate
account" under federal securities laws and is registered with the Securities and
Exchange Commission ("SEC") as a unit investment trust under the Investment
Company Act of 1940 ("1940 Act"). This registration does not involve the
supervision of management or investment practices or policies of the Variable
Account by the SEC.
15
<PAGE>
The Company reserves the right, subject to compliance with applicable law,
to change the names of the Variable Account and the Sub-Accounts.
KEMPER INVESTORS FUND -- The Variable Account invests in shares of Kemper
Investors Fund ("KINF"), a series type mutual fund registered with the
Commission as an open-end, diversified, management investment company.
Registration of KINF does not involve supervision of its management, investment
practices or policies by the Commission. KINF is designed to provide an
investment vehicle for certain variable annuity contracts and variable life
insurance policies. Shares of the Portfolios of KINF are sold only to insurance
company separate accounts. The investment objectives of the fourteen Portfolios
of KINF are summarized below:
MONEY MARKET PORTFOLIO seeks maximum current income to the extent consistent
with stability of principal from a portfolio of high quality money market
instruments that mature in twelve months or less.
TOTAL RETURN PORTFOLIO seeks a high total return, a combination of income
and capital appreciation, by investing in a combination of debt securities and
common stocks.
HIGH YIELD PORTFOLIO seeks to provide a high level of current income by
investing in fixed-income securities.
GROWTH PORTFOLIO seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital from a portfolio composed primarily of U.S. Government
securities.
INTERNATIONAL PORTFOLIO seeks total return, a combination of capital growth
and income, principally through an internationally diversified portfolio of
equity securities.
SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors' capital
from a portfolio primarily of growth stocks of smaller companies.
INVESTMENT GRADE BOND PORTFOLIO seeks high current income by investing
primarily in a diversified portfolio of investment grade debt securities.
VALUE PORTFOLIO seeks to achieve a high rate of total return from a
portfolio primarily of value stocks of larger companies.
SMALL CAP VALUE PORTFOLIO seeks long-term capital appreciation from a
portfolio primarily of value stocks of smaller companies.
VALUE+GROWTH PORTFOLIO seeks growth of capital through professional
management of a portfolio of growth and value stocks.
HORIZON 20+ PORTFOLIO, designed for investors with approximately a 20+ year
investment horizon, seeks growth of capital, with income as a secondary
objective.
HORIZON 10+ PORTFOLIO, designed for investors with approximately a 10+ year
investment horizon, seeks a balance between growth of capital and income,
consistent with moderate risk.
HORIZON 5 PORTFOLIO, designed for investors with approximately a 5 year
investment horizon, seeks income consistent with preservation of capital, with
growth of capital as a secondary objective.
There is no assurance that any of the Portfolios of KINF will achieve its
objective as stated in KINF's prospectus. More detailed information, including a
description of risks involved in investing in each of the
16
<PAGE>
Portfolios, may be found in the prospectus for KINF, which must accompany or
precede this Prospectus, and KINF's Statement of Additional Information
available upon request from KINF, 222 South Riverside Plaza, Chicago, Illinois
60606. Please read the prospectus of KINF carefully before investing.
INVESTMENT MANAGEMENT SERVICES TO KINF -- Responsibility for overall
management of KINF rests with the Board of Trustees and officers of KINF. ZKI is
the investment manager of each Portfolio other than the Value and Small Cap
Value Portfolios who are managed by DVA, a wholly owned subsidiary of ZKI. ZKI
and DVA provide each Portfolio with continuous professional investment
supervision. DVA is also the sub-adviser for the Value+Growth, Horizon 20+,
Horizon 10+, and Horizon 5 Portfolios. Under the terms of its Sub-Advisory
Agreement with ZKI, DVA will manage the value portion of each of these
Portfolios and will provide such other investment advice, research and
assistance as ZKI may, from time to time reasonably request.
For its services, ZKI is paid a management fee based upon the average daily
net assets of such Portfolios, as follows: Money Market (.50 of 1%), Total
Return (.55 of 1%), High Yield (.60 of 1%), Growth (.60 of 1%), Government
Securities (.55 of 1%), International (.75 of 1%), Small Cap Growth (.65 of 1%),
Investment Grade Bond (.60 of 1%), Value+Growth (.75 of 1%), Horizon 20+ (.60 of
1%), Horizon 10+ (.60 of 1%), and Horizon 5 (.60 of 1%). DVA serves as the
investment manager for the Value and Small Cap Value Portfolios and is paid a
management fee at an annual rate of .75 of 1% of the average daily net assets of
these Portfolios. For more information, see the KINF Prospectus and SAI.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law and to the
provision of the Participation Agreement (the "Participation Agreement") among
the Company, KINF, ZKI, and Kemper Distributors, Inc., to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Portfolio are no longer available for investment or if in the Company's judgment
further investment in any Portfolio should become inappropriate in view of the
purposes of the Variable Account or the affected Sub-Account, the Company may
redeem the shares of that Portfolio and substitute shares of another registered
open-end management company. The Company will not substitute any shares
attributable to a Contract interest in a Sub-Account without notice to the
Contract Owner and prior approval of the Commission and state insurance
authorities, to the extent required by the 1940 Act or other applicable law. The
Variable Account may, to the extent permitted by law, purchase other securities
for other contracts or permit a conversion between contracts upon request by a
Contract Owner.
The Company also reserves the right to establish additional Sub-Accounts of
the Variable Account, each of which would invest in shares corresponding to a
new Portfolio or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required Commission
approval, the Company may, in its sole discretion, establish new Sub-Accounts or
eliminate one or more Sub-Accounts if marketing needs, tax considerations or
investment conditions warrant. Any new Sub-Accounts may be made available to
existing Contract Owners on a basis to be determined by the Company.
Shares of the Portfolios are also issued to variable accounts of other
insurance companies which issue variable life Contracts ("mixed funding").
Shares of the Portfolios are also issued to other unaffiliated insurance
companies ("shared funding"). It is conceivable that in the future such mixed
funding or shared funding may be disadvantageous for variable life Contract
Owners or variable annuity Contract Owners. Although the Company and KINF do not
currently foresee any such disadvantages to either variable life insurance
Contract Owners or variable annuity Contract Owners, the Company and the
Trustees of KINF intend to monitor events in order to
17
<PAGE>
identify any material conflicts between such Contract Owners and to determine
what action, if any, should be taken in response thereto. If the Trustees were
to conclude that separate portfolios should be established for variable life and
variable annuity Separate accounts, the Company will bear the attendant
expenses.
If any of these substitutions or changes are made, the Company may by
appropriate endorsement change the Contract to reflect the substitution or
change and will notify Contract Owners of all such changes. If the Company deems
it to be in the best interest of Contract Owners, and subject to any approvals
that may be required under applicable law, the Variable Account or any
Sub-Account(s) may be operated as a management company under the 1940 Act, may
be deregistered under the 1940 Act if registration is no longer required, or may
be combined with other Sub-Accounts or other separate accounts of the Company.
VOTING RIGHTS
The Company will vote Portfolio shares held by each Sub-Account in
accordance with instructions received from Contract Owners and, after the
Annuity Date, from the Annuitants. Each person having a voting interest in a
Sub-Account will be provided with proxy materials of the Portfolio together with
a form with which to give voting instructions to the Company. Shares for which
no timely instructions are received will be voted in proportion to the
instructions which are received. The Company will also vote shares in a
Sub-Account that it owns and which are not attributable to Contracts in the same
proportion. If the 1940 Act or any rules thereunder should be amended or if the
present interpretation of the 1940 Act or such rules should change, and as a
result the Company determines that it is permitted to vote shares in its own
right, whether or not such shares are attributable to the Contract, the Company
reserves the right to do so.
The number of votes which a Contract Owner or Annuitant may cast will be
determined by the Company as of the record date established by the Portfolio.
During the accumulation period, the number of Portfolio shares attributable to
each Contract Owner will be determined by dividing the dollar value of the
Accumulation Units of the Sub-Account credited to the Contract by the net asset
value of one Portfolio share. During the annuity period, the number of Portfolio
shares attributable to each Annuitant will be determined by dividing the reserve
held in each Sub-Account for the Annuitant's variable annuity by the net asset
value of one Portfolio share. Ordinarily, the Annuitant's voting interest in the
Portfolio will decrease as the reserve for the variable annuity is depleted.
CHARGES AND DEDUCTIONS
Deductions under the Contracts and charges against the assets of the
Sub-Accounts are described below. Other deductions and expenses paid out of the
assets of the Portfolios are described in the Prospectus and SAI of KINF.
A. ANNUAL CHARGES AGAINST VARIABLE ACCOUNT ASSETS.
MORTALITY AND EXPENSE RISK CHARGE -- The Company makes a charge of 1.25% on
an annual basis of the daily value of each Sub-Account's assets to cover the
mortality and expense risk which the Company assumes in relation to the variable
portion of the Contract. The charge is imposed during both the accumulation
period and the annuity payout period. The mortality risk arises from the
Company's guarantee that it will make annuity benefit payments in accordance
with annuity rate provisions established at the time the Contract is issued for
the life of the Annuitant (or in accordance with the annuity option selected),
no matter how long the Annuitant (or other payee) lives and no matter how long
all Annuitants as a class live. Therefore, the mortality charge is deducted
during the annuity payout phase on all contracts, including those that do not
involve a life contingency,
18
<PAGE>
even though the Company does not bear direct mortality risk with respect to
variable annuity settlement options that do not involve life contingencies. The
expense risk arises from the Company's guarantee that the charges it makes will
not exceed the limits described in the Contract and in this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover
actual mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
Since mortality and expense risks involve future contingencies which are not
subject to precise determination in advance, it is not feasible to identify
specifically the portion of the charge which is applicable to each. The Company
estimates that a reasonable allocation might be 0.85% for mortality risk and
0.40% for expense risk.
ADMINISTRATIVE EXPENSE CHARGE -- The Company assesses each Sub-Account with
a daily charge at an annual rate of 0.15% of the average daily net assets of the
Sub-Account. The charge is imposed during both the accumulation period and the
annuity payout period. The daily Administrative Expense Charge is assessed to
help defray administrative expenses actually incurred in the administration of
the Sub-Account, without profits. However, there is no direct relationship
between the amount of administrative expenses imposed on a given contract and
the amount of expenses actually attributable to that contract.
Deductions for the Contract Fee (described under B. CONTRACT FEE) and for
the Administrative Expense Charge are designed to reimburse the Company for the
cost of administration and related expenses and are not expected to be a source
of profit. The administrative functions and expense assumed by the Company in
connection with the Variable Account and the Contracts include, but are not
limited to, clerical, accounting, actuarial and legal services, rent, postage,
telephone, office equipment and supplies, expenses of preparing and printing
registration statements, expense of preparing and typesetting prospectuses and
the cost of printing prospectuses not allocable to sales expense, filing and
other fees.
OTHER CHARGES -- Because the Sub-Accounts hold shares of the Portfolios, the
value of the net assets of the Sub-Accounts will reflect the investment advisory
fee and other expenses incurred by the Portfolios. The Prospectus and SAI of
KINF contain additional information concerning expenses of the Portfolios.
B. CONTRACT FEE.
A $35 Contract Fee currently is deducted on the Contract anniversary date
and upon full surrender of the Contract when the Accumulated Value is less than
$50,000. The Contract Fee is waived for Contracts issued to and maintained by
the Trustee of a 401(k) plan. Where Contract value has been allocated to more
than one account, a percentage of the total Contract Fee will be deducted from
the Value in each account. The portion of the charge deducted from each account
will be equal to the percentage which the Value in that account bears to the
Accumulated Value under the Contract. The deduction of the Contract Fee from a
Sub-Account will result in cancellation of a number of Accumulation Units equal
in value to the percentage of the charge deducted from that account.
C. PREMIUM TAXES.
Some states and municipalities impose a premium tax on variable annuity
Contracts. State premium taxes currently range up to 3.5%.
19
<PAGE>
The Company makes a charge for state and municipal premium taxes, when
applicable, and deducts the amount paid as a premium tax charge. The current
practice of the Company is to deduct the premium tax charge in one of two ways:
(1) if the premium tax was paid by the Company when payments were received,
the premium tax charge is deducted on a pro rata basis when withdrawals
are made, upon surrender of the Contract, or when annuity benefit
payments begin (the Company reserves the right instead to deduct the
premium tax charge for these Contracts at the time the payments are
received); or
(2) the premium tax charge is deducted when annuity benefit payments begin.
In no event will a deduction be taken before the Company has incurred a tax
liability under applicable state law. If no amount for premium tax was deducted
at the time the payment was received, but subsequently tax is determined to be
due prior to the Annuity Date, the Company reserves the right to deduct the
premium tax from the Contract value at the time such determination is made.
D. CONTINGENT DEFERRED SALES CHARGE.
No charge for sales expense is deducted from payments at the time the
payments are made. However, a contingent deferred sales charge is deducted from
the Accumulated Value of the Contract in the case of surrender and/or
withdrawals or at the time annuity benefit payments begin, within certain time
limits described below.
For purposes of determining the contingent deferred sales charge, the
Accumulated Value is divided into three categories: (1) New Payments -- payments
received by the Company during the six years preceding the date of the
surrender; (2) Old Payments -- Accumulated payments not defined as New Payments;
and (3) Earnings -- the amount of Contract Value in excess of all payments that
have not been previously surrendered. For purposes of determining the amount of
any contingent deferred sales charge, surrenders will be deemed to be taken
first from Old Payments, then from New Payments. Old Payments may be withdrawn
from the Contract at any time without the imposition of a contingent deferred
sales charge. If a withdrawal is attributable all or in part to New Payments, a
contingent deferred sales charge may apply.
An Owner may withdraw the greater of 100% of cumulative earnings or 15% of
the Accumulated Value in any calendar year without assessment of a Withdrawal
Charge. If the Owner withdraws an amount in excess of the Accumulated Value in
any calendar year, the amount withdrawn in excess of 15% is subject to a
Withdrawal Charge.
CHARGES FOR SURRENDER AND WITHDRAWALS -- If a Contract is surrendered or if
New Payments are withdrawn, while the Contract is in force and before the
Annuity Date, a contingent deferred sales charge may be imposed. This surrender
charge will never be applied to earnings. The amount of the charge will depend
upon the number of years that the New Payments, if any, to which the withdrawal
is attributed have remained credited under the Contract. Amounts withdrawn are
deducted first from Old Payments. Then, for the purpose of calculating surrender
charges for New Payments, all amounts withdrawn are assumed to be deducted first
from the earliest New Payment and then from the next earliest New Payment and so
on, until all New Payments have been exhausted pursuant to the
first-in-first-out ("FIFO") method of accounting. (See "FEDERAL TAX
CONSIDERATIONS" for a discussion of how withdrawals are treated for income tax
purposes.)
20
<PAGE>
The Contingent Deferred Sales Charges are as follows:
<TABLE>
<CAPTION>
CHARGE AS PERCENTAGE
YEARS FROM DATE OF OF NEW
PAYMENT PAYMENTS WITHDRAWN
- ------------------------------------------------- -------------------------
<S> <C>
Less than 1...................................... 7%
2................................................ 6%
3................................................ 5%
4................................................ 4%
5................................................ 3%
6................................................ 2%
Thereafter....................................... 0%
</TABLE>
The amount withdrawn equals the amount requested by the Contract Owner plus
the charge, if any. The charge is applied as a percentage of the New Payments
withdrawn, but in no event will the total contingent deferred sales charge
exceed a maximum limit of 7% of total gross New Payments. Such total charge
equals the aggregate of all applicable contingent deferred sales charges for
surrender, withdrawals, and annuitization.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE -- Where permitted by law, the
Company will waive the contingent deferred sales charge in the event that an
Owner (or the Annuitant, if the Owner is not an individual) is: (a) admitted to
a medical care facility after the issue date of the Contract and remains
confined there until the later of one year after the issue date or 90
consecutive days; (b) first diagnosed by a licensed physician as having a fatal
illness after the issue date of the Contract; (c) physically disabled after the
issue date of the Contract and before attaining age 65; or (d) commencing one
year after issue of the Contract, is confined to a hospice or receives home
health services, with certification from a licensed physician that the
confinement to the hospice or receipt of home health care services is expected
to continue until death. The Company may require proof of such disability and
continuing disability, including written confirmation of receipt and approval of
any claim for Social Security Disability Benefits and reserves the right to
obtain an examination by a licensed physician of its choice and at its expense.
For purposes of the above provision, "medical care facility" means any state
licensed facility (or, in a state that does not require licensing) a facility
that is operating pursuant to state law, providing medically necessary inpatient
care which is prescribed by a licensed "physician" in writing and based on
physical limitations which prohibit daily living in a non-institutional setting;
"Fatal illness" means a condition diagnosed by a licensed physician which is
expected to result in death within two years of the diagnosis; and "physician"
means a person other than the Owner, Annuitant or a member of one of their
families who is state licensed to give medical care or treatment and is acting
within the scope of that license.
