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File Nos. _________
811-7767
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Initial Registration
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 11
SEPARATE ACCOUNT KG OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Exact Name of Registrant)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Name of Depositor)
440 Lincoln Street
Worcester, MA 01653
(Address of Depositor's Principal Executive Offices)
(508) 855-1000
(Depositor's Telephone Number, including Area Code)
Abigail M. Armstrong, Secretary and Counsel
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) of Rule 485
---
on (date) pursuant to paragraph (b) of Rule 485
---
60 days after filing pursuant to paragraph (a) (1) of Rule 485
---
on (date) pursuant to paragraph (a) (1) of Rule 485
---
this post-effective amendment designates a new effective date
---for a previously filed post-effective amendment
VARIABLE ANNUITY POLICIES
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940
("1940 Act"), Registrant hereby declares that an indefinite amount of its
securities is being registered under the Securities Act of 1933 ("1933 Act").
No filing fee is submitted as a filing fee is not required for this type of
filing.
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until Registrant shall file a
further amendment which specifically states that this Registration Statement
shall become effective in accordance with section 8(a) of the Securities Act
of 1933 or until this Registration Statement shall become effective on such
date or dates as the Commission, acting pursuant to said section 8(a), may
determine.
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Registrant is making this filing in order to register a new flexible payment
variable annuity contract, which is the purpose of this initial Registration
Statement under the Securities Act of 1933 and amendment under the Investment
Company Act of 1940. Registrant does not intend this filing to delete or
amend any currently effective prospectus, statement of additional
information, or supplements thereto, contained in any other registration
statement of the Registrant under the Securities Act of 1933.
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
- ----------------- ---------------------
1. . . . . . . . . .Cover Page
2. . . . . . . . . .Special Terms
3. . . . . . . . . .Summary of Fees and Expenses; Summary of Contract Features
4. . . . . . . . . .Condensed Financial Information; Performance Information
5. . . . . . . . . .Description of the Company, the Variable Account, Kemper
Variable Series and Scudder Variable Life Investment Fund
6. . . . . . . . . .Charges and Deductions
7. . . . . . . . . .Description of the Contract -- The Accumulation Phase
8. . . . . . . . . .Electing the Annuity Date; Description of Annuity Payout
Options; Annuity Benefit Payments
9. . . . . . . . . .Death Benefit
10 . . . . . . . . .Payments; Computation of Values; Distribution
11 . . . . . . . . .Surrender; Withdrawals; Charge for Surrender and
Withdrawal; Withdrawal Without Surrender Charge; Texas
Optional Retirement Program
12 . . . . . . . . .Federal Tax Considerations
13 . . . . . . . . .Legal Matters
14 . . . . . . . . .Statement of Additional Information - Table of Contents
FORM N-4 ITEM NO. CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
- ----------------- -----------------------------------------------
15 . . . . . . . . .Cover Page
16 . . . . . . . . .Table of Contents
17 . . . . . . . . .General Information and History
18 Services
19 . . . . . . . . .Underwriters
20 . . . . . . . . .Underwriters
21 . . . . . . . . .Performance Information
22 . . . . . . . . .Annuity Benefit Payments
23 . . . . . . . . .Financial Statements
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
WORCESTER, MASSACHUSETTS
This Prospectus provides important information about the Kemper Gateway Plus
variable annuity contract issued by Allmerica Financial Life Insurance and
Annuity Company in all jurisdictions except New York. The contract is a flexible
payment tax-deferred combination variable and fixed annuity offered on both a
group and individual basis. PLEASE READ THIS PROSPECTUS CAREFULLY BEFORE
INVESTING AND KEEP IT FOR FUTURE REFERENCE. ANNUITIES INVOLVE RISKS INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
The Variable Account, known as Separate Account KG is subdivided into Sub-
Accounts, each investing exclusively in shares of one of the following
portfolios:
<TABLE>
<CAPTION>
KVS PORTFOLIOS:
- --------------------------------------------------
<S> <C>
Kemper Aggressive Growth Kemper Blue Chip
Kemper Technology Growth Kemper Value+Growth
Kemper-Dreman Financial Services Kemper Horizon 20+
Kemper Small Cap Growth Kemper Total Return
Kemper Small Cap Value Kemper Horizon 10+
Kemper-Dreman High Return Equity Kemper High Yield
Kemper International Kemper Horizon 5
Kemper International Kemper Global Income
Growth and Income Kemper Investment Grade Bond
Kemper Global Blue Chip Kemper Government Securities
Kemper Growth Kemper Money Market
Kemper Contrarian Value
<CAPTION>
SCUDDER VLIF PORTFOLIOS:
- --------------------------------------------------
<S> <C>
Scudder International Scudder Capital Growth
Scudder Global Discovery Scudder Growth and Income
</TABLE>
A Statement of Additional Information dated , 1999 containing more
information about this annuity is on file with the Securities and Exchange
Commission and is incorporated by reference into this Prospectus. A copy may be
obtained free of charge by calling Annuity Client Services at 1-800-782-8380.
The Table of Contents of the Statement of Additional Information is listed on
page 5 of this Prospectus. This Prospectus and the Statement of Additional
Information can also be obtained from the Securities and Exchange Commission's
website (http://www.sec.gov).
THIS ANNUITY IS NOT A BANK DEPOSIT; FEDERALLY INSURED OR ENDORSED BY ANY BANK OR
GOVERNMENTAL AGENCY.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THAT THE INFORMATION IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
DATED , 1999
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The Fixed Account is part of the Company's General Account and pays an interest
rate guaranteed for one year from the time a payment is received. The Guarantee
Period Accounts offer fixed rates of interest for specified periods ranging from
2 to 10 years. A Market Value Adjustment is applied to payments removed from a
Guarantee Period Account before the end of the specified period. The Market
Value Adjustment may be positive or negative. Payments allocated to a Guarantee
Period Account are held in the Company's Separate Account GPA (except in
California where they are allocated to the General Account.)
2
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
SPECIAL TERMS 6
SUMMARY OF FEES AND EXPENSES 9
SUMMARY OF CONTRACT FEATURES 18
PERFORMANCE INFORMATION ??
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, KEMPER VARIABLE SERIES AND
SCUDDER VARIABLE LIFE INVESTMENT FUND 24
INVESTMENT OBJECTIVES AND POLICIES 26
INVESTMENT MANAGEMENT SERVICES 28
DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE
30
A. Payments 30
B. Payment Credits 31
C. Computation of Values 31
The Accumulation Unit 31
Net Investment Factor 32
D. Right to Cancel 32
E. Transfer Privilege 33
Asset Allocation Model Reallocations 34
Automatic Transfers (Dollar Cost Averaging) 34
Automatic Account Rebalancing 35
F. Surrender and Withdrawals 36
Systematic Withdrawals 37
Withdrawal Without Surrender Charge 38
Life Expectancy Distributions 39
Systematic Level Free of Surrender Charge Withdrawal
Program 39
G. Death Benefit 39
Standard Death Benefit 39
Optional Enhanced Death Benefit Rider 40
Payment of the Death Benefit Prior to the Annuity Date 42
H. The Spouse of the Owner as Beneficiary 42
I. Optional Minimum Guaranteed Annuity Payout (M-GAP) Rider 43
J. Assignment 46
ANNUITIZATION -- THE PAYOUT PHASE 46
A. Electing the Annuity Date 46
B. Choosing the Annuity Payout Option 47
C. Description of Variable Annuity Payout Options 48
D. Variable Annuity Benefit Payments 49
The Annuity Unit 49
</TABLE>
3
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<TABLE>
<S> <C> <C> <C>
Determination of the First Annuity Benefit Payment 50
Determination of the Number of Annuity Units 50
Dollar Amount of Subsequent Variable Annuity Benefit
Payments 50
Payment of Annuity Benefit Payments 51
E. Transfers of Annuity Units 51
F. Withdrawals After the Annuity Date 52
Payment Withdrawal Amount Option 52
Present Value Withdrawal Option 53
Present Value Determination 53
G. Optional Annuitization Riders 54
Minimum Annuitization Floor ("MAF") Rider 54
Annuitization Payment Ratchet ("APR") Rider 54
H. Reversal of Annuitization 55
I. NORRIS Decision 56
CHARGES AND DEDUCTIONS 56
A. Variable Account Deductions 56
Mortality and Expense Risk Charge 56
Administrative Expense Charge 57
Other Charges 57
B. Contract Fee 57
C. Optional Rider Charges 58
D. Premium Taxes 59
E. Surrender Charge 59
Calculation of Surrender Charge 59
Reduction or Elimination of Surrender Charge and
Additional Amounts Credited 60
F. Transfer Charge 62
GUARANTEE PERIOD ACCOUNTS 63
FEDERAL TAX CONSIDERATIONS 66
A. General 66
The Company 66
Diversification Requirements 66
Investor Control 67
B. Qualified and Non-Qualified Contracts 67
C. Taxation of the Contract in General 68
Withdrawals Prior to Annuitization 68
Annuity Payouts After Annuitization 69
Penalty on Distribution 69
Assignments or Transfers 70
Nonnatural Owners 70
</TABLE>
4
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<TABLE>
<S> <C> <C> <C>
Deferred Compensation Plans of State and Local
Government and Tax-Exempt Organizations 70
D. Tax Withholding 70
E. Provisions Applicable to Qualified Employer Plans 71
Corporate and Self-Employed Pension and Profit Sharing
Plans 71
Individual Retirement Annuities 71
Tax-Sheltered Annuities 72
Texas Optional Retirement Program 72
STATEMENTS AND REPORTS 72
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS 73
CHANGES TO COMPLY WITH LAW AND AMENDMENTS 74
VOTING RIGHTS 74
DISTRIBUTION 75
SERVICES 76
LEGAL MATTERS 76
YEAR 2000 COMPLIANCE 76
FURTHER INFORMATION 77
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT
A-1
APPENDIX B -- PERFORMANCE TABLES B-1
APPENDIX C -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
C-1
APPENDIX D -- CONDENSED FINANCIAL INFORMATION D-1
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
GENERAL INFORMATION AND HISTORY
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY
SERVICES
UNDERWRITERS
ANNUITY BENEFIT PAYMENTS
PERFORMANCE INFORMATION
TAX-DEFERRED ACCUMULATION
FINANCIAL STATEMENTS
</TABLE>
5
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SPECIAL TERMS
ACCUMULATED VALUE: the total dollar amount of all values in the Sub-Accounts,
the Fixed Account and the Guarantee Period Accounts credited to the Contract on
any day before the Annuity Date. The Accumulated Value includes all Payment
Credits applied to the Contract.
ACCUMULATION UNIT: a measure used to calculate the value of a Sub-Account before
annuity benefit payments begin.
ANNUITANT: the person designated in the Contract whose life is used to determine
the duration of annuity benefit payments involving a life contingency. Joint
Annuitants are permitted and, unless otherwise indicated, any reference to
Annuitant shall include Joint Annuitants.
ANNUITY BENEFIT PAYMENT CHANGE FREQUENCY: the frequency (monthly, quarterly,
semi-annually or annually) that changes due to investment performance will be
reflected in the dollar value of an annuity benefit payment under a variable
annuity option.
ANNUITY DATE: the date specified in the Contract or a date elected later by the
Owner to begin annuity benefit payments. This date must be at least two years
after the issue date and may not be later than the Owner's (or youngest Joint
Owner's) 99th birthday.
ANNUITY UNIT: a measure used to calculate annuity benefit payments under a
variable payout option.
COMPANY: unless otherwise specified, any reference to the "Company" shall refer
exclusively to Allmerica Financial Life Insurance and Annuity Company.
CONTRACT YEAR: a period of twelve consecutive months starting on the Contract's
issue date or on any anniversary of the issue date.
FIXED ACCOUNT: an investment option under the Contract that guarantees principal
and a fixed minimum interest rate and which is part of the Company's General
Account.
FIXED ANNUITY PAYOUT: an annuity payout option with annuity benefit payments
that are fixed in amount and guaranteed throughout the annuity benefit payment
period.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
6
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GROSS PAYMENT BASE: the total of all payments invested in the Contract, less any
withdrawals which exceed the Withdrawal Without Surrender Charge amount.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited.
GUARANTEE PERIOD ACCOUNT: an account that corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period.
GUARANTEED INTEREST RATE: the annual effective rate of interest, after daily
compounding, credited to a Guarantee Period Account.
ISSUE DATE: the date the Contract is issued and the date that is used to
determine Contract days, Contract months, Contract years and anniversaries.
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.
OWNER (OR YOU): the person, persons (Joint Owners) or entity entitled to
exercise the rights and privileges under this Contract. Unless otherwise
indicated, any reference to Owner shall include Joint Owners.
PAYMENT CREDIT: an amount added to the Contract by the Company when a payment is
made to the Contract. The amount will be a specified percentage of the payment.
SUB-ACCOUNT: a subdivision of the Variable Account investing exclusively in the
shares of a corresponding portfolio of Kemper Variable Series ("KVS") or Scudder
Variable Life Investment Fund ("Scudder VLIF").
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any applicable Contract fee, surrender charge, rider charges and
Market Value Adjustment.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying 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, and on such other days (other than a day
during which no payment, withdrawal or surrender of a Contract was received)
when there is a sufficient degree of trading in an Underlying Portfolio's
portfolio securities such that the current unit value of the Sub-Accounts may be
affected materially.
VARIABLE ACCOUNT: Separate Account KG, one of the Company's separate accounts,
consisting of assets segregated from other assets of the Company. The
7
<PAGE>
investment performance of the assets of the Variable Account is determined
separately from the other assets of the Company and the assets are not
chargeable with liabilities arising out of any other business which the Company
may conduct.
VARIABLE ANNUITY PAYOUT: an annuity payout option providing for payments varying
in amount in accordance with the investment experience of certain of the
Underlying Portfolios.
8
<PAGE>
SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will incur directly or indirectly
under the Kemper Gateway Plus Contract. The purpose of the following tables is
to help you understand these various charges. The tables show (1) charges under
the Contract, (2) annual expenses of the Sub-Accounts, and (3) annual expenses
of the Portfolios during the accumulation phase. In addition to the charges and
expenses described below, premium taxes are applicable in some states and are
deducted as described under "D. Premium Taxes."
<TABLE>
<CAPTION>
COMPLETE YEARS
FROM DATE OF
(1) CONTRACT CHARGES: PAYMENT CHARGE
- ----------------------------------------------- --------------- ---------
<S> <C> <C>
SURRENDER CHARGE:* 0-4 8.5%
This charge may be assessed upon surrender, More than 4 7.5%
withdrawals or reversal of annuitization. The More than 5 6.5%
charge is a percentage of payments applied to More than 6 5.5%
the amount surrendered (in excess of any More than 7 3.5%
amount that is free of surrender charge) More than 8 1.5%
within the indicated time period. More than 9 0
TRANSFER CHARGE:
The Company currently does not charge for None
processing transfers and guarantees that the
first 12 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.
</TABLE>
* From time to time, the Company may reduce or eliminate the surrender charge,
the period during which it applies, or both, and/or credit additional amounts on
Contracts when Contracts are sold to individuals or groups in a manner that
reduces sales expenses or where the Owner and Annuitant on the date of issue is
within certain classes of eligible individuals. For more information see
"Reduction or Elimination of Surrender Charge and Additional Amounts Credited"
under "E. Surrender Charge."
9
<PAGE>
<TABLE>
<S> <C> <C>
WITHDRAWAL CHARGE AFTER THE ANNUITY DATE:
If you select either the Payment for a Cer-
tain Number of Years, Single Life with
Payment for a Certain Number of Years or Life
with Cash Back annuity benefit option, you
may request withdrawals which represent a
percentage of the Present Value of the
remaining guaranteed annuity payments. See
"F. Withdrawals After the Annuity Date" for
additional information. The interest rate
used to determine the Present Value is
adjusted in the following manner:
Within 5 years of Issue Date:
15 or more years of annuity
payments being valued 1.00%
10-14 years of annuity payments
being valued 1.50%
Less than 10 years of annuity
payments being valued 2.00%
The adjustment to the interest rate used to
determine the Present Value results in lower
future annuity payments than if the
adjustment had not been made.
ANNUAL CONTRACT FEE:
The fee is deducted annually and upon $35**
surrender prior to the Annuity Date when
Accumulated Value is less than $75,000. The
fee is waived for Contracts issued to and
maintained by the trustee of a 401(k) plan.
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C>
OPTIONAL RIDER CHARGES:
If rider 1, 2, 3, 4, or 5 is elected, 1/12th
of the annual charge is deducted pro rata on
a monthly basis at the end of each Contract
month and at termination of the Rider. The
charge for these riders on an annual basis as
a percentage of Accumulated Value is:
1. Minimum Guaranteed Annuity Payout Rider 0.35%
with a ten-year waiting period:
2. Minimum Guaranteed Annuity Payout Rider 0.20%
with a fifteen-year waiting period:
3. Enhanced Death Benefit With Annual Step-Up: 0.15%
4. 7% Enhanced Death Benefit: 0.30%
5. 7% Enhanced Death Benefit With Annual 0.35%
Step-Up:
</TABLE>
** The fee may be lower in some jurisdictions. See Contract Specifications for
specific charge.
<TABLE>
<S> <C> <C>
(2) ANNUAL SUB-ACCOUNT EXPENSES:
- --------------------------------------
(on an annual basis as a percentage
of average daily net assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.15%
---------
Total Asset Charges: 1.40%
</TABLE>
(3) ANNUAL PORTFOLIO EXPENSES: The following table shows the expenses of the
Underlying Portfolios as a percentage of average net asset for the year ended
December 31, 1998 (restated, if necessary, to reflect changes in expense
limitations effective May 1, 1999). For more information concerning fees and
expenses, see the prospectus of the Underlying Portfolios.
<TABLE>
<CAPTION>
MANAGEMENT
FEE OTHER TOTAL PORTFOLIO
(AFTER ANY EXPENSES EXPENSES (AFTER
VOLUNTARY (AFTER ANY ANY WAIVERS/
PORTFOLIO WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
- ----------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Kemper Aggressive Growth*(1)....... 0.67% 0.28% 0.95%
Kemper Technology Growth*(1)....... 0.66% 0.29% 0.95%
Kemper-Dreman Financial
Services**(1)..................... 0.02% 0.97% 0.99%
</TABLE>
11
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<TABLE>
<CAPTION>
MANAGEMENT
FEE OTHER TOTAL PORTFOLIO
(AFTER ANY EXPENSES EXPENSES (AFTER
VOLUNTARY (AFTER ANY ANY WAIVERS/
PORTFOLIO WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
- ----------------------------------- ------------------- ------------------- -------------------
Kemper Small Cap Growth............ 0.65% 0.05% 0.70%
<S> <C> <C> <C>
Kemper Small Cap Value............. 0.75% 0.05% 0.80%(2)
Kemper-Dreman High Return
Equity**(1)....................... 0.42% 0.45% 0.87%
Kemper International............... 0.75% 0.18% 0.93%
Kemper International Growth and
Income**(1)....................... 0.00% 1.12% 1.12%
Kemper Global Blue Chip**(1)....... 0.00% 1.56% 1.56%
Kemper Growth...................... 0.60% 0.05% 0.65%
Kemper Contrarian Value............ 0.75% 0.03% 0.78%(2)
Kemper Blue Chip................... 0.65% 0.11% 0.76%(2)
Kemper Value+Growth................ 0.75% 0.03% 0.78%(2)
Kemper Horizon 20+................. 0.60% 0.07% 0.67%(2)
Kemper Total Return................ 0.55% 0.05% 0.60%
Kemper Horizon 10+................. 0.60% 0.04% 0.64%(2)
Kemper High Yield.................. 0.60% 0.05% 0.65%
Kemper Horizon 5................... 0.60% 0.06% 0.66%(2)
Kemper Global Income(1)............ 0.72% 0.33% 1.05%
Kemper Investment Grade Bond....... 0.60% 0.07% 0.67%(2)
Kemper Government Securities....... 0.55% 0.11% 0.66%
Kemper Money Market................ 0.50% 0.04% 0.54%
Scudder International.............. 0.87% 0.18% 1.05%
Scudder Global Discovery........... 0.97% 0.81% 1.78%
Scudder Capital Growth............. 0.47% 0.04% 0.51%
Scudder Growth and Income.......... 0.47% 0.09% 0.56%
</TABLE>
* These Portfolios commenced operations after May 1, 1999, therefore "other
expenses" are estimated and annualized. Actual expenses may be greater or less
than shown.
** These Portfolios commenced operations in May, 1998, therefore "other
expenses" are annualized. Actual expenses may be greater or less than shown.
(1) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing on the date of this prospectus, to limit their respective
fees and to reimburse other operating expenses, in a manner communicated to
the Board of the Fund, to the extent necessary to limit total operating
expenses of the Kemper Aggressive Growth, Kemper Technology Growth,
Kemper-Dreman Financial Services, Kemper-Dreman High Return Equity,
12
<PAGE>
Kemper International Growth and Income and Kemper Global Blue Chip
Portfolios of Kemper Variable Series to the levels set forth in the table
above. Without taking into effect these expense caps, for the Aggressive
Growth, Technology Growth, Financial Services, High Return Equity,
International Growth and Income, Global Blue Chip and Global Income
Portfolios of Kemper Variable Series management fees are estimated to be
0.75%, 0.75%, 0.75%, 0.75%, 1.00%, 1.00% and 0.75%, respectively. Other
Expenses are estimated to be 0.28%, 0.29%, 0.97%, 0.45%, 18.54%, 11.32% and
0.33%, respectively; and total operating expenses are estimated to be 1.03%,
1.04%, 1.72%, 1.20%, 19.54%, 12.32%, and 1.08%, respectively. In addition,
for Kemper International Growth and Income and Kemper Global Blue Chip
Portfolios, the investment manager has agreed to limit its management fee to
0.70% and 0.85%, respectively, for such portfolios for one year from the
date of this Prospectus.
(2) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing on the date of this prospectus, to limit their respective
fees and to reimburse other operating expenses, in a manner communicated to
the Board of the Fund, to the extent necessary to limit total operating
expenses of the following described Portfolios to the amounts set forth
after the Portfolio names: Kemper Value+Growth Portfolio (0.84%), Kemper
Contrarian Value Portfolio (0.80%), Kemper Small Cap Value Portfolio
(0.84%), Kemper Horizon 5 Portfolio (0.97%), Kemper Horizon 10+ Portfolio
(0.83%), Kemper Horizon 20+ Portfolio (0.93%), Kemper Investment Grade Bond
Portfolio (0.80%), and Kemper Blue Chip Portfolio (0.95%). The amounts set
forth in the table above reflect actual expenses for the past fiscal year,
which were lower than these expense limits.
The Underlying Portfolio information above was provided by the Underlying
Portfolios and was not independently verified by the Company.
EXPENSE EXAMPLES: The following examples demonstrate the cumulative expenses
which an Owner would pay 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. Pursuant to the rules of the Securities and
Exchange Commission ("SEC"), the Contract fee has been reflected in the examples
by a method intended to show the "average" impact of the Contract fee on an
investment in the Variable Account. The total Contract fees collected under the
Contract by the Company are divided by the total average net assets attributable
to the Contract. The resulting percentage is 0.03%, and the amount of the
Contract fee is assumed to be $0.30 in the examples. The Contract fee is
deducted only when the Accumulated Value is less than $75,000. Lower costs apply
to Contracts issued and maintained as part of a
13
<PAGE>
401(k) plan. Because the expenses of the Underlying Portfolios differ, separate
examples are used to illustrate the expenses incurred by an Owner on an
investment in the various Sub-Accounts.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OF LESSER THAN THOSE SHOWN.
(1a) If, at the end of the applicable time period, you surrender your Contract,
you would have paid the following expenses on a $1,000 investment, assuming a 5%
annual return on assets, and no Riders.
<TABLE>
<CAPTION>
WITH SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth.......................... $ 98 $ 152 $ 198 $ 269
Kemper Technology Growth.......................... $ 98 $ 152 $ 198 $ 269
Kemper-Dreman Financial Services.................. $ 98 $ 153 $ 200 $ 273
Kemper Small Cap Growth........................... $ 96 $ 145 $ 187 $ 244
Kemper Small Cap Value............................ $ 97 $ 147 $ 191 $ 254
Kemper-Dreman High Return Equity.................. $ 97 $ 149 $ 195 $ 261
Kemper International.............................. $ 98 $ 151 $ 197 $ 267
Kemper International Growth and Income............ $ 100 $ 156 $ 206 $ 286
Kemper Global Blue Chip........................... $ 104 $ 168 $ 227 $ 328
Kemper Growth..................................... $ 95 $ 143 $ 184 $ 239
Kemper Contrarian Value........................... $ 96 $ 147 $ 190 $ 252
Kemper Blue Chip.................................. $ 96 $ 146 $ 190 $ 250
Kemper Value+Growth............................... $ 96 $ 147 $ 190 $ 252
Kemper Horizon 20+................................ $ 95 $ 144 $ 185 $ 241
Kemper Total Return............................... $ 95 $ 142 $ 182 $ 233
Kemper Horizon 10+................................ $ 95 $ 143 $ 184 $ 238
Kemper High Yield................................. $ 95 $ 143 $ 184 $ 239
Kemper Horizon 5.................................. $ 95 $ 144 $ 185 $ 240
Kemper Global Income.............................. $ 99 $ 154 $ 203 $ 279
Kemper Investment Grade Bond...................... $ 95 $ 144 $ 185 $ 241
Kemper Government Securities...................... $ 95 $ 144 $ 185 $ 240
Kemper Money Market............................... $ 94 $ 140 $ 179 $ 227
Scudder International............................. $ 99 $ 154 $ 203 $ 279
Scudder Global Discovery.......................... $ 106 $ 175 $ 236 $ 349
Scudder Capital Growth............................ $ 94 $ 139 $ 178 $ 224
Scudder Growth and Income......................... $ 94 $ 141 $ 180 $ 229
</TABLE>
14
<PAGE>
(1)(b) If, at the end of the applicable time period, you surrender your
Contract, you would have paid the following expenses on a $1,000 investment,
assuming a 5% annual return on assets and election at issue of the Minimum
Guaranteed Annuity Payout Rider with a ten-year waiting period, and the 7%
Enhanced Death Benefit Rider With Annual Step-Up.
<TABLE>
<CAPTION>
WITH SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth.......................... $ 104 $ 170 $ 228 $ 332
Kemper Technology Growth.......................... $ 104 $ 170 $ 228 $ 332
Kemper-Dreman Finanacial Services................. $ 104 $ 171 $ 230 $ 336
Kemper Small Cap Growth........................... $ 102 $ 163 $ 217 $ 308
Kemper Small Cap Value............................ $ 103 $ 165 $ 221 $ 318
Kemper-Dreman High Return Equity.................. $ 103 $ 167 $ 225 $ 325
Kemper International.............................. $ 104 $ 169 $ 227 $ 330
Kemper International Growth and Income............ $ 106 $ 174 $ 236 $ 348
Kemper Global Blue Chip........................... $ 110 $ 186 $ 256 $ 388
Kemper Growth..................................... $ 101 $ 161 $ 215 $ 304
Kemper Contrarian Value........................... $ 102 $ 165 $ 221 $ 316
Kemper Blue Chip.................................. $ 102 $ 164 $ 220 $ 314
Kemper Value+Growth............................... $ 102 $ 165 $ 221 $ 316
Kemper Horizon 20+................................ $ 101 $ 162 $ 216 $ 306
Kemper Total Return............................... $ 101 $ 160 $ 212 $ 299
Kemper Horizon 10+................................ $ 101 $ 161 $ 214 $ 303
Kemper High Yield................................. $ 101 $ 161 $ 215 $ 304
Kemper Horizon 5.................................. $ 101 $ 162 $ 215 $ 305
Kemper Global Income.............................. $ 105 $ 172 $ 233 $ 342
Kemper Investment Grade Bond...................... $ 101 $ 162 $ 216 $ 306
Kemper Government Securities...................... $ 101 $ 162 $ 215 $ 305
Kemper Money Market............................... $ 100 $ 158 $ 210 $ 293
Scudder International............................. $ 105 $ 172 $ 233 $ 342
Scudder Global Discovery.......................... $ 112 $ 192 $ 265 $ 407
Scudder Capital Growth............................ $ 100 $ 157 $ 208 $ 290
Scudder Growth and Income......................... $ 100 $ 159 $ 210 $ 295
</TABLE>
15
<PAGE>
(2)(a) If, at the end of the applicable time period, you do not surrender your
Contract or you annuitize,* you would have paid the following expenses on a
$1,000 investment, assuming a 5% annual return on assets and no Riders.