Where contingent deferred sales charges have been waived under any one of
three situations discussed above, no additional payments under this Contract
will be accepted.
In addition, from time to time the Company may allow a reduction in or
elimination of the contingent deferred sales charges, the period during which
the charges apply, or both, and/or credit additional amounts on Contracts, when
Contracts are sold to individuals or groups of individuals in a manner that
reduces sales expenses. The Company will consider factors such as the following:
(a) the size and type of group or class, and the persistency expected from that
group or class; (b) the total amount of payments to be received and the manner
in which payments are remitted; (c) the purpose for which the Contracts are
being purchased and whether that purpose makes it likely that costs and expenses
will be reduced; (d) other transactions where sales expenses are likely to be
reduced; or (e) the level of commissions paid to selling broker-dealers or
certain financial institutions with respect to Contracts within the same group
or class (for example, broker-dealers who offer this Contract in
21
<PAGE>
connection with financial planning services offered on a fee for service basis).
The Company may also reduce or waive the contingent deferred sales charge,
and/or credit additional amounts on Contracts, where both the Contract Owner and
the Annuitant on the date of issue are within the following classes of
individuals ("eligible persons"): employees and registered representatives of
any broker-dealer which has entered into a Sales Agreement with the Company to
sell the Contract; officers, directors, trustees and employees of any of the
Portfolios, investment managers or sub-advisers; and the spouses of and
immediate family members residing in the same household with such eligible
persons. "Immediate family members" means children, siblings, parents and
grandparents.
Any reduction or elimination in the amount or duration of the contingent
deferred sales charge will not discriminate unfairly between purchasers of this
Contract. The Company will not make any changes to this charge where prohibited
by law.
WITHDRAWAL WITHOUT SURRENDER CHARGE -- In each calendar year, including the
calendar year in which the Contract is issued, the Company will waive the
contingent deferred sales charge, if any, on an amount ("Withdrawal Without
Surrender Charge") equal to the greatest of (1), (2) or (3):
Where (1) is:
The Accumulated Value as of the Valuation Date coincident with or next
following the date of receipt of the request for withdrawal, reduced by
total gross payments not previously withdrawn ("Cumulative Earnings")
Where (2) is:
15% of the Accumulated Value as of the Valuation Date coincident with or
next following the date of receipt of the request for withdrawal, reduced by
the total amount of any prior withdrawals made in the same calendar year to
which no contingent deferred sales charge was applied.
Where (3) is:
The amount calculated under the Company's life expectancy distribution (see
"LED Distributions," below) whether or not the withdrawal was part of such
distribution (applies only if Annuitant is also an Owner)
For example, an 81 year old Owner/Annuitant with an Accumulated Value of
$15,000, of which $1,000 is Cumulative Earnings, would have a Free Withdrawal
Amount of $2,250, which is equal to the greatest of:
(1) Cumulative Earnings ($1,000);
(2) 15% of Accumulated Value ($2,250); or
(3) LED distribution of 10.2% of Accumulated Value ($1,530).
The Withdrawal Without Surrender Charge will first be deducted from
Cumulative Earnings. If the Withdrawal Without Surrender Charge exceeds
Cumulative Earnings, the excess amount will be deemed withdrawn from payments
not previously withdrawn on a last-in-first-out ("LIFO") basis. If more than one
withdrawal is made during the year, on each subsequent withdrawal the Company
will waive the contingent deferred sales load, if any, until the entire
Withdrawal Without Surrender Charge has been withdrawn. Amounts withdrawn from a
Guarantee Period Account prior to the end of the applicable Guarantee Period
will be subject to a Market Value Adjustment.
22
<PAGE>
LED DISTRIBUTIONS -- Prior to the Annuity Date a Contract Owner who is also
the Annuitant may elect to make a series of systematic withdrawals from the
Contract according to a life expectancy distribution ("LED") option, by
returning a properly signed LED request form to the Company's Principal Office.
The LED option permits the Contract Owner to make systematic withdrawals from
the Contract over his or her lifetime. The amount withdrawn from the Contract
changes each year, because life expectancy changes each year that a person
lives. For example, actuarial tables indicate that a person age 70 has a life
expectancy of 16 years, but a person who attains age 86 has a life expectancy of
another 6.5 years.
If a Contract Owner elects the LED option, in each calendar year a fraction
of the Accumulated Value is withdrawn based on the Contract Owner's then life
expectancy. The numerator of the fraction is 1 (one) and the denominator of the
fraction is the remaining life expectancy of the Contract Owner, as determined
annually by the Company. The resulting fraction, expressed as a percentage, is
applied to the Accumulated Value at the beginning of the year to determine the
amount to be distributed during the year. The Contract Owner may elect monthly,
bimonthly, quarterly, semiannual, or annual distributions, and may terminate the
LED option at any time. The Contract Owner may also elect to receive
distributions under an LED option which is determined on the joint life
expectancy of the Contract Owner and a beneficiary. The Company may also offer
other systematic withdrawal options.
If a Contract Owner makes withdrawals under the LED distribution prior to
age 59 1/2, the withdrawals may be treated by the IRS as premature distributions
from the Contract. The payments would then be taxed on an "income first" basis,
and be subject to a 10% federal tax penalty. For more information, see "FEDERAL
TAX CONSIDERATIONS," "B. Taxation of the Contracts in General." The LED will
cease on the Annuity Date.
SURRENDERS -- In the case of a complete surrender, the amount received by
the Contract Owner is equal to the entire Accumulated Value under the Contract,
net of the applicable contingent deferred sales charge on New Payments, the
Contract Fee and any applicable tax withholding and adjusted for any applicable
Market Value Adjustment. Subject to the same rules applicable to withdrawals,
the Company will not assess a contingent deferred sales charge on an amount
equal to the greater of the Withdrawal Without Surrender Charge Amount,
described above, or the life expectancy distribution, if applicable.
Where a Contract Owner who is a trustee under a pension plan surrenders, in
whole or in part, a Contract on a terminating employee, the trustee will be
permitted to reallocate all or a part of the total Accumulated Value under the
Contract to other contracts issued by the Company and owned by the trustee, with
no deduction for any otherwise applicable contingent deferred sales charge. Any
such reallocation will be at the unit values for the Sub-Accounts as of the
valuation date on which a written, signed request is received at the Company's
Principal Office.
For further information on surrender and withdrawals, including minimum
limits on amount withdrawn and amount remaining under the Contract in the case
of withdrawals, and important tax considerations, see "Surrender" and
"Withdrawals" under "DESCRIPTION OF CONTRACT" and see "FEDERAL TAX
CONSIDERATIONS."
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN -- If any commutable
period certain option or a non-commutable period certain option for less than 10
years is chosen, a contingent deferred sales charge will be deducted from the
Accumulated Value of the Contract if the Annuity Date occurs at any time when
the surrender charge would still apply had the Contract been surrendered on the
Annuity Date. (See discussion of Period Certain Variable Annuity under
"I. Description of Variable Annuity Option.")
23
<PAGE>
No contingent deferred sales charge is imposed at the time of annuitization
in any Contract year under an option involving a life contingency or for any
non-commutable period certain option for 10 years or more. However, a Market
Value Adjustment may apply. See "Guarantee Period Accounts."
If an owner of a fixed annuity Contract issued by the Company wishes to
elect a variable annuity option, the Company may permit such owner to exchange,
at the time of annuitization, the fixed Contract for a Contract offered in this
Prospectus. The proceeds of the fixed Contract, minus any contingent deferred
sales charge applicable under the fixed Contract if a period certain option is
chosen, will be applied towards the variable annuity option desired by the
owner. The number of Annuity Units under the option will be calculated using the
Annuity Unit values as of the 15th of the month preceding the Annuity Date.
E. TRANSFER CHARGE.
The Company currently makes no charge for processing transfers. The Company
guarantees that the first twelve transfers in a Contract Year will be free of
transfer charge, but reserves the right to assess a charge, guaranteed never to
exceed $25, for each subsequent transfer in a Contract Year.
The Contract Owner may have automatic transfers of at least $100 a month
made on a periodic basis (a) from the Sub-Accounts which invest in the Money
Market Portfolio or the Government Securities Portfolio or from the Fixed
Account to one or more of the other Sub-Accounts or (b) in order to reallocate
or rebalance Contract Value among the Sub-Accounts. The first automatic transfer
and all subsequent transfers of that request in the same contract year count as
one transfer towards the twelve transfers which are guaranteed to be free of a
transfer charge in each contract year. For more information, see "The Contract
Transfer Privilege."
DESCRIPTION OF THE CONTRACT
The Contracts are designed for use in connection with several types of
retirement plans as well as for sale to individuals. Participants under such
plans, as well as Contract Owners, Annuitants, and beneficiaries, are cautioned
that the rights of any person to any benefits under such Contracts may be
subject to the terms and conditions of the plans themselves, regardless of the
terms and conditions of the Contracts.
The Contracts offered by this Prospectus may be purchased from certain
independent broker-dealers, including representatives of Allmerica Investments,
Inc., the Principal Underwriter, which are registered under the Securities
Exchange Act of 1934 and are members of the National Association of Securities
Dealers, Inc. ("NASD").
Contract Owners may direct any inquiries to Annuity Customer Services,
Allmerica Financial Life Insurance and Annuity Company, 440 Lincoln Street,
Worcester, Massachusetts 01653, 800-782-8380.
A. PAYMENTS.
The Company's underwriting requirements, which include receipt of the
initial payment and allocation instructions by the Company at its Principal
Office, must be met before a Contract can be issued. These requirements may also
include the proper completion of an application; however, where permitted, the
Company may issue a contract without completion of an application for certain
classes of annuity contracts. Payments are to be made payable to the Company. A
net payment is equal to the payment received less the amount of any applicable
premium tax.
The initial net payment will be credited to the Contract as of the date that
all issue requirements are properly met. If all issue requirements are not
complied with within five business days of the Company's receipt of the
24
<PAGE>
initial payment, the payment will be returned unless the Owner specifically
consents to the holding of the initial payment until completion of any
outstanding issue requirements. Subsequent payments will be credited as of the
Valuation Date received at the Principal Office.
Payments are not limited as to frequency and number, but there are certain
limitations as to amount. Currently, the initial payment must be at least
$2,000. Under a salary deduction or monthly automatic payment plan, the minimum
initial payment is $167. In all cases, each subsequent payment must be at least
$100. Where the contribution on behalf of an employee under an
employer-sponsored retirement plan is less than $600 but more than $300
annually, the Company may issue a contract on the employee, if the plan's
average annual contribution per eligible plan participant is at least $600. The
minimum allocation to a Guarantee Period Account is $1,000. If less than $1,000
is allocated to a Guarantee Period Account, the Company reserves the right to
apply that amount to the Money Market Portfolio.
Generally, unless otherwise requested, all payments will be allocated among
the accounts in the same proportion that the initial net payment is allocated,
or, if subsequently changed, according to the most recent allocation
instructions. However, to the extent permitted by state law, if the contract is
issued as an IRA or is issued in Georgia, Idaho, Indiana, Michigan, Missouri,
North Carolina, Oklahoma, Oregon, South Carolina, Texas, Utah, Washington and
West Virginia, any portion of the initial net payment and of additional net
payments received during the contracts's first 15 days measured from the date of
issue, allocated to any Sub-Account and/or any Guarantee Period Account, will be
held in the Money Market Portfolio of KINF until the end of the fifteen day
period. Thereafter, these amounts will be allocated as requested.
The Contract Owner may change allocation instructions for new payments
pursuant to a written or telephone request. If telephone requests are elected by
the Contract Owner, a properly completed authorization must be on file before
telephone requests will be honored. The Company will not be responsible for
losses resulting from acting upon telephone requests reasonably believed to be
genuine. The Company will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine; otherwise, the Company may
be liable for any losses due to unauthorized or fraudulent instructions. The
procedures the Company follows for transactions initiated by telephone include
requirements that callers on behalf of a Contract Owner identify themselves by
name and identify the Annuitant by name, date of birth and social security
number. All transfer instructions by telephone are tape recorded.
B. TRANSFER PRIVILEGE.
At any time prior to the Annuity Date a Contract Owner may have amounts
transferred among all accounts. Transfer values will be effected at the
Accumulation Value next computed after receipt of the transfer order. The
Company will make transfers pursuant to written or telephone requests. As
discussed in "A. Payments," a properly completed authorization form must be on
file before telephone requests will be honored. In Oregon and Massachusetts,
payments and transfers to the Fixed Account are subject to certain restrcitions.
See Appendix A.
Transfers to a Guarantee Period Account must be at least $1,000. If the
amount to be transferred to a Guarantee Period Account is less than $1,000, the
Company may transfer that amount to the Sub-Account which invests in the Money
Market Portfolio.
C. DOLLAR COST AVERAGING AND AUTOMATIC REBALANCING OPTIONS.
The Contract Owner may have automatic transfers of at least $100 a month
made on a periodic basis (a) from the Sub-Accounts which invest in the Money
Market Portfolio or the Government Securities Portfolio or from the Fixed
Account to one or more of the other Sub-Accounts ("Dollar Cost Averaging
Option") or (b) in
25
<PAGE>
order to reallocate or rebalance Contract Value among the Sub-Accounts
("Automatic Rebalancing Option"). The first automatic transfer and all
subsequent transfers of that request in the same contract year count as one
transfer towards the twelve transfers which are guaranteed to be free of a
transfer charge in each contract year. The Dollar Cost Averaging Option and the
Automatic Rebalancing Option may not be in effect at the same time.
Currently, the Company makes no charge for transfers. The first twelve (12)
transfers in a Contract year are guaranteed to be free of any charge. For each
subsequent transfer in a Contract year the Company reserves the right to assess
a charge, guaranteed never to exceed $25, to reimburse it for the expense of
processing transfers.
D. SURRENDER.
At any time prior to the Annuity Date, a Contract Owner may surrender the
Contract and receive its Accumulated Value, less applicable charges and adjusted
for any Market Value Adjustment ("Surrender Amount"). The Contract Owner must
return the Contract and a signed, written request for surrender, satisfactory to
the Company, to the Company's Principal Office. The amount payable to the
Contract Owner upon surrender will be based on the Contract's Accumulated Value
as of the Valuation Date on which the request and the Contract are received at
the Company's Principal Office.
Before the Annuity Date, a contingent deferred sales charge may be deducted
when a Contract is surrendered if payments have been credited to the Contract
during the last six full contract years. See "CHARGES AND DEDUCTIONS." The
Contract Fee will be deducted upon surrender of the Contract.
After the Annuity Date, only Contracts under which future annuity benefit
payments are limited to a specified period (as specified in the Period Certain
Annuity Option ) may be surrendered. The Surrender Amount is the commuted value
of any unpaid installments, computed on the basis of the assumed interest rate
incorporated in such annuity benefit payments. No contingent deferred sales
charge is imposed after the Annuity Date.
Any amount surrendered is normally payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has by order permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of each separate account is not reasonably
practicable.
The right is reserved by the Company to defer surrenders and withdrawals of
amounts allocated to the Company's Fixed Account and Guarantee Period Accounts
for a period not to exceed six months.
The surrender rights of Contract Owners who are participants under Section
403(b) plans or who are participants in the Texas Optional Retirement Program
(Texas ORP) are restricted; see "FEDERAL TAX CONSIDERATIONS," "I. Public School
Systems and Certain Tax Exempt Organizations" and "J. Texas Optional Retirement
Program."
For important tax consequences which may result from surrender, see "FEDERAL
TAX CONSIDERATIONS."
E. WITHDRAWALS.
At any time prior to the Annuity Date, a Contract Owner may withdraw a
portion of the Accumulated Value of his or her Contract, subject to the limits
stated below. The Contract Owner must file a signed, written request for
withdrawals, satisfactory to the Company, at the Company's Principal Office. The
written request must indicate the dollar amount the Contract Owner wishes to
receive and the accounts from which such amount is to
26
<PAGE>
be withdrawn. The contract value following the withdrawal will reflect an amount
withdrawn equal to the amount requested by the Contract Owner plus any
applicable contingent deferred sales charge, as described under "CHARGES AND
DEDUCTIONS." In addition, amounts withdrawn from a Guarantee Period Account
prior to the end of the applicable Guarantee Period will be subject to a Market
Value Adjustment, as described under "GUARANTEE PERIOD ACCOUNTS."
Where allocations have been made to more than one account, a percentage of
the withdrawal may be allocated to each such account. A withdrawal from a
Sub-Account will result in cancellation of a number of units equivalent in value
to the amount withdrawn, computed as of the Valuation Date that the request is
received at the Company's Principal Office.