<TABLE>
<CAPTION>
WITHOUT SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth.......................... $ 24 $ 74 $ 126 $ 269
Kemper Technology Growth.......................... $ 24 $ 74 $ 126 $ 269
Kemper-Dreman Financial Services.................. $ 24 $ 75 $ 128 $ 273
Kemper Small Cap Growth........................... $ 21 $ 66 $ 113 $ 244
Kemper Small Cap Value............................ $ 22 $ 69 $ 118 $ 254
Kemper-Dreman High Return Equity.................. $ 23 $ 71 $ 122 $ 261
Kemper International.............................. $ 24 $ 73 $ 125 $ 267
Kemper International Growth and Income............ $ 26 $ 79 $ 134 $ 286
Kemper Global Blue Chip........................... $ 30 $ 92 $ 156 $ 328
Kemper Growth..................................... $ 21 $ 65 $ 111 $ 239
Kemper Contrarian Value........................... $ 22 $ 68 $ 117 $ 252
Kemper Blue Chip.................................. $ 22 $ 68 $ 116 $ 250
Kemper Value+Growth............................... $ 22 $ 68 $ 117 $ 252
Kemper Horizon 20+................................ $ 21 $ 65 $ 112 $ 241
Kemper Total Return............................... $ 20 $ 63 $ 108 $ 233
Kemper Horizon 10+................................ $ 21 $ 64 $ 110 $ 238
Kemper High Yield................................. $ 21 $ 65 $ 111 $ 239
Kemper Horizon 5.................................. $ 21 $ 65 $ 111 $ 240
Kemper Global Income.............................. $ 25 $ 77 $ 131 $ 279
Kemper Investment Grade Bond...................... $ 21 $ 65 $ 112 $ 241
Kemper Government Securities...................... $ 21 $ 65 $ 111 $ 240
Kemper Money Market............................... $ 20 $ 61 $ 105 $ 227
Scudder International............................. $ 25 $ 77 $ 131 $ 279
Scudder Global Discovery.......................... $ 32 $ 98 $ 167 $ 349
Scudder Capital Growth............................ $ 20 $ 60 $ 104 $ 224
Scudder Growth and Income......................... $ 20 $ 62 $ 106 $ 229
</TABLE>
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<PAGE>
(2)(b) If, at the end of the applicable time period, you do not surrender your
Contract or you annuitize,* you would pay the following expenses on a $1,000
investment, assuming an annual 5% return on assets and election at issue of the
Minimum Guaranteed Annuity Payout Rider with a ten-year waiting period and the
7% Enhanced Death Benefit Rider With Annual Step-Up.
<TABLE>
<CAPTION>
WITHOUT SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth.......................... $ 30 $ 93 $ 158 $ 332
Kemper Technology Growth.......................... $ 30 $ 93 $ 158 $ 332
Kemper-Dreman Finanacial Services................. $ 31 $ 94 $ 160 $ 336
Kemper Small Cap Growth........................... $ 28 $ 86 $ 146 $ 308
Kemper Small Cap Value............................ $ 29 $ 89 $ 151 $ 318
Kemper-Dreman High Return Equity.................. $ 30 $ 91 $ 154 $ 325
Kemper International.............................. $ 30 $ 92 $ 157 $ 330
Kemper International Growth and Income............ $ 32 $ 98 $ 166 $ 348
Kemper Global Blue Chip........................... $ 37 $ 111 $ 187 $ 388
Kemper Growth..................................... $ 27 $ 84 $ 143 $ 304
Kemper Contrarian Value........................... $ 29 $ 88 $ 150 $ 316
Kemper Blue Chip.................................. $ 29 $ 87 $ 149 $ 314
Kemper Value+Growth............................... $ 29 $ 88 $ 150 $ 316
Kemper Horizon 20+................................ $ 28 $ 85 $ 144 $ 306
Kemper Total Return............................... $ 27 $ 83 $ 141 $ 299
Kemper Horizon 10+................................ $ 27 $ 84 $ 143 $ 303
Kemper High Yield................................. $ 27 $ 84 $ 143 $ 304
Kemper Horizon 5.................................. $ 28 $ 84 $ 144 $ 305
Kemper Global Income.............................. $ 31 $ 96 $ 163 $ 342
Kemper Investment Grade Bond...................... $ 28 $ 85 $ 144 $ 306
Kemper Government Securities...................... $ 28 $ 84 $ 144 $ 305
Kemper Money Market............................... $ 26 $ 81 $ 138 $ 293
Scudder International............................. $ 31 $ 96 $ 163 $ 342
Scudder Global Discovery.......................... $ 39 $ 117 $ 198 $ 407
Scudder Capital Growth............................ $ 26 $ 80 $ 136 $ 290
Scudder Growth and Income......................... $ 27 $ 81 $ 139 $ 295
</TABLE>
* The Contract fee is not deducted after annuitization. No surrender charges are
deducted at or after annuitization under any of the available annuity options.
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<PAGE>
SUMMARY OF CONTRACT FEATURES
WHAT IS THE KEMPER GATEWAY PLUS VARIABLE ANNUITY?
The Kemper Gateway Plus 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;
- - 22 KVS Portfolios and 4 Scudder VLIF Portfolios;
- - 1 Fixed Account;
- - 9 Guarantee Period Accounts;
- - A Payment Credit equal to 5% of your payment, added to the Contract's
Accumulated Value as soon as your payment is applied;
- - Experienced professional investment advisers;
- - Tax deferral on earnings;
- - Guarantees that can protect your family;
- - Withdrawals during the accumulation and annuitization phases;
- - Income that you can receive for life;
- - Issue age up to the 85th birthday of the oldest person among the Owner(s) and
the Annuitant(s).
The Contract has two phases: an accumulation phase and, if you choose to
annuitize, an annuity payout phase (described below). During the accumulation
phase, you may allocate your initial payment and any additional payments you
choose to make among the Sub-Accounts investing in the portfolios of securities
("Portfolios"), to the Guarantee Period Accounts, and to the Fixed Account. You
select the investment options most appropriate for your investment needs. As
those needs change, you may also change your allocation without incurring any
tax consequences. Your Contract's Accumulated Value is based on the investment
performance of the Portfolios and any accumulations in the Guarantee Period and
Fixed Accounts. You do not pay taxes on any earnings under the Contract until
you withdraw money. In addition, during the accumulation phase, your
beneficiaries receive certain protections in the event of your death. See
discussion below "WHAT HAPPENS UPON MY DEATH DURING THE ACCUMULATION PHASE?"
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<PAGE>
WHAT HAPPENS UPON MY DEATH DURING THE ACCUMULATION PHASE?
If you or a Joint Owner dies before the Annuity Date, a standard death benefit
will be paid to the beneficiary. (No death benefit is payable at the death of
any Annuitant except when the Owner is not a natural person.) Three optional
Enhanced Death Benefit Riders are also available at issue for a separate monthly
charge. See "G. Death Benefit" under "DESCRIPTION OF THE CONTRACT -- THE
ACCUMULATION PHASE."
WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE?
During the annuity payout phase, you, or the payee you designate, can receive
income based on one of the numerous annuity payout options available under the
Contract. You choose:
- - the annuity payout option;
- - the date annuity benefit payments begin;
- - whether you want variable annuity benefit payments based on the investment
performance of the Portfolios, fixed-amount annuity benefit payments with
payment amounts guaranteed by the Company, or a combination of fixed-amount
and variable annuity benefit payments;
- - whether you want certain protections provided under optional annuitization
riders.
You may also take a withdrawal every year during the annuity payout phase (two
withdrawals annually if you choose an option other than a life annuity). In
addition, if you choose a variable option, you may transfer among the available
Sub-Accounts.
M-GAP RIDER. The Minimum Guaranteed Annuity Payout Rider ("M-GAP Rider") is
available in most jurisdictions. The M-GAP Rider must be purchased during the
Contract's accumulation phase for a separate monthly charge. This optional rider
provides a guaranteed minimum amount of income under a life contingent fixed
annuity payout option. The M-GAP Rider is based on the Company's guaranteed
annuity purchase rates.
MAF RIDER AND APR RIDER. Two additional optional riders are available when you
annuitize:
(1) The Minimum Annuitization Floor Rider ("MAF Rider") guarantees that the
amount of your variable annuity payout will never fall below a specified
amount (assuming no withdrawals are taken);
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<PAGE>
(2) The Annuitization Payment Ratchet Rider ("APR Rider") provides that annuity
benefit payments will never decrease as a result of investment performance
(assuming no withdrawals are taken).
Both Riders provide for proportionate reductions for withdrawals and the
appropriate reduction under the two-thirds and one-half survivor options. There
is no periodic charge for the MAF Rider or the APR Rider. However, lower annuity
option rates will be used to determine the initial annuity benefit payment. If
either Rider is in effect, the first annuity benefit payment will be lower than
it would have been without the Rider. Subsequent payments will also be lower
unless the guarantees provided by rider are triggered, at which time payments
will be higher than if the rider had not been elected.
For more information on these optional annuitization riders, see I. Optional
Minimum Guaranteed Annuity Payout (M-GAP) Rider under DESCRIPTION OF THE
CONTRACT -- THE ACCUMULATION PHASE and G. Optional Annuitization Riders under
ANNUITIZATION -- THE PAYOUT PHASE.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner"), and us, Allmerica Financial Life
Insurance and Annuity Company (for contracts issued in all jurisdictions except
New York.) Each Contract has an Owner (or an Owner and a Joint Owner), an
Annuitant (or an Annuitant and a Joint Annuitant) and one or more beneficiaries.
As Owner, you may:
- - make payments
- - choose investment allocations
- - choose annuity options
- - receive annuity benefit payments (or designate someone else to receive annuity
benefit payments)
- - select the Annuitant and beneficiary.
The Annuitant is the person whose life is used to determine the duration of
annuity benefit payments involving a life contingency. There must be at least
one Annuitant at all times. If an Annuitant dies and a replacement is not named,
the Owner will become the new Annuitant. The beneficiary is the person(s) or
entity entitled to the death benefit at the death of a sole Owner prior to the
Annuity Date. Under certain circumstances, the beneficiary may be entitled to
annuity benefit payments upon the death of an Owner on or after the Annuity
Date. In the case of the death of a Joint Owner, the surviving Joint Owner will
receive the death benefit.
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<PAGE>
HOW MUCH CAN I INVEST AND HOW OFTEN?
The number and frequency of your payments are flexible, subject only to a $2,000
minimum for your initial payment and a $100 minimum for any additional payments.
A lower initial payment is permitted for certain qualified plans and where
monthly payments are being forwarded directly from a financial institution. A
minimum of $1,000 is always required to establish a Guarantee Period Account.
Currently, each time you make a payment, you will immediately receive a Payment
Credit equal to 5% of your payment. This Payment Credit will be added to the
Accumulated Value and will be invested along with your payment.
WHAT ARE MY INVESTMENT CHOICES?
You may choose among the Sub-Accounts investing in the Portfolios, the Guarantee
Period Accounts, and the Fixed Account.
<TABLE>
<S> <C>
KVS PORTFOLIOS:
- --------------------------------------
Kemper Aggressive Growth Kemper Blue Chip
Kemper Technology Growth Kemper Value+Growth
Kemper-Dreman Financial Services Kemper Horizon 20+
Kemper Small Cap Growth Kemper Total Return
Kemper Small Cap Value Kemper Horizon 10+
Kemper-Dreman High Return Equity Kemper High Yield
Kemper International Kemper Horizon 5
Kemper International Growth and Kemper Global Income
Income
Kemper Global Blue Chip Kemper Investment Grade Bond
Kemper Growth Kemper Government Securities
Kemper Contrarian Value Kemper Money Market
SCUDDER VLIF PORTFOLIOS:
Scudder International Scudder Capital Growth
Scudder Global Discovery Scudder Growth and Income
</TABLE>
For a more detailed description of the Portfolios, see "INVESTMENT OBJECTIVES
AND POLICIES."
Each Portfolio operates pursuant to different investment objectives, and this
range of investment options enables you to allocate your money among the
Portfolios to meet your particular investment needs.
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 (except in California where assets are held in the
Company's General Account). Values and benefits calculated on the
21
<PAGE>
basis of Guarantee Period Account allocations, however, 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 may offer up to 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. However, this
adjustment will never be applied against your principal. In addition, earnings
in the GPA AFTER application of the Market Value Adjustment will not be less
than an effective annual rate of 3%. For more information about the Guarantee
Period Accounts and the Market Value Adjustment, see "GUARANTEE PERIOD
ACCOUNTS."
THE GUARANTEE PERIOD ACCOUNTS ARE NOT AVAILABLE IN ALL STATES AND ARE NOT
OFFERED AFTER ANNUITIZATION.
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. 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?
Scudder Kemper Investments, Inc. ("Scudder Kemper") is the investment manager of
each Portfolio of KVS and each Portfolio of Scudder VLIF. Scudder Investments
(U.K.) Limited, an affiliate of Scudder Kemper, is the sub-adviser for the
Kemper International Portfolio and the Kemper Global Income Portfolio. Dreman
Value Management, L.L.C. is the sub-advisor for the Kemper-Dreman Financial
Services Portfolio and Kemper-Dreman High Return Equity Portfolio. Scudder
Kemper is the investment manager of the Guarantee Period Accounts pursuant to an
investment advisory agreement between the Company and Scudder Kemper.
22
<PAGE>
CAN I MAKE TRANSFERS AMONG THE SUB-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. On and after the Annuity Date, if you have elected a variable option,
you may transfer among the Sub-Accounts. You will incur no current taxes on
transfers while your money remains in the Contract. See "E. Transfer Privilege."
The first 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
does not currently charge but reserves the right to assess a processing charge
guaranteed never to exceed $25.
WHAT IF I NEED MY MONEY BEFORE THE ANNUITY PAYOUT PHASE BEGINS?
Before the annuity payout phase begins, you may surrender your Contract or make
withdrawals at any time. Each calendar year, you can take without a surrender
charge the greater of:
(1) 100% of cumulative earnings (excluding Payment Credits); or
(2) 15% of the Gross Payment Base (your total gross payments less any
withdrawals you may have taken which exceed the Withdrawal Without Surrender
Charge amount.)
If greater than the amount available under either (1) or (2) above, the Owner of
a qualified Contract or a Contract issued under a Section 457 Deferred
Compensation Plan may take each calendar year without charge an amount
calculated by the Company based on his or her life expectancy. A 10% tax penalty
may apply on all amounts deemed to be earnings if you are under age 59 1/2.
In addition, WHERE PERMITTED BY LAW, the Company will waive surrender charges
if, after the Contract is issued:
- - you become disabled before you attain age 65; or
- - you are diagnosed with a fatal illness or are confined in a medical care
facility for the later of 90 consecutive days or one year after the issue
date.
Additional amounts may be withdrawn at anytime. However, the withdrawal of
payments that have not been invested in the Contract for more than nine years
may be subject to surrender charge. A Market Value Adjustment will apply to
withdrawals from a Guarantee Period Account prior to the expiration of the
Guarantee Period.
23
<PAGE>
CAN I EXAMINE THE CONTRACT?
Yes. Your Contract will be delivered to you after your purchase. If you return
the Contract to the Company within ten days of receipt, the Contract will be
cancelled. There may be a longer period in certain jurisdictions; see the "Right
to Examine" provision on the cover of your Contract.
If you cancel the Contract, you will receive the Contract's Accumulated Value
adjusted for any Market Value Adjustment for amounts allocated to a Guarantee
Period Account, less the Payment Credit, plus any fees or charges that may have
been deducted. However, if required in your state or if the Contract was issued
as an Individual Retirement Annuity (IRA), you will generally receive a refund
of your gross payment. In certain jurisdictions this refund may be the greater
of (1) your gross payment or (2) the Accumulated Value adjusted for an Market
Value Adjustment, less any Payment Credit, plus any fees or charges previously
deducted. See "D. Right to Cancel."
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
You can make several changes 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 an irrevocable
beneficiary.
- - You may change your allocation of payments.
- - You may make transfers among the Sub-Accounts without any tax consequences.
- - You may cancel your Contract within ten days of delivery (or longer if
required by state law).
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
KEMPER VARIABLE SERIES AND SCUDDER VARIABLE
LIFE INVESTMENT FUND
THE COMPANY. Allmerica Financial Life Insurance and Annuity Company ("Allmerica
Financial") is a life insurance company organized under the laws of Delaware in
July 1974. Its Principal Office is located at 440 Lincoln Street, Worcester, MA
01653, Telephone 508-855-1000. Allmerica Financial 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, Allmerica Financial is
subject to the insurance laws and regulations of other states and jurisdictions
in which it is licensed to operate. As of December 31, 1998, Allmerica Financial
had over $14 billion in assets and over $26 billion of life insurance in force.
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<PAGE>
Effective October 1, 1995, Allmerica Financial changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
Allmerica Financial is a 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.
Allmerica Financial is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness, and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE VARIABLE ACCOUNT. The Company maintains a separate investment account
called Separate Account KG (the "Variable Account") with 26 Sub-Accounts. The
assets used to fund the variable portions of the Contract are set aside in the
Variable Account and kept separate from the general assets 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 a "separate
account" under federal securities laws, and is registered with the SEC as a unit
investment trust under the 1940 Act. This registration does not involve the
supervision or management of investment practices or policies of the Variable
Account by the SEC.
Each Sub-Account of the Variable Account invests in a corresponding investment
series ("Portfolio") of Kemper Variable Series and Scudder Variable Life
Investment Fund. Each Sub-Account is administered and accounted for as part of
the general business of the Company. The income, capital gains, or capital
losses of each Sub-Account, however, 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 Company reserves the right, subject to compliance with applicable law, to
change the names of the Variable Account and the Sub-Accounts. The Company also
offers other variable annuity contracts investing in the Variable Account which
are not discussed in this Prospectus. In addition, the Variable Account may
invest in other underlying portfolios which are not available to the contracts
described in this Prospectus.
25
<PAGE>
KEMPER VARIABLE SERIES. Kemper Variable Series ("KVS"), is a series-type mutual
fund registered with the SEC as an open-end, management investment company.
Registration of KVS does not involve supervision of its management, investment
practices or policies by the SEC. KVS is designed to provide an investment
vehicle for certain variable annuity contracts and variable life insurance
policies. Shares of the Portfolios of KVS are sold only to insurance company
separate accounts. Scudder Kemper Investments, Inc. serves as the investment
adviser of KVS.
SCUDDER VARIABLE LIFE INVESTMENT FUND. Scudder Variable Life Investment Fund
("Scudder VLIF") is an open-end, diversified management investment company
established as a Massachusetts business trust on March 15, 1985, and registered
with the SEC under the 1940 Act. Scudder Kemper Investments, Inc. serves as the
investment adviser of Scudder VLIF.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Portfolios is set
forth below. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING PORTFOLIOS AND OTHER
RELEVANT INFORMATION REGARDING KVS AND SCUDDER VLIF MAY BE FOUND IN THEIR
RESPECTIVE PROSPECTUSES, WHICH ACCOMPANY THIS PROSPECTUS. PLEASE READ THEM
CAREFULLY BEFORE INVESTING. The Statements of Additional Information of the
Underlying Portfolios are available upon request.
KVS PORTFOLIOS:
KEMPER AGGRESSIVE GROWTH PORTFOLIO -- seeks capital appreciation through the use
of aggressive investment techniques.
KEMPER TECHNOLOGY GROWTH PORTFOLIO -- seeks growth of capital.
KEMPER-DREMAN FINANCIAL SERVICES PORTFOLIO -- seeks long-term capital
appreciation by investing primarily in common stocks and other equity securities
of companies in the financial services industry believed by the Portfolio's
investment manager to be undervalued.
KEMPER SMALL CAP GROWTH PORTFOLIO -- seeks maximum appreciation of investors'
capital from a portfolio primarily of growth stocks of smaller companies.
KEMPER SMALL CAP VALUE PORTFOLIO -- seeks long-term capital appreciation from a
portfolio primarily of value stocks of smaller companies.
KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO -- seeks to achieve a high rate of
total return.
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<PAGE>
KEMPER INTERNATIONAL PORTFOLIO -- seeks total return, a combination of capital
growth and income, principally through an internationally diversified portfolio
of equity securities.
KEMPER INTERNATIONAL GROWTH AND INCOME PORTFOLIO -- seeks long-term growth of
capital and current income primarily from foreign equity securities.
KEMPER GLOBAL BLUE CHIP PORTFOLIO -- seeks long-term growth of capital through a
diversified worldwide portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt securities
convertible into common stocks.
KEMPER GROWTH PORTFOLIO -- seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
KEMPER CONTRARIAN VALUE PORTFOLIO -- seeks to achieve a high rate of total
return from a portfolio primarily of value stocks of larger companies. This
Portfolio was formerly known as the Kemper Value Portfolio.
KEMPER BLUE CHIP PORTFOLIO -- seeks growth of capital and of income. Kemper
Value+Growth Portfolio -- seeks growth of capital through professional
management of a portfolio of growth and value stocks. A secondary objective is
the reduction of risk over a full market cycle compared to a portfolio of only
growth stocks or only value stocks.
KEMPER HORIZON 20+ PORTFOLIO -- designed for investors with approximately a 20+
year investment horizon, seeks growth of capital, with income as a secondary
objective.
KEMPER 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.
KEMPER 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.
KEMPER HIGH YIELD PORTFOLIO -- seeks to provide a high level of current income
by investing in fixed-income securities.
KEMPER HORIZON 5 PORTFOLIO -- designed for investors with approximately a five
year investment horizon, seeks income consistent with preservation of capital,
with growth of capital as a secondary objective.
KEMPER GLOBAL INCOME PORTFOLIO -- seeks to provide high current income
consistent with prudent total return asset management.
KEMPER INVESTMENT GRADE BOND PORTFOLIO -- seeks high current income by investing
primarily in a diversified portfolio of investment grade debt securities
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<PAGE>
KEMPER GOVERNMENT SECURITIES PORTFOLIO -- seeks high current return consistent
with preservation of capital from a portfolio composed primarily of U.S.
Government securities.
KEMPER 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 12 months or less.
SCUDDER VLIF PORTFOLIOS:
SCUDDER INTERNATIONAL PORTFOLIO -- seeks long term growth of capital principally
from a diversified portfolio of foreign equity securities.
SCUDDER GLOBAL DISCOVERY PORTFOLIO -- seeks above average capital appreciation
over the long term by investing primarily in the equity securities of small
companies located throughout the world.
SCUDDER CAPITAL GROWTH PORTFOLIO -- seeks to maximize long-term capital growth
from a portfolio consisting primarily of equity securities.
SCUDDER GROWTH AND INCOME PORTFOLIO -- seeks long-term growth of capital,
current income and growth of income from a portfolio consisting primarily of
common stocks and securities convertible into common stocks.
Certain Underlying Portfolios have investment objectives and/or policies similar
to those of other Underlying Portfolios. To choose the Sub-Accounts which best
meet your individual needs and objectives, carefully read the Underlying
Portfolio prospectuses. In some states, insurance regulations may restrict the
availability of particular Sub-Accounts.
INVESTMENT MANAGEMENT SERVICES
Responsibility for overall management of KVS rests with the Board of Trustees
and officers of KVS. Responsibility for overall management of Scudder VLIF rests
with its Board of Trustees and officers. Scudder Kemper Investments, Inc.
("Scudder Kemper") is the investment manager of all the Portfolios available
under this Contract. Scudder Investments (U.K.) Limited, an affiliate of Scudder
Kemper, is a sub-adviser for the Kemper International Portfolio and the Kemper
Global Income Portfolio. Dreman Value Management, L.L.C. serves as the sub-
advisor for the Kemper-Dreman Financial Services Portfolio and Kemper-Dreman
High Return Equity Portfolio.
For its services, Scudder Kemper receives a management fee, payable monthly at
1/12th of the following annual rates based on the average daily net assets of
each Portfolio: Money Market (0.50%), Total Return (0.55%), High Yield (0.60%),
Growth (0.60%), Government Securities (0.55%), International (0.75%), Small Cap
Growth (0.65%), Investment Grade Bond (0.60%), Contrarian Value
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(0.75%), Small Cap Value (0.75%), Value+Growth (0.75%), Horizon 20+ (0.60%),
Horizon 10+ (0.60%), Horizon 5 (0.60%), Blue Chip (0.65%), Global Income (0.75%)
and International Growth and Income (1.00%).
The Aggressive Growth, Technology Growth, High Return Equity, Financial Services
and Global Blue Chip Portfolios each pay Scudder Kemper an investment management
fee, payable monthly, at 1/12th of the following annual rates based on the
average daily net assets of each Portfolio.
<TABLE>
<S> <C>
Aggressive Growth,
Technology Growth,
High Return Equity
Portfolio and
Financial Services
Portfolio............. 0.75% for the first $250 million, 0.72% for
the next $750 million, 0.70% for the next
$1.5 billion, 0.68% for the next $2.5
billion, 0.65% for the next $2.5 billion,
0.64% for the next $2.5 billion, 0.63% for
the next $2.5 billion and 0.62% over $12.5
billion.
Global Blue Chip
Portfolio............. 1.00% for the first $250 million, 0.95% for
the next $750 million and 0.90% over $1
billion.
</TABLE>
Scudder Kemper pays Scudder Investments (U.K.) Limited for its services as sub-
adviser for the Kemper International Portfolio and the Kemper Global Income
Portfolio a sub-advisory fee, payable monthly, at 1/12th of the annual rate of
0.35% of average daily net assets of the Kemper International Portfolio and
0.30% of average daily net assets of the Kemper Global Income Portfolio. Scudder
Kemper also pays Dreman Value Management, L.L.C. a fee for its services to the
Kemper-Dreman Financial Services Portfolio and Kemper-Dreman High Return Equity
Portfolio. A sub-advisory fee, payable monthly, at the annual rate of 0.24% of
the first $250 million of each Portfolio's average daily net assets, 0.23% of
average daily net assets between $250 million and $1 billion, 0.224% of average
daily net assets between $1 billion and $2.5 billion, 0.218% of average daily
net assets between $2.5 billion and $5 billion, 0.208% of average daily net
assets between $5 billion and $7.5 billion, 0.205% of average daily net assets
between $7.5 billion and $10 billion, 0.202% of average daily net assets between
$10 billion and $12.5 billion and 0.198% of each Portfolio's average daily net
assets over $12 billion.
For its investment management services to the Scudder VLIF Portfolios, Scudder
Kemper receives compensation monthly at the following annual rates for each
Portfolio: Scudder International Portfolio (0.875% for the first $500,000,000
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<PAGE>
and 0.775% for amounts in excess of $500,000,000); Scudder Global Discovery
Portfolio (0.975%); Scudder Capital Growth Portfolio (0.475%) and Scudder Growth
and Income Portfolio (0.475%).
For more information, see the KVS and Scudder VLIF prospectuses and SAIs.
DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE
A. PAYMENTS
An applicant for a Contract may not be older than age 85 at date of issue. The
Company will issue a Contract when its underwriting requirements are met. These
requirements include receipt of the initial payment and allocation instructions
by the Company at its Principal Office and may include the proper completion of
an application; however, where permitted by law, the Company may issue a
Contract without completion of an application. If all issue requirements are not
completed within five business days of the Company's receipt of the initial
payment, the payment will be returned immediately unless the applicant
authorizes the Company to retain it pending completion of all issue
requirements.
Payments may be made to the Contract at any time prior to the Annuity Date,
subject to certain minimums:
- - 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
- - 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 Kemper Money Market Portfolio.
Payments are to be made payable to the Company. The Company may reduce a payment
by any applicable premium tax before applying it to the Contract. The initial
payment is credited to the Contract and allocated among the requested accounts
as of the date that all issue requirements are properly met. 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.
In order for the Owner to be able to initiate transactions over the telephone, a
properly completed authorization must be on file before telephone requests will
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be honored. The policy of the Company and its agents and affiliates is that we
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. Such procedures may include, among others, requiring some form of
personal identification prior to acting upon instructions received by telephone.
All telephone instructions are tape-recorded.
B. PAYMENT CREDITS
A Payment Credit will be added to the Contract's Accumulated Value each time a
payment is made. The Payment Credit is funded from the Company's General Account
and is currently equal to 5% of each payment received. The Company guarantees
that the Payment Credit will never be less than 5%. The Company reserves the
right to increase the Payment Credit from time to time for payments received
during a specified time period or on portions of payments received in excess of
a specified amount. Any increase in the Payment Credit will be applied uniformly
to all Owners of the same class, but increases will not be available where
prohibited by law.
Each Payment Credit is allocated among the accounts in the same proportion as
the applicable payment. Amounts refunded under a Contract's "Right to Examine"
provision will be reduced by the amount of any Payment Credit applied (see "C.
Computation of Value" and "D. Right to Cancel"). Payment Credits are not
considered to be "investment in the contract" for income tax purposes (see
"FEDERAL TAX CONSIDERATIONS").
C. COMPUTATION OF VALUES
THE ACCUMULATION UNIT. Each payment is allocated among the account(s) selected
by the 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 payment and Payment Credit
allocated to the Sub-Account, divided by the dollar value of the applicable
Accumulation Unit as of the Valuation Date. The number of Accumulation Units
resulting from each payment and Payment Credit 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 Underlying Portfolios. The value of an Accumulation Unit was arbitrarily
set at $1.00 on the first Valuation Date for each Sub-Account.
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<PAGE>
Allocations to the 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 "GUARANTEE PERIOD ACCOUNTS" and APPENDIX A,
"MORE INFORMATION ABOUT THE FIXED ACCOUNT."
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 together the values of each Sub-Account, 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 (which may be positive or
negative) from dividing (1) by (2) and subtracting (3) and (4) where:
(1) 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;
(2) is the value of that Sub-Account's assets at the beginning of the Valuation
Period;
(3) 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
(4) is an administrative charge equal to 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 an Accumulation Unit calculation using a hypothetical
example see the SAI.
D. RIGHT TO CANCEL
An Owner may cancel the Contract at any time within ten days after receipt of
the Contract (or longer if required by law) and receive a refund. In order to
cancel the Contract, the Owner must mail or deliver it to the Company's
Principal Office at 440 Lincoln Street, Worcester, MA 01653, or to an authorized
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representative. Mailing or delivery must occur within ten days after receipt of
the Contract for cancellation to be effective. The Company will normally provide
the refund within seven days of receipt of the Contract.
At the time the Contract is issued, the "Right to Examine" provision on the
cover of the Contract will specifically indicate what the refund will be and the
time period allowed to exercise the right to cancel. In most states, the Company
will pay the Owner the Contract's Accumulated Value adjusted for any Market
Value Adjustment for amounts allocated to a Guarantee Period Account, plus any
amounts deducted for taxes, charges or fees, minus any Payment Credit. However,
if the Contract was purchased as an IRA or issued in a state that requires a
full refund of the initial payment(s), the Company will provide a refund equal
to the gross payment(s) received. In some states, the refund may equal the
greater of (a) gross payments or (b) the Accumulated Value adjusted for any
Market Value Adjustment, plus any amounts deducted for taxes, charges or fees
minus any Payment Credit.
The liability of the Variable Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
E. TRANSFER PRIVILEGE
Prior to the Annuity Date, the Owner may transfer amounts among accounts at any
time upon written or telephone request to the Company. As discussed in "A.
Payments", a properly completed authorization form must be on file before
telephone requests will be honored. Transfer values will be based on the
Accumulated Value next computed after receipt of the transfer request.
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 Kemper Money Market Portfolio. Transfers from a
Guarantee Period Account prior to the expiration of the Guarantee Period will be
subject to a Market Value Adjustment.
Currently, the Company does not charge for transfers. The first 12 transfers in
a Contract year are guaranteed to be free of any transfer 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. As of the date of this Prospectus, transfers may be made
to all of the Sub-Accounts during the life of the Contract and prior to the
Annuity Date. However, should additional Funds be added to the Contract, the
Company reserves the right to limit the number of Sub-Accounts to which
transfers may be made.
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<PAGE>
The Company also reserves the right to restrict transfer privileges when
exercised by a market timing firm or any other third party authorized to
initiate allocations, transfers or exchanges on behalf of multiple Contract
Owners. The Company may, among other things, not accept:
- - the transfer or exchange instructions of any agent acting under a power of
attorney on behalf of more than one Owner, or
- - the transfer or exchange instructions of individual Owners who have executed
pre-authorized transfer or exchange forms which are submitted by market timing
firms or other third parties on behalf of more than one Owner at the same
time.
ASSET ALLOCATION MODEL REALLOCATIONS. If an Owner elects to follow an asset
allocation strategy, the Owner may preauthorize transfers in accordance with the
chosen strategy. The Company may provide administrative or other support
services to independent third parties that provide recommendations as to such
allocation strategies. However, the Company does not engage any third parties to
offer investment allocation services of any type under this Contract, does not
endorse or review any investment allocation recommendations made by such third
parties and is not responsible for the investment allocations and transfers
transacted on the Owner's behalf. The Company does not charge for providing
additional asset allocation support services. Additional information concerning
asset allocation programs for which the Company is currently providing support
services may be obtained from a registered representative or the Company.
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING). You may elect automatic transfers
of a predetermined dollar amount on a periodic basis from a source account to
one or more Sub-Accounts, subject to the following:
- - the predetermined dollar amount may not be less than $100;
- - the periodic basis may be monthly, quarterly, semi-annually or annually;
- - the available source accounts are currently the Fixed Account or the Sub-
Accounts investing in the Kemper Money Market Portfolio and the Kemper
Government Securities Portfolio;
- - automatic transfers may not be made into the selected source account, Fixed
Account, or the Guarantee Period Accounts; and
- - if an automatic transfer would reduce the balance in the source account(s) to
less than $100, the entire balance will be transferred proportionately to the
chosen Sub-Accounts.
Automatic transfers from a particular source account will continue until the
earlier of:
- - the amount in the source account on a transfer date is zero; or
- - the Owner's request to terminate the option is received by the Company.
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<PAGE>
If additional amounts are allocated to a source account before its balance has
fallen to zero, those additional amounts will also be automatically transferred.
The original automatic transfer allocations will apply to all amounts in that
source account unless new allocation instructions are provided. New allocation
instructions will apply to the entire balance in the source account. If
additional amounts are allocated to a source account after its balance has
fallen to zero, automatic transfers will not begin again unless you specifically
notify the Company.
To the extent permitted by law, the Company reserves the right, from time to
time, to credit an enhanced interest rate to an initial and/or subsequent
payment deposited into the Fixed Account, which is then used as the source
account from which to process automatic transfers. For more information see
APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
AUTOMATIC ACCOUNT REBALANCING. The Owner may request automatic rebalancing of
Sub-Account allocations on a monthly, quarterly, semi-annual or annual basis in
accordance with his/her specified percentage allocations. As frequently as
elected by the Owner, the Company will review the percentage allocations in the
Portfolios and, if necessary, transfer amounts to ensure conformity with the
designated percentage allocation mix. If the amount necessary to re-establish
the mix on any scheduled date is less than $100, no transfer will be made.
Automatic Account Rebalancing will continue until (1) the Owner's request to
terminate or change the option is received by the Company or (2) the end date
designated by the Owner when the option was elected. If a subsequent payment is
allocated in a manner different from the percentage allocation mix in effect on
the date the payment is received, on the next scheduled rebalancing date the
payment will be reallocated in accordance with the existing mix.
The first automatic transfer or rebalancing under a request counts as one
transfer for purposes of the 12 transfers guaranteed to be free of a transfer
charge in each Contract year. Each subsequent automatic transfer under that
request is without charge and does not reduce the remaining number of transfers
which may be made free of charge in that Contract year.
Currently, Dollar Cost Averaging and Automatic Account Rebalancing may not be in
effect simultaneously. Either option may be elected at no additional charge when
the Contract is purchased or at a later date. The Company reserves the right to
limit the number of Sub-Accounts that may be utilized for automatic transfers
and rebalancing, and to discontinue either option upon advance written notice.
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F. SURRENDERS AND WITHDRAWALS
Before the Annuity Date, an Owner may surrender the Contract for its Surrender
Value or withdraw a portion of its Accumulated Value. In the case of surrender,
the Owner must send the Contract and a signed, written request for surrender,
satisfactory to the Company, to the Principal Office. The Surrender Value will
be calculated based on the Contract's Accumulated Value as of the Valuation
Date. A surrender charge and a Contract fee may apply when a Contract is
surrendered. See "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."
In the case of a withdrawal, the Owner must submit to the Principal Office a
signed, written request indicating the desired dollar amount and the accounts
from which such amount is to be withdrawn. A withdrawal from a Sub-Account will
result in cancellation of a number of units equivalent in value to the amount
withdrawn. The amount withdrawn will equal the amount requested by the Owner
plus any applicable surrender charge, as described in "E. Surrender Charge"
under "CHARGES AND DEDUCTIONS." See also, "Reduction or Elimination of Surrender
Charge and Additional Amounts Credited." 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.
Each withdrawal must be a minimum of $100. No withdrawal will be permitted if
the Accumulated Value remaining under the Contract would be reduced to less than
$1,000.
Any distribution is normally payable within seven days following the Company's
receipt of the surrender or withdrawal request. The Company reserves the right
to defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which:
- - 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,
- - the SEC has by order permitted such suspension, or
- - an emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of a separate account is not reasonably
practicable.
The Company reserves the right 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.
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The surrender and withdrawal rights of Owners who are participants under Section
403(b) plans or who are participants in the Texas Optional Retirement Program
(Texas ORP) are restricted; see "Tax Sheltered Annuities" and "Texas Optional
Retirement Program."
For important tax consequences, which may result from surrender or withdrawals,
see "FEDERAL TAX CONSIDERATIONS."
SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of
withdrawals (systematic withdrawals) from amounts in the Sub-Accounts and/or the
Fixed Account on a periodic basis (monthly, bi-monthly, quarterly, semi-annual
or annual). Systematic withdrawals from Guarantee Period Accounts are not
available. The Owner may request:
- - the withdrawal of a SPECIFIC DOLLAR AMOUNT and the percentage of this amount
to be taken from each designated Sub-Account and/or the Fixed Account; or
- - the withdrawal of a SPECIFIC PERCENTAGE of the Accumulated Value calculated as
of the withdrawal dates, and may designate the percentage of this amount which
should be taken from each account.
The first withdrawal will take place on the date the written request is received
at the Principal Office or, if later, on a date specified by the Owner.
Systematic withdrawals will first be taken from amounts available as a
"Withdrawal Without Surrender Charge" (see below); then from any applicable
payments not subject to a surrender charge, if any, then from payments subject
to a surrender charge and last, from Payment Credits. Any applicable surrender
charge will be deducted from the Contract's remaining Accumulated Value.
The minimum amount of each automatic withdrawal is $100. If a withdrawal would
cause the remaining Accumulated Value to be less than $1,000, systematic
withdrawals may be discontinued. Systematic withdrawals will cease automatically
on the Annuity Date. The Owner may change or terminate systematic withdrawals
only by written request to the Principal Office.
WITHDRAWAL WITHOUT SURRENDER CHARGE. Each calendar year prior to the Annuity
Date, an Owner may withdraw a portion of the Contract's Surrender Value without
any applicable surrender charge. The maximum amount available without charge
during any calendar year is the greater of (a) or (b):
Where (a) is: 100% of Cumulative Earnings excluding Payment Credits
(calculated as the Accumulated Value as of the Valuation Date
reduced by Payment Credits and total gross payments not
previously withdrawn); and
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Where (b) is: 15% of the Gross Payment Base as of the Valuation Date reduced
by any prior Withdrawal Without Surrender Charge received during
the same calendar year.
For Qualified Contracts and Contracts issued under Section 457 Deferred
Compensation Plans only, the maximum amount available without a surrender charge
during any calendar year will be the greatest of (a), (b) and (c) where (a) and
(b) are the same as above and (c) is the amount available as a Life Expectancy
Distribution less any withdrawals taken during the same calendar year which were
not subject to a surrender charge (see "Life Expectancy Distributions" below.)
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 surrender charge, 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.
LIFE EXPECTANCY DISTRIBUTIONS. (For Qualified Contracts and Contracts issued
under Section 457 Deferred Compensation Plans only.) Prior to the Annuity Date,
an Owner may elect to make a series of systematic withdrawals from the Contract
according to the Company's life expectancy distribution ("LED") option by
returning a properly signed LED request form to the Principal Office. Where the
Owner is a trust or other nonnatural person, the Owner may elect the LED option
based on the Annuitant's life expectancy.
If an Owner elects the Company's LED option, in each calendar year a fraction of
the Accumulated Value is withdrawn without a surrender charge, based on the
Owner's life expectancy (or the joint life expectancy of the Owner and a
beneficiary.) The numerator of the fraction is 1 (one). The denominator of the
fraction will be either:
- - the remaining life expectancy of the Owner (or Owner and beneficiary), as
determined annually by the Company; or
- - the prior year's life expectancy, minus one.
The resulting fraction, expressed as a percentage, is then applied to the
Accumulated Value at the beginning of the year to determine the amount to be
distributed during the year. The Owner may choose to have the applicable life
expectancy redetermined each year or use the prior year's life expectancy, minus
one. Under the Company's LED option, the amount withdrawn from the Contract
changes each year.
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The Owner may elect periodic LED distributions on a monthly, bi-monthly,
quarterly, semi-annual, or annual basis. The Owner may terminate the LED option
at any time. The LED option will terminate automatically on the maximum Annuity
Date permitted under the Contract, at which time an Annuity Option must be
selected.
The LED option may not produce annual distributions that meet the definition of
"substantially equal periodic payments" as defined under Code Section 72(t). The
withdrawals may be treated by the Internal Revenue Service (IRS) as premature
distributions from the Contract and may be subject to a 10% federal tax penalty.
Owners seeking distributions over their life under this definition should
consult their tax advisor. For more information, see "FEDERAL TAX
CONSIDERATIONS," "B. Taxation of the Contract in General."
IN ADDITION, IF THE AMOUNT NECESSARY TO MEET THE "SUBSTANTIALLY EQUAL PERIODIC
PAYMENT" DEFINITION IS GREATER THAN THE COMPANY'S LED AMOUNT, A SURRENDER CHARGE
MAY APPLY TO THE AMOUNT IN EXCESS OF THE LED AMOUNT.
SYSTEMATIC LEVEL FREE OF SURRENDER CHARGE WITHDRAWAL PROGRAM. Under the
Systematic Level Free of Surrender Charge Withdrawal Program, the Owner may
preauthorize level periodic (monthly, bi-monthly, quarterly, semi-annual or
annual) Withdrawals Without Surrender Charge. In order to ensure that no
surrender charge will ever apply, the total Systematic Level Free of Surrender
Charge Withdrawal in any calendar year is limited to not more than 15% of the
Gross Payment Base as of the Valuation Date, less any prior Withdrawals Without
Surrender Charge taken in the same calendar year. The program will automatically
terminate if a withdrawal that is not part of the program is made. Otherwise,
withdrawals will continue until all available Accumulated Value has been
exhausted or until the Owner terminates the program by written request.
G. DEATH BENEFIT.
A death benefit is payable if the Owner or the first of Joint Owners dies prior
to the Annuity Date. If the Owner is a natural person, no death benefit is
payable at the death of any Annuitant. If the Owner is not a natural person, a
death benefit will be paid upon the death of any Annuitant. A spousal
beneficiary may elect to continue the Contract as provided in "H. The Spouse of
the Owner as Beneficiary," rather than receive the death benefit.
STANDARD DEATH BENEFIT. Unless the enhanced death benefit is elected at issue,
the standard death benefit will be paid. The standard death benefit is equal to
the greater of (a) the Contract's Accumulated Value on the Valuation Date,
increased by any positive Market Value Adjustment or (b) gross payments prior to
the date of death, proportionately reduced to reflect withdrawals.
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For each withdrawal under (b), the proportionate reduction is calculated by
multiplying the standard death benefit immediately prior to the withdrawal by
the following fraction:
Amount of the withdrawal
-------------------------------------------------
Accumulated Value immediately prior to the withdrawal
OPTIONAL ENHANCED DEATH BENEFIT. When applying for the Contract, an Owner under
age 89 may elect one of three optional Enhanced Death Benefit (EDB) Riders: (1)
an Enhanced Death Benefit With Annual Step-Up; (2) a 7% Enhanced Death Benefit;
or (3) a 7% Enhanced Death Benefit With Annual Step-Up. A separate charge for an
EDB Rider is made against the Contract's Accumulated Value on the last day of
each Contract month and, if applicable, on the date the Rider is terminated. The
charge is made through a pro-rata reduction (based on relative values) of
Accumulation Units in the Sub-Accounts and dollar amounts in the Fixed and
Guarantee Period Accounts. The charge is deducted in arrears. For specific
charges and more detail, see "C. Optional Rider Charges" under CHARGES AND
DEDUCTIONS.
1. THE EDB WITH ANNUAL STEP-UP PROVIDES THE FOLLOWING BENEFIT:
I. Death BEFORE 90th Birthday. If an Owner (or an Annuitant if the Owner is not
a natural person) dies before the Annuity Date and before his/her 90th birthday,
the death benefit is equal to the GREATEST of:
(a) the Accumulated Value on the Valuation Date increased by any positive
Market Value Adjustment;
(b) gross payments made to the Contract until the date of death,
proportionately reduced to reflect subsequent withdrawals; and
(c) the highest Accumulated Value on any Contract anniversary date prior to
the date of death, as determined after being increased for any positive
Market Value Adjustment and subsequent payments and proportionately
reduced for subsequent withdrawals.
II. Death AFTER 90th Birthday. If an Owner (or an Annuitant if the Owner is not
a natural person) dies before the Annuity Date but after his/her 90th birthday,
the death benefit is equal to the greater of:
(a) the Accumulated Value on the Valuation Date increased by any positive
Market Value Adjustment; or
(b) the death benefit, as calculated under Section I above, that would have
been payable on the Contract anniversary prior to the deceased's 90th
birthday, increased for subsequent payments and proportionately reduced
for subsequent withdrawals.
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Proportionate reductions are calculated in the same manner as described above
under "Standard Death Benefit."
2. THE 7% EDB PROVIDES THE FOLLOWING BENEFIT:
I. Death BEFORE 90th Birthday. If an Owner (or an Annuitant if the Owner is a
not a natural person) dies before the Annuity Date and before his/her 90th
birthday, the death benefit will be the GREATER of:
(a) the Accumulated Value on the Valuation Date increased by any positive
Market Value Adjustment; or
(b) gross payments, accumulated daily at an effective annual yield of 7%
from the date each payment is applied until the date of death,
proportionately reduced to reflect subsequent withdrawals;
II. Death AFTER 90th Birthday. If an Owner (or an Annuitant if the Owner is not
a natural person) dies before the Annuity Date but after his/her 90th birthday,
the death benefit is equal to the GREATER of:
(a) the Accumulated Value on the Valuation Date increased by any positive
Market Value Adjustment; or
(b) the death benefit, as calculated under Section I above, that would have
been payable on the Contract anniversary prior to the deceased's 90th
birthday, increased for subsequent payments and proportionately reduced
for subsequent withdrawals.
Proportionate reductions are calculated in the same manner as described above
under "Standard Death Benefit."
3. THE 7% EDB WITH ANNUAL STEP-UP PROVIDES THE FOLLOWING BENEFIT:
I. Death BEFORE 90th Birthday. If an Owner (or an Annuitant if the Owner is a
not a natural person) dies before the Annuity Date and before his/her 90th
birthday, the death benefit will be the GREATEST of:
(a) the Accumulated Value on the Valuation Date increased by any positive
Market Value Adjustment;
(b) gross payments, accumulated daily at an effective annual yield of 7%
from the date each payment is applied until the date of death,
proportionately reduced to reflect subsequent withdrawals; and
(c) the highest Accumulated Value on any Contract anniversary date prior to
the date of death, as determined after being increased for any positive
Market Value Adjustment and subsequent payments and proportionately
reduced for subsequent withdrawals.
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II. Death AFTER 90th Birthday. If an Owner (or the Annuitant if the Owner is not
a natural person) dies before the Annuity Date but after his/her 90th birthday,
the death benefit is equal to the GREATER of:
(a) the Accumulated Value on the Valuation Date increased by any positive
Market Value Adjustment; or
(b) the death benefit, as calculated under Section I above, that would have
been payable on the Contract anniversary prior to the deceased's 90th
birthday, increased for subsequent payments and proportionately reduced
for subsequent withdrawals.
Proportionate reductions are calculated in the same manner as described above
under "Standard Death Benefit."
PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit
generally will be paid to the beneficiary in one sum upon receipt of due proof
of death at the Principal Office, unless the Owner has elected to apply the
proceeds to a life annuity not extending beyond the beneficiary's life
expectancy. Instead of payment in one sum, the beneficiary may, by written
request, elect to:
(1) defer distribution of the death benefit for a period no more than five
years from the date of death; or
(2) receive distributions over the life of the beneficiary or for a period
certain not extending beyond the beneficiary's life expectancy, with
annuity benefit payments beginning within one year from the date of
death.
If distribution of the death benefit is deferred under (1) or (2), any value in
the Guarantee Period Accounts will be transferred to the Kemper Money Market
Sub-Account. The excess, if any, of the death benefit over the Accumulated Value
also will be transferred to the Kemper Money Market Sub-Account. The beneficiary
may, by written request, effect transfers and withdrawals during the deferral
period and prior to annuitization under (2), but may not make additional
payments. The death benefit will reflect any earnings or losses experienced
during the deferral period. If there are multiple beneficiaries, the consent of
all is required.
H. THE SPOUSE OF THE OWNER AS BENEFICIARY
If the sole beneficiary is the deceased Owner's spouse, he or she may, by
written request, continue the Contract in lieu of receiving payment of the death
benefit. The spouse will then become the Owner and Annuitant subject to the
following:
(1) any value in the Guarantee Period Accounts will be transferred to the Kemper
Money Market Sub-Account;
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(2) the excess, if any, of the death benefit over the Contract's Accumulated
Value also will be added to the Kemper Money Market Sub-Account.
This value will never be subject to a surrender charge when withdrawn. The new
Owner may also make additional payments, but a surrender charge will apply to
these additional amounts if they are withdrawn before they have been invested in
the Contract for at least nine years. All other rights and benefits provided in
the Contract will continue, except that any subsequent spouse of the new Owner,
if named as beneficiary, will not be entitled to continue the Contract when the
new Owner dies.
I. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER
An optional Minimum Guaranteed Annuity Payout Rider is available in most
jurisdictions for a separate monthly charge. (See "C. Optional Rider Charges"
under CHARGES AND DEDUCTIONS.) The M-GAP Rider guarantees a minimum amount of
fixed annuity lifetime income during the annuity payout phase after a ten-year
or a fifteen-year waiting period, subject to the conditions described below. The
M-GAP Rider must be purchased during the Contract's accumulation phase for a
separate monthly charge (see "Conditions on Election of the M-GAP Rider" below).
The M-GAP Rider does not create Accumulated Value or guarantee performance of
any investment option. Annuitization under the terms of this Rider will occur at
the guaranteed annuity purchase rates listed under the Annuity Option Tables in
the Contract. Because this Rider is based on guaranteed actuarial factors, the
level of lifetime income that it guarantees may often be less than the level
that would be provided by applying the then current annuity factors. Therefore,
the Rider should be regarded as providing a guarantee of a minimum amount of
annuity income.
An M-GAP Rider Benefit Base is determined on the Rider's effective date and each
applicable Contract anniversary thereafter. The M-GAP Benefit Base, less any
applicable premium tax, is the value that will be annuitized at the guaranteed
annuity rates if the Rider is exercised. As described below, withdrawals will
reduce the Benefit Base.
The M-GAP Benefit Base is equal to the greatest of:
(a) the Accumulated Value, increased by any positive Market Value Adjustment, if
applicable;
(b) the Accumulated Value on the effective date of the Rider accumulated daily
at an effective annual yield of 5%, plus gross payments made thereafter
accumulated daily at an effective annual yield of 5%, starting on the date
each payment is applied, proportionately reduced to reflect withdrawals; and
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(c) the highest Accumulated Value on any Contract anniversary since the Rider's
effective date as determined after being increased for any subsequent
payments and any positive Market Value Adjustment, if applicable, and
proportionately reduced for subsequent withdrawals.
For each withdrawal described above, the proportionate reduction is calculated
by multiplying the (b) or (c) value, whichever is applicable, determined
immediately prior to the withdrawal by the following fraction:
Amount of the withdrawal
-----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal
CONDITIONS ON ELECTION OF THE M-GAP RIDER. The following conditions apply to
the election of the M-GAP Rider:
- The Owner may elect the M-GAP Rider at Contract issue or at any time
thereafter. However, if the Rider is not elected within thirty days after
Contract issue or within thirty days after a Contract anniversary date, the
effective date of the Rider will be the following Contract anniversary date.
- The Owner may not elect a Rider with a ten-year waiting period if at the
time of election the Owner has reached his or her 87th birthday. The Owner
may not elect a Rider with a fifteen-year waiting period if at the time of
election the Owner has reached his or her 82nd birthday (the age limitations
may be lower in some jurisdictions.)
REPURCHASE FEATURE. On any Contract anniversary or within 30 days immediately
following a Contract anniversary, if the M-GAP Rider is still offered by the
Company, the Owner may elect to terminate and repurchase the Rider, thereby
resetting the benefit based on the Contract's then current Accumulated Value.
The repurchase will be effective as of the termination date of the prior Rider.
A new waiting period, equal to or greater than the prior waiting period, will
commence as of that date. If the benefit is repurchased, the Company's then
current monthly charge for the M-GAP Rider will apply.
EXERCISING THE M-GAP RIDER. The following conditions apply to the exercise of
the M-GAP Rider:
- The Owner may only exercise the M-GAP Rider within thirty days after any
Contract anniversary following the expiration of a ten or fifteen-year
waiting period (whichever was elected) from the effective date of the Rider.
- The Owner may only annuitize under a fixed annuity payout option involving a
life contingency, as provided under "C. Description of Variable Annuity
Payout Options."
- The Owner may only annuitize at the guaranteed fixed annuity purchase rates
listed under the Annuity Option Tables in the Contract.
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TERMINATING THE M-GAP RIDER. The following conditions apply to the termination
of the M-GAP Rider:
- The Owner may not terminate the M-GAP Rider prior to the seventh Contract
anniversary after the effective date of the Rider, unless such termination
occurs (1) on or within thirty days after a Contract anniversary and (2) in
conjunction with the repurchase of an M-GAP Rider with a waiting period of
equal or greater length, if available.
- The Owner may terminate the M-GAP Rider any time after the seventh Contract
anniversary following the effective date of the Rider,
- Other than in the event of a repurchase, once terminated the M-GAP Rider may
not be purchased again.
- The M-GAP Rider will terminate on the date the Contract is surrendered or
annuitized, or on the date that a death benefit is payable unless the
Contract is continued under "H. The Spouse of the Owner as Beneficiary" (see
"DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE").
From time to time the Company may illustrate minimum guaranteed income amounts
under the M-GAP Rider for individuals based on a variety of assumptions,
including varying rates of return on the value of the Contract during the
accumulation phase, annuity payout periods, annuity payout options and M-GAP
Rider waiting periods. Any assumed rates of return are for purposes of
illustration only and are not intended as a representation of past or future
investment rates of return.
For example, the illustration below assumes an initial payment of $100,000 for a
male age 60 (at issue) and exercise of a M-GAP Rider with a ten-year waiting
period. The illustration assumes that no subsequent payments or withdrawals are
made and that the annuity payout option is a Life Annuity With Payments
Guaranteed For 10 Years. The values below have been computed based on a 5% net
rate of return and are the guaranteed minimums that would be received under the
M-GAP Rider. The minimum guaranteed benefit base amounts are the values that
will be annuitized if the Rider is exercised. Minimum guaranteed annual income
values are based on a fixed annuity payout.