Each withdrawal must be in a minimum amount of $100. No withdrawal will be
permitted if the Accumulated Value remaining under the Contract would be reduced
to less than $1,000. Withdrawals will be paid in accordance with the time
limitations described under "Surrender."
After the Annuity Date, only Contracts under which future variable annuity
benefit payments are limited to a specified period may be withdrawn. A
withdrawal after the Annuity Date will result in cancellation of a number of
Annuity Units equivalent in value to the amount withdrawn.
For important restrictions on withdrawals which are applicable to Contract
Owners who are participants under Section 403(b) plans or under the Texas ORP,
see "FEDERAL TAX CONSIDERATIONS," "I. Public School Systems and Certain Tax
Exempt Organizations" and "J. Texas Optional Retirement Program."
For important tax consequences which may result from withdrawals, see
"FEDERAL TAX CONSIDERATIONS."
F. DEATH BENEFIT.
If the Annuitant dies (or a Contract Owner predeceases the Annuitant) prior
to the Annuity Date while the Contract is in force, the Company will pay the
Beneficiary a death benefit, except where the Contract continues as provided in
"F. THE SPOUSE OF THE CONTRACT OWNER AS BENEFICIARY."
Upon death of the Annuitant (including an Owner who is also the Annuitant),
the death benefit is equal to the greatest of (a) the Accumulated Value under
the Contract increased for any positive Market Value Adjustment, (b) gross
payments accumulated daily at an annual rate of 5% starting on the date each
payment is applied, reduced proportionately to reflect withdrawals (for each
withdrawal, the proportionate reduction is calculated as the death benefit under
this option immediately prior to the withdrawal multiplied by the withdrawal
amount and divided by the Accumulated Value immediately prior to the
withdrawal); or (c) or the death benefit that would have been payable on the
most recent contract anniversary, increased for subsequent payments and reduced
proportionately to reflect withdrawals after that date.
If an Owner who is not also the Annuitant dies before the Annuity Date, the
death benefit will be the Accumulated Value increased by any positive Market
Value Adjustment. The death benefit will never be reduced by a negative Market
Value Adjustment. The death benefit will generally be paid to the Beneficiary in
one sum within 7 days of the receipt of due proof of death unless the Owner has
specified a death benefit annuity option. Instead, the Beneficiary may, by
Written Request, elect to:
27
<PAGE>
(a) defer distribution of the death benefit for a period no more than 5
years from the date of death; or
(b) receive a life annuity or an annuity for a period certain not extending
beyond the Beneficiary's life expectancy. Annuity benefit payments must
begin within one year from the date of death.
If distribution of the death benefit is deferred under (a) or (b), any value
in the Guarantee Period Accounts will be transferred to the Sub-Account
investing in the Money Market Portfolio. The excess, if any, of the death
benefit over the Accumulated Value will also be added to the Money Market
Portfolio. The Beneficiary may, by Written Request, effect transfers and
withdrawals during the deferral period and prior to annuitization under (b), but
may not make additional payments. If there are multiple Beneficiaries, the
consent of all is required.
If the Annuitant's death occurs on or after the Annuity Date but before the
completion of all guaranteed annuity benefit payments, any unpaid amounts or
installments will be paid to the Beneficiary. The Company must pay the remaining
payments at least as rapidly as under the payment option in effect on the date
of the Annuitant's death.
With respect to any death benefit, the Accumulated Value under the Contract
will be based on the unit values next computed after due proof of the
Annuitant's death has been received at the Company's Principal Office. If the
Beneficiary elects to receive the death benefit in one sum, the death benefit
will be paid within seven business days. If the Beneficiary has not elected an
annuity option within one year from the date notice of death is received by the
Company, the Company will pay the death benefit in one sum. The death benefit
will reflect any earnings or losses experienced during the period and any
withdrawals.
G. THE SPOUSE OF THE CONTRACT OWNER AS BENEFICIARY.
The Contract Owner's spouse, if named as the sole primary beneficiary, may
by written request continue the Contract in lieu of receiving the amount payable
upon death of the Contract Owner. Upon such election, the spouse will become the
Owner and Annuitant subject to the following: (a) any value in the Guarantee
Period Accounts will be transferred to the Money Market Sub-Account; (b) the
excess, if any, of the death benefit over the Contract's Accumulated Value will
also be added to the Money Market Sub-Account. Additional payments may be made;
however, a surrender charge will apply to these amounts. All other rights and
benefits provided in the Contract will continue, except that any subsequent
spouse of such new Contract Owner will not be entitled to continue the Contract
upon such new Owner's death.
H. ASSIGNMENT.
The Contracts, other than those sold in connection with certain qualified
plans, may be assigned by the Contract Owner at any time prior to the Annuity
Date and while the Annuitant is alive (see "FEDERAL TAX CONSIDERATIONS"). The
Company will not be deemed to have knowledge of an assignment unless it is made
in writing and filed at the Principal Office. The Company will not assume
responsibility for determining the validity of any assignment. If an assignment
of the Contract is in effect on the Annuity Date, the Company reserves the right
to pay to the assignee, in one sum, that portion of the Surrender Value of the
Contract to which the assignee appears to be entitled. The Company will pay the
balance, if any, in one sum to the Contract Owner in full settlement of all
liability under the Contract. The interest of the Contract Owner and of any
beneficiary will be subject to any assignment.
I. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE.
Subject to certain restrictions described below, the Contract Owner has the
right (1) to select the annuity option under which annuity benefit payments are
to be made, and (2) to determine whether payments are to be
28
<PAGE>
made on a fixed basis, a variable basis, or a combination fixed and variable
basis. Annuity benefit payments are determined according to the annuity tables
in the Contract, by the annuity option selected, and by the investment
performance of the Account(s) selected.
To the extent a fixed annuity payout is selected, Accumulated Value will be
transferred to the Fixed Account of the Company, and the annuity benefit
payments will be fixed in amount. See APPENDIX A, "MORE INFORMATION ABOUT THE
FIXED ACCOUNT."
Under a variable annuity, a payment equal to the value of the fixed number
of Annuity Units in the Sub-Account(s) is made monthly, quarterly, semiannually
or annually. Since the value of an Annuity Unit in a Sub-Account will reflect
the investment performance of the Sub-Account, the amount of each annuity
benefit payment will vary.
The annuity option selected must produce an initial payment of at least $50
(a lower amount may be required in some states). The Company reserves the right
to increase this minimum amount. If the annuity option(s) selected does not
produce an initial payment which meet this minimum, a single payment will be
made. Once the Company begins making annuity benefit payments, the Annuitant
cannot make withdrawals or surrender the annuity benefit, except in the case
where future annuity benefit payments are limited to a "period certain." Only
beneficiaries entitled to receive remaining payments for a "period certain" may
elect to instead receive a lump sum settlement.
The Annuity Date is selected by the Contract Owner. To the extent permitted
in your state, the Annuity Date may be the first day of any month (a) before the
Annuitant's 85th birthday, if the Annuitant's age at the date of issue of the
Contract is 75 or under, or (b) within 10 years from the date of issue of the
Contract and before the Annuitant's 90th birthday, if the Annuitant's age at the
date of issue is between 76 and 90. The Contract Owner may elect to change the
Annuity Date by sending a request to the Company's Principal Office at least one
month before the new Annuity date. The new Annuity Date must be the first day of
any month occurring before the Annuitant's 90th birthday and must be within the
life expectancy of the Annuitant. The Company shall determine such life
expectancy at the time a change in Annuity Date is requested. The Code and the
terms of qualified plans impose limitations on the age at which annuity benefit
payments may commence and the type of annuity option selected. See "FEDERAL TAX
CONSIDERATIONS" for further information.
If the Contract Owner does not elect otherwise, a variable life annuity with
periodic payments for 10 years guaranteed will be purchased. Changes in either
the Annuity Date or annuity option can be made up to one month prior to the
Annuity Date.
J. DESCRIPTION OF VARIABLE ANNUITY OPTIONS.
The Company provides the variable annuity options described below.
Currently, Variable annuity options may be funded through the Sub-Accounts
investing in the Investment Grade Bond, Value+Growth, Horizon 10+ and Horizon 5
Portfolios. The Company also provides these same options funded through the
Fixed Account (fixed-amount annuity option). Regardless of how payments were
allocated during the accumulation period, any of the variable annuity options or
the fixed-amount options may be selected, or any of the variable annuity options
may be selected in combination with any of the fixed-amount annuity options.
Other annuity options may be offered by the Company.
VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 YEARS -- This variable
annuity is payable periodically during the lifetime of the payee with the
guarantee that if the payee should die before all payments have been made, the
remaining annuity benefit payments will continue to the beneficiary.
29
<PAGE>
VARIABLE LIFE ANNUITY PAYABLE PERIODICALLY DURING THE LIFETIME OF THE PAYEE
ONLY -- It would be possible under this option for the Annuitant to receive only
one annuity benefit payment if the Annuitant dies prior to the due date of the
second annuity benefit payment, two annuity benefit payments if the Annuitant
dies before the due date of the third annuity benefit payment, and so on.
However, payments will continue during the lifetime of the payee, no matter how
long the payee lives.
UNIT REFUND VARIABLE LIFE ANNUITY -- This is an annuity payable periodically
during the lifetime of the payee with the guarantee that if (1) exceeds (2) then
periodic variable annuity benefit payments will continue to the beneficiary
until the number of such payments equals the number determined in (1).
Where: (1) is the dollar amount of the Accumulated Value divided by the
dollar amount of the first payment, and
(2) is the number of payments paid prior to the death of the
payee,
JOINT AND SURVIVOR VARIABLE LIFE ANNUITY --This variable annuity is payable
jointly to two payees during their joint lifetime, and then continues thereafter
during the lifetime of the survivor. The amount of each payment to the survivor
is based on the same number of Annuity Units which applied during the joint
lifetime of the two payees. One of the payees must be either the person
designated as the Annuitant in the Contract or the beneficiary. There is no
minimum number of payments under this option.
JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY --This variable annuity
is payable jointly to two payees during their joint lifetime, and then continues
thereafter during the lifetime of the survivor. However, the amount of each
periodic payment to the survivor is based upon two-thirds of the number of
Annuity Units which applied during the joint lifetime of the two payees. One of
the payees must be the person designated as the Annuitant in the Contract or the
beneficiary. There is no minimum number of payments under this option.
PERIOD CERTAIN VARIABLE ANNUITY --This variable annuity has periodic
payments for a stipulated number of years ranging from one to thirty. This
option may be commutable, that is, the payee reserves the right to receive a
lump sum in place of installments, or it becomes non-commutable. The payee must
reserve this right at the time benefits begin.
It should be noted that the Period Certain Option does not involve a life
contingency. In the computation of the payments under this option, the charge
for annuity rate guarantees, which includes a factor for mortality risks, is
made. Although not contractually required to do so, the Company currently
follows a practice of permitting persons receiving payments under the Period
Certain Option to elect to convert to a variable annuity involving a life
contingency. The Company may discontinue or change this practice at any time,
but not with respect to election of the option made prior to the date of any
change in this practice. See "FEDERAL TAX CONSIDERATIONS" for a discussion of
the possible adverse tax consequences of selecting a Period Certain Option.
K. NORRIS DECISION.
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States
Supreme Court ruled that, in connection with retirement benefit options offered
under certain employer-sponsored employee benefit plans, annuity options based
on sex-distinct actuarial tables are not permissible under Title VII of the
Civil Rights Act of 1964. The ruling requires that benefits derived from
contributions paid into a plan after August 1, 1983 be calculated without regard
to the sex of the employee. Annuity benefits attributable to payments received
by the Company under a Contract issued in connection with an employer-sponsored
benefit plan affected by the NORRIS
30
<PAGE>
decision will be based on the greater of (1) the Company's unisex Non-Guaranteed
Current Annuity Option Rates or (2) the guaranteed unisex rates described in
such Contract, regardless of whether the Annuitant is male or female.
L. COMPUTATION OF VALUES AND ANNUITY BENEFIT PAYMENTS.
THE ACCUMULATION UNIT -- Each net payment is allocated to the account(s)
selected by the Contract Owner. Allocations to the Sub-Accounts are credited to
the Contract in the form of Accumulation Units. Accumulation Units are credited
separately for each Sub-Account. The number of Accumulation Units of each
Sub-Account credited to the Contract is equal to the portion of the net payment
allocated to the Sub-Account, divided by the dollar value of the applicable
Accumulation Unit as of the Valuation Date the payment is received in good order
at the Company's Principal Office. The number of Accumulation Units resulting
from each payment will remain fixed unless changed by a subsequent split of
Accumulation Unit value, a transfer, a withdrawal, or surrender. The dollar
value of an Accumulation Unit of each Sub-Account varies from Valuation Date to
Valuation Date based on the investment experience of that Sub-Account and will
reflect the investment performance, expenses and charges of its Portfolios. The
value of an Accumulation Unit was set at $1.00 on the first Valuation Date for
each Sub-Account.
Allocations to Guarantee Period Accounts and the Fixed Account are not
converted into Accumulation Units, but are credited interest at a rate
periodically set by the Company. See Appendix B.
The Accumulated Value under the Contract is determined by (1) multiplying
the number of Accumulation Units in each Sub-Account by the value of an
Accumulation Unit of that Sub-Account on the Valuation Date, (2) adding the
products, and (3) adding the amount of the accumulations in the Fixed Account
and Guarantee Period Accounts, if any.
NET INVESTMENT FACTOR -- The Net Investment Factor is an index that measures
the investment performance of a Sub-Account from one Valuation Period to the
next. This factor is equal to 1.000000 plus the result from dividing (a) by (b)
and subtracting (c) and (d) where:
(a) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(b) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(c) is a charge for mortality and expense risks equal to 1.25% on an
annual basis of the daily value of the Sub-Account's assets, and
(d) is an administrative charge of 0.15% on an annual basis of the daily
value of the Sub-Account's assets.
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor. For an illustration of Accumulation Unit calculation using a
hypothetical example see "ANNUITY PAYMENTS" in the SAI.
THE ANNUITY UNIT -- On and after the Annuity Date the Annuity Unit is a
measure of the value of the Annuitant's monthly annuity benefit payments under a
variable annuity option. The value of an Annuity Unit in each Sub-Account
initially was set at $1.00. The value of an Annuity Unit under a Sub-Account on
any Valuation Date thereafter is equal to the value of such unit on the
immediately preceding Valuation Date, multiplied by the product of (1) the net
investment factor of the Sub-Account for the current Valuation Period and (2) a
factor to adjust benefits to neutralize the assumed interest rate. The assumed
interest rate, discussed below, is incorporated in the variable annuity options
offered in the Contract.
31
<PAGE>
DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY BENEFIT PAYMENTS -- The
first periodic annuity benefit payment is based upon the Accumulated Value as of
a date not more than four weeks preceding the date that the first annuity
benefit payment is due. Currently, variable annuity benefit payments are made on
the first of a month based on unit values as of the 15th day of the preceding
month.
The Contract provides annuity rates which determine the dollar amount of the
first periodic payment under each form of annuity for each $1,000 of applied
value. For Life Option and Noncommutable Period Certain Options of 10 or more
years, the annuity value is the Accumulated Value less any premium taxes and
adjusted for any Market Value Adjustment. For commutable period certain options
or any period certain option less than 10 years, the value is surrender value
less any premium tax. For a death benefit annuity, the annuity value will be the
amount of the death benefit. The annuity rates in the Contract are based on a
modification of the 1983(a) Individual Mortality Table on rates.
The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "K. NORRIS Decision") and age of the Annuitant
and the value of the amount applied under the annuity option. The variable
annuity options offered by the Company are based on a 3 1/2% assumed interest
rate. Variable payments are affected by the assumed interest rate used in
calculating the annuity option rates. Variable annuity benefit payments will
increase over periods when the actual net investment result of the
Sub-Account(s) funding the annuity exceeds the equivalent of the assumed
interest rate for the period. Variable annuity benefit payments will decrease
over periods when the actual net investment result of the respective Sub-Account
is less than the equivalent of the assumed interest rate for the period.
The dollar amount of the first periodic annuity benefit payment under life
annuity options and non-commutable period certain options of 10 years or more is
determined by multiplying (1) the Accumulated Value applied under that option
(after application of any Market Value Adjustment and less premium tax, if any)
divided by $1,000, by (2) the applicable amount of the first monthly payment per
$1,000 of value. For commutable period certain options and any period certain
option of less than 10 years, the Surrender Value less premium taxes, if any, is
used rather than the Accumulated Value. The dollar amount of the first variable
annuity benefit payment is then divided by the value of an Annuity Unit of the
selected Sub-Account(s) to determine the number of Annuity Units represented by
the first payment. This number of Annuity Units remains fixed under all annuity
options except the joint and two-thirds survivor annuity option. For each
subsequent payment, the dollar amount of the variable annuity benefit payment is
determined by multiplying this fixed number of Annuity Units by the value of an
Annuity unit on the applicable Valuation Date.