<TABLE>
<CAPTION>
CONTRACT MINIMUM MINIMUM
ANNIVERSARY GUARANTEED GUARANTEED
AT EXERCISE BENEFIT BASE ANNUAL INCOME(1)
- ----------------- ------------ ----------------
<S> <C> <C>
10 $ 171,034 $ 12,786
15 $ 218,287 $ 18,545
</TABLE>
(1) Other fixed annuity options involving a life contingency other than Life
Annuity With Payments Guaranteed For 10 Years are available. See "C.
Description of Variable Annuity Payout Options."
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J. ASSIGNMENT
The Contract, other than one sold in connection with certain qualified plans,
may be assigned by the Owner at any time prior to the Annuity Date and prior to
the death of an Owner (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 Owner in full settlement of all liability under the
Contract. The interest of the Owner and of any beneficiary will be subject to
any assignment.
ANNUITIZATION -- THE PAYOUT PHASE
Subject to certain restrictions discussed below, at annuitization the Owner has
the right:
- - to select the annuity option under which annuity benefit payments are to be
made;
- - to determine whether those payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. If a variable
annuity option is selected, the Owner must choose an Annuity Benefit Payment
Change Frequency ("Change Frequency") and the date the first Change Frequency
will occur.
- - to select one of the available assumed investment returns for a variable
option (see "D. Variable Annuity Benefit Payments" below for details);
- - to choose an optional annuitization rider -- the Minimum Annuitization Floor
("MAF") Rider or the Annuitization Payment Ratchet ("APR") Rider ; and
- - to elect to have the Death Benefit applied under any annuity option not
extending beyond the beneficiary's life expectancy. The beneficiary may not
change such an election.
A. ELECTING THE ANNUITY DATE
Generally, annuity benefit payments under the Contract will begin on the Annuity
Date. The Annuity Date:
- - may not be earlier than the second Contract Anniversary; and
- - must occur on the first day of any month before the Owner's 99th birthday or
two years after the issue date, whichever is later.
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If the Owner does not select an Annuity Date, the Annuity Date will be the later
of (a) the Owner's age 85 or (b) two years after the date of issue.
If there are Joint Owners, the age of the younger will determine the maximum
Annuity Date. The Owner may elect to change the Annuity Date by sending a
request to the Principal Office at least one month before the earlier of the new
Annuity Date or the currently scheduled date.
If the Annuity Date occurs when the Owner is at an advanced age, it is possible
that the Contract will not be considered an annuity for federal tax purposes. In
addition, the Internal Revenue Code ("the Code") and/or the terms of qualified
plans may impose limitations on the age at which annuity benefit payments may
commence and the type of annuity option that may be elected. The Owner should
carefully review the Annuity Date and the annuity options with his/her tax
adviser. See "FEDERAL TAX CONSIDERATIONS" for further information.
B. CHOOSING THE ANNUITY PAYOUT OPTION
Regardless of how payments were allocated during the accumulation phase, the
Owner may choose a variable annuity payout option, a fixed annuity payout option
or a combination fixed and variable annuity payout option. Currently, all of the
variable annuity payout options described below are available and may be funded
through all of the variable Sub-Accounts. In addition, each of the variable
annuity payout options is also available on a fixed basis. The Company may offer
other annuity options.
The Owner may change the annuity option up to one month before the Annuity Date.
If the Owner fails to choose an annuity option, monthly benefit payments will be
made under a fixed Life Annuity with Cash Back. If the Owner exercises the M-GAP
Rider, annuity benefit payments must be made under a fixed annuity payout option
involving a life contingency option.
The annuity option selected must result in an initial payment of at least $50 (a
lower amount may be required in certain jurisdictions.) The Company reserves the
right to increase this minimum amount. If the annuity option selected does not
produce an initial payment which meets this minimum, a single payment may be
made.
FIXED ANNUITY PAYOUT OPTIONS. If the Owner selects a fixed annuity payout
option, each monthly annuity benefit payment will be equal to the first (unless
a withdrawal is made or as otherwise described under certain reduced survivor
annuity benefits.) Any portion of the Contract's Accumulated Value converted to
a fixed annuity will be held in the Company's General Account. The Contract
provides guaranteed fixed annuity rates that determine the dollar amount of the
first payment under each form of fixed annuity for each $1,000 of applied value.
These rates are based on the Annuity 2000 Mortality Table and a 3% AIR. The
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Company may offer its Owners annuity rates more favorable than those contained
in the Contract. Any such rates will be applied uniformly to all Owners of the
same class. For more specific information about fixed annuity payout options,
see the Contract.
VARIABLE ANNUITY PAYOUT OPTIONS. If the Owner selects a variable annuity
payout, he/she will receive monthly payments equal to the value of the fixed
number of Annuity Units in the chosen Sub-Account(s). Since the value of an
Annuity Unit in a Sub-Account reflects the investment performance of the Sub-
Account, the amount of each monthly annuity benefit payment will usually vary.
However, under this Contract, if the Owner elects a variable option, he or she
must also select a monthly, quarterly, semi-annual or annual Annuity Benefit
Change Frequency ("Change Frequency.") The Change Frequency is the frequency
that changes due to the Sub-Account's investment performance will be reflected
in the dollar value of a variable annuity benefit payment. As such, the Change
Frequency chosen will determine how frequently monthly variable annuity payments
will vary. For example, if a monthly Change Frequency is in effect, payments may
vary on a monthly basis. If a quarterly Change Frequency is selected, the amount
of each monthly payment may change every three months and will be level within
each three month cycle.
At the time the Change Frequency is elected, the Owner must also select the date
the first change is to occur. This date may not be later than the length of the
Change Frequency elected. For example, if a semi-annual Change Frequency is
elected, the date of the first change may not be later than six months after the
Annuity Date. If a quarterly Change Frequency is elected, the date of the first
change may not be later than three months after the Annuity Date.
C. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS
The Company currently provides the following variable annuity payout options:
LIFE ANNUITIES
- - SINGLE LIFE ANNUITY -- Monthly payments during the Annuitant's life. Payments
cease with the last annuity benefit payment due prior to the Annuitant's
death.
- - JOINT AND SURVIVOR ANNUITIES -- Monthly payments during the Annuitant's and
Joint Annuitant's joint lifetimes. Upon the first death, payments will
continue for the remaining lifetime of the survivor at a previously elected
level of 100%, two-thirds or one-half of the total number of Annuity Units.
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LIFE WITH GUARANTEE PERIOD ANNUITY
- - SINGLE LIFE -- Monthly payments guaranteed for a specified number of years and
continuing thereafter during the Annuitant's lifetime. If the Annuitant dies
before all guaranteed payments have been made, the remaining payments continue
to the Owner or the Beneficiary, whichever is applicable.
- - JOINT AND SURVIVOR ANNUITIES -- Monthly payments guaranteed for a specified
number of years and continuing during the Annuitant's and Joint Annuitant's
joint lifetimes. Upon the first death, payments continue for the survivor's
remaining lifetime at the previously elected level of 100%, two-thirds or one-
half of the Annuity Units. If the surviving Annuitant dies before all
guaranteed payments have been made, the remaining payments continue to the
Owner or the Beneficiary, whichever is applicable.
LIFE ANNUITY WITH CASH BACK
- - SINGLE LIFE -- Monthly payments during the Annuitant's life. Thereafter, any
excess of the original applied Annuity Value, over the total amount of annuity
benefit payments made and withdrawals taken, will be paid to the Owner or the
Beneficiary (whichever is applicable).
- - Joint and Survivor Annuities -- Monthly payments during the Annuitant's and
Joint Annuitant's joint lifetimes. At the first death, payments continue for
the survivor's remaining lifetime at the previously elected level of 100%,
two-thirds or one-half of the Annuity Units. Thereafter, any excess of the
original applied Annuity Value, over the total amount of annuity benefit
payments made and withdrawals taken, will be paid to the Owner or the
Beneficiary (whichever is applicable).
PERIOD CERTAIN ANNUITY
Monthly annuity benefit payments for a chosen number of years ranging from five
to thirty are paid. If the Annuitant dies before the end of the period,
remaining payments will continue. 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.
D. VARIABLE ANNUITY BENEFIT PAYMENTS
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the monthly annuity benefit payments under a variable annuity
option. The value of an Annuity Unit in each Sub-Account on its inception date
was set at $1.00. The value of an Annuity Unit of a Sub-Account on any Valuation
Date thereafter is equal to the value of the Annuity Unit on the immediately
preceding Valuation Date multiplied by the product of:
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(a) discount factor equivalent to the Assumed Investment Return and
(b) the Net Investment Factor of the Sub-Account funding the annuity benefit
payments for the applicable Valuation Period.
Annuity benefit payments will increase from one payment date to the next if the
annualized net rate of return during that period is greater than the AIR and
will decrease if the annualized net rate of return is less than the AIR. Where
permitted by law, the Owner may select an AIR of 3%, 5% or 7%. A higher AIR will
result in a higher initial payment. However, subsequent payments will increase
more slowly during periods when actual investment performance exceeds the AIR
and will decrease more rapidly during periods when investment performance is
less than the AIR.
DETERMINATION OF THE FIRST ANNUITY BENEFIT PAYMENT. The amount of the first
periodic variable annuity benefit payment depends on the:
- - annuity payout option chosen;
- - length of the annuity option elected;
- - age of the Annuitant;
- - gender of the Annuitant (if applicable, see "I. NORRIS Decision");
- - value of the amount applied under the annuity option;
- - applicable annuity purchase rates based on the Annuity 2000 Mortality Table;
and
- - assumed investment return (AIR) selected.
The dollar amount of the first periodic annuity benefit payment 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, (or the amount of
the death benefit, if applicable) divided by $1,000, by
(2) the applicable amount of the first monthly payment per $1,000 of value.
DETERMINATION OF THE NUMBER OF ANNUITY UNITS. 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. The number of Annuity Units remains fixed
under all annuity options (except for the survivor annuity benefit payment under
the joint and two-thirds or joint and one-half option) unless the Owner
transfers among Sub-Accounts, makes a withdrawal, or units are split.
DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY BENEFIT PAYMENTS. 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
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value of an Annuity Unit on the applicable Valuation Date. The dollar amount of
each periodic variable annuity benefit payment after the first will vary with
subsequent variations in the value of the Annuity Unit of the selected Sub-
Account(s).
For an illustration of the calculation of a variable annuity benefit payment
using a hypothetical example, see "Annuity Benefit Payments" in the SAI.
PAYMENT OF ANNUITY BENEFIT PAYMENTS. The Owner will receive the annuity benefit
payments unless he/she requests in writing that payments be made to another
person, persons, or entity. If the Owner (or, if there are Joint Owners, the
surviving Joint Owner) dies on or after the Annuity Date, the beneficiary will
become the Owner of the Contract. Any remaining annuity benefit payments will
continue to the beneficiary in accordance with the terms of the annuity benefit
payment option selected. If there are Joint Owners on or after the Annuity Date,
upon the first Owner's death, any remaining annuity benefit payments will
continue to the surviving Joint Owner in accordance with the terms of the
annuity benefit payment option selected.
If an Annuitant dies on or after the Annuity Date but before all guaranteed
annuity benefit payments have been made, any remaining payments will continue to
be paid to the Owner or the payee the Owner has designated. Unless otherwise
indicated by the Owner, after the death of the Annuitant, the present value of
any remaining guaranteed annuity benefit payments may be paid in a single sum to
the Owner. For discussion of present value calculation, see "Present Value
Determination" below. Variable annuity benefit payments will be commuted at the
AIR. Fixed annuity benefit rates will be commuted at the rate used to determine
the benefit.
E. TRANSFERS OF ANNUITY UNITS
After the Annuity Date and prior to the death of the Annuitant, the Owner may
transfer among the available Sub-Accounts upon written or telephone request to
the Company. As discussed in "A. Payments," a properly completed authorization
form must be on file before telephone requests will be honored. A designated
number of Annuity Units equal to the dollar amount of the transfer requested
will be exchanged for an equivalent dollar amount of Annuity Units of another
Sub-Account. Transfer values will be based on the Annuity Value next computed
after receipt of the transfer request.
Currently, the Company does not charge for transfers. The first 12 transfers in
a Contract year are guaranteed to be free of any transfer 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.
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Automatic transfers (Dollar Cost Averaging) is available during the
annuitization phase subject to the rules described in "E. Transfer Privilege"
except that the Fixed Account is not available as a source account.
F. WITHDRAWALS AFTER THE ANNUITY DATE (NOT AVAILABLE UNDER QUALIFIED PLANS,
EXCEPT AS DESCRIBED BELOW). After the Annuity Date and prior to the death of
the Annuitant, the Owner may take a withdrawal from the Contract. The Owner may
choose between two withdrawal options: a "Payment Withdrawal Amount" option or a
"Present Value Withdrawal" option.
Withdrawals after the Annuity Date are generally not available for:
- - Qualified Contracts*
- - Contracts funding Section 457 Deferred Compensation Plans
- - All other Contracts in which the beneficiary has chosen to receive annuity
payments in one lump sum.
* however, withdrawals may be made under Roth IRAs before the death of the
Owner.
WITHDRAWALS AFTER THE ANNUITY DATE MAY HAVE ADVERSE TAX CONSEQUENCES. SEE
FEDERAL TAX CONSIDERATIONS, B. TAXATION OF THE CONTRACT IN GENERAL, "WITHDRAWALS
AFTER ANNUITIZATION."
The minimum amount of a withdrawal is $1,000. Any withdrawal is normally payable
within seven days following the Company's receipt of the surrender or withdrawal
request.
The Company reserves the right to defer withdrawals of amounts in each Sub-
Account in any period during which:
- - 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;
- - the SEC has by order permitted such suspension; or
- - an emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of a separate account is not reasonably
practicable.
The Company reserves the right to defer withdrawals of amounts allocated to the
Company's General Account for a period not to exceed six months. Deferred
amounts will receive interest during the deferral period at a rate of at least
3%.
PAYMENT WITHDRAWAL AMOUNT OPTION. Once each calendar year, the Owner may
withdraw an amount not to exceed the previous monthly annuity benefit payment
multiplied by ten (10) (the "Payment Withdrawal Amount"). The withdrawal may not
exceed the maximum remaining guaranteed payments. Any withdrawal proportionately
reduces the number of Annuity Units applied to
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each future annuity benefit payment. The proportionate reduction is calculated
by multiplying the number of Annuity Units in each future annuity benefit
payment, determined immediately prior to the withdrawal, by the following
fraction:
Amount of the variable or fixed withdrawal
-------------------------------------------------------
Present Value of all remaining variable or fixed annuity benefit
payments immediately prior to the withdrawal.
PRESENT VALUE WITHDRAWAL OPTION. In addition, if the Owner has annuitized under
a period certain or cash back annuity payout option and there are remaining
guaranteed payments, the Owner may withdraw no more than once each calendar year
a portion of the present value of those remaining guaranteed annuity benefit
payments calculated with a discount factor as outlined in the Contract. The
total percentage withdrawn during the entire payout phase cannot exceed a
maximum of 75% of the present value of the remaining guaranteed annuity payments
(the "Present Value Withdrawal Amount"). Each withdrawal proportionately reduces
the number of units in future annuity benefit payments. This proportionate
reduction is calculated by multiplying the number of Annuity Units in each
future annuity benefit payment, determined immediately prior to the withdrawal,
by the following fraction:
Amount of the variable or fixed withdrawal
-----------------------------------------------------------
Present Value of all remaining variable or fixed guaranteed annuity
benefit payments immediately prior to the withdrawal
If the Annuitant is still living after the guaranteed number of payments has
been made, the number of Annuity Units used in calculating the annuity benefit
payment prior to any withdrawal will be restored to its original value (adjusted
for any transfers if applicable) as if no withdrawal(s) had taken place.
PRESENT VALUE DETERMINATION. Present values of either all future annuity
benefit payments or future guaranteed annuity benefit payments are calculated
based on the Annuity 2000 Mortality Table (male, female or unisex rates as
appropriate), and the interest rate or AIR used to determine the annuity benefit
payments, increased by the following adjustments:
- - Death of Annuitant -- 0.00% Adjustment
- - Withdrawals 5 or more years after issue date -- 0.00% Adjustment
- - Withdrawals within 5 years of issue date:
15 or more years of annuity benefit
payments being valued -- 1.00% Adjustment
10-14 years of annuity benefit
payments being valued -- 1.50% Adjustment
Less than 10 years of annuity benefit
payments being valued -- 2.00% Adjustment
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The adjustment to the interest rate used to determine the Present Value results
in lower future annuity payments.
G. OPTIONAL ANNUITIZATION RIDERS
The following optional annuitization riders are available under the Contract:
- - Minimum Annuitization Floor ("MAF") Rider
- - Annuitization Payment Ratchet ("APR") Rider
MINIMUM ANNUITIZATION FLOOR ("MAF") RIDER. If the Owner elects a variable
annuity option, an optional Minimum Annuitization Floor ("MAF") Rider is
available at annuitization in most jurisdictions. The MAF Rider guarantees that
each monthly benefit payment after the first will never be less than that first
payment (the "MAF Amount"), unless an adjustment is required due to a withdrawal
or the death of the first Annuitant under a two-thirds or one-half survivor
benefit option.
If a withdrawal is taken while the Rider is in effect, the MAF Amount will be
reduced in the same manner that Annuity Units are reduced. After the death of
the first Annuitant under a joint and survivor option, the number of Annuity
Units will be reduced by one-third or one-half, as applicable.
There is no periodic charge for the MAF Rider. However, because lower annuity
option rates will be used under the MAF Rider, the first annuity benefit payment
will be lower than it would have been without the MAF Rider. Subsequent payments
will also be lower unless the guarantee provided by the MAF Rider is triggered,
at which time payments may be higher than if the MFAF Rider had not been
elected.
The Rider terminates upon payment of the last annuity benefit payment.
ANNUITIZATION PAYMENT RATCHET ("APR") RIDER. If the Owner elects a variable
annuity option, an optional Annuitization Payment Ratchet ("APR") Rider is
available at annuitization in most jurisdictions. In order to elect the Rider,
the Owner must also elect an ANNUAL Annuity Benefit Payment Change Frequency
("Change Frequency").
The APR Rider provides that, regardless of investment performance, the amount of
the monthly payments within each annual Change Frequency cycle (assuming no
withdrawals are taken) will equal or exceed the dollar amount of the last
monthly payment in the previous annual Change Frequency cycle. The amount of the
last monthly payment in the previous Change Frequency cycle is called the
"Current Ratchet Amount." The monthly payment in any Change Frequency cycle will
never exceed 10% of the Current Ratchet Amount (assuming no withdrawals are
taken). As a result, under the APR Rider each monthly payment
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<PAGE>
will equal or exceed the previous payment, but the potential increase in benefit
payments from one annual Change Frequency cycle to the next is limited by the
10% cap on any increase in the Current Ratchet Amount.
The APR Rider is subject to the conditions outlined below:
- - The amount of each monthly payment prior to the beginning of the first Change
Frequency cycle will be equal to the first variable annuity benefit payment
determined on the Annuity Date assuming no withdrawals are taken.
- - If a withdrawal is taken, the Current Ratchet Amount will be proportionately
reduced in the same manner that the Annuity Units are reduced.
- - At the death of the first Annuitant under a two-thirds or one-half survivor
annuitization option, the Current Ratchet Amount is adjusted by one-third or
one-half, as applicable.
There is no periodic charge for the APR Rider. However, lower annuity option
rates are used to determine the initial annuity benefit payment. If the APR
Rider is in effect, the first annuity benefit payment will be lower than it
would have been without the Rider. Subsequent payments will also be lower unless
the ratcheting effect provided by the APR Rider is triggered, at which time
payments will be higher than if the Rider had not been elected.
The Rider will terminate upon payment of the last annuity benefit payment.
H. REVERSAL OF ANNUITIZATION
The Owner may reverse the decision to annuitize by request to the Company within
90 days of the Annuity Date. Upon receipt of such request, the Company will
return the Contract to the accumulation phase subject to the following:
(1) The value applied under a variable annuity option during this period will
be treated as if it had been invested in the accumulation phase of the
Contract, with the same allocations that were in effect since the Annuity
Date.
(2) The value applied under a fixed annuity option during this period, except
for the excess value of the M-GAP Benefit Base over the Annuity Value, if
applicable, will be treated as if it had been invested in the Fixed
Account during the accumulation phase of the Contract since the Annuity
Date.
(3) Any annuity benefit payments paid or withdrawals taken during this period
will be treated as a withdrawal of the Surrender Value as of the date of
the payment or withdrawal. Fixed annuity benefit payments will be treated
as withdrawals from the Fixed Account. Variable annuity benefit payments
will be treated as withdrawals from the variable Sub-Accounts. Surrender
charges may apply to these withdrawals.
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(4) If the Company learns of the Owner's decision to reverse after the maximum
Annuity Date permitted under the Contract, the Owner must immediately
select another annuity payout option.
I. 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 decision will be based on unisex rates.
CHARGES AND DEDUCTIONS
Deductions under the Contract and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Underlying Portfolios are described in the prospectuses and SAIs of KVS and
Scudder VLIF.
A. VARIABLE ACCOUNT DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE. The Company assesses a charge against the
assets of each Sub-Account to compensate for certain mortality and expense risks
it has assumed. The mortality and expense risk charge is assessed daily at an
annual rate of 1.25% of each Sub-Account's assets. The charge is imposed during
both the accumulation phase and the annuity payout phase. 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
payout option selected), no matter how long the Annuitant lives and no matter
how long all Annuitants as a class live. The mortality charge is deducted during
the annuity payout phase on all Contracts, including those that do not involve a
life contingency, 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
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<PAGE>
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.
This charge may not be increased. 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.
ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a
daily Administrative Expense 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 phase and the annuity payout phase. The daily Administrative
Expense Charge is assessed to help defray administrative expenses actually
incurred in the administration of the Sub-Account. There is no direct
relationship, however, 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 below under "B. Contract Fee") and
for the Administrative Expense Charge are designed to reimburse the Company for
the cost of administration and related expenses. The administrative functions
and expense assumed by the Company in connection with the Variable Account and
the Contract 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 purchase shares of the Underlying
Portfolios, the value of the net assets of the Sub-Accounts will reflect the
investment advisory fee and other expenses incurred by the Underlying
Portfolios. The prospectuses and SAIs of KVS and Scudder VLIF contain additional
information concerning expenses of the Underlying Portfolios.
B. CONTRACT FEE
A $35 Contract fee (a lower fee may apply in some states) currently is deducted
during the accumulation phase, on the Contract anniversary date and upon full
surrender of the Contract if the Accumulated Value on any of these dates is less
than $75,000. 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
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<PAGE>
that 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 portion of
the charge deducted from that Sub-Account.
Where permitted by law, the Contract fee also may be waived for Contracts where,
on the issue date, either the Owner or the Annuitant is within the following
class of individuals: employees and registered representatives of any
broker-dealer which has entered into a sales agreement with the Company to sell
the Contract; employees of the Company, its affiliates and subsidiaries
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.
C. OPTIONAL RIDER CHARGES
Subject to state availability, the Company offers a number of riders that may be
elected by the Owner at issue. The M-GAP Rider may be elected at issue or on any
Contract anniversary. A separate monthly charge is made for each Rider through a
pro-rata reduction of the Accumulated Value of the Sub-Accounts, the Fixed
Account and the Guarantee Period Accounts. The pro-rata reduction is based on
the relative value that the Accumulation Units of the Sub-Accounts, the dollar
amounts in the Fixed Account and the dollar amounts in the Guarantee Period
Accounts bear to the total Accumulated Value.
The applicable charge for the following is assessed on the Accumulated Value on
the last day of each Contract month and, if applicable, on the date the Rider is
terminated, multiplied by 1/12th of the following annual percentage rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout Rider with ten-year waiting
period...................................................... 0.35%
Minimum Guaranteed Annuity Payout Rider with fifteen-year
waiting period.............................................. 0.20%
Enhanced Death Benefit With Annual Step-Up................... 0.15%
7% Enhanced Death Benefit.................................... 0.30%
7% Enhanced Death Benefit With Annual Step-Up................ 0.35%
</TABLE>
For a description of the Riders, see "Optional Enhanced Death Benefit" under "G.
Death Benefit", and "I. Optional Minimum Guaranteed Annuity Payout (M-GAP)
Rider" under "DESCRIPTON OF THE CONTRACT -- THE ACCUMULATION PHASE," above.
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D. PREMIUM TAXES
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%. 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 a Contract at the time payments are received); or
2. the premium tax charge is deducted in total 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.
E. SURRENDER CHARGE
No charge for sales expense is deducted from payments at the time the payments
are made. A surrender charge, however, is deducted from the Accumulated Value in
the case of surrender within certain time limits described below.
CALCULATION OF SURRENDER CHARGE. For purposes of determining the surrender
charge, the Accumulated Value is divided into four categories:
- - New Payments -- payments received by the Company during the nine
years preceding the date of the surrender;
- - Old Payments -- total payments invested in the Contract for more than nine
years;
- - the amount available under the Withdrawal Without Surrender Charge provision;
and
- - Payment Credits.
For purposes of determining the amount of any surrender charge, surrenders will
be deemed to be taken on the following order:
(1) first from amounts available as a Withdrawal Without Surrender Charge, if
any;
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(2) then from any Old Payments;
(3) then from New Payments; and
(4) last from Payment Credits.
Amounts available as a Withdrawal Without Surrender Charge, followed by Old
Payments, may be withdrawn from the Contract at any time without the imposition
of a surrender charge. However, if a withdrawal or surrender is attributable all
or in part to New Payments, a surrender charge may be imposed.
The amount of the charge will depend upon the number of years that any New
Payments to which the withdrawal is attributed have remained credited under the
Contract. For the purpose of calculating surrender charges for New Payments, all
amounts withdrawn are assumed to be deducted first from the oldest New Payment
and then from the next oldest 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.)
The surrender charge is as follows:
<TABLE>
<CAPTION>
COMPLETE YEARS FROM
DATE OF PAYMENT CHARGE
- -------------------------- ----------
<S> <C>
0-4 8.5%
more than 4 7.5%
more than 5 6.5%
more than 6 5.5%
more than 7 3.5%
more than 8 1.5%
more than 9 0
</TABLE>
The amount withdrawn equals the amount requested by the Owner plus the surrender
charge, if any. The charge is applied as a percentage of the New Payments
withdrawn, but in no event will the total surrender charge exceed a maximum
limit of 8.5% of total gross New Payments. Such total charge equals the
aggregate of all applicable surrender charges for a surrender and withdrawals.
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 "F. Surrender and
Withdrawals" under "DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE" and
see "FEDERAL TAX CONSIDERATIONS."
REDUCTION OR ELIMINATION OF SURRENDER CHARGE AND ADDITIONAL AMOUNTS
CREDITED. Where permitted by state law, the Company will waive the surrender
charge in the event that the Owner (or the Annuitant, if the Owner is not an
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individual) becomes physically disabled after the issue date of the Contract (or
in the event that the original Owner or Annuitant has changed since issue, after
being named Owner or Annuitant) and before attaining age 65. The Company may
require proof of such disability and continuing disability and reserves the
right to obtain an examination by a licensed physician of its choice and at its
expense.
In addition, the Company will waive the surrender charge in the event that an
Owner (or the Annuitant, if the Owner is not an individual) is:
(1) admitted to a medical care facility after becoming the Owner or Annuitant
under the Contract and remains confined there until the later of one year
after the issue date or 90 consecutive days; or
(2) first diagnosed by a licensed physician as having a fatal illness after
the issue date of the Contract and after being named Owner or Annuitant.
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. "Physically disabled" means the Owner or
Annuitant, as applicable, has been unable to engage in an occupation or to
conduct daily activities for a period of at least 12 consecutive months as a
result of disease or bodily injury.
Where surrender charges have been waived under any of the situations discussed
above, no additional payments under this Contract will be accepted unless
required by state law.
In addition, from time to time the Company may allow a reduction in or
elimination of the surrender 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:
- - the size and type of group or class, and the persistency expected from that
group or class;
- - the total amount of payments to be received, and the manner in which payments
are remitted;
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- - the purpose for which the Contracts are being purchased, and whether that
purpose makes it likely that costs and expenses will be reduced;
- - other transactions where sales expenses are likely to be reduced; or
- - 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 connection with financial
planning services offered on a fee-for-service basis).
The Company also may reduce or waive the surrender charge, and/or credit
additional amounts on Contracts, where either the Owner or the Annuitant on the
issue date is within the following class 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;
- - employees of the Company, its affiliates and subsidiaries; officers,
directors, trustees and employees of any of the Underlying 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.
In addition, if permitted under state law, the surrender charge will be waived
under 403(b) Contracts where the amount withdrawn is being contributed to a life
policy issued by the Company as part of the individual's 403(b) plan.
Where an Owner who is 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 Accumulated Value under the Contract to other
Contracts issued by the Company and owned by the trustee, with no deduction for
any otherwise applicable surrender 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 Principal Office.
Any reduction or elimination in the amount or duration of the surrender charge
will not discriminate unfairly among purchasers of this Contract. The Company
will not make any changes to this charge where prohibited by law.
F. TRANSFER CHARGE
The Company currently assesses no charge for processing transfers. The Company
guarantees that the first 12 transfers in a Contract year will be free of a
transfer charge, but reserves the right to assess a charge, guaranteed never to
exceed $25, for each subsequent transfer in a Contract year to reimburse it for
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the expense of processing transfers. For more information, see "E. Transfer
Privilege" under "DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE."
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 1933 Act or
the 1940 Act. Accordingly, the staff of the SEC 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 Contract or any fixed benefits offered under these
accounts may be subject to the provisions of the 1933 Act relating to the
accuracy and completeness of statements made in the Prospectus.
INVESTMENT OPTIONS. In most jurisdictions, Guarantee Periods ranging from two
through ten years may be available. Each Guarantee Period established for the
Owner is accounted for separately in a non-unitized segregated account, except
in California where it is accounted for in the Company's General 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. Once an interest rate is in effect
for a Guarantee Period Account, however, the Company may not change it during
the duration of its Guarantee Period. In no event will the Guaranteed Interest
Rate be less than 3%. The Guarantee Period Accounts are not available in New
York, Oregon, Maryland, and Pennsylvania.
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 initially was issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period.
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. 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
Owner allocates or transfers amounts to a Guarantee Period 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,
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the Company reserves the right to apply that amount to the Sub-Account investing
in the Kemper Money Market Portfolio. The 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 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 automatically
will be applied to a new Guarantee Period Account with the same duration at the
then current rate 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 Sub-Account investing
in the Kemper Money Market Portfolio. Where amounts have been renewed
automatically 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 surrender from a Guarantee Period Account on the
expiration of its Guarantee Period. In addition, no negative 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." All other
transfers, withdrawals, or a surrender prior to the end of a Guarantee Period
will be subject to a Market Value Adjustment, which may increase or decrease the
account value. 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)] to the power of n/365-1
<TABLE>
<S> <C>
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
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
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 Valuation Date to
the end of the current Guarantee Period.
</TABLE>
Based on the application of this formula, the value of a Guarantee Period
Account will increase after the Market Value Adjustment is applied if the then
current market rates are lower than the rate being credited to the Guarantee
Period Account. Similarly, the value of a Guarantee Period Account will decrease
after the Market Value Adjustment is applied if the then current market rates
are higher than the rate being credited to the Guarantee Period Account. The
Market Value Adjustment is limited, however, so that even if the account value
is decreased after application of a Market Value Adjustment, it will equal or
exceed the Owner's principal plus 3% earnings per year less applicable Contract
fees. Conversely, if the then current market rates are lower and the account
value is increased after the Market Value Adjustment is applied, the increase in
value is also affected by the minimum guaranteed rate of 3%. The amount that
will be added to the Guarantee Period Account is limited to the difference
between the amount earned and the 3% minimum guaranteed earnings. For examples
of how the Market Value Adjustment works, See APPENDIX C, "SURRENDER CHARGES AND
THE MARKET VALUE ADJUSTMENT".
WITHDRAWALS. Prior to the Annuity Date, the 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 "F. Surrender and Withdrawals." In addition, the following provisions also
apply to withdrawals from a Guarantee Period Account: (1) a Market Value
Adjustment will apply to all withdrawals, including Withdrawals Without
Surrender Charge, unless made at the end of the Guarantee Period; and (2) 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 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 surrender charge applies to
the withdrawal, it will be calculated as set forth under "E. Surrender Charge"
after application of the Market Value Adjustment.
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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
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 IRS. In
addition, this discussion does not address state or local tax consequences that
may be associated with the Contract.
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 ALWAYS SHOULD BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
A. GENERAL
THE COMPANY. The Company intends to make a charge for any effect which the
income, assets, or existence of the Contract, 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 Owners and with respect to each separate account as though that separate
account was 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.
DIVERSIFICATION REQUIREMENTS. The IRS has issued regulations under Section
817(h) of the Code relating to the diversification requirements for variable
annuity and variable life insurance contracts. The regulations prescribed by the
Treasury Department 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. Under this section of the Code, if
the investments are not adequately diversified, the Contract will not be treated
as an annuity contract, and therefore the income on the Contract, for any
taxable year of the Owner, would be treated as ordinary income received or
accrued by the Owner. It is anticipated that the Portfolios of KVS and Scudder
VLIF will comply
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with the current diversification requirements. In the event that future IRS
regulations and/or rulings would require Contract modifications in order to
remain in compliance with the diversification standards, the Company will make
reasonable efforts to comply, and it reserves the right to make such changes as
it deems appropriate for that purpose.
INVESTOR CONTROL. In order for a variable annuity contract to qualify for tax
deferral, the Company, and not the variable contract owner, must be considered
to be the owner for tax purposes of the assets in the segregated asset account
underlying the variable annuity contract. In certain circumstances, however,
variable annuity contract owners may now be considered the owners of these
assets for federal income tax purposes. Specifically, the IRS has stated in
published rulings that a variable annuity contract owner may be considered the
owner of segregated account assets if the contract owner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations concerning investment diversification, that those
regulations do not provide guidance governing the circumstances in which
investor control of the investments of a segregated asset account may cause the
investor (i.e., the contract owner), rather than the insurance company, to be
treated as the owner of the assets in the account. This announcement also states
that guidance would be issued by way of regulations or rulings on the "extent to
which policyholders may direct their investments to particular sub-accounts
without being treated as owners of the underlying assets." As of the date of
this Prospectus, no such guidance has been issued. The Company therefore
additionally reserves the right to modify the Contract as necessary in order to
attempt to prevent a contract owner from being considered the owner of a pro
rata share of the assets of the segregated asset account underlying the variable
annuity contracts.
B. 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, or 408 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, depending on 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 E. below.
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C. TAXATION OF THE CONTRACT IN GENERAL
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Nonnatural Owner" below), be considered an annuity
contract under Section 72 of the Code. Please note, however, if the Owner
chooses an Annuity Date beyond the Owner's 85th birthday, it is possible that
the Contract may not be considered an annuity for tax purposes, and therefore,
the Owner will be taxed on the annual increase in Accumulated Value. The Owner
should consult tax and financial advisors for more information. This section
governs the taxation of annuities. The following discussion concerns annuities
subject to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in
the Contract's Accumulated Value is not taxable to the Owner until it is
withdrawn from the Contract. Under the current provisions of the Code, amounts
received under an annuity contract prior to annuitization (including payments
made upon the death of the annuitant or owner), generally are first attributable
to any investment gains credited to the contract over the taxpayer's "investment
in the contract." Such amounts will be treated as gross income subject to
federal income taxation. "Investment in the contract" is the total of all
payments to the Contract which were not excluded from the Owner's gross income
less any amounts previously withdrawn which were not included in income. Section
72(e)(11)(A)(ii) requires that all non-qualified deferred annuity contracts
issued by the same insurance company to the same owner during a single calendar
year be treated as one contract in determining taxable distributions.
WITHDRAWALS AFTER ANNUITIZATION. The Internal Revenue Service may take the view
that when withdrawals (other than annuity payments) are taken during the annuity
payout phase of the Contract, all amounts received by the taxpayer are taxable
as ordinary income rates as amounts "not received as an annuity." In addition,
such amounts are taxable to the recipient without regard to the owner's
investment in the Contract or any investment gain that which might be present in
the current annuity value.
For example, assume that a Contract owner with a Contract Value of $100,000 of
which $90,000 is comprised of investment in the Contract and $10,000 is
investment gain, makes a withdrawal of $20,000 during the annuity payout phase.
Under this view, the Contract owner would pay income taxes on the entire $20,000
amount in that tax year. For some taxpayers, such as those under age 59 1/2,
additional tax penalties may also apply.
OWNERS OF NONQUALIFIED CONTRACTS SHOULD CONSIDER CAREFULLY THE TAX IMPLICATIONS
OF ANY WITHDRAWAL REQUESTS AND THEIR NEED FOR CONTRACT FUNDS PRIOR TO THE
EXERCISE OF THE WITHDRAWAL RIGHT. CONTRACT OWNERS SHOULD ALSO CONTACT THEIR TAX
ADVISER PRIOR TO MAKING WITHDRAWALS.
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ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments begin under
the Contract, generally a portion of each payment may be excluded from gross
income. The excludable portion generally is determined by a formula that
establishes the ratio that the investment in 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 the investment 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
owner's final tax return.
PENALTY ON DISTRIBUTION. 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 on withdrawals:
- - taken on or after age 59 1/2; or
- - if the withdrawal follows the death of the Owner (or, if the Owner is not an
individual, the death of the primary Annuitant, as defined in the Code); or
- - in the case of the Owner's "total disability" (as defined in the Code); or
- - if withdrawals from a qualified Contract are made to an employee who has
terminated employment after reaching age 55; or
- - 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.
The requirement of "substantially equal" periodic payments is met when the Owner
elects to have distributions made over the Owner's life expectancy, or over the
joint life expectancy of the Owner and beneficiary. The requirement is also met
when the number of units withdrawn to make each distribution is substantially
the same. Any modification, other than by reason of death or disability, of
distributions which are part of a series of substantially equal periodic
payments that occurs before the Owner's age 59 1/2, or five years, will subject
the Owner to the 10% penalty tax on the prior distributions.
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, 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, therefore, were subject to the 10%
federal penalty tax. This Private Letter Ruling may be applicable to an Owner
who receives distributions under any LED-type option prior to age 59 1/2.
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.
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ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Contract to
another individual as a gift prior to the Annuity Date, the Code provides that
the 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 any investment gain in value over the
Owner's cost basis at the time of the transfer. The transfer also is subject to
federal gift tax provisions. Where the 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 Owner
as such; however, the Owner will not incur taxable income. Instead, the
Annuitant will incur taxable income upon receipt of annuity benefit payments as
discussed above.
NONNATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"nonnatural persons" (e.g., a corporation) are not treated as annuity contracts
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity contracts purchased with a single payment when the annuity date
is no later than a year from the issue date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other than employers, such as a trust, holding an
annuity as an agent for a natural person. This exception, however, will not
apply in cases of any employer who is the owner of an annuity contract under a
non-qualified deferred compensation plan.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity contracts. Contributions and investment earnings
are not taxable to employees until distributed; however, with respect to
payments made after February 28, 1986, a Contract owned by a state or local
government or a tax-exempt organization will not be treated as an annuity under
Section 72 as well. In addition, plan assets are treated as property of the
employer, and are subject to the claims of the employer's general creditors.
D. TAX WITHHOLDING
The Code requires withholding with respect to payments or distributions from
non-qualified 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.
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E. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS
The tax rules applicable to qualified retirement plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan may be subject to that plan's terms and conditions irrespective of the
terms and conditions of any annuity contract used to fund such benefits. As
such, the following is simply a general description of various types of
qualified plans that may use the Contract. Before purchasing any annuity
contract for use in funding a qualified plan, more specific information should
be obtained.
Qualified Contracts may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to owners of non-qualified
Contracts. Individuals purchasing a qualified Contract should carefully review
any such changes or limitations which may include restrictions to ownership,
transferability, assignability, contributions, and distributions.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT SHARING
PLANS. Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of tax-favored retirement
plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962,
as amended, permits self-employed individuals to establish similar plans for
themselves and their employees. Employers intending to use qualified Contracts
in connection with such plans should seek competent advice as to the suitability
of the Contract to their specific needs and as to applicable Code limitations
and tax consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity ("IRA"). Note: This term covers all IRAs permitted
under Section 408 of the Code, including Roth IRAs. IRAs are subject to limits
on the amounts that may be contributed, the persons who may be eligible, and on
the time when distributions may commence. In addition, certain distributions
from other types of retirement plans may be "rolled over," on a tax-deferred
basis, to an IRA. Purchasers of an IRA Contract will be provided with
supplementary information as may be required by the IRS or other appropriate
agency, and will have the right to cancel the Contract as described in this
Prospectus. See "B. Right to Cancel Individual Retirement Annuity."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans for their employees using
IRAs.
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Employer contributions that may be made to such plans are larger than the
amounts that may be contributed to regular IRAs and may be deductible to the
employer.
TAX-SHELTERED ANNUITIES ("TSAS"). Under the provisions of Section 403(b) of the
Code, payments made to 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 total annual payments do not exceed the
maximum contribution permitted under the Code. Purchasers of TSA contracts
should seek competent advice as to eligibility, limitations on permissible
payments and other tax consequences associated with the contracts.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA contract after December
31, 1988, may not begin before the employee attains age 59 1/2, separates from
service, dies or becomes disabled. In the case of hardship, an 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 may be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA contract issued to
participants in the Texas Optional Retirement Program 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 additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
STATEMENTS AND REPORTS
An Owner is sent a report semi-annually which provides certain financial
information about the Underlying Portfolios. At least annually, but possibly as
frequently as quarterly, the Company will furnish a statement to the Owner
containing information about his or her Contract, including Accumulation Unit
Values and other information as required by applicable law, rules and
regulations. The Company will also send a confirmation statement to Owners each
time a transaction is made affecting the Contract Value. (Certain transactions
made under recurring payment plans may in the future be confirmed quarterly
rather than by immediate confirmations.) The Owner should review the information
in all statements carefully. All errors or corrections must be reported to the
Company immediately to assure proper crediting to the Contract. The Company will
assume that all transactions are accurately reported on confirmation statements
and quarterly/annual statements unless the Owner notifies the Principal Office
in writing within 30 days after receipt of the statement.
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ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law 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 no longer are 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 Owner
and prior approval of the SEC 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 an 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 SEC 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
Owners on a basis to be determined by the Company.
Shares of the Portfolios also are issued to separate accounts of other insurance
companies which issue variable life contracts ("mixed funding"). Shares of the
Portfolios also are 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 owners or variable annuity
owners. Although the Company, KVS and Scudder VLIF do not currently foresee any
such disadvantages to either variable life insurance owners or variable annuity
owners, the Company and the trustees of KVS and Scudder VLIF intend to monitor
events in order to identify any material conflicts between such 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 is made, the Company may, by
appropriate endorsement, change the Contract to reflect the substitution or
change, and will notify Owners of all such changes. If the Company deems it to
be in the best interest of Owners, and subject to any approvals that may be
required under applicable law, the Variable Account or any Sub-Accounts may be
operated as a
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management company under the 1940 Act, may be deregistered under the 1940 Act if
registration no longer is required, or may be combined with other sub-accounts
or other separate accounts of the Company.
The Company reserves the right, subject to compliance with applicable law and to
the provisions of the Participation Agreements, to:
(1) transfer assets from the Variable 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 be made without notice to Owners in
accordance with the 1940 Act.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
The Company reserves the right, without the consent of Owners, to suspend sales
of the Contract as presently offered, and to make any change to provisions of
the Contract to comply with, or give Owners the benefit of, any federal or state
statute, rule or regulation, including but not limited to requirements for
annuity contracts and retirement plans under the Code and pertinent regulations
or any state statute or regulation. Any such changes will apply uniformly to all
contracts that are affected. You will be given written notice of such changes.
VOTING RIGHTS
The Company will vote Underlying Portfolio shares held by each Sub-Account in
accordance with instructions received from 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 Underlying 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,
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which are received. The Company also will vote shares in a Sub-Account that it
owns and which are not attributable to the Contract 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 an Owner or Annuitant may cast will be determined by
the Company as of the record date established by the Underlying Portfolio.
During the accumulation phase, the number of Underlying Portfolio shares
attributable to each 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 Underlying Portfolio share. During the annuity payout phase,
the number of Underlying 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 Underlying Portfolio share.
Ordinarily, the Annuitant's voting interest in the Underlying Portfolio will
decrease as the reserve for the variable annuity is depleted.
DISTRIBUTION
The Contract offered by this Prospectus may be purchased from certain
independent broker-dealers, which are registered under the Securities Exchange
Act of 1934 and are members of the National Association of Securities Dealers,
Inc. ("NASD"). The Contract is also offered through Allmerica Investments, Inc.,
which is the principal underwriter and distributor of the Contracts. Allmerica
Investments, Inc., 440 Lincoln Street, Worcester, MA 01653, is a registered
broker-dealer, a member of the NASD and an indirectly wholly owned subsidiary of
First Allmerica.
The Company pays commissions, not to exceed 7.0% of payments, to broker-dealers
which sell the Contract. 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 also may 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 Contract, including the recruitment and
training of personnel, production of promotional literature, and similar
services.
The Company intends to recoup commissions and other sales expenses through a
combination of anticipated surrender charges and profits from the Company's
General Account, which may include amounts derived from mortality and expense
risk charges. Commissions paid on the Contract, including additional
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incentives or payments, do not result in any additional charge to Owners or to
the Variable Account. The Company will retain any surrender charges assessed on
a Contract.
Owners may direct any inquiries to their financial representative or to
Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653, telephone
1-800-782-8380.
SERVICES
The Company receives fees from the investment advisers or other service
providers of certain Underlying Portfolios in return for providing certain
services to Owners. Currently, the Company receives service fees with respect to
the Scudder International Portfolio, Scudder Global Discovery Portfolio, Scudder
Capital Growth Portfolio and Scudder Growth and Income Portfolio. The Company
receives service fees at an annual rate of 0.15% per annum of the aggregate net
asset value of shares held by the Variable Account. The Company may in the
future render services for which it will receive compensation from the
investment advisers or other service providers of other Underlying Portfolios.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party
or to which the assets of the Variable Account are subject. The Company and the
Principal Underwriter are not involved in any litigation that is of material
importance in relation to their total assets or that relates to the Variable
Account.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a third party assessment, the Company determined that significant
portions of its software required modification or replacement to enable its
computer systems to properly process dates beyond December 31, 1999. The Company
is presently completing the process of modifying or replacing existing software
and believes that this action will resolve the Year 2000 issue. However, if such
modifications and conversions are not made, or are not completed timely, or
should there be serious unanticipated interruptions from unknown sources, the
Year 2000 issue could have a material adverse impact on the operations of
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the Company. Specifically, the Company could experience, among other things, an
interruption in its ability to collect and process premiums, process claim
payments, safeguard and manage its invested assets, accurately maintain
policyholder information, accurately maintain accounting records, and perform
customer service. Any of these specific events, depending on duration, could
have a material adverse impact on the results of operations and the financial
position of the Company.
The Company has initiated formal communications with all of its significant
suppliers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 issue. The Company's
total Year 2000 project cost and estimates to complete the project include the
estimated costs and time associated with the Company's involvement on a third
party's Year 2000 program, and are based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company. The
Company does not believe that it has material exposure to contingencies related
to the Year 2000 issue for the products it has sold. Although the Company does
not believe that there is a material contingency associated with the Year 2000
issue, there can be no assurance that exposure for material contingencies will
not arise.
The cost of the Year 2000 project will be expensed as incurred and is being
funded primarily through a reallocation of resources from discretionary projects
and a reduction in systems maintenance and support costs. Therefore, the Year
2000 project is not expected to result in any significant incremental technology
cost and is not expected to have a material effect on the results of operations.
The Company and its affiliates have incurred and expensed approximately $54
million related to the assessment, plan development and substantial completion
of the Year 2000 project through December 31, 1998. The total remaining cost of
the project is estimated between $20-$30 million
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted in this Prospectus pursuant to the rules and
regulations of the SEC. The omitted information may be obtained from the SEC's
principal office in Washington, D.C., upon payment of the SEC's prescribed fees.
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APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account generally are not subject to regulation under the
provisions of the 1933 Act or the 1940 Act. Disclosures regarding the fixed
portion of the annuity Contract and the Fixed Account may be subject to the
provisions of the 1933 Act concerning the accuracy and completeness of
statements made in this Prospectus. The disclosures in this APPENDIX A have not
been reviewed by the SEC.
The Fixed Account is part of the Company's General Account which is made up of
all of the general assets of the Company other than those allocated to a
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 Contract, 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 surrender charge is imposed
if such event occurs before the payments attributable to the surrender or
withdrawal have been credited to the Contract for nine full Contract years.
SALES RESTRICTIONS. In Massachusetts, payments and transfers to the Fixed
Account are subject to the following restrictions:
If a Contract is 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. 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.
In Oregon, no payments to the Fixed Account will be permitted if a Contract is
issued after the Annuitant's 81st birthday. If an allocation designated as a
Fixed
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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 Kemper Money Market Sub-Account.
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAMS. To the extent
permitted by law, the Company reserves the right to offer Enhanced Automatic
Transfer Program(s) from time to time. If you elect to participate, the Company
will credit an enhanced interest rate to payments made to the Enhanced Automatic
Transfer Program. Eligible payments:
- - must be new payments to the contract, including the initial payment,
- - must be allocated to the Fixed Account, which will be the source account,
- - must be automatically transferred out of the Fixed Account to one or more
accounts (excluding the Fixed Account and the Guarantee Period Accounts) over
a specified time period and
- - will receive the enhanced rate while they remain in the Fixed Account.
You may be able to establish more than one Enhanced Automatic Transfer Program.
Payments made to the Contract during the same month will be part of the same
Enhanced Automatic Transfer Program if the length of the time period is the same
and the enhanced rate is the same. The allocation for all of the amounts in the
same program will be in accordance with the instructions for the most recent
payment to this program. The monthly transfer will be made on the date
designated for the initial payment to this program. The amount allocated will be
determined by dividing the amount in the program by the number of remaining
months. For example, for a six-month program, the first automatic transfer will
be 1/6th of the balance; the second automatic transfer will be 1/5th of the
balance, and so on.
Payments to different Enhanced Automatic Transfer Programs will be handled in
accordance with the instructions for each particular program.
A-2
<PAGE>
APPENDIX B
PERFORMANCE INFORMATION
This Contract was first offered to the public in 1999. However, in order to help
people understand how investment performance can affect money invested in the
Sub-Accounts, the Company may advertise "total return" and "average annual total
return" performance information based on (1) the periods that the Sub-Accounts
have been in existence and (2) the periods that the Underlying Portfolios have
been in existence. Performance results in Tables 1A and 2A reflect the
applicable deductions for the Contract fee, Sub-Account charges and Underlying
Portfolio charges under this Contract and also assume that the Contract is
surrendered at the end of the applicable period. Performance results in Tables
1B and 2B do not include the Contract fee and assume that the Contract is not
surrendered at the end of the applicable period. Neither sets of tables include
optional Rider charges. Both the total return and yield figures are based on
historical earnings and are not intended to indicate future performance.
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 Variable Account charges, and expressed as a
percentage. The "average annual total return" represents the average annual
percentage change in the value of an investment in the Sub-Account over a given
period of time. It 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 Kemper 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 yield of a Sub-Account investing in a Portfolio other than the Kemper Money
Market Portfolio refers to the annualized income generated by an investment in
the Sub-Account over a specified 30-day or one-month period. The yield is
calculated by assuming that the income generated by the investment during that
30-day or one- month period is generated each period over a 12-month period and
is shown as a percentage of the investment.
Quotations of average annual total return as shown in Table 1A are calculated in
the manner prescribed by the SEC and show the percentage rate of return of a
B-1
<PAGE>
hypothetical initial investment of $1,000 for the most recent one, five and ten
year period or for a period covering the time the Sub-Account has been in
existence, if less than the prescribed periods. The calculation is adjusted to
reflect the deduction of the annual Sub-Account asset charge of 1.40%, the
effect of the $35 annual Contract fee, the Underlying Portfolio charges and the
surrender charge which would be assessed if the investment were completely
withdrawn at the end of the specified period. The calculation is not adjusted to
reflect the deduction of any optional Rider charges. Quotations of supplemental
average total returns, as shown in Table 1B, are calculated in exactly the same
manner and for the same periods of time except that it does not reflect the
Contract fee and assumes that the Contract is not surrendered at the end of the
periods shown.
The performance shown in Tables 2A and 2B is calculated in exactly the same
manner as the performance in Tables 1A and 1B; however, the period of time is
based on the Underlying Portfolio's lifetime, which may predate the
Sub-Account's inception date. These performance calculations are based on the
assumption that the Sub-Account corresponding to the applicable Underlying
Portfolio was actually in existence throughout the stated period and that the
contractual charges and expenses during that period were equal to those
currently assessed under this Contract.
For more detailed information about these performance calculations, including
actual formulas, see the SAI.
PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS ONLY THE PERFORMANCE OF A
HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE TIME PERIOD ON WHICH THE
CALCULATIONS ARE BASED. PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF
THE INVESTMENT OBJECTIVES AND POLICIES AND RISK CHARACTERISTICS OF THE
UNDERLYING 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.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to:
(1) the Standard & Poor's 500 Composite Stock Price 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; or
(2) other groups of variable annuity separate accounts or other investment
products tracked by Lipper, Inc., a widely used independent research firm
B-2
<PAGE>
which ranks mutual funds and other investment products by overall
performance, investment objectives, and assets, or tracked by other
services, companies, publications, or persons, who rank such investment
products on overall performance or other criteria; or
(3) 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. In addition, relevant
broad-based indices and performance from independent sources may be used to
illustrate the performance of certain Contract features.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Portfolios.
B-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
FOR YEAR SINCE
SUB-ACCOUNT INVESTING IN SUB-ACCOUNT ENDED INCEPTION OF
UNDERLYING PORTFOLIO INCEPTION DATE 12/31/98 SUB-ACCOUNT
- --------------------------------------------- -------------- ------------ ------------
<S> <C> <C> <C>
Kemper Aggressive Growth.....................
Kemper Technology Growth.....................
Kemper-Dreman Financial Services.............
Kemper Small Cap Growth......................
Kemper Small Cap Value.......................
Kemper-Dreman High Return Equity.............
Kemper International.........................
Kemper International Growth and Income.......
Kemper Global Blue Chip......................
Kemper Growth................................
Kemper Contrarian Value......................
Kemper Blue Chip.............................
Kemper Value+Growth..........................
Kemper Horizon 20+...........................
Kemper Total Return..........................
Kemper Horizon 10+...........................
Kemper High Yield............................
Kemper Horizon 5.............................
Kemper Global Income.........................
Kemper Investment Grade Bond.................
Kemper Government Securities.................
Kemper Money Market..........................
Scudder International........................
Scudder Global Discovery.....................
Scudder Capital Growth.......................
Scudder Growth and Income....................
</TABLE>
B-4
<PAGE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
FOR YEAR SINCE
SUB-ACCOUNT INVESTING IN SUB-ACCOUNT ENDED INCEPTION OF
UNDERLYING PORTFOLIO INCEPTION DATE 12/31/98 SUB-ACCOUNT
- --------------------------------------------- -------------- ------------ ------------
<S> <C> <C> <C>
Kemper Aggressive Growth.....................
Kemper Technology Growth.....................
Kemper-Dreman Financial Services.............
Kemper Small Cap Growth......................
Kemper Small Cap Value.......................
Kemper-Dreman High Return Equity.............
Kemper International.........................
Kemper International Growth and Income.......
Kemper Global Blue Chip......................
Kemper Growth................................
Kemper Contrarian Value......................
Kemper Blue Chip.............................
Kemper Value+Growth..........................
Kemper Horizon 20+...........................
Kemper Total Return..........................
Kemper Horizon 10+...........................
Kemper High Yield............................
Kemper Horizon 5.............................
Kemper Global Income.........................
Kemper Investment Grade Bond.................
Kemper Government Securities.................
Kemper Money Market..........................
Scudder International........................
Scudder Global Discovery.....................
Scudder Capital Growth.......................
Scudder Growth and Income....................