After the first benefit payment, the dollar amount of each periodic variable
annuity benefit payment will vary with subsequent variations in the value of the
Annuity Unit of the selected Sub-Account(s). The dollar amount of each fixed
amount annuity benefit payment is fixed and will not change, except under the
joint and two-thirds survivor annuity option.
The Company may from time to time offer its Contract Owners both fixed and
variable annuity rates more favorable than those contained in the Contract. Any
such rates will be applied uniformly to all Contract Owners of the same class.
For an illustration of variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY PAYMENTS" in the SAI.
32
<PAGE>
GUARANTEE PERIOD ACCOUNTS
Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Company's Fixed Account are
not registered as an investment company under the provisions of the Securities
Act of 1933 or the Investment Company Act of 1940. Accordingly, the staff of the
Commission has not reviewed the disclosures in this Prospectus relating to the
Guarantee Period Accounts or the Fixed Account. Nevertheless, disclosures
regarding the Guarantee Period Accounts and the Fixed Account of this annuity
Contract or any benefits offered under these accounts may be subject to the
provisions of the Securities Act of 1933 relating to the accuracy and
completeness of statements made in the Prospectus.
INVESTMENT OPTIONS -- In most jurisdictions, there are currently nine
Guarantee Periods available under this Contract with durations of two, three,
four, five, six, seven, eight, nine and 10 years. Each Guarantee Period Account
established for the Contract Owner is accounted for separately in a non-unitized
segregated account. Each Guarantee Period Account provides for the accumulation
of interest at a Guaranteed Interest Rate. The Guaranteed Interest Rate on
amounts allocated or transferred to a Guarantee Period Account is determined
from time-to-time by the Company in accordance with market conditions; however,
once an interest rate is in effect for a Guarantee Period Account, the Company
may not change it during the duration of the Guarantee Period. In no event will
the Guaranteed Interest Rate be less than 3%.
To the extent permitted by law, the Company reserves the right at any time
to offer Guarantee Periods with durations that differ from those which were
available when a Contract was initially issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period.
Contract Owners may allocate net payments or make transfers from any of the
Sub-Accounts, the Fixed Account or an existing Guarantee Period Account to
establish a new Guarantee Period Account at any time prior to the Annuity Date.
(In Oregon and Massachusetts, payments and transfers to the Fixed Account are
subject to certain restrictions. See Appendix A.) Transfers from a Guarantee
Period Account on any date other than on the day following the expiration of
that Guarantee Period will be subject to a Market Value Adjustment. The Company
establishes a separate investment account each time the Contract Owner allocates
or transfers amounts to a Guarantee Period Account except that amounts allocated
to the same Guarantee Period on the same day will be treated as one Guarantee
Period Account. The minimum that may be allocated to establish a Guarantee
Period Account is $1,000. If less than $1,000 is allocated, the Company reserves
the right to apply that amount to the Money Market Portfolio. The Contract Owner
may allocate amounts to any of the Guarantee Periods available.
At least 45 days, but not more than 75 days prior to the end of a Guarantee
Period, the Company will notify the Contract Owner in writing of the expiration
of that Guarantee Period. At the end of a Guarantee Period the Owner may
transfer amounts to the Sub-Accounts, the Fixed Account or establish a new
Guarantee Period Account of any duration then offered by the Company without a
Market Value Adjustment. If reallocation instructions are not received at the
Principal Office before the end of a Guarantee Period, the account value will be
automatically applied to a new Guarantee Period Account with the same duration
unless (1) less than $1,000 would remain in the Guarantee Period Account on the
expiration date, or (2) unless the Guarantee Period would extend beyond the
Annuity Date or is no longer available. In such cases, the Guarantee Period
Account value will be transferred to the Money Market Portfolio. Where amounts
have been automatically renewed in a new Guarantee Period, it is the Company's
current practice to give the Owner an additional 30 days to transfer out of the
Guarantee Period Account without application of a Market Value adjustment.
MARKET VALUE ADJUSTMENT -- No Market Value Adjustment will be applied to
transfers, withdrawals, or a surrender from a Guarantee Period Account on the
expiration of its Guarantee Period. In addition, no negative
33
<PAGE>
Market Value Adjustment will be applied to a death benefit although a positive
Market Value Adjustment, if any, will be applied to increase the value of the
death benefit when based on the Contract's Accumulated Value. See "Death
Benefit." A Market Value Adjustment will apply to all other transfers,
withdrawals, or a surrender. Amounts applied under an annuity option are treated
as withdrawals when calculating the Market Value Adjustment. The Market Value
Adjustment will be determined by multiplying the amount taken from each
Guarantee Period Account before deduction of any Surrender Charge by the market
value factor. The market value factor for each Guarantee Period Account is equal
to:
[(1+i)/(1+j)]n/365-1
where:
i is the Guaranteed Interest Rate expressed as a decimal (for example:
3% = 0.03) being credited to the current Guarantee Period;
j is the new Guaranteed Interest Rate, expressed as a decimal, for a
Guarantee Period with a duration equal to the number of years
remaining in the current Guarantee Period, rounded to the next higher
number of whole years. If that rate is not available, the Company will
use a suitable rate or index allowed by the Department of Insurance;
and
n is the number of days remaining from the Effective Valuation Date to
the end of the current Guarantee Period.
If the Guaranteed Interest Rate being credited is lower than the new
Guaranteed Interest Rate, the Market Value Adjustment will decrease the
Guarantee Period Account value. Similarly, if the Guaranteed Interest Rate being
credited is higher than the new Guaranteed Interest Rate, the Market Value
Adjustment will increase the Guarantee Period Account value. The Market Value
Adjustment will never result in a change to the value more than the interest
earned in excess of the Minimum Guarantee Period Account Interest Rate (see
Specifications page) compounded annually from the beginning of the current
Guarantee Period. For examples of how the Market Value Adjustment works, See
Appendix B.
PROGRAM TO PROTECT PRINCIPAL AND PROVIDE GROWTH POTENTIAL -- Under this
feature, the Owner elects a Guarantee Period and one or more Sub-Accounts. The
Company will then compute the proportion of the initial payment that must be
allocated to the Guarantee Period selected, assuming no transfers or
withdrawals, in order to ensure that on the last day of the Guarantee Period it
will equal the amount of the entire initial payment. The required amount is then
allocated to the pre-selected Guarantee Period Account. The balance of the
initial payment is allocated among the other investment options selected by the
Owner as described in "A. PAYMENTS."
WITHDRAWALS -- Prior to the Annuity Date, the Contract Owner may make
withdrawals of amounts held in the Guarantee Period Accounts. Withdrawals from
these accounts will be made in the same manner and be subject to the same rules
as set forth under "Withdrawals" and "Surrender." In addition, the following
provisions also apply to withdrawals from a Guarantee Period Account: a) a
Market Value Adjustment will apply to all withdrawals, including Withdrawals
without Surrender Charge, unless made at the end of the Guarantee Period; and b)
the Company reserves the right to defer payments of amounts withdrawn from a
Guarantee Period Account for up to six months from the date it receives the
withdrawal request. If deferred for 30 days or more, the Company will pay
interest on the amount deferred at a rate of at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a
portion of the value of a Guarantee Period Account, it will be calculated on the
amount requested and deducted or added to the amount remaining in
34
<PAGE>
the Guarantee Period Account. If the entire amount in a Guarantee Period Account
is requested, the adjustment will be made to the amount payable. If a Contingent
Deferred Sales Charge applies to the withdrawal, it will be calculated as set
forth under "Contingent Deferred Sales Charge" after application of the Market
Value Adjustment.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Contract, on
withdrawals or surrenders, on annuity benefit payments, and on the economic
benefit to the Contract Owner, Annuitant, or beneficiary depends upon a variety
of factors. The following discussion is based upon the Company's understanding
of current federal income tax laws as they are interpreted as of the date of
this Prospectus. No representation is made regarding the likelihood of
continuation of current federal income tax laws or of current interpretations by
the Internal Revenue Service (IRS).
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS IS NOT EXHAUSTIVE,
DOES NOT PURPORT TO COVER ALL SITUATIONS AND IS NOT INTENDED AS TAX ADVICE. A
QUALIFIED TAX ADVISER SHOULD ALWAYS BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
The Company intends to make a charge for any effect which the income,
assets, or existence of the Contracts, the Variable Account or the Sub-Accounts
may have upon its tax. The Variable Account presently is not subject to tax, but
the Company reserves the right to assess a charge for taxes should the Variable
Account at any time become subject to tax. Any charge for taxes will be assessed
on a fair and equitable basis in order to preserve equity among classes of
Contract Owners and with respect to each separate account as though that
separate account were a separate taxable entity.
The Variable Account is considered a part of and taxed with the operations
of the Company. The Company is taxed as a life insurance company under
subchapter L of the Code. The Company files a consolidated tax return with its
affiliates.
The Internal Revenue Service has issued regulations relating to the
diversification requirements for variable annuity and variable life insurance
contracts under Section 817(h) of the Code. The regulations provide that the
investments of a segregated asset account underlying a variable annuity contract
are adequately diversified if no more than 55% of the value of its assets is
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments, and no more than 90% by any four
investments. If the investments are not adequately diversified, the income on a
contract, for any taxable year of the Contract Owner, would be treated as
ordinary income received or accrued by the Contract Owner. It is anticipated
that the Portfolios will comply with the diversification requirements.
A. QUALIFIED AND NON-QUALIFIED CONTRACTS.
From a federal tax viewpoint there are two types of variable annuity
Contracts, "qualified" Contracts and "non-qualified" Contracts. A qualified
Contract is one that is purchased in connection with a retirement plan which
meets the requirements of Sections 401, 403, 408, or 457 of the Code, while a
non-qualified Contract is one that is not purchased in connection with one of
the indicated retirement plans. The tax treatment for certain withdrawals or
surrenders will vary according to whether they are made from a qualified
Contract or a non-qualified Contract. For more information on the tax provisions
applicable to qualified Contracts, see Sections D through J, below.
35
<PAGE>
B. TAXATION OF THE CONTRACTS IN GENERAL.
The Company believes that the Contracts described in this Prospectus will,
with certain exceptions (see K below), be considered annuity contracts under
Section 72 of the Code. This section provides for the taxation of annuities. The
following discussion concerns annuities subject to Section 72. Section
72(e)(11)(A)(ii) requires that all non-qualified deferred annuity contracts
issued by the same insurance company to the same Contract Owner during the same
calendar year be treated as a single contract in determining taxable
distributions under Section 72(e).
With certain exceptions, any increase in the Accumulated Value of the
Contract is not taxable to the Contract Owner until it is withdrawn from the
Contract. If the Contract is surrendered or amounts are withdrawn prior to the
Annuity Date, withdrawal of any investment gain in value over the cost basis of
the Contract would be taxed as ordinary income. Under the current provisions of
the Code, amounts received under a non-qualified Contract prior to the Annuity
Date (including payments made upon the death of the Annuitant or Contract
Owner), or as non-periodic payments after the Annuity Date, are generally first
attributable to any investment gains credited to the Contract over the
taxpayer's basis (if any) in the Contract. Such amounts will be treated as
income subject to federal income taxation.
A 10% penalty tax may be imposed on the withdrawal of investment gains if
the withdrawal is made prior to age 59 1/2. The penalty tax will not be imposed
after age 59 1/2, or if the withdrawal follows the death of the Contract Owner
(or, if the Contract Owner is not an individual, the death of the primary
Annuitant, as defined in the Code), or in the case of the "total disability" (as
defined in the Code) of the Owner. Furthermore, under Section 72 of the Code,
this penalty tax will not be imposed, irrespective of age, if the amount
received is one of a series of "substantially equal" periodic payments made at
least annually for the life or life expectancy of the payee. This requirement is
met when the Contract Owner elects to have distributions made over the Contract
Owner's life expectancy, or over the joint life expectancy of the Contract Owner
and beneficiary. The requirement that the amount be paid out as one of a series
of "substantially equal" periodic payments is met when the number of units
withdrawn to make each distribution is substantially the same.
In a Private Letter Ruling, the IRS took the position that where
distributions from a variable annuity contract were determined by amortizing the
Accumulated Value of the contract over the taxpayer's remaining life expectancy
(such as under the Contract's life expectancy distribution ("LED") option), and
the option could be changed or terminated at any time, the distributions failed
to qualify as part of a "series of substantially equal payments" within the
meaning of Section 72 of the Code. The distributions were therefore subject to
the 10% federal penalty tax. This Private Letter Ruling may be applicable to a
Contract Owner who receives distributions under the LED option prior to age 59 .
Subsequent private letter rulings, however, have treated LED-type withdrawal
programs as effectively avoiding the 10% penalty tax. The position of the IRS on
this issue is unclear.
If the Contract Owner transfers (assigns) the Contract to another individual
as a gift prior to the Annuity Date, the Code provides that the Contract Owner
will incur taxable income at the time of the transfer. An exception is provided
for certain transfers between spouses. The amount of taxable income upon such
taxable transfer is equal to the excess, if any, of the Surrender Value of the
Contract over the Contract Owner's cost basis at the time of the transfer. The
transfer is also subject to federal gift tax provisions. Where the Contract
Owner and Annuitant are different persons, the change of ownership of the
Contract to the Annuitant on the Annuity Date, as required under the Contract,
is a gift and will be taxable to the Contract Owner as such; however, the
Contract Owner will not incur taxable income. Instead, the Annuitant will incur
taxable income upon receipt of annuity benefit payments as discussed below.
36
<PAGE>
When annuity benefit payments are commenced under the Contract, generally a
portion of each payment may be excluded from gross income. The excludable
portion is generally determined by a formula that establishes the ratio that the
cost basis of the Contract bears to the expected return under the Contract. The
portion of the payment in excess of this excludable amount is taxable as
ordinary income. Once all cost basis in the Contract is recovered, the entire
payment is taxable. If the Annuitant dies before cost basis is recovered, a
deduction for the difference is allowed on the Annuitant's final tax return.
C. TAX WITHHOLDING AND PENALTIES.
The Code requires withholding with respect to payments or distributions from
nonqualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.
In certain situations, the Code provides for a tax penalty if, prior to
death, disability or attainment of age 59 1/2, a Contract Owner makes a
withdrawal or receives any amount under the Contract, unless the distribution is
in the form of a life annuity (including life expectancy distributions). The
penalty is 10% of the amount includible in income by the Contract Owner.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether the amount
withdrawn or surrendered is allocable to an investment in the Contract made
before or after certain dates.
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS.
The tax rules applicable to qualified employer plans, as defined by the
Code, vary according to the type of plan and the terms and conditions of the
plan itself. Therefore, the following is general information about the use of
the Contracts with various types of qualified plans. The rights of any person to
any benefits under such qualified plans will be subject to the terms and
conditions of the qualified plans themselves regardless of the terms and
conditions of the Contract.
A loan to a participant or beneficiary from plans qualified under Sections
401 and 403 or an assignment or pledge of an interest in such a plan is
generally treated as a distribution. This general rule does not apply to loans
which contain certain repayment terms and do not exceed a specified maximum
amount, as required under Section 72(p).
E. QUALIFIED EMPLOYEE PENSION AND PROFIT SHARING TRUSTS AND QUALIFIED ANNUITY
PLANS.
When an employee (including a self-employed individual) or one or more of
the employee's beneficiaries receives a "lump sum" distribution (a distribution
from a qualified plan described in Code Section 401(a) within one taxable year
equal to the total amount payable with respect to such an employee) the taxable
portion of such distribution may qualify for special treatment under a special
five-year income averaging provision of the Code. The employee must have had at
least 5 years of participation under the plan, and the lump sum distribution
must be made after the employee has attained age 59 1/2 or on account of his or
her death, separation from the employer's service (in the case of a common-law
employee) or disability (in the case of a self-employed individual). Such
treatment can be elected for only one taxable year once the individual has
reached age 59 1/2. An employee who attained age 50 before January 1, 1986 may
elect to treat part of the taxable portion of a lump-sum distribution as
long-term capital gains and may also elect 10-year averaging instead of
five-year averaging.
The Company can provide prototype plans for certain of the pension or profit
sharing plans for review by your legal counsel. For information, ask your
financial representative.
37
<PAGE>
F. SELF-EMPLOYED INDIVIDUALS.
The Self-Employed Individuals Tax Retirement Act of 1962, as amended,
frequently referred to as "H.R. 10," allows self-employed individuals and
partners to establish qualified pension and profit sharing trusts and annuity
plans to provide benefits for themselves and their employees.