</TABLE>
B-5
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING PORTFOLIO
(ASSUMING COMPLETE WITHDRAWAL OF INVESTMENT)
<TABLE>
<CAPTION>
10 YEARS
UNDERLYING FOR YEAR (OR SINCE
SUB-ACCOUNT INVESTING IN PORTFOLIO ENDED INCEPTION IF
UNDERLYING PORTFOLIO INCEPTION DATE 12/31/98 5 YEARS LESS)
- -------------------------------- -------------- ------------ --------- ----------------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth........
Kemper Technology Growth........
Kemper-Dreman Financial
Services.......................
Kemper Small Cap Growth.........
Kemper Small Cap Value..........
Kemper-Dreman High Return
Equity.........................
Kemper International............
Kemper International Growth and
Income.........................
Kemper Global Blue Chip.........
Kemper Growth...................
Kemper Contrarian Value.........
Kemper Blue Chip................
Kemper Value+Growth.............
Kemper Horizon 20+..............
Kemper Total Return.............
Kemper Horizon 10+..............
Kemper High Yield...............
Kemper Horizon 5................
Kemper Global Income............
Kemper Investment Grade Bond....
Kemper Government Securities....
Kemper Money Market.............
Scudder International...........
Scudder Global Discovery........
Scudder Capital Growth..........
Scudder Growth and Income.......
</TABLE>
B-6
<PAGE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING PORTFOLIO
(ASSUMING NO WITHDRAWAL OF INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
10 YEARS
UNDERLYING FOR YEAR (OR SINCE
SUB-ACCOUNT INVESTING IN PORTFOLIO ENDED INCEPTION IF
UNDERLYING PORTFOLIO INCEPTION DATE 12/31/98 5 YEARS LESS)
- -------------------------------- -------------- ------------ --------- ----------------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth........
Kemper Technology Growth........
Kemper-Dreman Financial
Services.......................
Kemper Small Cap Growth.........
Kemper Small Cap Value..........
Kemper-Dreman High Return
Equity.........................
Kemper International............
Kemper International Growth and
Income.........................
Kemper Global Blue Chip.........
Kemper Growth...................
Kemper Contrarian Value.........
Kemper Blue Chip................
Kemper Value+Growth.............
Kemper Horizon 20+..............
Kemper Total Return.............
Kemper Horizon 10+..............
Kemper High Yield...............
Kemper Horizon 5................
Kemper Global Income............
Kemper Investment Grade Bond....
Kemper Government Securities....
Kemper Money Market.............
Scudder International...........
Scudder Global Discovery........
Scudder Capital Growth..........
Scudder Growth and Income.......
</TABLE>
B-7
<PAGE>
APPENDIX C
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no partial withdrawals and that the Withdrawal
Without Surrender Charge Amount is equal to the greater of 15% of the Gross
Payment Base or the Cumulative earnings excluding Payment Credits in the
Contract. The table below presents examples of the surrender charge resulting
from a full surrender, based on Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
CONTRACT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE CHARGE AMOUNT PERCENTAGE CHARGE
- ------------- ------------- ------------------ --------------- -----------
<S> <C> <C> <C> <C>
1 $ 56,700 $ 7,500 8.5% $ 4,182
2 61,236 8,736 8.5% 4,250
3 66,135 13,635 8.5% 4,250
4 71,426 18,926 8.5% 4,250
5 77,140 24,640 7.5% 3,750
6 83.311 30,811 6.5% 3,250
7 89,976 37,476 5.5% 2,750
8 97,174 44,674 3.5% 1,750
9 104,948 52,448 1.5% 750
10 113,344 60,844 0.0% 0
</TABLE>
WITHDRAWALS
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume that the Withdrawal Without Surrender Charge Amount is equal to
the greater of 15% of the Gross Payment Base or the Cumulative earnings
excluding Payment Credits in the Contract and there are
C-1
<PAGE>
withdrawals as detailed below. The table below presents examples of the
surrender charge resulting from withdrawals, based on Hypothetical Accumulated
Values:
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
CONTRACT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE WITHDRAWALS CHARGE AMOUNT PERCENTAGE CHARGE
- ------------- ------------- ------------ ------------------ --------------- -----------
<S> <C> <C> <C> <C> <C>
1 $ 56,700 $ 0 $ 7,500 8.5% $ 0
2 61,236 0 8,736 8.5% 0
3 66,135 0 13,635 8.5% 0
4 71,426 30,000 18,926 8.5% 941
5 44,740 10,000 5,839 7.5% 312
6 37,519 5,000 5,215 6.5% 0
7 35,120 10,000 5,215 5.5% 263
8 27,130 15,000 4,497 3.5% 368
9 13,100 5,000 2.921 1.5% 31
10 8,748 5,000 2,610 0.0% 0.00
</TABLE>
PART 2: MARKET VALUE ADJUSTMENT
The market value factor is: [(1+i)/(1+j)] to the power of n/365-1
The following examples assume:
1. The payment was allocated to a ten-year Guarantee Period Account with a
Guaranteed Interest Rate of 8%.
2. The date of surrender is seven years (2,555 days) from the expiration
date.
3. The value of the Guarantee Period Account is equal to $66,134.88 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.
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
The market value factor = [(1+i)/(1+j)] to the power of n/365-1
= [(1+.08)/(1+.10)] to the power of 2555/365-1
= (.98182) to the power of 7-1
= -.12054
The market value adjustment = the market value factor multiplied by the
withdrawal
C-2
<PAGE>
= -.12054X$66,134.88
= -$7,971.71
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
The market value factor = [(1+i)/(1+j)]
to the power of n/365-1
= [(1+.08)/(1+.07)] to the power of 2555/365-1
= (1.0093) to the power of 7-1
= .06728
The market value adjustment = the market value factor multiplied by the
withdrawal
= .06728 x $66,134.88
= $4,449.79
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
The market value factor = [(1+i)/(1+j)] to the power of n/365-1
= [(1+.08)/(1+.11)] to the power of 2555/365-1
= (.97297) to the power of 7-1
= -.17454
The market value adjustment = Minimum of the market value factor multiplied by
the withdrawal or the negative of the excess
interest earned over 3%
= Minimum (-.17454X$66,134.88 or -$11,498.53)
= Minimum (-$11,543.18 or -$11,498.53)
= -$11,498.53
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 5.00% or 0.05
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.065]2555/365-1
= (1.02857)7-1
= .21798
The market value adjustment = Minimum of the market value factor multiplied by
the withdrawal or the excess interest earned over
3%
The market value factor = Minimum of (.21798X$66,134.88 or $11,498.53)
= Minimum of ($14,416.27 or $11,498.53)
= $11,498.53
C-3
<PAGE>
APPENDIX D
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1998 1997 1996
- ------------------------------------------------------ ---------- --------- ---------
<S> <C> <C> <C>
KEMPER-DREMAN FINANCIAL SERVICES PORTFOLIO
Unit Value $:
Beginning of Period................................. 0.000 N/A N/A
End of Period....................................... 0.969 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 12,487 N/A N/A
KEMPER SMALL CAP GROWTH PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.309 0.989 1.000
End of Period....................................... 1.528 1.309 0.989
Number of Units Outstanding at End of Period (in
thousands)........................................... 34,993 16,339 210
KEMPER SMALL CAP VALUE PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.227 1.022 1.000
End of Period....................................... 1.074 1.227 1.022
Number of Units Outstanding at End of Period (in
thousands)........................................... 49,408 29,597 314
KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO
Unit Value $:
Beginning of Period................................. 0.000 N/A N/A
End of Period....................................... 1.019 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 45,758 N/A N/A
KEMPER INTERNATIONAL PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.100 1.019 1.000
End of Period....................................... 1.194 1.100 1.019
Number of Units Outstanding at End of Period (in
thousands)........................................... 46,830 30,789 360
KEMPER INTERNATIONAL GROWTH AND INCOME PORTFOLIO
Unit Value $:
Beginning of Period................................. 0.000 N/A N/A
End of Period....................................... 0.903 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 2,218 N/A N/A
</TABLE>
D-1
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1998 1997 1996
- ------------------------------------------------------ ---------- --------- ---------
<S> <C> <C> <C>
KEMPER GLOBAL BLUE CHIP PORTFOLIO
Unit Value $:
Beginning of Period................................. 0.000 N/A N/A
End of Period....................................... 0.989 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 2,382 N/A N/A
KEMPER GROWTH PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.191 0.995 1.000
End of Period....................................... 1.352 1.191 0.995
Number of Units Outstanding at End of Period (in
thousands)........................................... 56,608 24,186 370
KEMPER CONTRARIAN VALUE PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.332 1.036 1.000
End of Period....................................... 1.566 1.332 1.036
Number of Units Outstanding at End of Period (in
thousands)........................................... 90,048 53,634 317
KEMPER BLUE CHIP PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.105 0 N/A
End of Period....................................... 1.241 1.105 N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 49,320 13,179 N/A
KEMPER VALUE+GROWTH PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.213 0.981 1.000
End of Period....................................... 1.438 1.213 0.981
Number of Units Outstanding at End of Period (in
thousands)........................................... 64,931 30,946 197
KEMPER HORIZON 20+ PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.183 0.995 1.000
End of Period....................................... 1.318 1.183 0.995
Number of Units Outstanding at End of Period (in
thousands)........................................... 19,538 7,768 226
</TABLE>
D-2
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1998 1997 1996
- ------------------------------------------------------ ---------- --------- ---------
<S> <C> <C> <C>
KEMPER TOTAL RETURN PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.164 0.984 1.000
End of Period....................................... 1.321 1.164 0.984
Number of Units Outstanding at End of Period (in
thousands)........................................... 85,265 31,284 353
KEMPER HORIZON 10+ PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.154 1.002 1.000
End of Period....................................... 1.267 1.154 1.002
Number of Units Outstanding at End of Period (in
thousands)........................................... 28,551 10,199 39
KEMPER HIGH YIELD PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.123 1.020 1.000
End of Period....................................... 1.124 1.123 1.020
Number of Units Outstanding at End of Period (in
thousands)........................................... 132,619 64,634 941
KEMPER HORIZON 5 PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.114 1.002 1.000
End of Period....................................... 1.206 1.114 1.002
Number of Units Outstanding at End of Period (in
thousands)........................................... 19,335 7,888 53
KEMPER GLOBAL INCOME PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.019 0 N/A
End of Period....................................... 1.115 1.019 N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 2,760 1,317 N/A
KEMPER INVESTMENT GRADE BOND PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.079 1.003 1.000
End of Period....................................... 1.148 1.079 1.003
Number of Units Outstanding at End of Period (in
thousands)........................................... 29,010 8,255 22
</TABLE>
D-3
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1998 1997 1996
- ------------------------------------------------------ ---------- --------- ---------
<S> <C> <C> <C>
KEMPER GOVERNMENT SECURITIES PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.067 0.993 1.000
End of Period....................................... 1.126 1.067 0.993
Number of Units Outstanding at End of Period (in
thousands)........................................... 28,997 7,815 498
KEMPER MONEY MARKET PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.042 1.004 1.000
End of Period....................................... 1.080 1.042 1.004
Number of Units Outstanding at End of Period (in
thousands)........................................... 28,692 15,760 1,904
SCUDDER INTERNATIONAL PORTFOLIO
Unit Value $:
Beginning of Period................................. 0.000 N/A N/A
End of Period....................................... 0.986 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 4,592 N/A N/A
SCUDDER GLOBAL DISCOVERY PORTFOLIO
Unit Value $:
Beginning of Period................................. 0.000 N/A N/A
End of Period....................................... 0.955 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 2,770 N/A N/A
SCUDDER CAPITAL GROWTH PORTFOLIO
Unit Value $:
Beginning of Period................................. 0.000 N/A N/A
End of Period....................................... 1.059 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 4,396 N/A N/A
SCUDDER GROWTH AND INCOME PORTFOLIO
Unit Value $:
Beginning of Period................................. 0.000 N/A N/A
End of Period....................................... 0.938 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 11,424 N/A N/A
</TABLE>
No information is shown above for the Sub-Accounts that commenced operations
after December 31, 1998.
D-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
STATEMENT OF ADDITIONAL INFORMATION
OF
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS FUNDED THROUGH
SEPARATE ACCOUNT KG
INVESTING IN SHARES OF KEMPER VARIABLE SERIES AND
SCUDDER VARIABLE LIFE INVESTMENT COMPANY
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Kemper Gateway Plus prospectus for the above
sub-accounts of Separate Account KG, dated _______ __, 1999 ("the
Prospectus"). The Prospectus may be obtained from Annuity Client Services,
Allmerica Financial Life Insurance and Annuity Company, 440 Lincoln Street,
Worcester, Massachusetts 01653, telephone 1-800-782-8380.
DATED ______ __, 1999
AFLIAC Kemper Gateway Plus
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
GENERAL INFORMATION AND HISTORY. . . . . . . . . . . . . . . . . . . . . . .2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE
COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
UNDERWRITERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
ANNUITY BENEFIT PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . .4
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . .5
TAX-DEFERRED ACCUMULATION. . . . . . . . . . . . . . . . . . . . . . . . . .8
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . .F-1
</TABLE>
GENERAL INFORMATION AND HISTORY
Separate Account KG (the "Variable Account") is a separate investment account of
Allmerica Financial Life Insurance and Annuity Company (the "Company")
authorized by vote of its 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 (the "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, 1998, the
Company had over $14 billion in assets and over $26 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 a 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 and adopted its present
name on October 16, 1995. First Allmerica is among the five oldest life
insurance companies in America. As of December 31, 1998, First Allmerica
and its subsidiaries (including the Company) had over $27 billion in combined
assets and over $48 billion in life insurance in force.
Currently, 26 Sub-Accounts of the Variable Account are available under the
Kemper Gateway Plus contract (the "Contract.") Each Sub-Account invests in a
corresponding investment portfolio of Kemper Variable Series ("KVS") or
Scudder Variable Life Investment Fund ("Scudder VLIF"), open-end, registered
management investment companies. Twenty-two different portfolios of KVS are
available under the Contract: the Kemper Aggressive Growth Portfolio, Kemper
Technology Growth Portfolio, Kemper-Dreman Financial Services Portfolio,
Kemper Small Cap Growth Portfolio,
2
<PAGE>
Kemper Small Cap Value Portfolio, Kemper-Dreman High Return Equity Portfolio,
Kemper International Portfolio, Kemper International Growth and Income
Portfolio, Kemper Global Blue Chip Portfolio, Kemper Growth Portfolio, Kemper
Contrarian Value Portfolio, Kemper Blue Chip Portfolio, Kemper Value+Growth
Portfolio, Kemper Horizon 20+ Portfolio, Kemper Total Return Portfolio, Kemper
Horizon 10+ Portfolio, Kemper High Yield Portfolio, Kemper Horizon 5 Portfolio,
Kemper Global Income Portfolio, Kemper Investment Grade Bond Portfolio, Kemper
Government Securities Portfolio, and Kemper Money Market Portfolio. Four
portfolios of Scudder VLIF are available under the Contract: the Scudder
International Portfolio, Scudder Global Discovery Portfolio, Scudder Capital
Growth Portfolio, and Scudder Growth and Income Portfolio (together, the
"Underlying Portfolios"). Each Underlying Portfolio available under the Contract
has its own investment objectives and certain attendant risks.
TAXATION OF THE CONTRACT, THE 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 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
Contract 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 the Contract 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 ("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. Underlying Portfolio shares owned by the Sub-Accounts are held
on an open account basis. A Sub-Account's ownership of Underlying Portfolio
shares is reflected on the records of the Underlying Portfolio and is not
represented by any transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998, and
the financial statements of Separate Account KG of the Company as of December
31, 1998 and for the periods indicated, included in this Statement of Additional
Information constituting part of this Registration Statement, have been so
included in reliance on the reports of PricewaterhouseCoopers 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
Contract.
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 and general distributor for the Contract pursuant to a contract with
Allmerica Investments, the Company and the Variable Account. Allmerica
Investments distributes the Contract on a best-efforts basis. Allmerica
Investments, Inc., 440 Lincoln Street, Worcester, Massachusetts 01653, was
3
<PAGE>
organized in 1969 as a wholly owned subsidiary of First Allmerica, and presently
is indirectly wholly owned by First Allmerica.
The Contract offered by this Prospectus is 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 the Contract 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 7.0% of purchase payments, to entities
which sell the Contract. To the extent permitted by NASD rules, promotional
incentives or payments also may 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 Contract, including the recruitment and training of
personnel, production of promotional literature and similar services. A
Promotional Allowance of 1.0% of total payments is paid to Kemper Distributors,
Inc. for administrative and support services with respect to the distribution of
the Contract; however, Kemper Distributors, Inc. may direct the Company to pay a
portion of said allowance to broker-dealers who provide support services
directly.
Commissions paid by the Company do not result in any charge to 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.
No commissions were paid to Allmerica Investments, Inc. during 1996, 1997 and
1998. Sales of these contracts began in 1996.
No commissions were paid for sales of Contract Form A3028-99 since it was not
offered until ________ __, 1999.
ANNUITY BENEFIT PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "Computation of Values" 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 assets of a Sub-Account at
the beginning of a one-day Valuation Period were $5,000,000; that the value of
an Accumulation Unit on the previous date was $1.135000; and that during the
Valuation Period, the investment income and net realized and unrealized capital
gains exceed net realized and unrealized capital losses by $1,675. The
Accumulation Unit Value at the end of the current Valuation Period would be
calculated as follows:
<TABLE>
<CAPTION>
<S> <C>
(1) Accumulation Unit Value -- Previous Valuation Period. . . . . $ 1.135000
(2) Value of Assets -- Beginning of Valuation Period. . . . . . . $5,000,000
(3) Excess of Investment Income and Net Gains Over Capital Losses . . $1,675
(4) Adjusted Gross Investment Rate for the Valuation
Period (3) divided by (2) . . . . . . . . . . . . . . . . . . . 0.000335
(5) Annual Charge (one-day equivalent of 1.40% per annum) . . . . . 0.000039
(6) Net Investment Rate (4) - (5) . . . . . . . . . . . . . . . . . 0.000296
4
<PAGE>
(7) Net Investment Factor 1.000000 + (6). . . . . . . . . . . . . . 1.000296
(8) Accumulation Unit Value -- Current Period (1) x (7) . . . . . $ 1.135336
</TABLE>
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains by $1,675, the
Accumulation Unit Value at the end of the Valuation Period would have been
$1.134576.
The method for determining the amount of annuity benefit payments is
described in detail under "Variable Annuity Benefit Payments" in the
Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY BENEFIT PAYMENT CALCULATION USING HYPOTHETICAL
EXAMPLE. The determination of the Annuity Unit value and the variable annuity
benefit payment may be illustrated by the following hypothetical example:
Assume an Annuitant has 40,000 Accumulation Units in a Separate 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 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 surrender
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 3.5% 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 the former reflect the 3.5% 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 benefit payment is 1.000190. Multiplying this factor by .999906 (the
one-day adjustment factor for the assumed interest rate of 3.5% per annum)
produces a factor of 1.000096. This then is 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 then is 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.
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 material information on various
topics of interest to Owners and prospective 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
5
<PAGE>
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 Contract and the characteristics of and market
for such financial instruments. Total return data and supplemental total return
information may be advertised based on the period of time that an Underlying
Portfolio and an underlying Sub-Account have been in existence, even if longer
than the period of time that the Contract has been offered. The results for any
period prior to a Contract being offered will be calculated as if the Contract
had been offered during that period of time, with all charges assumed to be
those applicable to the Contract.
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-Account's asset charge and any applicable surrender charge which
would be assessed upon complete withdrawal of the investment.
Total Return figures are calculated by standardized methods prescribed by rules
of the Securities and Exchange Commission (the "SEC"). 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:
P(1 + T)(n) = ERV
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 Contract was issued at the beginning of
the period, and (2) a complete surrender of the Contract at the end of the
period. The deduction of the surrender charge, if any, applicable at the end of
the period is included in the calculation, according to the following schedule:
<TABLE>
<CAPTION>
COMPLETE YEARS FROM DATE OF PAYMENT CHARGE
<S> <C>
0-4 8.5%
more than 4 7.5%
more than 5 6.5%
more than 6 5.5%
more than 7 3.5%
more than 8 1.5%
more than 9 0%
</TABLE>
6
<PAGE>
No surrender charge is deducted upon expiration of the periods specified above.
In each calendar year, a certain amount (withdrawal without surrender charge
amount, as described in the Prospectus) is not subject to the surrender charge.
The calculations of Total Return reflect the deduction of the $35 annual
Contract fee.
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. It
is assumed, however, 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:
P(1 + T)(n) = 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
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
Contract is NOT surrendered at the end of the specified period, and therefore
there is no adjustment for the surrender charge that would be applicable if the
Contract was surrendered at the end of the period. The calculation of
supplemental total return does not include the deduction of the $35 annual
Contract fee.
YIELD AND EFFECTIVE YIELD - THE 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, 1998:
<TABLE>
<S> <C>
Yield 3.01%
Effective Yield 3.06%
</TABLE>
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, 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:
7
<PAGE>
(365/7)
Effective Yield = [(base period return + 1) ] - 1
The calculations of yield and effective yield reflect the $35 Contract fee.
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
NON-QUALIFIED CONVENTIONAL
ANNUITY CONTRACT SAVINGS PLAN
AFTER-TAX CONTRIBUTIONS
AND TAX-DEFERRED EARNINGS
TAXABLE AFTER-TAX
LUMP CONTRIBUTIONS
NO SUM AND TAXABLE
WITHDRAWALS WITHDRAWAL EARNINGS
<S> <C> <C> <C>
Years 10 . $107,946 $ 86,448 $ 81,693
Years 20 . 233,048 165,137 133,476
Years 30 . 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
non-qualified annuity contract with a conventional savings plan.
Contributions to the non-qualified annuity contract and the conventional
savings plan are made after tax. Only the gain in the non-qualified annuity
contract will be subject to income tax in a taxable lump sum withdrawal. 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 Contract. Income on
non-qualified annuity contracts is taxed as ordinary income upon withdrawal.
A 10% tax penalty may apply to early withdrawals. See "Federal Tax
Considerations" in the Prospectus.
The chart does not reflect the following charges and expenses under the
Contract: 1.25% for mortality and expense risk; 0.15% administration charges;
8.5% maximum surrender charge; and $35 annual Contract fee. 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 Contract. (IMPORTANT -- THIS
IS NOT AN ILLUSTRATION OF YIELD OR RETURN.)
Unlike savings plans, contributions to non-qualified annuity contracts provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
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.
8
<PAGE>
FINANCIAL STATEMENTS
Financial Statements are included for Allmerica Financial Life Insurance and
Annuity Company and for its Separate Account KG.
9
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of Allmerica Financial Life Insurance and Annuity Company (the "Company") at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 1999, except for paragraph 2 of Note 12,
which is as of March 19, 1999
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
----------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
REVENUES
Premiums................................... $ 0.5 $ 22.8 $ 32.7
Universal life and investment product
policy fees.............................. 267.4 212.2 176.2
Net investment income...................... 151.3 164.2 171.7
Net realized investment gains (losses)..... 20.0 2.9 (3.6)
Other income............................... 0.6 1.4 0.9
------- ------- -------
Total revenues......................... 439.8 403.5 377.9
------- ------- -------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 153.9 187.8 192.6
Policy acquisition expenses................ 64.6 2.8 49.9
Sales practice litigation.................. 21.0 -- --
Loss from cession of disability income
business................................. -- 53.9 --
Other operating expenses................... 104.1 101.3 86.6
------- ------- -------
Total benefits, losses and expenses.... 343.6 345.8 329.1
------- ------- -------
Income before federal income taxes............. 96.2 57.7 48.8
------- ------- -------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 22.1 13.9 26.9
Deferred................................... 11.8 7.1 (9.8)
------- ------- -------
Total federal income tax expense....... 33.9 21.0 17.1
------- ------- -------
Net income..................................... $ 62.3 $ 36.7 $ 31.7
------- ------- -------
------- ------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,284.6 and $1,340.5)............................ $ 1,330.4 $ 1,402.5
Equity securities at fair value (cost of $27.4 and
$34.4)............................................ 31.8 54.0
Mortgage loans...................................... 230.0 228.2
Real estate......................................... 14.5 12.0
Policy loans........................................ 151.5 140.1
Other long-term investments......................... 9.1 20.3
---------- ----------
Total investments............................... 1,767.3 1,857.1
---------- ----------
Cash and cash equivalents............................. 217.9 31.1
Accrued investment income............................. 33.5 34.2
Deferred policy acquisition costs..................... 950.5 765.3
Reinsurance receivables on paid and unpaid losses,
future policy benefits and unearned premiums........ 308.0 251.1
Other assets.......................................... 46.9 10.7
Separate account assets............................... 11,020.4 7,567.3
---------- ----------
Total assets.................................... $ 14,344.5 $ 10,516.8
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,284.8 $ 2,097.3
Outstanding claims, losses and loss adjustment
expenses.......................................... 17.9 18.5
Unearned premiums................................... 2.7 1.8
Contractholder deposit funds and other policy
liabilities....................................... 38.1 32.5
---------- ----------
Total policy liabilities and accruals........... 2,343.5 2,150.1
---------- ----------
Expenses and taxes payable............................ 146.2 77.6
Reinsurance premiums payable.......................... 45.7 4.9
Deferred federal income taxes......................... 78.8 75.9
Separate account liabilities.......................... 11,020.4 7,567.3
---------- ----------
Total liabilities............................... 13,634.6 9,875.8
---------- ----------
Commitments and contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,524 and 2,521 shares issued and
outstanding......................................... 2.5 2.5
Additional paid-in capital............................ 407.9 386.9
Accumulated other comprehensive income................ 24.1 38.5
Retained earnings..................................... 275.4 213.1
---------- ----------
Total shareholder's equity...................... 709.9 641.0
---------- ----------
Total liabilities and shareholder's equity...... $ 14,344.5 $ 10,516.8
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
----------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................... $ 2.5 $ 2.5 $ 2.5
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 386.9 346.3 324.3
Issuance of common stock................... 21.0 40.6 22.0
-------- -------- --------
Balance at end of period................... 407.9 386.9 346.3
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized appreciation on investments:
Balance at beginning of period............. 38.5 20.5 23.8
Appreciation (depreciation) during the
period:
Net (depreciation) appreciation on
available-for-sale securities........ (23.4) 27.0 (5.1)
Benefit (provision) for deferred
federal income taxes................. 9.0 (9.0) 1.8
-------- -------- --------
(14.4) 18.0 (3.3)
-------- -------- --------
Balance at end of period................... 24.1 38.5 20.5
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............. 213.1 176.4 144.7
Net income................................. 62.3 36.7 31.7
-------- -------- --------
Balance at end of period................... 275.4 213.1 176.4
-------- -------- --------
Total shareholder's equity............. $ 709.9 $ 641.0 $ 545.7
-------- -------- --------
-------- -------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
-------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Net income.................................. $ 62.3 $ 36.7 $ 31.7
Other comprehensive income:
Net (depreciation) appreciation on
available-for-sale securities......... (23.4) 27.0 (5.1)
Benefit (provision) for deferred federal
income taxes.......................... 9.0 (9.0) 1.8
------- ------- -------
Other comprehensive income.......... (14.4) 18.0 (3.3)
------- ------- -------
Comprehensive income.................... 47.9 $ 54.7 $ 28.4
------- ------- -------
------- ------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
-------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 62.3 $ 36.7 $ 31.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized gains.................. (20.0) (2.9) 3.6
Net amortization and depreciation... (7.1) -- 3.5
Sales practice litigation expense... 21.0
Loss from cession of disability
income business................... -- 53.9 --
Deferred federal income taxes....... 11.8 7.1 (9.8)
Payment related to cession of
disability income business........ -- (207.0) --
Change in deferred acquisition
costs............................. (177.8) (181.3) (66.8)
Change in reinsurance premiums
payable........................... 40.8 3.9 (0.2)
Change in accrued investment
income............................ 0.7 3.5 1.2
Change in policy liabilities and
accruals, net..................... 193.1 (72.4) (39.9)
Change in reinsurance receivable.... (56.9) 22.1 (1.5)
Change in expenses and taxes
payable........................... 55.4 0.2 32.3
Separate account activity, net...... (0.5) 1.6 8.0
Other, net.......................... (28.0) (8.7) 2.3
-------- -------- --------
Net cash provided by (used in)
operating activities.......... 94.8 (343.3) (35.6)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 187.0 909.7 809.4
Proceeds from disposals of equity
securities............................ 53.3 2.4 1.5
Proceeds from disposals of other
investments........................... 22.7 23.7 17.4
Proceeds from mortgages matured or
collected............................. 60.1 62.9 34.0
Purchase of available-for-sale fixed
maturities............................ (136.0) (579.7) (795.8)
Purchase of equity securities........... (30.6) (3.2) (13.2)
Purchase of other investments........... (22.7) (9.0) (13.9)
Purchase of mortgages................... (58.9) (70.4) (22.3)
Other investing activities, net......... (3.9) -- (2.0)
-------- -------- --------
Net cash provided by investing
activities........................ 71.0 336.4 15.1
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in....................... 21.0 19.2 22.0
-------- -------- --------
Net cash provided by financing
activities........................ 21.0 19.2 22.0
-------- -------- --------
Net change in cash and cash equivalents..... 186.8 12.3 1.5
Cash and cash equivalents, beginning of
period..................................... 31.1 18.8 17.3
-------- -------- --------
Cash and cash equivalents, end of period.... $ 217.9 $ 31.1 $ 18.8
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 0.6 $ -- $ 3.4
Income taxes paid....................... $ 36.2 $ 5.4 $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a wholly
owned subsidiary of Allmerica Financial Corporation ("AFC").