These plans generally are subject to the same rules and requirements
applicable to corporate qualified plans, with some special restrictions imposed
on "owner-employees." An "owner-employee" is an employee who (1) owns the entire
interest in an unincorporated trade or business, or (2) owns more than 10% of
either the capital interest or profits interest in a partnership.
G. INDIVIDUAL RETIREMENT ACCOUNT PLANS.
Any individual who earns "compensation" (as defined in the Code and
including alimony payable under a court decree) from employment or
self-employment, whether or not he or she is covered by another qualified plan,
may establish an Individual Retirement Account or Annuity plan ("IRA") for the
accumulation of retirement savings on a tax-deferred basis. Income from
investments is not included in "compensation." The assets of an IRA may be
invested in, among other things, annuity Contracts including the Contracts
offered by this Prospectus.
Contributions to the IRA may be made by the individual or on behalf of the
individual by an employer. IRA contributions may be deductible up to the lesser
of (1) $2,000 or (2) 100% of compensation. The deduction is reduced
proportionately for adjusted gross income between $40,000 and $50,000 (between
$25,000 and $35,000 for unmarried taxpayers and between $0 and $10,000 for a
married taxpayer filing separately) if the taxpayer and his or her spouse file a
joint return and either is an active participant in an employer sponsored
retirement plan.
An individual and a working spouse each may have an IRA with the
above-described limit on each. For the 1996 tax year an individual with an IRA
may establish an additional IRA for a non-working spouse if they file a joint
return. Contributions to the two IRAs together are deductible up to the lesser
of $2,250 or 100% of compensation. Effective for the 1997 tax year and
thereafter, an individual may establish a spousal IRA if the spouse's
compensation is less than the individual's and they file a joint return. The
maximum contributions to the two IRA's is the lesser of $4,000 or 100% of
combined income.
No deduction is allowed for contributions made for the year in which the
individual attains age 70 1/2 and years thereafter. Contributions for that year
and for years thereafter will result in certain adverse tax consequences.
Non-deductible contributions may be made to IRAs until the year in which the
individual attains age 70 1/2. Although these contributions may not be deducted,
taxes on their earnings are deferred until the earnings are distributed. The
maximum permissible non-deductible contribution is $2,000 for an individual
taxpayer and $2,250 for a taxpayer and non-working spouse. These limits are
reduced by the amount of any deductible contributions made by the taxpayer.
Contributions may be made with respect to a particular year until the due
date of the individual's federal income tax return for that year, not including
extensions. However, for reporting purposes, the Company will regard
contributions as being applicable to the year made unless it receives notice to
the contrary.
38
<PAGE>
All annuity benefit payments and other distributions under an IRA will be
taxed as ordinary income unless the owner has made non-deductible contributions.
In addition, a minimum level of distributions must begin no later than April 1
following the year in which the individual attains age 70 1/2, and failure to
make adequate distributions at this time may result in certain adverse tax
consequences to the individual.
Distributions from all of an individual's IRAs are treated as if they were a
distribution from one IRA and all distributions during the same taxable year are
treated as if they were one distribution. An individual who makes a
non-deductible contribution to an IRA or receives a distribution from an IRA
during the taxable year must provide certain information on the individual's tax
return to enable the IRS to determine the proportion of the IRA balance which
represents non-deductible contributions. If the required information is
provided, that part of the amount withdrawn which is proportionate to the
individual's aggregate non-deductible contributions over the aggregate balance
of all of the individual's IRAs, is excludable from income.
Distributions which are a return of a non-deductible contribution are
non-taxable, as they represent a return of basis. If the required information is
not provided to the IRS, distributions from an IRA to which both deductible and
non-deductible contributions have been made are presumed to be fully taxable.
H. SIMPLIFIED EMPLOYEE PENSIONS.
Employers may establish Simplified Employee Pensions ("SEPs") under Code
Section 408(k) until the end of the 1996 tax year if certain requirements are
met. A SEP is an IRA to which the employer contributes under a written formula.
Currently, a SEP may accept employer contributions each year up to $30,000 or
15% of compensation (as defined), whichever is less. To establish SEPs the
employer must make a contribution for every employee age 21 and over who has
performed services for the employer for at least three of the five immediately
preceding calendar years and who has earned at least $300 for the year. SEP
contributions for employees over age 70 1/2 are permissible.
The employer's contribution is excluded from the employee's gross income for
the taxable year for which it was made up to the $30,000/15% limit. In addition
to the employer's contribution, the employee may contribute 100% of the
employee's earned income, up to $2,000, to the SEP, but such contributions will
be subject to the rules described above in "G. Individual Retirement Account
Plans."
These plans are subject to the general employer's deduction limitations
applicable to all corporate qualified plans. Employers may not establish new SEP
plans after the end of the 1996 tax year.
I. PUBLIC SCHOOL SYSTEMS AND CERTAIN TAX-EXEMPT ORGANIZATIONS.
Under the provisions of Section 403(b) of the Code, payments made for
annuity Contracts purchased for employees under annuity plans adopted by public
school systems and certain organizations which are tax exempt under Section
501(c)(3) of the Code are excludable from the gross income of such employees to
the extent that the aggregate payments for such annuity Contracts in any year do
not exceed the maximum contribution permitted under the Code.
A Contract qualifying under Section 403(b) of the Code must provide that
withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) may not begin before the employee
attains age 59 1/2, separates from service, dies, or becomes disabled. In the
case of hardship a Contract Owner may withdraw amounts contributed by salary
reduction, but not the earnings on such amounts. Even though a distribution may
be permitted under these rules (e.g., for hardship or after separation from
service), it
39
<PAGE>
may nonetheless be subject to a 10% penalty tax as a premature distribution, in
addition to income tax. The distribution restrictions are effective for years
beginning after December 31, 1988, but only with respect to amounts that were
not held under the Contract as of that date.
J. TEXAS OPTIONAL RETIREMENT PROGRAM.
Under a Code Section 403(b) annuity contract issued as a result of
participation in the Texas Optional Retirement Program, distributions may not be
received except in the case of the participant's death, retirement or
termination of employment in the Texas public institutions of higher education.
These restrictions are imposed by reason of an opinion of the Texas Attorney
General interpreting the Texas laws governing the Optional Retirement Program.
K. SECTION 457 PLANS FOR STATE GOVERNMENTS AND TAX-EXEMPT ENTITIES.
Code Section 457 allows employees of a state, one of its political
subdivisions, or certain tax-exempt entities to participate in eligible
government deferred compensation plans. An eligible plan, by its terms, must not
allow deferral of more than $7,500 or 33 1/3% of a participant's includible
compensation for the taxable year, whichever is less. Includible compensation
does not include amounts excludable under the eligible deferred compensation
plan or amounts paid into a Code Section 403(b) annuity. The amount a
participant may defer must be reduced dollar-for-dollar by elective deferrals
under a SEP, 401(k) plan or a deductible employee contribution to a 501(c)(18)
plan. Under eligible deferred compensation plans the state, political
subdivision, or tax-exempt entity will be owner of the Contract.
If an employee also participates in another eligible plan or contributes to
a Code Section 403(b) annuity, a single limit of $7,500 will be applied for all
plans. Additionally, the employee must designate how much of the $7,500 or
33 1/3% limitation will be allocated among the various plans. Contributions to
an eligible plan will serve to reduce the maximum exclusion allowance for a Code
Section 403(b) annuity. Amounts received by employees under such plans generally
are includible in gross income in the year of receipt.
L. NON-INDIVIDUAL OWNERS.
Non-individual Owners (e.g., a corporation) of deferred annuity contracts
generally will be currently taxed on any increase in the cash surrender value of
the deferred annuity attributable to contributions made after February 28, 1986.
This rule does not apply to immediate annuities or to deferred annuities held by
a qualified pension plan, an IRA, a 403(b) plan, estates, employers with respect
to terminated pension plans, or a nominee or agent holding a contract for the
benefit of an individual. Corporate-owned annuities may result in exposure to
the alternative minimum tax, to the extent that income on the annuities
increases the corporation's adjusted current earnings.
REPORTS
A Contract Owner is sent a report semi-annually which states certain
financial information about the Portfolios. The Company will also furnish an
annual report to the Contract Owner containing a statement of his or her
account, including unit values and other information as required by applicable
law, rules and regulations.
40
<PAGE>
LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to owners of TSA contracts (i.e. contracts issued under
Section 403(b) of the Internal Revenue Code) and to contracts issued to plans
qualified under Sections 401(a) and 401(k) of the Code. Loans are subject to
provisions of the Code and to applicable qualified retirement plan rules. Tax
advisors and plan fiduciaries should be consulted prior to exercising loan
privileges.
Loaned amounts will first be withdrawn from Sub-Account and Fixed Account
values on a pro-rata basis until exhausted. Thereafter, any additional amounts
will be withdrawn from the Guarantee Period Accounts (pro-rata by duration and
LIFO (last-in, first-out) within each duration), subject to any applicable
Market Value Adjustments. The maximum loan amount will be determined under the
Company's maximum loan formula. The minimum loan amount is $1,000. Loans will be
secured by a security interest in the contract and the amount borrowed will be
transferred to a loan asset account within the Company's General Account, where
it will accrue interest at a specified rate below the then-current loan rate.
Generally, loans must be repaid within five years or less and repayments must be
made quarterly and in substantially equal amounts. Repayments will be allocated
pro-rata in accordance with the most recent payment allocation, except that any
allocations to a Guarantee Period Account will instead be allocated to the Money
Market Portfolio.
CHANGES IN OPERATION OF THE VARIABLE ACCOUNT
The Company reserves the right, subject to compliance with applicable law
and to the provisions of the Participation Agreement, to (1) transfer assets
from any Separate Account or Sub-Account to another of the Company's variable
accounts or Sub-Accounts having assets of the same class, (2) to operate the
variable account or any Sub-Account as a management investment company under the
1940 Act or in any other form permitted by law, (3) to deregister the Variable
Account under the 1940 Act in accordance with the requirements of the 1940 Act,
(4) to substitute the shares of any other registered investment company for the
Portfolio shares held by a Sub-Account, in the event that Portfolio shares are
unavailable for investment, or if the Company determines that further investment
in such Portfolio shares is inappropriate in view of the purpose of the
Sub-Account, (5) to change the methodology for determining the net investment
factor, and (6) to change the names of the Variable Account or of the
Sub-Accounts. In no event will the changes described above be made without
notice to Contract Owners in accordance with the 1940 Act.
DISTRIBUTION
The Contracts offered by the Prospectus may be purchased from certain
independent broker-dealers including representatives of Allmerica Investments,
Inc. (the Principal Underwriter) which are registered under the Securities
Exchange Act of 1934 and are members of the National Association of Securities
Dealers, Inc. ("NASD").
The Company pays commissions not to exceed 6.0% of payments to
broker-dealers which sell the Contracts. Alternative commission schedules are
available with lower initial commission amounts based on payments, plus ongoing
annual compensation of up to 1% of contract value. To the extent permitted by
NASD rules, promotional incentives or payments may also be provided to such
broker-dealers based on sales volumes, the assumption of wholesaling functions,
or other sales-related criteria. Additional payments may be made for other
services not directly related to the sale of the Contracts, including the
recruitment and training of personnel, production of promotional literature, and
similar services.
41
<PAGE>
The Company intends to recoup commissions and other sales expenses through a
combination of anticipated contingent deferred sales charges and profits from
the Company's General Account. Commissions paid on the Contracts, including
additional incentives or payments, do not result in any additional charge to
Contract Owners or to the Variable Account. Any contingent deferred sales
charges assessed on a Contract will be retained by the Company.
Contract Owners may direct any inquiries to their financial representative
or to Allmerica Investments, Inc., 440 Lincoln Street, Worcester, Massachusetts
01653, 800-782-8380.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a
party.
FURTHER INFORMATION
A Registration Statement under the Securities Act of 1933 relating to this
offering has been filed with the Securities and Exchange Commission. Certain
portions of the Registration Statement and amendments have been omitted in this
Prospectus pursuant to the rules and regulations of the Commission. The omitted
information may be obtained from the Commission's principal office in
Washington, D.C., upon payment of the Commission's prescribed fees.
42
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account are not generally subject to regulation under the
provisions of the Securities Act of 1933 or the Investment Company Act of 1940.
Disclosures regarding the fixed portion of the annuity contract and the Fixed
Account may be subject to the provisions of the Securities Act of 1933
concerning the accuracy and completeness of statements made in the Prospectus.
The disclosures in this APPENDIX A have not been reviewed by the Securities and
Exchange Commission.
The Fixed Account is made up of all of the general assets of the Company
other than those allocated to the separate account. Allocations to the Fixed
Account become part of the assets of the Company and are used to support
insurance and annuity obligations. A portion or all of net payments may be
allocated to accumulate at a fixed rate of interest in the Fixed Account. Such
net amounts are guaranteed by the Company as to principal and a minimum rate of
interest. Under the Contracts, the minimum interest which may be credited on
amounts allocated to the Fixed Account is 3% compounded annually. Additional
"Excess Interest" may or may not be credited at the sole discretion of the
Company.
If a Contract is surrendered, or if an Excess Amount is withdrawn, while the
Contract is in force and before the Annuity Date, a contingent deferred sales
charge is imposed if such event occurs before the payments attributable to the
surrender or withdrawal have been credited to the Contract less than six full
contract years.
In Massachusetts, payments and transfers to the Fixed Account are subject to
the following restrictions:
If a Contract issued prior to the Annuitant's 60th birthday, allocations to
the Fixed Account will be permitted until the Annuitant's 61st birthday. On
and after the Annuitant's 61st birthday, no additional Fixed Account
allocations will be accepted. If a Contract is issued on or after the
Annuitant's 60th birthday, up through and including the Annuitant's 81st
birthday, Fixed Account allocations will be permitted during the first
Contract year. If a Contract is issued on or after the Annuitant's 81st
birthday, Fixed Account allocations will be permitted during the first
Contract year. On and after the first Contract anniversary, no additional
allocations to the Fixed Account will be permitted. If a Contract is issued
after the Annuitant's 81st birthday, no payments to the Fixed Account will
be permitted at any time.
If an allocation designated as a Fixed Account allocation is received at the
Principal Office during a period when the Fixed Account is not available due
to the limitations outlined above, the monies will be allocated to the Money
Market Portfolio.
In Oregon, no payments to the Fixed Account will be permitted if a Contract
is issued after the Annuitant's 81st birthday.
43
<PAGE>
APPENDIX B
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER -- Assume a Payment of $50,000 is made on the Date of Issue
and no additional Payments are made. Assume there are no withdrawals and that
the free withdrawal amount is equal to the greater of 15% of the current Account
Value or the accumulated earnings in the Contract. The table below presents
examples of the surrender charge resulting from a full surrender of the Contract
Owner's Account, based on hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL FREE SURRENDER
ACCOUNT ACCUMULATED WITHDRAWAL CHARGE SURRENDER
YEAR VALUE AMOUNT PERCENTAGE CHARGE
- --------- ------------- ------------ --------------- ----------
<S> <C> <C> <C> <C>
1 54,000.00 8,100.00 7% 3,213.00
2 58,320.00 8,748.00 6% 2,974.32
3 62,985.60 12,985.60 5% 2,500.00
4 68,024.45 18,024.45 4% 2,000.00
5 73,466.40 23,466.40 3% 1,500.00
6 79,343.72 29,343.72 2% 1,000.00
7 85,691.21 35,691.21 0% 0.00
</TABLE>
WITHDRAWAL -- Assume a Payment of $50,000 is made on the Date of Issue and
no additional Payments are made. Assume that the free withdrawal amount is equal
to the greater of 15% of the current Account Value or the accumulated earnings
in the contract and there are withdrawals as detailed below. The table below
presents examples of the surrender charge resulting from withdrawals from the
Contract Owner's Account, based on hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL FREE SURRENDER
ACCOUNT ACCUMULATED WITHDRAWAL CHARGE SURRENDER
YEAR VALUE WITHDRAWAL AMOUNT PERCENTAGE CHARGE
- --------- ------------- ------------ ------------ --------------- -----------
<S> <C> <C> <C> <C> <C>
1 54,000.00 0.00 8,100.00 7% 0.00
2 58,320.00 0.00 8,748.00 6% 0.00
3 62,985.60 0.00 12,985.60 5% 0.00
4 68,024.45 30,000.00 18,024.45 4% 479.02
5 41,066.40 10,000.00 6,159.96 3% 115.20
6 33,551.72 5,000.00 5,032.76 2% 0.00
7 30,835.85 10,000.00 4,625.38 0% 0.00
</TABLE>
PART 2: MARKET VALUE ADJUSTMENT
The market value factor is: [(1+i)/(1+j)]n/365-1
The following examples assume:
1. The Payment was allocated to a 10 year Guarantee Period Account with
a guaranteed interest rate of 8%.
2. The date of surrender is seven years (2555 days) from the expiration
date.