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company, which was transferred from
SMAFCO effective November 30, 1997 and dissolved as a subsidiary, effective
November 30, 1998. Its results of operations are included for 11 months of 1998
and for the month of December, 1997.
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company 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.
B. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "Accounting for Certain Investments in Debt and
Equity Securities", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and re-evaluates such designation as of each balance sheet date.
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholder's equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company 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 the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company adopted to a plan to dispose of all real estate assets
by the end of 1998. As of December 31, 1998, there was 1 property remaining in
the Company's real estate portfolio, which is being actively marketed. As a
result of the Plan, real estate held by the Company and real estate joint
ventures were written down to the estimated fair value less cost of disposal.
Depreciation is not recorded on this asset while it is held for disposal.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans are included
in realized investment gains or losses.
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuation. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Acquisition costs related to universal life products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized from this group of
products, including realized and unrealized gains and losses from investments.
Acquisition costs related to fixed annuities and other life insurance products
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. Although realization of deferred policy acquisition costs is not
assured, the Company believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. 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 contractholders 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
shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, disability income and annuity
products. Such liabilities are established in amounts adequate to meet the
estimated future obligations of policies in force. The liabilities associated
with traditional life insurance products are computed using the net level
premium method for
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
individual life and annuity policies, and are based upon estimates as to future
investment yield, mortality and withdrawals that include provisions for adverse
deviation. Future policy benefits for individual life insurance and annuity
policies are computed using interest rates ranging from 3% to 6% for life
insurance and 3 1/2% to 9 1/2% for annuities. Mortality, morbidity and
withdrawal assumptions for all policies are based on the Company's own
experience and industry standards. Liabilities for universal life include
deposits received from customers and investment earnings on their fund balances,
less administrative charges. Universal life fund balances are also assessed
mortality and surrender charges.
Individual disability income benefit liabilities for active lives are estimated
using the net level premium method, and assumptions as to future morbidity,
withdrawals and interest which provide a margin for adverse deviation. Benefit
liabilities for disabled lives are estimated using the present value of benefits
method and experience assumptions as to claim terminations, expenses and
interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported for individual life and disability income policies.
These estimates are continually reviewed and adjusted as necessary; such
adjustments are reflected in current operations.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, the Company
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.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and individual annuity products, excluding
universal life and investment-related products, are considered revenue when due.
Individual disability income insurance premiums are recognized as revenue over
the related contract periods. The unexpired portion of these premiums is
recorded as unearned premiums. Benefits, losses and related expenses are matched
with premiums, resulting in their recognition over the lives of the contracts.
This matching is accomplished through the provision for future benefits,
estimated and unpaid losses and amortization of deferred policy acquisition
costs. Revenues for investment-related products consist of net investment income
and contract charges assessed against the fund values. Related benefit expenses
primarily consist of net investment income credited to the fund values after
deduction for investment and risk charges. Revenues for universal life and group
variable universal life products consist of net investment income, with
mortality, administration and surrender charges assessed against the fund
values. Related benefit expenses include universal life benefit claims in excess
of fund values and net investment income credited to universal life fund values.
Certain policy charges that represent compensation for services to be provided
in future periods are deferred and amortized over the period benefited using the
same assumptions used to amortize capitalized acquisition costs.
I. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries file a 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 tax losses that can be
applied to offset life insurance company taxable income.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate federal income tax allocation policies and
procedures, which are subject to written agreement between the
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement
No. 109). These differences result primarily from policy reserves, policy
acquisition expenses, and unrealized appreciation or depreciation on
investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges; fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investment in foreign operations. This statement is effective for fiscal years
beginning after June 15, 1999. The Company is currently assessing the impact of
adoption of Statement No. 133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter, the Company adopted
SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax income
of $9.8 million through December 31, 1998. The adoption of SoP 98-1 did not have
a material effect on the results of operations or financial position for the
three months ended March 31, 1998.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SoP 97-3"). SoP 97-3 provides
guidance when a liability should be recognized for guaranty fund and other
assessments and how to measure the liability. This statement allows for the
discounting of the liability if the amount and timing of the cash payments are
fixed and determinable. In addition, it provides criteria for when an asset may
be recognized for a portion or all of the assessment liability or paid
assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The Company believes that the adoption of this statement will
not have a material effect on the results of operations or financial position.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
beginning after December 15, 1997. AFLIAC consists of one segment, Allmerica
Financial Services, which underwrites and distributes variable annuities and
variable universal life via retail channels.
In June 1997, the FASB also issued Statement No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"), which established standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. All items that are required to be
recognized under accounting standards as components of comprehensive income are
to be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement stipulates that
comprehensive income reflect the change in equity of an enterprise during a
period from transactions and other events and circumstances from non-owner
sources. This statement is effective for fiscal years beginning after December
15, 1997. The Company adopted Statement No. 130 for the first quarter of 1998,
which resulted primarily in reporting unrealized gains and losses on investments
in debt and equity securities in comprehensive income.
2. SIGNIFICANT TRANSACTIONS
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. The agreement does not have a
material effect on the results of operations or financial position of the
Company.
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
During 1998, 1997 and 1996 , SMAFCO contributed $21.0 million, $40.6 million and
$22.0 million, respectively, of additional paid-in capital to the Company. The
nature of the 1997 contribution was $19.2 million in cash and $21.4 million in
other assets including Somerset Square, Inc.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 5.8 $ 0.8 $-- $ 6.6
States and political subdivisions....... 2.7 0.2 -- 2.9
Foreign governments..................... 48.8 1.6 1.5 48.9
Corporate fixed maturities.............. 1,096.0 58.0 17.7 1,136.3
Mortgage-backed securities.............. 131.3 5.8 1.4 135.7
--------- ----- ----- --------
Total fixed maturities.................. $ 1,284.6 $66.4 $20.6 $1,330.4
--------- ----- ----- --------
--------- ----- ----- --------
Equity securities....................... $ 27.4 $ 8.9 $ 4.5 $ 31.8
--------- ----- ----- --------
--------- ----- ----- --------
</TABLE>
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
1997
----------------------------------------------
<CAPTION>
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 6.3 $ 0.5 $-- $ 6.8
States and political subdivisions....... 2.8 0.2 -- 3.0
Foreign governments..................... 50.1 2.0 -- 52.1
Corporate fixed maturities.............. 1,147.5 58.7 3.3 1,202.9
Mortgage-backed securities.............. 133.8 5.2 1.3 137.7
--------- ----- ----- --------
Total fixed maturities.................. $ 1,340.5 $66.6 $ 4.6 $1,402.5
--------- ----- ----- --------
--------- ----- ----- --------
Equity securities....................... $ 34.4 $19.9 $ 0.3 $ 54.0
--------- ----- ----- --------
--------- ----- ----- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC 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 liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1998, the amortized
cost and market value of these assets on deposit in New York were $268.5 million
and $284.1 million, respectively. At December 31, 1997, the amortized cost and
market value of assets on deposit were $276.8 million and $291.7 million,
respectively. In addition, fixed maturities, excluding those securities on
deposit in New York, with an amortized cost of $4.2 million were on deposit with
various state and governmental authorities at December 31, 1998 and 1997.
There were no contractual fixed maturity investment commitments at December 31,
1998 and 1997, respectively.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may 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
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1998
--------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 97.7 $ 98.9
Due after one year through five years....................... 269.1 278.3
Due after five years through ten years...................... 638.2 658.5
Due after ten years......................................... 279.6 294.7
--------- --------
Total....................................................... $ 1,284.6 $1,330.4
--------- --------
--------- --------
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------------------------------------------------------ --------------- ----- ------
<S> <C> <C> <C>
1998
Fixed maturities............................................ $ 60.0 $ 2.0 $ 2.0
Equity securities........................................... $ 52.6 $17.5 $ 0.9
1997
Fixed maturities............................................ $702.9 $11.4 $ 5.0
Equity securities........................................... $ 1.3 $ 0.5 $ --
1996
Fixed maturities............................................ $496.6 $ 4.3 $ 8.3
Equity securities........................................... $ 1.5 $ 0.4 $ 0.1
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- -------
<S> <C> <C> <C>
1998
Net appreciation, beginning of year......................... $ 22.1 $ 16.4 $ 38.5
---------- ------ -------
Net depreciation on available-for-sale securities........... (16.2) (14.3) (30.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 7.1 -- 7.1
Benefit from deferred federal income taxes.................. 3.2 5.8 9.0
---------- ------ -------
(5.9) (8.5) (14.4)
---------- ------ -------
Net appreciation, end of year............................... $ 16.2 $ 7.9 $ 24.1
---------- ------ -------
---------- ------ -------
1997
Net appreciation, beginning of year......................... $ 12.7 $ 7.8 $ 20.5
---------- ------ -------
Net appreciation on available-for-sale securities........... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (9.8) -- (9.8)
Provision for deferred federal income taxes................. (5.1) (3.9) (9.0)
---------- ------ -------
9.4 8.6 18.0
---------- ------ -------
Net appreciation, end of year............................... $ 22.1 $ 16.4 $ 38.5
---------- ------ -------
---------- ------ -------
1996
Net appreciation, beginning of year......................... $ 20.4 $ 3.4 $ 23.8
---------- ------ -------
Net (depreciation) appreciation on available-for-sale
securities................................................. (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 9.0 -- 9.0
Benefit (provision) for deferred federal income taxes....... 4.1 (2.3) 1.8
---------- ------ -------
(7.7) 4.4 (3.3)
---------- ------ -------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
---------- ------ -------
---------- ------ -------
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) Includes net appreciation on other investments of $.9 million, $1.3 million,
and $2.2 million in 1998, 1997, and 1996, respectively.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate 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
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------- -------
<S> <C> <C>
Mortgage loans.............................................. $ 230.0 $ 228.2
Real estate held for sale................................... 14.5 12.0
------- -------
Total mortgage loans and real estate........................ $ 244.5 $ 240.2
------- -------
------- -------
</TABLE>
Reserves for mortgage loans were $3.3 million and $9.4 million at December 31,
1998 and 1997, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. At December 31, 1998, there was 1 property remaining
in the Company's real estate portfolio, which is being actively marketed. As a
result of the Plan, during 1997, real estate assets with a carrying amount of
$15.7 million were written down to the estimated fair value less cost to sell of
$12.0 million, and a net realized investment loss of $3.7 million was
recognized. Depreciation was not recorded on these assets while they were held
for disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1998 and 1997. During 1996, non-cash
investing activities included real estate acquired through foreclosure of
mortgage loans, which had a fair value of $0.9 million.
There were no contractual commitments to extend credit under commercial mortgage
loan agreements at December 31, 1998. These commitments generally expire within
one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ ------
<S> <C> <C>
Property type:
Office building........................................... $129.2 $101.7
Residential............................................... 18.9 19.3
Retail.................................................... 37.4 42.2
Industrial/warehouse...................................... 59.2 61.9
Other..................................................... 3.1 24.5
Valuation allowances...................................... (3.3) (9.4)
------ ------
Total....................................................... $244.5 $240.2
------ ------
------ ------
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ ------
Geographic region:
<S> <C> <C>
South Atlantic............................................ $ 55.5 $ 68.7
Pacific................................................... 80.0 56.6
East North Central........................................ 41.4 61.4
Middle Atlantic........................................... 22.5 29.8
West South Central........................................ 6.7 6.9
New England............................................... 26.9 12.4
Other..................................................... 14.8 13.8
Valuation allowances...................................... (3.3) (9.4)
------ ------
Total....................................................... $244.5 $240.2
------ ------
------ ------
</TABLE>
At December 31, 1998, scheduled mortgage loan maturities were as follows: 1999
- -- $24.8 million; 2000 -- $43.5 million; 2001 -- $6.6 million; 2002 -- $11.5
million; 2003 -- $0.6 million; and $143.0 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1998, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances, which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------------------------------------------------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1998
Mortgage loans.............................................. $ 9.4 $(4.5) $1.6 $ 3.3
----- ----- --- -----
----- ----- --- -----
1997
Mortgage loans.............................................. $ 9.5 $ 1.1 $1.2 $ 9.4
Real estate................................................. 1.7 3.7 5.4 --
----- ----- --- -----
Total................................................... $11.2 $ 4.8 $6.6 $ 9.4
----- ----- --- -----
----- ----- --- -----
1996
Mortgage loans.............................................. $12.5 $ 4.5 $7.5 $ 9.5
Real estate................................................. 2.1 -- 0.4 1.7
----- ----- --- -----
Total................................................... $14.6 $ 4.5 $7.9 $11.2
----- ----- --- -----
----- ----- --- -----
</TABLE>
Provisions on mortgages during 1998 reflect the release of redundant reserves.
Write-offs of $5.4 million to the investment valuation allowance related to real
estate in 1997 primarily reflect write downs to the estimated fair value less
cost to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $15.3 million and $20.6 million, with
related reserves of $1.5 million and $7.1 million as of December 31, 1998 and
1997, respectively. All impaired loans were reserved as of December 31, 1998 and
1997.
The average carrying value of impaired loans was $17.0 million, $19.8 million
and $26.3 million, with related interest income while such loans were impaired
of $2.0 million, $2.2 million and $3.4 million as of December 31, 1998, 1997 and
1996, respectively.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. OTHER
At December 31, 1998, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $107.7 $130.0 $137.2
Mortgage loans.............................................. 25.5 20.4 22.0
Equity securities........................................... 0.3 1.3 0.7
Policy loans................................................ 11.7 10.8 10.2
Real estate................................................. 3.3 3.9 6.2
Other long-term investments................................. 1.5 1.0 0.8
Short-term investments...................................... 4.2 1.4 1.4
------ ------ ------
Gross investment income..................................... 154.2 168.8 178.5
Less investment expenses.................................... (2.9) (4.6) (6.8)
------ ------ ------
Net investment income....................................... $151.3 $164.2 $171.7
------ ------ ------
------ ------ ------
</TABLE>
There were no mortgage loans or fixed maturities on non-accrual status at
December 31, 1998. The effect of non-accruals, compared with amounts that would
have been recognized in accordance with the original terms of the investment,
had no impact in 1998 and 1997, and reduced net income by $0.1 million in 1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $12.6 million, $21.1 million and $25.4 million at December 31,
1998, 1997 and 1996, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $1.4 million, $1.9 million and $3.6 million in 1998,
1997, and 1996, respectively. Actual interest income on these loans included in
net investment income aggregated $1.8 million, $2.1 million and $2.2 million in
1998, 1997, and 1996, respectively.
There were no fixed maturities or mortgage loans which, were non-income
producing for the twelve months ended December 31, 1998.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $ (6.1) $ 3.0 $ (3.3)
Mortgage loans.............................................. 8.0 (1.1) (3.2)
Equity securities........................................... 15.7 0.5 0.3
Real estate................................................. 2.4 (1.5) 2.5
Other....................................................... -- 2.0 0.1
------ ------ ------
Net realized investment gains (losses)...................... $ 20.0 $ 2.9 $ (3.6)
------ ------ ------
------ ------ ------
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized gains to the
net balance shown in the Statement of Comprehensive income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------- ------- -------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period (net of taxes
of $(5.6) million, $10.2 million and $(2.9) million in
1998, 1997 and 1996 respectively).......................... $ (8.2) $ 20.3 $ (5.3)
Less: reclassification adjustment for gains included in net
income (net of taxes of $3.4 million, $1.2 million and
$(1.0) million in 1998, 1997 and 1996 respectively)........ 6.2 2.3 (2.0)
------- ------- -------
Other comprehensive income.................................. $ (14.4) $ 18.0 $ (3.3)
------- ------- -------
------- ------- -------
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments"
("Statement No, 107"), 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 realized 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.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
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.
EQUITY SECURITIES
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.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------------------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 217.9 $ 217.9 $ 31.1 $ 31.1
Fixed maturities.......................................... 1,330.4 1,330.4 1,402.5 1,402.5
Equity securities......................................... 31.8 31.8 54.0 54.0
Mortgage loans............................................ 230.0 241.9 228.2 239.8
Policy loans.............................................. 151.5 151.5 140.1 140.1
--------- --------- --------- ---------
$ 1,961.6 $ 1,973.5 $ 1,855.9 $ 1,867.5
--------- --------- --------- ---------
--------- --------- --------- ---------
FINANCIAL LIABILITIES
Individual fixed annuity contracts........................ $ 1,069.4 $ 1,034.6 $ 876.0 $ 850.6
Supplemental contracts without life Contingencies......... 16.6 16.6 15.3 15.3
--------- --------- --------- ---------
$ 1,086.0 $ 1,051.2 $ 891.3 $ 865.9
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
6. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of Statement No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ----- ----- -----
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................... $22.1 $13.9 $26.9
Deferred.................................................. 11.8 7.1 (9.8)
----- ----- -----
Total....................................................... $33.9 $21.0 $17.1
----- ----- -----
----- ----- -----
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The deferred tax liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
Policy reserves........................................... $ (205.1) $ (175.8)
Deferred acquisition costs................................ 278.8 226.4
Investments, net.......................................... 12.5 27.0
Sales practice litigation................................. (7.4) --
Bad debt reserve.......................................... (0.4) (2.0)
Other, net................................................ 0.4 0.3
-------- --------
Deferred tax liability, net................................. $ 78.8 $ 75.9
-------- --------
-------- --------
</TABLE>
Gross deferred income tax liabilities totaled $291.7 million and $253.7 million
at December 31, 1998 and 1997, respectively. Gross deferred income tax assets
totaled $212.9 million and $177.8 at December 31, 1998 and 1997, respectively.
The Company believes, based on its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the consolidated group's federal
income tax returns through 1994. The Company has appealed certain adjustments
proposed by the IRS with respect to the consolidated group's federal income tax
returns for 1992, 1993, and 1994. Also, certain adjustments proposed by the IRS
with respect to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983
remain unresolved. If upheld, these adjustments would result in additional
payments; however, the Company will vigorously defend its position with respect
to these adjustments. In the Company's opinion, adequate tax liabilities have
been established for all years. However, the amount of these tax liabilities
could be revised in the near term if estimates of the Company's ultimate
liability are revised.
7. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $145.4 million and $124.1 million in 1998 and 1997. The
net amounts payable to FAFLIC and affiliates for accrued expenses and various
other liabilities and receivables were $16.4 million and $15.0 million at
December 31, 1998 and 1997, respectively.
8. 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 policyholders' 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
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
No dividends were declared by the Company during 1998, 1997 and 1996. During
1999, AFLIAC could pay dividends of $26.1 million to FAFLIC without prior
approval.
9. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of Statement No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" ("Statement No.
113").
The Company reinsures 100% of its traditional individual life and certain blocks
of its universal life business, substantially all of its disability income
business, and effective January 1, 1998, the mortality risk on the variable
universal life and remaining universal life blocks of business in-force at
December 31, 1997.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
Amounts recoverable from reinsurers at December 31, 1998 and 1997 for the
disability income business were $230.8 million and $216.1 million, respectively,
traditional life were $11.4 million and $15.2 million, respectively, and
universal and variable universal life were $65.8 million and $19.8 million,
respectively.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Insurance premiums:
Direct.................................................... $ 45.5 $ 48.8 $ 53.3
Assumed................................................... -- 2.6 3.1
Ceded..................................................... (45.0) (28.6) (23.7)
------ ------ ------
Net premiums................................................ $ 0.5 $ 22.8 $ 32.7
------ ------ ------
------ ------ ------
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
Insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
<S> <C> <C> <C>
Direct.................................................... $204.0 $226.0 $206.4
Assumed................................................... -- 4.2 4.5
Ceded..................................................... (50.1) (42.4) (18.3)
------ ------ ------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $153.9 $187.8 $192.6
------ ------ ------
------ ------ ------
</TABLE>
10. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year................................ $765.3 $632.7 $555.7
Acquisition expenses deferred............................. 242.4 184.2 116.6
Amortized to expense during the year...................... (64.6) (53.1) (49.9)
Adjustment to equity during the year...................... 7.4 (10.2) 10.3
Adjustment for cession of disability income insurance..... -- (38.6) --
Adjustment for revision of universal life and variable
universal life insurance mortality assumptions.......... -- 50.3 --
------ ------ ------
Balance at end of year...................................... $950.5 $765.3 $632.7
------ ------ ------
------ ------ ------
</TABLE>
On October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.3 million recapitalization of deferred policy acquisition costs.
11. LIABILITIES FOR INDIVIDUAL DISABILITY INCOME BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior estimates are recorded in
results of operations in the year such changes are determined to be needed.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's disability income business was
$233.3 million and $219.9 million at December 31, 1998 and 1997. Due to the
reinsurance agreement whereby the Company has ceded substantially all of its
disability income business to a highly rated reinsurer, the Company believes
that no material adverse development of losses will occur. However, the amount
of the liabilities could be revised in the near term if the estimates are
revised.
12. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recovered through a reduction in future premium taxes in some states. The
Company is not able to reasonably estimate the potential effect on it of any
such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries including AFLIAC, by
individual plaintiffs alleging fraud, unfair or deceptive acts, breach of
contract, misrepresentation, and related claims in the sale of life insurance
policies. In October 1997, plaintiffs voluntarily dismissed the Louisiana suit
and filed a substantially similar action in Federal District Court in Worcester,
Massachusetts. In early November 1998, AFC and the plaintiffs entered into a
settlement agreement, to which the court granted preliminary approval on
December 4, 1998. A hearing was held on March 19, 1999 to consider final
approval of the settlement agreement. A decision by the court is expected to be
rendered in the near future. Accordingly, AFLIAC recognized a $21.0 million
pre-tax expense during the third quarter of 1998 related to this litigation.
Although the Company believes that this expense reflects appropriate recognition
of its obligation under the settlement, this estimate assumes the availability
of insurance coverage for certain claims, and the estimate may be revised based
on the amount of reimbursement actually tendered by AFC's insurance carriers, if
any, and based on changes in the Company's estimate of the ultimate cost of the
benefits to be provided to members of the class.
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the Company's opinion of, 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. However, liabilities
related to these proceedings could be established in the near term if estimates
of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Although the Company does not believe that there is a material contingency
associated with the Year 2000 project, there can be no assurance that exposure
for material contingencies will not arise.
13. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles
primarily because policy acquisition costs are expensed when incurred,
investment reserves are based on different assumptions, life insurance reserves
are based on different assumptions and income tax expense reflects only taxes
paid or currently payable. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Statutory net income........................................ $ (8.2) $ 31.5 $ 5.4
Statutory shareholder's surplus............................. $309.7 $307.1 $234.0
</TABLE>
14. EVENTS SUBSEQUENT TO DATE OF INDEPENDENT ACCOUNTANTS' REPORT
AFC has proposed certain changes to its corporate structure. These changes
include transfer of FAFLIC's ownership of Allmerica P&C, as well as several
non-insurance subsidiaries, from FAFLIC to AFC. FAFLIC would retain its
ownership of AFLIAC and certain other subsidiaries. Under the proposal, AFC
would contribute to FAFLIC capital of $125.0 million and agree to maintain
FAFLIC's statutory surplus at specified levels during the following six
years. In addition, any dividend from FAFLIC to AFC during 2000 and 2001
would require the prior approval of the Commonwealth of Massachusetts
Insurance Commissioner (the "Commissioner"). This proposed transaction was
approved by the Commissioner on May 24, 1999.
On May 19, 1999, the Federal District Court in Worcester, Massachusetts
issued an order relating to the litigation mentioned in Note 12, above,
certifying the class for settlement purposes and granting final approval of
the settlement agreement.