3. The value of the Guarantee Period Account is equal to $62,985.60 at
the end of three years.
4. No transfers or withdrawals affecting this Guarantee Period Account
have been made.
5. Surrender charges, if any, are calculated in the same manner as shown
in the examples in Part 1.
44
<PAGE>
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<S> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.10)]2555/365-1
= (.98182)7-1
= -.12054
The market value = the market value factor multiplied by the withdrawal
adjustment
= -.12054X$62,985.60
= -$7,592.11
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
<TABLE>
<S> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.07)]2555/365-1
= (1.0093)7-1
= .06694
The market value = the market value factor multiplied by the withdrawal
adjustment
= .06694X$62,985.60
= $4,216.26
</TABLE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
<TABLE>
<S> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.11)]2555/365-1
= (.97297)7-1
= -.17454
The market value = Minimum of the market value factor multiplied by the
adjustment withdrawal or the negative of the excess interest earned
over 3%
= Minimum of (-.17454X$62,985.60 or -$8,349.25)
= Minimum of (-$10,993.51 or -$8,349.25)
= -$8,349.25
</TABLE>
45
<PAGE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
<TABLE>
<S> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.06)]2555/365-1
= (1.01887)7-1
= .13981
The market value = Minimum of the market value factor multiplied by the
adjustment withdrawal or the excess interest earned over 3%
= Minimum of (.13981X$62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
</TABLE>
46
<PAGE>
APPENDIX C
THE DEATH BENEFIT
PART 1: DEATH OF THE ANNUITANT
DEATH BENEFIT ASSUMING NO WITHDRAWALS
Assume a Payment of $50,000 is made on the Date of Issue and no additional
Payments are made. Assume there are no withdrawals and that the Death Benefit
Effective Annual Yield is equal to 5%. The table below presents examples of the
Death Benefit based on the hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL
HYPOTHETICAL MARKET HYPOTHETICAL
ACCUMULATED VALUE DEATH DEATH DEATH DEATH
YEAR VALUE ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) BENEFIT
- --------- ------------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1 53,000.00 0.00 53,000.00 52,500.00 50,000.00 53,000.00
2 53,530.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 58,883.00 0.00 58,883.00 57,881.25 55,125.00 58,883.00
4 52,994.70 500.00 53,494.70 60,775.31 58,883.00 60,775.31
5 58,294.17 0.00 58,294.17 63,814.08 60,775.31 63,814.08
6 64,123.59 500.00 64,623.59 67,004.78 63,814.08 67,004.78
7 70,535.95 0.00 70,535.95 70,355.02 67,004.78 70,535.95
8 77,589.54 500.00 78,089.54 73,872.77 70,535.95 78,089.54
9 85,348.49 0.00 85,348.49 77,566.41 78,089.54 85,348.49
10 93,883.34 0.00 93,883.34 81,444.73 85,348.49 93,883.34
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment.
Death Benefit (b) is the gross payments accumulated daily at the Death Benefit
Effective Annual Yield reduced proportionately to reflect withdrawals.
Death Benefit (c) is the death benefit that would have been payable on the most
recent contract anniversary, increased for subsequent payments, and decreased
proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c).
47
<PAGE>
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a Payment of $50,000 is made on the Date of Issue and no additional
Payments are made. Assume there are withdrawals as detailed in the table below
and that the Death Benefit Effective Annual Yield is equal to 5%. The table
below presents examples of the Death Benefit based on the hypothetical
Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL
HYPOTHETICAL MARKET HYPOTHETICAL
ACCUMULATED PARTIAL VALUE DEATH DEATH DEATH DEATH
YEAR VALUE WITHDRAWAL ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) BENEFIT
- --------- ------------- ------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 53,000.00 0.00 0.00 53,000.00 52,500.00 50,000.00 53,000.00
2 53,530.00 0.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 3,883.00 50,000.00 0.00 3,883.00 3,816.94 3,635.18 3,883.00
4 3,494.70 0.00 500.00 3,994.70 4,007.79 3,883.00 4,007.79
5 3,844.17 0.00 0.00 3,844.17 4,208.18 4,007.79 4,208.18
6 4,228.59 0.00 500.00 4,728.59 4,418.59 4,208.18 4,728.59
7 4,651.45 0.00 0.00 4,651.45 4,639.51 4,728.59 4,728.59
8 5,116.59 0.00 500.00 5,616.59 4,871.49 4,728.59 5,616.59
9 5,628.25 0.00 0.00 5,628.25 5,115.07 5,616.59 5,628.25
10 691.07 5,000.00 0.00 691.07 599.51 628.25 691.07
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment
Death Benefit (b) is the gross payments accumulated daily at the Death Benefit
Effective Annual Yield reduced proportionately to reflect withdrawals.
Death Benefit (c) is the death benefit that would have been payable on the most
recent contract anniversary, increased for subsequent payments, and decreased
proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c)
PART 2: DEATH OF THE OWNER WHO IS NOT THE ANNUITANT
Assume a Payment of $50,000 is made on the Date of Issue and no additional
Payments are made. Assume there are no withdrawals and that the Death Benefit
Effective Annual Yield is equal to 5%. The table below presents examples of the
Death Benefit based on the hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL
HYPOTHETICAL MARKET HYPOTHETICAL
ACCUMULATED VALUE DEATH
YEAR VALUE ADJUSTMENT BENEFIT
- --------- ------------- ------------- ------------
<S> <C> <C> <C>
1 53,000.00 0.00 53,000.00
2 53,530.00 500.00 54,030.00
3 58,883.00 0.00 58,883.00
4 52,994.70 500.00 53,494.70
5 58,294.17 0.00 58,294.17
6 64,123.59 500.00 64,623.59
7 70,535.95 0.00 70,535.95
8 77,589.54 500.00 78,089.54
9 85,348.49 0.00 85,348.49
10 93,883.34 0.00 93,883.34
</TABLE>
The hypothetical Death Benefit is the Accumulated Value increased by any
positive Market Value Adjustment.
48
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
STATEMENT OF ADDITIONAL INFORMATION
FOR
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS
FUNDED THROUGH
SUB-ACCOUNTS OF
SEPARATE ACCOUNT KG
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS FOR THE VARIABLE ACCOUNT DATED OCTOBER ,
1996, ("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED FROM ALLMERICA
INVESTMENTS, INC., 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653,
800-782-8380.
DATED NOVEMBER 13, 1996
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY . . . . . . . . . . . . . . . . . . . 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE
COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
UNDERWRITERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ANNUITY PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 5
TAX-DEFERRED ACCUMULATION . . . . . . . . . . . . . . . . . . . . . . 8
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 8
GENERAL INFORMATION AND HISTORY
Separate Account KG ("Variable Account") is a separate investment account of
Allmerica Financial Life Insurance and Annuity Company ("Company") authorized
by vote of the Board of Directors on June 13, 1996. The Company is a life
insurance company organized under the laws of Delaware in July, 1974. Its
Principal Office is located at 440 Lincoln Street, Worcester, Massachusetts
01653, Telephone 508-855-1000. The Company is subject to the laws of the
state of Delaware governing insurance companies and to regulation by the
Commissioner of Insurance of Delaware. In addition, the Company is subject
to the insurance laws and regulations of other states and jurisdictions in
which it is licensed to operate. As of December 31, 1995, the Company had
over $5 billion in assets and over $18 billion of life insurance in force.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirectly wholly-owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica"), which in turn is a wholly-owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company on October 16, 1995 and adopted its
present name. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1995 First Allmerica and its subsidiaries
(including the Company) had over $11 billion in combined assets and over $35.2
billion in life insurance in force.
Each Sub-Account invests in a corresponding investment portfolio of Kemper
Investors Fund ("the Fund"), a series type mutual fund registered with the
Securities and Exchange Commission (the "SEC") as an open-end, diversified,
management investment company. Currently, 14 Sub-Accounts of the Variable
Account are available under the Contracts. The Money Market Portfolio, Total
Return Portfolio, High Yield Portfolio, Growth Portfolio, Government Securities
Portfolio, International Portfolio, Small Cap Growth Portfolio, Investment Grade
Bond Portfolio, Value Portfolio, Small Cap Value Portfolio, Value+Growth
Portfolio, Horizon 20+Portfolio, Horizon 10+Portfolio, and Horizon 5 Portfolio.
Each Portfolio available under the Contracts has its own investment objectives
and certain attendant risks.
TAXATION OF THE CONTRACT, VARIABLE
ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with the
Contract, other than for state and local
-2-
<PAGE>
premium taxes and similar assessments when applicable. The Company reserves the
right to impose a charge for any other taxes that may become payable in the
future in connection with the Contracts or the Variable Account.
The Variable Account is considered to be a part of and taxed with the
operations of The Company. The Company is taxed as a life insurance company
under subchapter L of the Internal Revenue Code (the "Code") and files a
consolidated tax return with its parent and affiliated companies.
The Company reserves the right to make a charge for any effect which the income,
assets, or existence of Contracts or the Variable Account may have upon its tax.
Such charge for taxes, if any, will be assessed on a fair and equitable basis in
order to preserve equity among classes of Contract Owners. The Variable Account
presently is not subject to tax.
SERVICES
CUSTODIAN OF SECURITIES. The Company serves as custodian of the assets of the
Variable Account. Trust shares owned by the Sub-Accounts are held on an open
account basis. A Sub-Account's ownership of Trust shares is reflected on the
records of the Trust and not represented by any transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1995 and
1994 and for each of the three years in the period ended December 31, 1995,
included in this Statement of Additional Information constituting part of the
Registration Statement, have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Contracts.
UNDERWRITERS
Allmerica Investments, Inc., ("Allmerica Investments") a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. (NASD), serves as principal
underwriter for the Contracts pursuant to a contract with the Company and the
Variable Account. Allmerica Investments distributes the Contracts on a best
efforts basis. Allmerica Investments, 440 Lincoln Street, Worcester,
Massachusetts 01653 was organized in 1969 as a wholly-owned subsidiary of
First Allmerica and is an indirectly wholly-owned subsidiary of First
Allmerica.
The Contracts offered by this Prospectus are offered continuously and may be
purchased from certain independent broker-dealers which are NASD members and
whose representatives are authorized by applicable law to sell variable
annuity contracts.
All persons selling contracts are required to be licensed by their respective
state insurance authorities for the sale of variable annuity contracts. The
Company pays commissions not to exceed 6.0% of purchase payments to entities
which sell the Contracts. To the extent permitted by NASD rules, promotional
incentives or payments may also be provided to such entities based on sales
volumes, the assumption of wholesaling functions, or other sales-related
criteria. Additional payments may be made for other services not directly
related to the sale of the Contracts, including the recruitment and training of
personnel, production of promotional literature, and similar services.
Commissions paid on the Contracts, including additional incentives or payments,
do not result in any additional charge to Contract Owners or to the Variable
Account.
-3-
<PAGE>
Commissions are paid by The Company and do not result in any charge to Contract
Owners or to the Variable Account in addition to the charges described under
"CHARGES AND DEDUCTIONS" in the Prospectus. The Company intends to recoup the
commission and other sales expense through a combination of anticipated
surrender, withdrawal, and/or annuitization charges, profits from The Company's
general account, including the investment earnings on amounts allocated to
accumulate on a fixed basis in excess of the interest credited on fixed
accumulations by The Company, and the profit, if any, from the mortality and
expense risk charge.
ANNUITY PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "COMPUTATION OF CONTRACT VALUES AND ANNUITY PAYMENTS"
in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated by
the following hypothetical example: Assume that the Net Asset Value of a
portfolio share held in a Sub-Account at the end of a one-day Valuation Period
were $1.135000; that the Net Asset Value on the previous date was $1.132000;
that the value of an Accumulation Unit on the previous date was $1.117500; and
that during the Valuation Period, the dividends and capital gain
distributions were $0.000335 per share. The Accumulation Unit Value at the end
of the current Valuation Period would be calculated as follows:
(1) Accumulation Unit Value - Previous Valuation Period. . . . . . . $1.117500
(2) Net Asset Value - Previous Valuation Period. . . . . . . . . . . $1.132000
(3) Net Asset Value - Current Valuation Period . . . . . . . . . . . $1.135000
(4) Dividends and capital gain distributions . . . . . . . . . . . . $0.000335
(5) Annual Charge (one day equivalent of 1.40% per annum). . . . . . 0.000039
(6) Net Investment Factor { [(3) + (4)] (2)} - (5) . . . . . . . . . 1.002908
(8) Accumulation Unit Value - Current Valuation Period (1) X (6) . . $1.120750
The method for determining the amount of annuity payments is described in detail
under "COMPUTATION OF CONTRACT VALUES AND ANNUITY PAYMENTS" in the Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY PAYMENT CALCULATION USING HYPOTHETICAL EXAMPLE.
The determination of the Annuity Unit value and the variable annuity payment may
be illustrated by the following hypothetical example: Assume an Annuitant has
40,000 Accumulation Units in a Variable Account, and that the value of an
Accumulation Unit on the Valuation Date used to determine the amount of the
first variable annuity payment is $1.120000. Therefore, the Accumulation Value
of the Contract is $44,800 (40,000 x $1.120000). Assume also that the Contract
Owner elects an option for which the first monthly payment is $6.57 per $1,000
of Accumulated Value applied. Assuming no premium tax or contingent deferred
sales charge, the first monthly payment would be 44.800 multiplied by $6.57, or
$294.34.
Next, assume that the Annuity Unit value for the assumed rate of 3-1/2% per
annum for the Valuation Date as of which the first payment was calculated was
$1.100000. Annuity Unit values will not be the same as Accumulation Unit values
because
-4-
<PAGE>
the former reflect the 3-1/2% assumed interest rate used in the annuity rate
calculations. When the Annuity Unit value of $1.100000 is divided into the
first monthly payment the number of Annuity Units represented by that payment
is determined to be 267.5818. The value of this same number of Annuity Units
will be paid in each subsequent month under most options. Assume further that
the net investment factor for the Valuation Period applicable to the next
annuity payment is 1.000190. Multiplying this factor by .999906 (the one-day
adjustment factor for the assumed interest rate of 3-1/2% per annum) produces a
factor of 1.000096. This is then multiplied by the Annuity Unit value on the
immediately preceding Valuation Date (assumed here to be $1.105000). The result
is an Annuity Unit value of $1.105106 for the current monthly payment. The
current monthly payment is then determined by multiplying the number of Annuity
Units by the current Annuity Unit value, or 267.5818 times $1.105106, which
produces a current monthly payment of $295.71.
Method for Determining Variable Annuity Option V Redemption and Illustration
Using Hypothetical Example. As discussed in the Prospectus under "DESCRIPTION
OF VARIABLE ANNUITY OPTIONS," the Annuitant, or the beneficiary if the Annuitant
has died, may choose at any time to withdraw the Contract and receive its
commuted value. Commuted value is the present value of remaining payments
commuted at 3 1/2% interest. However, if the annuitant elects the withdrawal,
the remaining payments are deemed to be the remaining payments that would have
been payable had the Surrender Value, rather than the Accumulation Value, been
applied at the Annuity Date. The determination of the commuted value upon
redemption by an Annuitant may be illustrated by the following hypothetical
example.
Assume an annuity period of 10 years or longer is elected. The number of
Annuity Units each payment is based on would be calculated using the
Accumulated Value. Assume this results in 267.5818 Annuity Units. Assume
the commuted value is requested with 60 monthly payments remaining and a
current Annuity Unit Value of $1.200000. Based on these assumptions, the
dollar amount of remaining payments would be $321.10 a month for 60 months.
If the commuted value was requested by a beneficiary, the value would be
based on the present value at 3 1/2% interest of this stream of annuity
payments. The commuted value would be $17,725.49. However, if the commuted
value is requested by an Annuitant, the value is calculated as if the
Surrender Value, not the Accumulated Value, had been used to calculate the
number of Annuity units. Assume this results in 250 Annuity units. Based on
these assumptions, the dollar amount of remaining payments would be $300 a
month for 60 months. The present value at 3 1/2% of all remaining payments
would be $16,560.72.
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the prospectus under
"PERFORMANCE INFORMATION." In addition, the Company may provide advertising,
sales literature, periodic publications or other materials information on
various topics of interest to Contract owners and prospective Contract
owners. These topics may include the relationship between sectors of the
economy and the economy as a whole and its effect on various securities
markets, investment strategies and techniques (such as value investing,
market timing, dollar cost averaging, asset allocation, constant ratio
transfer and account rebalancing), the advantages and disadvantages of
investing in tax-deferred and taxable investments, customer profiles and
hypothetical purchase and investment scenarios, financial management and tax
and retirement planning, and investment alternatives to certificates of
deposit and other financial instruments, including comparisons between the
Contracts and the characteristics of and market for such financial
instruments.
TOTAL RETURN
"Total Return" refers to the total of the income generated by an investment
in a Sub-Account and of the changes of value of the principal invested (due
to realized and unrealized capital gains or losses) for a specified period,
reduced by the Sub-Accounts asset charge and any applicable contingent deferred
sales charge which would be assessed upon complete redemption of the investment.
Total Return figures are calculated by standardized methods prescribed by
rules of the Securities and Exchange Commission. The quotations are computed
by finding the average annual compounded rates of return over the specified
periods that would equate the initial amount invested to the ending
redeemable values, according to the following formula:
n
P(1 + T) = ERV
-5-
<PAGE>
Where: P = a hypothetical initial payment to the Variable Account of $1,000
T = average annual total return
n = number of years
ERV = the ending redeemable value of the $1,000 payment at the end of
the specified period
The calculation of Total Return includes the annual charges against the asset of
the Sub-Account. This charge is 1.40% on an annual basis. The calculation of
ending redeemable value assumes (1) the policy was issued at the beginning of
the period and (2) a complete surrender of the policy at the end of the period.
The deduction of the contingent deferred sales charge, if any, applicable at the
end of the period is included in the calculation, according to the following
schedule:
Years from date of Charge as Percentage of
Payment New Payments Withdrawn*
------------------ -----------------------
0 - 1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
Thereafter 0%
*Subject to the maximum limit described in the prospectus.
No contingent deferred sales charge is deducted upon expiration of the
periods specified above. In all calendar years, an amount equal to (a) 15% of
the Accumulated Value or (b) cumulative earnings (Accumulated Value less
total gross payments not previously withdrawn) is not subject to a contingent
deferred sales charge.
The calculations of Total Return effect the deduction of an 0.88 Annual
Contract Fee, representing a pro-rata portion of the $35 Annual Contract fee
based on a mean contract of $40,000.
SUPPLEMENTAL TOTAL RETURN INFORMATION
The Supplemental Total Return information in this section refers to the total of
the income generated by an investment in a Sub-Account and of the changes of
value of the principal invested (due to realized and unrealized capital gains or
losses) for a specified period reduced by the Sub-Account's asset charges.
However, it is assumed that the investment is NOT withdrawn at the end of each
period.
The quotations of Supplemental Total Return are computed by finding the average
annual compounded rates of return over the specified periods that would equate
the initial amount invested to the ending values, according to the following
formula:
n
P(1 + T) = EV
Where: P = a hypothetical initial payment to the Variable Account of $1,000
T = average annual total return
n = number of years
EV = the ending value of the $1,000 payment at the end of the
specified period
-6-
<PAGE>
The calculation of Supplemental Total Return reflects the 1.40% annual charge
against the assets of the Sub-Accounts. The ending value assumes that the
policy is NOT withdrawn at the end of the specified period, and there is
therefore no adjustment for the contingent deferred sales charge that would be
applicable if the policy was withdrawn at the end of the period.
The calculations of Supplemental Total Return include the deduction of an
0.88 Annual Contract Fee, representing a pro-rata portion of the $35 Annual
Contract fee based on a mean contract size of $40,000.
YIELD AND EFFECTIVE YIELD - MONEY MARKET SUB-ACCOUNT
Set forth below is yield and effective yield information for the Money Market
Sub-Account for the seven-day period ended December 31, 1995:
Yield 3.92%
Effective Yield 4.00%
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the SEC. Under those methods, the yield quotation is
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing account having a balance of one
accumulation unit of the Sub-Account at the beginning of the period, subtracting
a charge reflecting the annual 1.40% deduction for mortality and expense risk
and the administrative charge, dividing the difference by the value of the
account at the beginning of the same period to obtain the base period return,
and then multiplying the return for a seven-day base period by (365/7), with the
resulting yield carried to the nearest hundredth of one percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
(365/7)
Effective Yield = [(base period return + 1) ] - 1
The calculations of yield and effective yield do NOT reflect the $35 Annual
Contract fee.
TAX-DEFERRED ACCUMULATION
$50,000 "AFTER-TAX" INVESTMENT(1)
<TABLE>
<CAPTION>
YEARS TAX-DEFERRED CONVENTIONAL
SINCE ANNUITY CONTRACT SAVINGS PLAN
INVESTMENT
- -------------------------------------------------------------------------------
Tax-Deferred Net Amount After
Accumulation Taxable Lump Taxable
(Before Withdrawals)(2) Sum Withdrawal(3) Accumulation(3)
----------------------- ------------------ ---------------
<S> <C> <C> <C>
10 years. . . . . $107,946 $ 86,448 $ 81,693
20 years. . . . . 233,048 165,137 133,476
30 years. . . . . 503,133 335,021 218,082
</TABLE>
(1) This chart compares the accumulation of a $50,000 investment in a
tax-deferred nonqualified annuity contract and in a conventional taxable
savings plan. The $50,000 investment in the annuity contract and in the
conventional savings plan is assumed to be made on an "after-tax" basis. Only
the gain in the annuity contract will be subject to income tax upon a taxable
lump sum withdrawal.
Unlike conventional savings plans, investments in non-qualified annuity
contracts provide tax-deferred treatment on earnings. When monies are
received from a non-qualified annuity contract (and you have many different
options on how you receive your funds), they are subject to income tax. At
the time of receipt, if the person receiving the monies is retired, not
working or has additional tax exemptions, these monies may be taxed at a
lesser rate.
(2) The chart does not reflect the following charges and expenses under the
annuity contract: 1.25% for mortality and expense risk; 0.15% administration
charges; 7% maximum deferred withdrawal charge; and $35 annual records
maintenance charge. The tax-deferred accumulation would be reduced if these
charges were reflected. No implication is intended by the use of these
assumptions that the return shown is guaranteed in any way or that the return
shown represents an average or expected rate of return over the period of the
Contracts. [IMPORTANT - THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN.]
(3) The chart assumes a 37.1% federal marginal tax rate and an 8% annual
return. The 37.1% federal marginal tax is based on a marginal tax rate of 36%,
representative of the target market, adjusted to reflect a decrease of $3 of
itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Contracts. Income
on non-qualified annuity contracts is taxed as ordinary income upon
withdrawal. A 10% tax penalty may apply to early withdrawals. See "Federal
Income Taxes" in the prospectus.
FINANCIAL STATEMENTS
Financial Statements are included for Allmerica Financial Life Insurance and
Annuity Company. Financial Statements for KG Variable Account are not
included as the Variable Account has not begun operations.
-7-
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
(formerly SMA Life Assurance Company)
STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1995
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
December 31, 1995
Statutory Financial Statements
Report of Independent Accountants . . . . . . . . . . . . . . . . . 1
Statement of Assets, Liabilities, Surplus and Other Funds . . . . . 3
Statement of Operations and Changes in Capital and Surplus. . . . . 4
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Statutory Financial Statements . . . . . . . . . . . . . . 6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Allmerica Financial Life Insurance and Annuity Company
(formerly known as SMA Life Assurance Company)
We have audited the accompanying statutory basis statement of assets,
liabilities, surplus and other funds of Allmerica Financial Life Insurance and
Annuity Company as of December 31, 1995 and 1994, and the related statutory
basis statements of operations and changes in capital and surplus, and of cash
flows for each of the three years ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Note 1 to the financial statements, the Company
prepared these financial statements using accounting practices prescribed or
permitted by the Insurance Department of the State of Delaware, which practices
differ from generally accepted accounting principles. The effects on the
financial statements of the variances between the statutory basis of accounting
and generally accepted accounting principles, although not reasonably
determinable, are presumed to be material.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Allmerica Financial Life Insurance and Annuity Company as of December 31,
1995 and 1994, or the results of its operations or its cash flows for each of
the three years ended December 31, 1995.
<PAGE>
To the Board of Directors and Stockholder of
Allmerica Financial Life Insurance and Annuity Company
(formerly known as SMA Life Assurance Company)
Page 2
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets, liabilities, surplus and other funds of
Allmerica Financial Life Insurance and Annuity Company as of December 31, 1995
and 1994, and the results of its operations and its cash flows for each of the
three years ended December 31, 1995, on the basis of accounting described in
Note 1.
As discussed in Note 1 to the financial statements, the Company's parent, State
Mutual Life Assurance Company of America, converted from a Massachusetts mutual
life insurance company to a Massachusetts stock life insurance company on
October 16, 1995. In connection with this transaction, the Company changed its
name to Allmerica Financial Life Insurance and Annuity Company and its parent
became a wholly-owned subsidiary of Allmerica Financial Corporation.
/s/Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Boston, MA
February 5, 1996
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
STATEMENT OF ASSETS, LIABILITIES, SURPLUS AND
OTHER FUNDS
as of December 31,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1995 1994
---- ----
<S> <C> <C>
Cash $ 7,791 $ 7,248
Investments:
Bonds 1,659,575 1,595,275
Stocks 18,132 12,283
Mortgage loans 239,522 295,532
Policy loans 122,696 116,600
Real estate 40,967 51,288
Short term investments 3,500 45,239
Other invested assets 40,196 27,443
----------- -----------
Total cash and investments 2,132,379 2,150,908
Premiums deferred and uncollected (1,231) 5,452
Investment income due and accrued 38,413 39,442
Other assets 6,060 10,569
Assets held in separate accounts 2,978,409 1,869,695
----------- -----------
$ 5,154,030 $ 4,076,066
----------- -----------
----------- -----------
LIABILITIES, SURPLUS AND OTHER FUNDS
Liabilities:
Policy liabilities:
Life reserves $ 856,239 $ 890,880
Annuity and other fund reserves 865,216 928,325
Accident and health reserves 167,246 121,580
Claims payable 11,047 11,720
----------- -----------
Total policy liabilities 1,899,748 1,952,505
Expenses and taxes payable 20,824 17,484
Other liabilities 27,499 36,466
Asset valuation reserve 31,556 20,786
Obligations related to separate account business 2,967,547 1,859,502
----------- -----------
Total liabilities 4,947,174 3,886,743
----------- -----------
Surplus and Other Funds:
Common stock, $1,000 par value
Authorized - 10,000 shares
Issued and outstanding - 2,517 shares 2,517 2,517
Paid-in surplus 199,307 199,307
Unassigned surplus (deficit) 4,282 (13,621)
Special contingency reserves 750 1,120
----------- -----------
Total surplus and other funds 206,856 189,323
----------- -----------
$ 5,154,030 $ 4,076,066
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
STATEMENT OF OPERATIONS AND
CHANGES IN CAPITAL AND SURPLUS
for the year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
REVENUE 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Premiums and other considerations:
Life $ 156,864 $ 195,633 $ 189,285
Annuities 729,222 707,172 660,143
Accident and health 31,790 31,927 35,718
Reinsurance commissions and reserve adjustments 20,198 4,195 2,309
---------- ---------- ----------
Total premiums and other considerations 938,074 938,927 887,455
Net investment income 167,470 170,430 177,612
Realized capital losses, net of tax (2,295) (17,172) (7,225)
Other revenue 37,466 26,065 19,055
---------- ---------- ----------
Total revenue 1,140,715 1,118,250 1,076,897
---------- ---------- ----------
POLICY BENEFITS AND OPERATING EXPENSES
Policy benefits:
Claims, surrenders and other benefits 391,254 331,418 275,290
Increase (decrease) in policy reserves (22,669) 40,113 15,292
---------- ---------- ----------
Total policy benefits 368,585 371,531 290,582
Operating and selling expenses 150,215 164,175 160,928
Taxes, except capital gains tax 26,536 22,846 19,066
Net transfers to separate accounts 556,856 553,295 586,539
---------- ---------- ----------
Total policy benefits and operating expenses 1,102,192 1,111,847 1,057,115
---------- ---------- ----------
NET INCOME 38,523 6,403 19,782
CAPITAL AND SURPLUS, BEGINNING OF YEAR 189,323 182,216 171,941
Unrealized capital gains (losses) on investments 8,279 12,170 (9,052)
Transfer from (to) asset valuation reserve (10,770) (9,822) 1,974
Other adjustments (18,499) (1,644) (2,429)
---------- ---------- ----------
CAPITAL AND SURPLUS, END OF YEAR $ 206,856 $ 189,323 $ 182,216
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
STATEMENT OF CASH FLOWS
for the year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
CASH FLOW FROM OPERATING ACTIVITIES 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Premiums, deposits and other income $ 964,129 $ 962,147 $ 902,725
Allowances and reserve adjustments on
reinsurance ceded 20,693 3,279 22,185
Net investment income 170,949 173,294 182,843
Net increase in policy loans (6,096) (7,585) (7,812)
Benefits to policyholders and beneficiaries (393,472) (330,900) (298,612)
Operating and selling expenses and taxes (153,504) (193,796) (171,533)
Net transfers to separate accounts (608,480) (600,760) (634,021)
Federal income tax (excluding tax on capital gains) (6,771) (19,603) (4828)
Other sources (applications) (13,642) 19,868 7,757
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (26,194) 5,944 (1,296)
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Sales and maturities of long term investments:
Bonds 572,640 478,512 386,414
Stocks 481 63 64
Real estate and other invested assets 13,008 3,008 11,094
Repayment of mortgage principal 55,202 65,334 79,844
Capital gains tax (400) (968) (3,296)
Acquisition of long term investments:
Bonds (640,339) (508,603) (466,086)
Stocks (44) - -
Real estate and other invested assets (11,929) (24,544) (2,392)
Mortgage loans (415) (364) (2,266)
Other investing activities (3,206) 18,934 (27,254)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (15,002) 31,372 (23,878)
---------- ---------- ----------
Net change in cash and short term investments (41,196) 37,316 (25,174)
CASH AND SHORT TERM INVESTMENTS
Beginning of the year 52,487 15,171 40,345
---------- ---------- ----------
End of the year $ 11,291 $ 52,487 $ 15,171
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
NOTES TO STATUTORY FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION - Allmerica Financial Life Insurance and
Annuity Company ("Allmerica Financial" or the "Company", formerly SMA Life
Assurance Company) is a wholly owned subsidiary of SMA Financial Corp., which is
wholly owned by First Allmerica Financial Life Insurance Company ("First
Allmerica", formerly, State Mutual Life Assurance Company of America), a stock
life insurance company. On October 16, 1995, First Allmerica converted from a
mutual life insurance company to a stock life insurance company. Concurrent
with this transaction, First Allmerica became a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC").
The stockholder's equity of the Company is being maintained at a minimum level
of 5% of general account assets by First Allmerica in accordance with a policy
established by vote of First Allmerica's Board of Directors.
The Company's financial statements have been prepared on the basis of accounting
practices prescribed or permitted by the Insurance Department of the State of
Delaware and in conformity with practices prescribed by the National Association
of Insurance Commissioners (NAIC), which while common in the industry, vary in
some respects from generally accepted accounting principles. Significant
differences include:
- Bonds considered to be "available-for-sale" or "trading" are not
carried at fair value and changes in fair value are not recognized
through surplus or the statement of operations, respectively;
- The Asset Valuation Reserve, represents a reserve against possible
losses on investments and is recorded as a liability through a charge
to surplus. The Interest Maintenance Reserve is designed to include
deferred realized gains and losses (net of applicable federal income
taxes) due to interest rate changes and is also recorded as a
liability, however, the deferred net realized investment gains and
losses are amortized into future income generally over the original
period to maturity of the assets sold. These liabilities are not
required under generally accepted accounting principles;
- Total premiums, deposits and benefits on certain investment-type
contracts are reflected in the statement of operations, instead of
using the deposit method of accounting;
- Policy acquisition costs, such as commissions, premium taxes and other
items, are not deferred and amortized in relation to the revenue/gross
profit streams from the related contracts;
- Benefit reserves are determined using statutorily prescribed interest,
morbidity and mortality assumptions instead of using more realistic
expense, interest, morbidity, mortality and voluntary withdrawal
assumptions with provision made for adverse deviation;
- Amounts recoverable from reinsurers for unpaid losses are not recorded
as assets, but as offsets against the respective liabilities;
- Deferred federal income taxes are not provided for temporary
differences between amounts reported in the financial statements and
those included in the tax returns;
- Certain adjustments related to prior years are recorded as direct
charges or credits to surplus;
- Certain assets, designated as "non-admitted" assets (principally
agents' balances), are not recorded as assets, but are charged to
surplus; and,
- Costs related to other postretirement benefits are recognized only for
employees that are fully vested.
6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
The preparation of financial statements in accordance with practices prescribed
or permitted by the Insurance Department of the State of Delaware and in
conformity with practices prescribed by the NAIC requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
VALUATION OF INVESTMENTS - Investments in bonds are carried principally at
amortized cost, in accordance with NAIC guidelines. Preferred stocks are
carried generally at cost and common stocks are carried at market value. Policy
loans are carried principally at unpaid principal balances.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts. Mortgage loans are reduced for losses expected by
management to be realized on transfers of mortgage loans to real estate (upon
foreclosure), on the disposition or settlement of mortgage loans and on mortgage
loans which management believes may not be collectible in full. In determining
the amount of the loss, management considers, among other things, the estimated
fair value of the underlying collateral. Investment real estate and real estate
acquired through foreclosure are carried at the lower of depreciated cost or
market value. Depreciation is generally calculated using the straight-line
method.
An asset valuation reserve (AVR) for bonds, mortgage loans, stocks, real estate,
and other invested assets is maintained by appropriations from surplus in
accordance with a formula specified by the NAIC and is classified as a
liability.
FINANCIAL INSTRUMENTS - In the normal course of business, the Company enters
into transactions involving various types of financial instruments including
investments such as bonds, stocks and mortgage loans and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuations. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
RECOGNITION OF PREMIUM INCOME AND ACQUISITION COSTS - In general, premiums are
recognized as revenue over the premium paying period of the policies;
commissions and other costs of acquiring the policies are charged to operations
when incurred.
SEPARATE ACCOUNTS - Separate account assets and liabilities represent segregated
funds administered and invested by the Company for the benefit of certain
variable annuity and variable life contract holders. Assets consist principally
of bonds, common stocks, mutual funds, and short term obligations at market
value. The investment income, gains, and losses of these accounts generally
accrue to the contract holders and therefore, are not included in the Company's
net income. Appreciation and depreciation of the Company's interest in the
separate accounts, including undistributed net investment income, is reflected
in capital and surplus.
INSURANCE RESERVES AND ANNUITY AND OTHER FUND RESERVES - Reserves for life
insurance, annuities, and accident and health insurance are established in
amounts adequate to meet the estimated future obligations of policies in
force. These liabilities are computed based upon mortality, morbidity and
interest rate assumptions applicable to these coverages, including provision
for adverse deviation. Reserves are computed using interest rates ranging
from 3% to 6% for individual life insurance policies, 3% to 5 1/2% for
accident and health policies and 3 1/2% to 9 1/2% for annuity contracts.
Mortality, morbidity and withdrawal assumptions for all policies are based on
the Company's own experience and industry standards. The assumptions vary by
plan, age at issue, year of issue and duration. Claims reserves are computed
based on historical experience modified for expected trends in frequency and
severity. Withdrawal characteristics of annuity and other fund reserves vary
by contract. At December 31, 1995 and 1994, approximately 84% and 77%,
respectively, of the contracts (included in both the general account and
separate accounts of the Company) were not subject to discretionary
withdrawal or were subject to withdrawal at book value less surrender charge.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
FEDERAL INCOME TAXES - AFC, its life insurance subsidiaries, First Allmerica and
Allmerica Financial and its non-insurance domestic subsidiaries file a
life-nonlife consolidated United States federal income tax return. Entities
included within the consolidated group are segregated into either a life
insurance or non-life insurance company subgroup. The consolidation of these
subgroups is subject to certain statutory restrictions on the percentage of
eligible non-life taxable operating losses that can be applied to offset life
company taxable income. Allmerica P&C and its subsidiaries file a separate
United States Federal income tax return.
The federal income tax allocation policies and procedures are subject to written
agreement between the companies. The federal income tax for all subsidiaries in
the consolidated return of AFC is calculated on a separate return basis. Any
current tax liability is paid to AFC. Tax benefits resulting from taxable
operating losses or credits of AFC's subsidiaries are not reimbursed to the
subsidiary until such losses or credits can be utilized by the subsidiary on a
separate return basis.
CAPITAL GAINS AND LOSSES - Realized capital gains and losses, net of applicable
capital gains tax or benefit, exclusive of those transferred to the interest
maintenance reserve ("IMR"), are included in the statement of operations.
Unrealized capital gains and losses are reflected as direct credits or charges
to capital and surplus. The IMR, which is included in other liabilities,
establishes a reserve for realized gains and losses, net of tax, resulting from
changes in interest rates on short and long term fixed income investments. Net
realized gains and losses charged to the IMR are amortized into net investment
income over the remaining life of the investment sold. The Company uses the
seriatim method of amortization for interest related gains and losses arising
from the sale of mortgages, and uses the group method to amortize interest
related gains and losses arising from all other fixed income investments.
NOTE 2 - INVESTMENTS
BONDS - The carrying value and fair value of investments in bonds are as
follows:
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross
Carrying Unrealized Unrealized Fair
(In thousands) Value Appreciation Depreciation Value
----- ------------ ------------ -----
<S> <C> <C> <C> <C>
Federal government bonds $ 67,039 $ 3,063 $ - $ 70,102
State, local and government agency bonds 13,607 2,290 23 15,874
Foreign government bonds 12,121 772 249 12,644
Corporate securities 1,471,422 55,836 6,275 1,520,983
Mortgage-backed securities 95,385 951 - 96,336
---------- ---------- ---------- ----------
Total $1,659,574 $ 62,912 $ 6,457 $1,715,939
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
December 31, 1995
Gross Gross
Carrying Unrealized Unrealized Fair
(In thousands) Value Appreciation Depreciation Value
----- ------------ ------------ -----
Federal government bonds $ 17,651 $ 8 $ 762 $ 16,897
State, local and government agency bonds 1,110 54 - 1,164
Foreign government bonds 31,863 83 3,735 28,211
Corporate securities 1,462,871 8,145 56,011 1,415,005
Mortgage-backed securities 81,780 268 1,737 80,311
---------- ---------- ---------- ----------
Total $1,595,275 $ 8,558 $ 62,245 $1,541,588
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
The carrying value and fair value by contractual maturity at December 31, 1995,
are shown below. Actual maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties or the Company may have the right to put or
sell the obligation back to the issuer. Mortgage-backed securities are
classified based on expected maturities.
<TABLE>
<CAPTION>
Carrying Fair
(In thousands) Value Value
----- -----
<S> <C> <C>
Due in one year or less $ 250,578 $ 258,436
Due after one year through five years 736,003 763,179
Due after five years through ten years 538,897 558,445
Due after ten years 134,097 135,880
---------- ----------
Total $1,659,575 $1,715,940
---------- ----------
---------- ----------
</TABLE>
MORTGAGE LOANS AND REAL ESTATE - Mortgage loans and real estate investments, are
diversified by property type and location. Real estate investments have been
obtained primarily through foreclosure. Mortgage loans are collateralized by
the related properties and are generally no more than 75% of the property value
at the time the original loan is made. At December 31, 1995 and 1994, mortgage
loan and real estate investments were distributed by the following types and
geographic regions:
<TABLE>
<CAPTION>
(In thousands)
Property Type 1995 1994
- ------------- ---- ----
<S> <C> <C>
Office buildings $ 127,149 $ 140,292
Residential 59,934 57,061
Retail 29,578 72,787
Industrial/Warehouse 38,192 39,424
Other 25,636 37,256
----------- -----------
Total $ 280,489 $ 346,820
----------- -----------
----------- -----------
Geographic Region 1995 1994
- ----------------- ---- ----
South Atlantic $ 86,410 $ 92,934
East North Central 55,991 72,704
Middle Atlantic 38,666 48,688
Pacific 32,803 39,892
West North Central 21,486 27,377
Mountain 9,939 12,211
New England 24,886 26,613
East South Central 5,487 6,224
West South Central 4,821 20,177
---------- ----------
Total $ 280,489 $ 346,820
---------- ----------
---------- ----------
</TABLE>
Reserves for mortgage loans and real estate reflected in the above amounts were
$18.9 million and $21.0 million at December 31, 1995 and 1994, respectively.
9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
NET INVESTMENT INCOME - The components of net investment income for the year
ended December 31 were as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Bonds $ 122,318 $ 123,495 $ 126,729
Stocks 1,653 1,799 953
Mortgage loans 26,356 31,945 40,823
Real estate 9,139 8,425 9,493
Policy loans 9,486 8,797 8,215
Other investments 3,951 1,651 674
Short term investments 2,252 1,378 840
---------- ---------- ----------
175,155 177,490 187,727
Less investment expenses 9,703 9,138 11,026
---------- ---------- ----------
Net investment income, before IMR amortization 165,452 168,352 176,701
IMR amortization 2,018 2,078 911
---------- ---------- ----------
Net investment income $ 167,470 $ 170,430 $ 177,612
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
REALIZED CAPITAL GAINS AND LOSSES - Realized capital gains (losses) on
investments for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Bonds $ 727 $ 645 $ 10,133
Stocks (263) (62) 16
Mortgage loans (1,083) (17,142) (83)
Real estate (1,892) 605 (2,044)
--------- --------- ---------
(2,511) (15,954) 8,022
Less income tax 400 968 3,296
--------- --------- ---------
Net realized capital gains (losses) before transfer to IMR (2,911) (16,922) 4,726
Net realized capital gains transferred to IMR 616 (250) (11,951)
--------- --------- ---------
Net realized capital gains (losses) $ (2,295) $(17,172) $ (7,225)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Proceeds from voluntary sales of investments in bonds during 1995, 1994 and 1993
were $22.4 million, $17.9 million, and $13.2 million, respectively. Gross gains
of $4.3 million, $3.0 million, and $4.5 million and gross losses of $5.2
million, $4.6 million, and $ .5 million, respectively, were realized on those
sales.
NOTE 3 - FAIR VALUE DISCLOSURES OF FINANCIAL INFORMATION
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" requires disclosure of fair value information
about certain financial instruments (insurance contracts, real estate, goodwill
and taxes are excluded) for which it is practicable to estimate such values,
whether or not these instruments are included in the balance sheet. The fair
values presented for certain financial instruments are estimates which, in many
cases, may differ significantly from the amounts which could be recognized upon
immediate liquidation. In cases where market prices are not available,
estimates of fair value are based on discounted cash flow analyses which utilize
current interest rates for similar financial instruments which have comparable
terms and credit quality.
10
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
FINANCIAL ASSETS:
CASH AND SHORT TERM INVESTMENTS - The carrying amounts reported in the statement
of assets, liabilities, surplus and other funds approximate fair value.
BONDS - Fair values are based on quoted market prices, if available. If a
quoted market price is not available, fair values are estimated using
independent pricing sources or internally developed pricing models using
discounted cash flow analyses.
STOCKS - Fair values are based on quoted market prices, if available. If a
quoted market price is not available, fair values are estimated using
independent pricing sources or internally developed pricing models.
MORTGAGE LOANS - Fair values are estimated by discounting the future contractual
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings. The fair value of below investment grade
mortgage loans is limited to the lesser of the present value of the cash flows
or book value.
POLICY LOANS - The carrying amount reported in the statement of assets,
liabilities, surplus and other funds approximates fair value since policy loans
have no defined maturity dates and are inseparable from the insurance contracts.
FINANCIAL LIABILITIES:
ANNUITY AND OTHER FUND RESERVES (WITHOUT MORTALITY/MORBIDITY FEATURES) - Fair
values for the Company's liabilities under individual annuity contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments as of December 31 were as
follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial Assets:
Cash $ 7,791 $ 7,791 $ 7,248 $ 7,248
Short term investments 3,500 3,500 45,239 45,239
Bonds 1,659,575 1,715,940 1,595,275 1,541,588
Stocks 18,132 18,414 12,283 12,590
Mortgage loans 239,522 250,196 295,532 291,704
Policy loans 122,696 122,696 116,600 116,600
Financial Liabilities:
Individual annuity contracts 803,099 797,024 869,230 862,662
Supplemental contracts without life
contingencies 16,796 16,796 16,673 16,673
Other contract deposit funds 632 632 1,105 1,105
</TABLE>
11
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
NOTE 4 - FEDERAL INCOME TAXES
The federal income tax provisions for 1995, 1994 and 1993 were $17.4 million,
$13.1 million and $8.6 million, respectively, which include taxes applicable to
realized capital gains of $.4 million, $1.0 million and $3.3 million.
The effective federal income tax rates were 27%, 67% and 30% in 1995, 1994 and
1993, respectively. The differences between the federal statutory rate and the
Company's effective tax rates are primarily related to decreases in taxable
income for the write-offs of mortgage loans; and increases in taxable income for
differences in policyholder liabilities for federal income tax purposes and
financial reporting purposes and the deferral of policy acquisition costs for
federal tax purposes.
The consolidated federal income tax returns are routinely audited by the
Internal Revenue Service (IRS) and provisions are routinely made in the
financial statements in anticipation of the results of these audits. The IRS
has completed its examination of all of the consolidated federal income tax
returns through 1988. In management's opinion, adequate tax liabilities have
been established for all years. However, the amount of these liabilities could
be revised in the near term if estimates of the Company's ultimate liability are
revised.
NOTE 5 - REINSURANCE
The Company participates in reinsurance to reduce overall risks, including
exposure to large losses and to permit recovery of a portion of direct losses.
Reinsurance contracts do not relieve the Company from its obligation to its
policyholders. Reinsurance financial data for the years ended December 31, is
as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Reinsurance premiums assumed $ 3,442 $ 3,788 $ 4,190
Reinsurance premiums ceded
42,914 17,430 14,798
Deduction from insurance
liability including
reinsurance recoverable on
unpaid claims 82,227 46,734 42,805
</TABLE>
Individual life premiums ceded to First Allmerica aggregated $6.8 million, $7.8
million and $9.0 million in 1995, 1994 and 1993, respectively. The Company has
also entered into various reinsurance agreements with First Allmerica under
which certain insurance risks related to individual accident and health
business, premium income and related expenses are assumed by the Company from
First Allmerica. Premiums assumed pursuant to these agreements aggregated $3.4
million, $3.8 million and $4.2 million in 1995, 1994 and 1993, respectively .
During the year Allmerica Financial entered into a coinsurance agreement to
reinsure substantially all of its yearly renewable term life insurance.
Premiums ceded and reinsurance credits taken under this agreement amounted to
$25.4 million and $20.7 million, respectively. At December 31, 1995, the
deduction from insurance liability, including reinsurance recoverable on unpaid
claims under this agreement was $12.7 million.
NOTE 6 - ACCIDENT AND HEALTH POLICY AND CLAIM LIABILITIES
The Company regularly updates its estimates of policy and claims liabilities as
new information becomes available and further events occur which may impact the
resolution of unsettled claims for its accident and health line of business.
Changes in prior estimates are generally reflected in results of operations in
the year such changes are determined to be needed and recorded.
The policy and claims liabilities related to the Company's accident and health
business were $169.7 million and $123.5 million at December 31, 1995 and 1994,
respectively. Accident and health policy and claims liabilities have been
re-estimated for all prior years and were increased by $42.5 million, $10.9
million and $13.2 million, in 1995, 1994 and 1993, respectively, including $21.9
million and $2.8 million recorded as an adjustment to surplus in 1995 and 1993,
respectively. The unfavorable development is primarily due to reserve
strengthening and adverse experience in the Company's individual accident and
health line of business.
12
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(a wholly owned subsidiary of First Allmerica Financial Life Insurance Company)
NOTE 7 - DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its statutory policyholder surplus as of the preceding
December 31 or (ii) the individual company's statutory net gain from operations
for the preceding calendar year (if such insurer is a life company) or its net
income (not including realized capital gains) for the preceding calendar year
(if such insurer is not a life company). Any dividends to be paid by an
insurer, whether or not in excess of the aforementioned threshold, from a source
other than statutory earned surplus would also require the prior approval of the
Delaware Commissioner of Insurance. At January 1, 1996, the Company could pay
dividends of $4.3 million to First Allmerica, without prior approval.
NOTE 8 - OTHER RELATED PARTY TRANSACTIONS
First Allmerica provides management, operating personnel and facilities on a
cost reimbursement basis to the Company. Expenses for services received from
First Allmerica were $ 85.8 million, $102.5 million and $98.9 million in 1995,
1994 and 1993, respectively. The net amounts payable to First Allmerica and
affiliates for accrued expenses and various other liabilities and receivables
were $12.6 million and $8.3 million at December 31, 1995 and 1994, respectively.
NOTE 9 - FUNDS ON DEPOSIT
In March 1994, the Company voluntarily withdrew from being licensed in New York.
In connection with the withdrawal First Allmerica, which is licensed in New
York, became qualified to sell the products previously sold by Allmerica
Financial in New York. The Company agreed with the New York Department of
Insurance to maintain, through a custodial account in New York, a security
deposit, the market value of which will at all times equal 102% of all
outstanding general account liabilities of the Company for New York
policyholders, claimants and creditors. As of December 31, 1995, the carrying
value and fair value of the assets or deposit was $295.0 million and $303.6
million, respectively, which is in excess of the required amount.
Additional securities with a carrying value of $4.2 million and $3.9 million
were on deposit with various other state and governmental authorities as of
December 31, 1995 and 1994, respectively.
NOTE 10 - LITIGATION
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the opinion of management, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the Company's financial statements.
13