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and the Contractowners of Separate Account KG of Allmerica Financial
Life Insurance and Annuity Company
In our opinion, the accompanying statements of assets and liabilities, and the
related statements of operations and changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
constituting the Separate Account KG of Allmerica Financial Life Insurance and
Annuity Company at December 31, 1998, the results of each of their operations
and the changes in each of their net assets for each of the periods indicated,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of Allmerica Financial Life Insurance and
Annuity Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
Funds, provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 26, 1999
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SMALL CAP SMALL CAP CONTRARIAN*
VALUE GROWTH VALUE INTERNATIONAL
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Investors Fund Series........ $ 53,064,960 $ 53,460,040 $ 141,055,428 $55,906,982
Investments in shares of
Scudder Variable Life
Investment Fund (VLIF)....... -- -- -- --
Dividend receivable........... -- -- -- --
Receivable from Allmerica
Financial Life Insurance and
Annuity Company (Sponsor).... -- -- -- --
------------ ------------ ------------- -------------
Total assets................ 53,064,960 53,460,040 141,055,428 55,906,982
LIABILITIES:
Payable to Allmerica Financial
Life Insurance and Annuity
Company (Sponsor)............ -- -- -- --
------------ ------------ ------------- -------------
Net assets.................. $ 53,064,960 $ 53,460,040 $ 141,055,428 $55,906,982
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Net asset distribution by
category:
Qualified variable annuity
contracts................. $ 13,627,393 $ 12,563,154 $ 31,977,999 $14,212,237
Non-qualified variable
annuity contracts......... 39,437,567 40,896,886 109,077,429 41,694,745
------------ ------------ ------------- -------------
$ 53,064,960 $ 53,460,040 $ 141,055,428 $55,906,982
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Qualified units outstanding,
December 31, 1998............ 12,688,188 8,223,461 20,414,312 11,904,811
Net asset value per qualified
unit, December 31, 1998...... $ 1.074022 $ 1.527721 $ 1.566450 $ 1.193823
Non-qualified units
outstanding, December 31,
1998......................... 36,719,515 26,769,866 69,633,521 34,925,399
Net asset value per
non-qualified unit, December
31, 1998..................... $ 1.074022 $ 1.527721 $ 1.566450 $ 1.193823
<CAPTION>
TOTAL
GROWTH VALUE+GROWTH HORIZON 20+ RETURN
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Investors Fund Series........ $ 76,542,185 $93,372,379 $25,753,983 $ 112,673,905
Investments in shares of
Scudder Variable Life
Investment Fund (VLIF)....... -- -- -- --
Dividend receivable........... -- -- -- --
Receivable from Allmerica
Financial Life Insurance and
Annuity Company (Sponsor).... -- 6,081 -- --
------------ ------------ ------------ -------------
Total assets................ 76,542,185 93,378,460 25,753,983 112,673,905
LIABILITIES:
Payable to Allmerica Financial
Life Insurance and Annuity
Company (Sponsor)............ -- -- -- --
------------ ------------ ------------ -------------
Net assets.................. $ 76,542,185 $93,378,460 $25,753,983 $ 112,673,905
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Net asset distribution by
category:
Qualified variable annuity
contracts................. $ 16,257,733 $22,374,616 $ 8,897,229 $ 22,280,492
Non-qualified variable
annuity contracts......... 60,284,452 71,003,844 16,856,754 90,393,413
------------ ------------ ------------ -------------
$ 76,542,185 $93,378,460 $25,753,983 $ 112,673,905
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Qualified units outstanding,
December 31, 1998............ 12,023,759 15,558,283 6,749,626 16,860,499
Net asset value per qualified
unit, December 31, 1998...... $ 1.352134 $ 1.438116 $ 1.318181 $ 1.321461
Non-qualified units
outstanding, December 31,
1998......................... 44,584,674 49,372,822 12,787,890 68,404,148
Net asset value per
non-qualified unit, December
31, 1998..................... $ 1.352134 $ 1.438116 $ 1.318181 $ 1.321461
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
HIGH INVESTMENT
HORIZON 10+ HORIZON 5 YIELD GRADE BOND
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Investors Fund
Series..................................... $36,169,887 $ 23,310,445 $ 149,008,407 $33,284,565
Investments in shares of Scudder Variable
Life Investment Fund (VLIF)................ -- -- -- --
Dividend receivable......................... -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- 679 -- 21,813
------------ ------------ ------------- ------------
Total assets.............................. 36,169,887 23,311,124 149,008,407 33,306,378
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... 787 -- -- --
------------ ------------ ------------- ------------
Net assets................................ $36,169,100 $ 23,311,124 $ 149,008,407 $33,306,378
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 9,962,045 $ 3,924,320 $ 30,558,415 $ 6,908,540
Non-qualified variable annuity
contracts............................... 26,207,055 19,386,804 118,449,992 26,397,838
------------ ------------ ------------- ------------
$36,169,100 $ 23,311,124 $ 149,008,407 $33,306,378
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Qualified units outstanding, December 31,
1998....................................... 7,863,740 3,255,036 27,197,365 6,017,321
Net asset value per qualified unit, December
31, 1998................................... $ 1.266833 $ 1.205615 $ 1.123580 $ 1.148109
Non-qualified units outstanding, December
31, 1998................................... 20,687,064 16,080,427 105,421,947 22,992,449
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 1.266833 $ 1.205615 $ 1.123580 $ 1.148109
<CAPTION>
GOVERNMENT GLOBAL BLUE
SECURITIES MONEY MARKET INCOME CHIP
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Investors Fund
Series..................................... $32,656,623 $ 30,929,817 $ 3,078,846 $ 61,197,712
Investments in shares of Scudder Variable
Life Investment Fund (VLIF)................ -- -- -- --
Dividend receivable......................... -- 59,904 -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- -- --
------------ ------------ ----------- ------------
Total assets.............................. 32,656,623 30,989,721 3,078,846 61,197,712
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- -- --
------------ ------------ ----------- ------------
Net assets................................ $32,656,623 $ 30,989,721 $ 3,078,846 $ 61,197,712
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 5,247,516 $ 6,293,691 $ 746,283 $ 14,457,112
Non-qualified variable annuity
contracts............................... 27,409,107 24,696,030 2,332,563 46,740,600
------------ ------------ ----------- ------------
$32,656,623 $ 30,989,721 $ 3,078,846 $ 61,197,712
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
Qualified units outstanding, December 31,
1998....................................... 4,659,460 5,827,098 669,091 11,651,181
Net asset value per qualified unit, December
31, 1998................................... $ 1.126207 $ 1.080073 $ 1.115369 $ 1.240828
Non-qualified units outstanding, December
31, 1998................................... 24,337,539 22,865,149 2,091,292 37,668,880
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 1.126207 $ 1.080073 $ 1.115369 $ 1.240828
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
DREMAN DREMAN INTERNATIONAL
FINANCIAL HIGH RETURN GROWTH AND GLOBAL
SERVICES EQUITY INCOME BLUE CHIP
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Investors Fund
Series..................................... $ 12,099,070 $46,632,882 $2,003,953 $ 2,355,309
Investments in shares of Scudder Variable
Life Investment Fund (VLIF)................ -- -- -- --
Dividend receivable......................... -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- -- --
------------ ------------ ------------- -----------
Total assets.............................. 12,099,070 46,632,882 2,003,953 2,355,309
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- -- --
------------ ------------ ------------- -----------
Net assets................................ $ 12,099,070 $46,632,882 $2,003,953 $ 2,355,309
------------ ------------ ------------- -----------
------------ ------------ ------------- -----------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 2,921,696 $10,846,977 $ 643,777 $ 679,720
Non-qualified variable annuity
contracts............................... 9,177,374 35,785,905 1,360,176 1,675,589
------------ ------------ ------------- -----------
$ 12,099,070 $46,632,882 $2,003,953 $ 2,355,309
------------ ------------ ------------- -----------
------------ ------------ ------------- -----------
Qualified units outstanding, December 31,
1998....................................... 3,015,387 10,643,547 712,659 687,509
Net asset value per qualified unit, December
31, 1998................................... $ 0.968929 $ 1.019113 $ 0.903345 $ 0.988670
Non-qualified units outstanding, December
31, 1998................................... 9,471,668 35,114,757 1,505,710 1,694,791
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 0.968929 $ 1.019113 $ 0.903345 $ 0.988670
<CAPTION>
VLIF VLIF GLOBAL VLIF VLIF GROWTH
INTERNATIONAL DISCOVERY CAPITAL GROWTH AND INCOME
------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Investors Fund
Series..................................... $ -- $ -- $ -- $ --
Investments in shares of Scudder Variable
Life Investment Fund (VLIF)................ 4,525,749 2,645,801 4,652,641 10,718,783
Dividend receivable......................... -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- -- --
------------- ----------- -------------- ------------
Total assets.............................. 4,525,749 2,645,801 4,652,641 10,718,783
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- -- --
------------- ----------- -------------- ------------
Net assets................................ $4,525,749 $2,645,801 $4,652,641 $10,718,783
------------- ----------- -------------- ------------
------------- ----------- -------------- ------------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 723,046 $ 637,521 $1,322,096 $ 1,923,427
Non-qualified variable annuity
contracts............................... 3,802,703 2,008,280 3,330,545 8,795,356
------------- ----------- -------------- ------------
$4,525,749 $2,645,801 $4,652,641 $10,718,783
------------- ----------- -------------- ------------
------------- ----------- -------------- ------------
Qualified units outstanding, December 31,
1998....................................... 733,667 667,373 1,249,028 2,049,956
Net asset value per qualified unit, December
31, 1998................................... $ 0.985523 $ 0.955270 $ 1.058500 $ 0.938277
Non-qualified units outstanding, December
31, 1998................................... 3,858,564 2,102,316 3,146,476 9,373,944
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 0.985523 $ 0.955270 $ 1.058500 $ 0.938277
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SMALL CAP VALUE SMALL CAP GROWTH
--------------------------- ---------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ -- $ 47,080 $ -- $ 16,845
Mortality and expense risk fees............ (584,005) (178,545) (436,697) (100,403)
Administrative expense fees................ (70,081) (21,426) (52,404) (12,048)
------------ ------------ ------------ ------------
Net investment income (loss)............. (654,086) (152,891) (489,101) (95,606)
------------ ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 1,115,662 -- 4,942,858 320,050
Net realized gain (loss) from sales of
investments.............................. (239,399) 18,177 (150,444) 15,233
------------ ------------ ------------ ------------
Net realized gain (loss)................... 876,263 18,177 4,792,414 335,283
Net unrealized gain (loss)................. (7,341,076) 1,759,941 2,357,658 2,010,568
------------ ------------ ------------ ------------
Net realized and unrealized gain
(loss)................................. (6,464,813) 1,778,118 7,150,072 2,345,851
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
operations............................... (7,118,899) 1,625,227 6,660,971 2,250,245
------------ ------------ ------------ ------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 23,789,375 26,418,229 21,614,441 14,614,458
Withdrawals................................ (2,072,501) (581,435) (1,263,376) (229,859)
Contract benefits.......................... (671,460) (94,481) (628,139) (76,198)
Contract charges........................... (11,668) (269) (7,215) (114)
Transfers between sub-accounts (including
fixed account), net...................... (1,003,036) 8,009,844 2,245,841 4,234,262
Other transfers from (to) the General
Account.................................. 3,833,373 621,937 3,453,623 383,902
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
contract transactions.................... 23,864,083 34,373,825 25,415,175 18,926,451
------------ ------------ ------------ ------------
Net increase (decrease) in net assets...... 16,745,184 35,999,052 32,076,146 21,176,696
NET ASSETS:
Beginning of year.......................... 36,319,776 320,724 21,383,894 207,198
------------ ------------ ------------ ------------
End of year................................ $ 53,064,960 $ 36,319,776 $ 53,460,040 $ 21,383,894
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
<CAPTION>
CONTRARIAN VALUE* INTERNATIONAL
---------------------------- ---------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 633,471 $ 74,722 $ 489,867 $ 88,112
Mortality and expense risk fees............ (1,382,818) (351,384) (584,917) (200,312)
Administrative expense fees................ (165,938) (42,166) (70,191) (24,038)
------------- ------------ ------------ ------------
Net investment income (loss)............. (915,285) (318,828) (165,241) (136,238)
------------- ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 2,533,883 -- 1,469,600 308,389
Net realized gain (loss) from sales of
investments.............................. 525,805 12,074 (59,061) (283)
------------- ------------ ------------ ------------
Net realized gain (loss)................... 3,059,688 12,074 1,410,539 308,106
Net unrealized gain (loss)................. 14,662,017 6,408,577 1,259,087 (393,562)
------------- ------------ ------------ ------------
Net realized and unrealized gain
(loss)................................. 17,721,705 6,420,651 2,669,626 (85,456)
------------- ------------ ------------ ------------
Net increase (decrease) in net assets from
operations............................... 16,806,420 6,101,823 2,504,385 (221,694)
------------- ------------ ------------ ------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 55,490,687 51,755,894 19,119,834 27,242,757
Withdrawals................................ (4,934,497) (1,012,429) (1,671,001) (479,373)
Contract benefits.......................... (1,296,893) (267,497) (719,636) (173,076)
Contract charges........................... (27,258) (271) (10,634) (98)
Transfers between sub-accounts (including
fixed account), net...................... (3,451,681) 12,760,040 (606,885) 6,577,637
Other transfers from (to) the General
Account.................................. 7,034,801 1,768,326 3,412,651 565,568
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
------------- ------------ ------------ ------------
Net increase (decrease) in net assets from
contract transactions.................... 52,815,159 65,004,063 19,524,329 33,733,415
------------- ------------ ------------ ------------
Net increase (decrease) in net assets...... 69,621,579 71,105,886 22,028,714 33,511,721
NET ASSETS:
Beginning of year.......................... 71,433,849 327,963 33,878,268 366,547
------------- ------------ ------------ ------------
End of year................................ $ 141,055,428 $ 71,433,849 $ 55,906,982 $ 33,878,268
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GROWTH VALUE+GROWTH
--------------------------- ---------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 127,622 $ 34,351 $ -- $ 40,431
Mortality and expense risk fees............ (636,986) (160,465) (816,513) (177,197)
Administrative expense fees................ (76,438) (19,256) (97,982) (21,263)
------------ ------------ ------------ ------------
Net investment income (loss)............. (585,802) (145,370) (914,495) (158,029)
------------ ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 6,381,102 1,391,185 1,465,937 --
Net realized gain (loss) from sales of
investments.............................. (353,788) 6,716 (86,036) 16,087
------------ ------------ ------------ ------------
Net realized gain (loss)................... 6,027,314 1,397,901 1,379,901 16,087
Net unrealized gain (loss)................. 419,230 734,032 10,264,094 1,966,784
------------ ------------ ------------ ------------
Net realized and unrealized gain
(loss)................................. 6,446,544 2,131,933 11,643,995 1,982,871
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
operations............................... 5,860,742 1,986,563 10,729,500 1,824,842
------------ ------------ ------------ ------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 39,283,179 21,528,673 43,919,177 28,556,776
Withdrawals................................ (2,255,077) (466,604) (3,154,277) (566,546)
Contract benefits.......................... (996,123) (186,633) (1,199,454) (20,598)
Contract charges........................... (10,479) (137) (13,304) (120)
Transfers between sub-accounts (including
fixed account), net...................... 1,000,885 5,341,184 (738,468) 6,527,316
Other transfers from (to) the General
Account.................................. 4,848,132 239,467 6,283,341 1,037,491
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
contract transactions.................... 41,870,517 26,455,950 45,097,015 35,534,319
------------ ------------ ------------ ------------
Net increase (decrease) in net assets...... 47,731,259 28,442,513 55,826,515 37,359,161
NET ASSETS:
Beginning of year.......................... 28,810,926 368,413 37,551,945 192,784
------------ ------------ ------------ ------------
End of year................................ $ 76,542,185 $ 28,810,926 $ 93,378,460 $ 37,551,945
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
<CAPTION>
HORIZON 20+ TOTAL RETURN
-------------------------- ----------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 96,845 $ 16,264 $ 1,753,779 $ 155,748
Mortality and expense risk fees............ (215,242) (44,550) (893,166) (174,956)
Administrative expense fees................ (25,829) (5,346) (107,180) (20,994)
------------ ----------- ------------- ------------
Net investment income (loss)............. (144,226) (33,632) 753,433 (40,202)
------------ ----------- ------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 387,382 -- 7,794,571 640,299
Net realized gain (loss) from sales of
investments.............................. 922 19,104 (182,322) (1,220)
------------ ----------- ------------- ------------
Net realized gain (loss)................... 388,304 19,104 7,612,249 639,079
Net unrealized gain (loss)................. 1,280,559 534,900 1,095,523 1,196,085
------------ ----------- ------------- ------------
Net realized and unrealized gain
(loss)................................. 1,668,863 554,004 8,707,772 1,835,164
------------ ----------- ------------- ------------
Net increase (decrease) in net assets from
operations............................... 1,524,637 520,372 9,461,205 1,794,962
------------ ----------- ------------- ------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 13,742,259 6,639,510 60,531,473 27,606,532
Withdrawals................................ (902,539) (104,209) (4,287,789) (499,571)
Contract benefits.......................... (93,965) -- (980,496) (160,213)
Contract charges........................... (3,959) (35) (12,887) (148)
Transfers between sub-accounts (including
fixed account), net...................... 536,069 1,684,354 439,225 6,332,604
Other transfers from (to) the General
Account.................................. 1,765,444 220,744 11,115,973 985,554
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
------------ ----------- ------------- ------------
Net increase (decrease) in net assets from
contract transactions.................... 15,043,309 8,440,364 66,805,499 34,264,758
------------ ----------- ------------- ------------
Net increase (decrease) in net assets...... 16,567,946 8,960,736 76,266,704 36,059,720
NET ASSETS:
Beginning of year.......................... 9,186,037 225,301 36,407,201 347,481
------------ ----------- ------------- ------------
End of year................................ $ 25,753,983 $ 9,186,037 $ 112,673,905 $ 36,407,201
------------ ----------- ------------- ------------
------------ ----------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
HORIZON 10+ HORIZON 5
--------------------------- --------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 127,937 $ 14,964 $ 101,425 $ 14,508
Mortality and expense risk fees............ (278,180) (58,622) (192,457) (42,009)
Administrative expense fees................ (33,382) (7,035) (23,095) (5,042)
------------ ------------ ------------ -----------
Net investment income (loss)............. (183,625) (50,693) (114,127) (32,543)
------------ ------------ ------------ -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 383,811 -- 304,275 --
Net realized gain (loss) from sales of
investments.............................. 48,043 12,017 26,745 6,148
------------ ------------ ------------ -----------
Net realized gain (loss)................... 431,854 12,017 331,020 6,148
Net unrealized gain (loss)................. 1,933,426 517,554 1,051,773 371,802
------------ ------------ ------------ -----------
Net realized and unrealized gain
(loss)................................. 2,365,280 529,571 1,382,793 377,950
------------ ------------ ------------ -----------
Net increase (decrease) in net assets from
operations............................... 2,181,655 478,878 1,268,666 345,407
------------ ------------ ------------ -----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 17,322,094 8,487,755 10,016,522 6,722,321
Withdrawals................................ (1,228,986) (109,586) (710,798) (170,981)
Contract benefits.......................... (206,618) -- (349,599) (3,258)
Contract charges........................... (4,988) (19) (2,463) (11)
Transfers between sub-accounts (including
fixed account), net...................... 1,445,601 2,466,477 346,870 1,383,613
Other transfers from (to) the General
Account.................................. 4,892,426 405,527 3,956,115 455,930
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
------------ ------------ ------------ -----------
Net increase (decrease) in net assets from
contract transactions.................... 22,219,529 11,250,154 13,256,647 8,387,614
------------ ------------ ------------ -----------
Net increase (decrease) in net assets...... 24,401,184 11,729,032 14,525,313 8,733,021
NET ASSETS:
Beginning of year.......................... 11,767,916 38,884 8,785,811 52,790
------------ ------------ ------------ -----------
End of year................................ $ 36,169,100 $ 11,767,916 $ 23,311,124 $ 8,785,811
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
<CAPTION>
HIGH YIELD INVESTMENT GRADE BOND
---------------------------- --------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 7,281,617 $ 1,692,326 $ 386,125 $ 13,330
Mortality and expense risk fees............ (1,496,936) (418,706) (241,099) (43,570)
Administrative expense fees................ (179,632) (50,245) (28,932) (5,229)
------------- ------------ ------------ -----------
Net investment income (loss)............. 5,605,049 1,223,375 116,094 (35,469)
------------- ------------ ------------ -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- -- 128,708 --
Net realized gain (loss) from sales of
investments.............................. (551,935) (1,819) 41,448 1,923
------------- ------------ ------------ -----------
Net realized gain (loss)................... (551,935) (1,819) 170,156 1,923
Net unrealized gain (loss)................. (6,177,713) 2,081,418 923,527 359,468
------------- ------------ ------------ -----------
Net realized and unrealized gain
(loss)................................. (6,729,648) 2,079,599 1,093,683 361,391
------------- ------------ ------------ -----------
Net increase (decrease) in net assets from
operations............................... (1,124,599) 3,302,974 1,209,777 325,922
------------- ------------ ------------ -----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 81,022,156 58,758,080 17,451,387 7,165,204
Withdrawals................................ (6,547,920) (1,747,189) (1,109,622) (122,182)
Contract benefits.......................... (2,658,763) (651,247) (529,109) (110,978)
Contract charges........................... (21,805) (158) (2,702) --
Transfers between sub-accounts (including
fixed account), net...................... (6,373,866) 11,240,404 2,164,116 1,451,096
Other transfers from (to) the General
Account.................................. 11,790,153 1,059,350 5,217,887 173,549
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
------------- ------------ ------------ -----------
Net increase (decrease) in net assets from
contract transactions.................... 77,209,955 68,659,240 23,191,957 8,556,689
------------- ------------ ------------ -----------
Net increase (decrease) in net assets...... 76,085,356 71,962,214 24,401,734 8,882,611
NET ASSETS:
Beginning of year.......................... 72,923,051 960,837 8,904,644 22,033
------------- ------------ ------------ -----------
End of year................................ $ 149,008,407 $ 72,923,051 $ 33,306,378 $ 8,904,644
------------- ------------ ------------ -----------
------------- ------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES MONEY MARKET
-------------------------- -----------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 894,572 $ 130,640 $ 1,115,115 $ 650,734
Mortality and expense risk fees............ (247,378) (47,309) (278,097) (157,220)
Administrative expense fees................ (29,685) (5,677) (33,372) (18,866)
------------ ----------- ------------- -------------
Net investment income (loss)............. 617,509 77,654 803,646 474,648
------------ ----------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- -- -- --
Net realized gain (loss) from sales of
investments.............................. 89,758 6,594 -- --
------------ ----------- ------------- -------------
Net realized gain (loss)................... 89,758 6,594 -- --
Net unrealized gain (loss)................. 337,987 229,723 -- --
------------ ----------- ------------- -------------
Net realized and unrealized gain
(loss)................................. 427,745 236,317 -- --
------------ ----------- ------------- -------------
Net increase (decrease) in net assets from
operations............................... 1,045,254 313,971 803,646 474,648
------------ ----------- ------------- -------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 22,349,806 8,695,248 31,596,153 90,905,689
Withdrawals................................ (1,638,958) (341,177) (3,292,780) (1,106,116)
Contract benefits.......................... (270,581) (71,442) (782,679) (16,619)
Contract charges........................... (1,883) (1) (1,815) --
Transfers between sub-accounts (including
fixed account), net...................... (1,003,639) (910,194) (12,411,316) (74,943,353)
Other transfers from (to) the General
Account.................................. 3,837,960 157,749 (1,336,066) (811,096)
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
------------ ----------- ------------- -------------
Net increase (decrease) in net assets from
contract transactions.................... 23,272,705 7,530,183 13,771,497 14,028,505
------------ ----------- ------------- -------------
Net increase (decrease) in net assets...... 24,317,959 7,844,154 14,575,143 14,503,153
NET ASSETS:
Beginning of year.......................... 8,338,664 494,510 16,414,578 1,911,425
------------ ----------- ------------- -------------
End of year................................ $ 32,656,623 $ 8,338,664 $ 30,989,721 $ 16,414,578
------------ ----------- ------------- -------------
------------ ----------- ------------- -------------
<CAPTION>
GLOBAL INCOME BLUE CHIP
--------------------------- ----------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED 5/1/97** TO YEAR ENDED 5/1/97** TO
12/31/98 12/31/97 12/31/98 12/31/97
----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 38,436 $ -- $ 231,176 $ --
Mortality and expense risk fees............ (28,575) (4,683) (449,022) (42,643)
Administrative expense fees................ (3,429) (562) (53,883) (5,117)
----------- ------------- ------------ -------------
Net investment income (loss)............. 6,432 (5,245) (271,729) (47,760)
----------- ------------- ------------ -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 19,218 -- -- --
Net realized gain (loss) from sales of
investments.............................. 17,493 1,016 (4,634) 10,843
----------- ------------- ------------ -------------
Net realized gain (loss)................... 36,711 1,016 (4,634) 10,843
Net unrealized gain (loss)................. 178,063 15,990 4,727,366 361,450
----------- ------------- ------------ -------------
Net realized and unrealized gain
(loss)................................. 214,774 17,006 4,722,732 372,293
----------- ------------- ------------ -------------
Net increase (decrease) in net assets from
operations............................... 221,206 11,761 4,451,003 324,533
----------- ------------- ------------ -------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 1,466,759 1,077,346 37,192,832 12,085,430
Withdrawals................................ (66,544) (39,522) (1,560,813) (250,802)
Contract benefits.......................... (60,759) -- (617,207) (10,417)
Contract charges........................... (350) -- (4,649) (4)
Transfers between sub-accounts (including
fixed account), net...................... (11,453) 226,043 1,491,067 2,169,909
Other transfers from (to) the General
Account.................................. 187,742 66,617 5,679,785 247,047
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- (2)
----------- ------------- ------------ -------------
Net increase (decrease) in net assets from
contract transactions.................... 1,515,395 1,330,484 42,181,015 14,241,161
----------- ------------- ------------ -------------
Net increase (decrease) in net assets...... 1,736,601 1,342,245 46,632,018 14,565,694
NET ASSETS:
Beginning of year.......................... 1,342,245 -- 14,565,694 --
----------- ------------- ------------ -------------
End of year................................ $3,078,846 $1,342,245 $61,197,712 $14,565,694
----------- ------------- ------------ -------------
----------- ------------- ------------ -------------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
DREMAN INTERNATIONAL
FINANCIAL DREMAN HIGH GROWTH AND GLOBAL
SERVICES RETURN EQUITY INCOME BLUE CHIP
----------------- ------------- -------------- ------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
5/4/98** TO 5/5/98** TO 5/19/98** TO 5/12/98** TO
12/31/98 12/31/98 12/31/98 12/31/98
----------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends............................. $ -- $ -- $ -- $ --
Mortality and expense risk fees....... (53,996) (172,312) (6,802) (7,976)
Administrative expense fees........... (6,480) (20,677) (816) (958)
----------------- ------------- -------------- ------------
Net investment income (loss)........ (60,476) (192,989) (7,618) (8,934)
----------------- ------------- -------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from
portfolio sponsors.................. -- -- -- --
Net realized gain (loss) from sales of
investments......................... (86,875) 9,307 (2,943) (144)
----------------- ------------- -------------- ------------
Net realized gain (loss).............. (86,875) 9,307 (2,943) (144)
Net unrealized gain (loss)............ 367,539 2,651,775 (10,261) 85,043
----------------- ------------- -------------- ------------
Net realized and unrealized gain
(loss)............................ 280,664 2,661,082 (13,204) 84,899
----------------- ------------- -------------- ------------
Net increase (decrease) in net assets
from operations..................... 220,188 2,468,093 (20,822) 75,965
----------------- ------------- -------------- ------------
CONTRACT TRANSACTIONS:
Net purchase payments................. 7,215,268 27,871,658 1,154,289 1,572,737
Withdrawals........................... (93,345) (477,636) (15,699) (21,153)
Contract benefits..................... (8,312) (41,586) -- (1,031)
Contract charges...................... (206) (571) (39) (14)
Transfers between sub-accounts
(including fixed account), net...... 2,845,468 8,922,472 407,263 246,914
Other transfers from (to) the General
Account............................. 1,920,009 7,890,452 478,961 481,891
Net increase (decrease) in investment
by Sponsor.......................... -- -- -- --
----------------- ------------- -------------- ------------
Net increase (decrease) in net assets
from contract transactions.......... 11,878,882 44,164,789 2,024,775 2,279,344
----------------- ------------- -------------- ------------
Net increase (decrease) in net
assets.............................. 12,099,070 46,632,882 2,003,953 2,355,309
NET ASSETS:
Beginning of year..................... -- -- -- --
----------------- ------------- -------------- ------------
End of year........................... $12,099,070 $46,632,882 $2,003,953 $2,355,309
----------------- ------------- -------------- ------------
----------------- ------------- -------------- ------------
<CAPTION>
VLIF
VLIF VLIF VLIF GROWTH AND
INTERNATIONAL GLOBAL DISCOVERY CAPITAL GROWTH INCOME
------------- ---------------- -------------- ----------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
5/6/98** TO 5/6/98** TO 5/11/98** TO 5/1/98** TO
12/31/98 12/31/98 12/31/98 12/31/98
------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends............................. $ -- $ -- $ 8,092 $ 66,360
Mortality and expense risk fees....... (18,790) (8,664) (14,841) (40,433)
Administrative expense fees........... (2,255) (1,040) (1,781) (4,851)
------------- ---------------- -------------- ----------------
Net investment income (loss)........ (21,045) (9,704) (8,530) 21,076
------------- ---------------- -------------- ----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from
portfolio sponsors.................. -- -- -- --
Net realized gain (loss) from sales of
investments......................... (72,137) (329) 426 (152)
------------- ---------------- -------------- ----------------
Net realized gain (loss).............. (72,137) (329) 426 (152)
Net unrealized gain (loss)............ 65,557 200,714 480,191 272,443
------------- ---------------- -------------- ----------------
Net realized and unrealized gain
(loss)............................ (6,580) 200,385 480,617 272,291
------------- ---------------- -------------- ----------------
Net increase (decrease) in net assets
from operations..................... (27,625) 190,681 472,087 293,367
------------- ---------------- -------------- ----------------
CONTRACT TRANSACTIONS:
Net purchase payments................. 2,357,151 1,276,882 1,885,314 7,243,015
Withdrawals........................... (244,548) (14,325) (24,556) (123,326)
Contract benefits..................... -- -- -- (4,763)
Contract charges...................... (136) (62) (59) (240)
Transfers between sub-accounts
(including fixed account), net...... 1,581,433 532,771 1,265,981 665,676
Other transfers from (to) the General
Account............................. 859,474 659,854 1,053,874 2,645,054
Net increase (decrease) in investment
by Sponsor.......................... -- -- -- --
------------- ---------------- -------------- ----------------
Net increase (decrease) in net assets
from contract transactions.......... 4,553,374 2,455,120 4,180,554 10,425,416
------------- ---------------- -------------- ----------------
Net increase (decrease) in net
assets.............................. 4,525,749 2,645,801 4,652,641 10,718,783
NET ASSETS:
Beginning of year..................... -- -- -- --
------------- ---------------- -------------- ----------------
End of year........................... $4,525,749 $2,645,801 $4,652,641 $10,718,783
------------- ---------------- -------------- ----------------
------------- ---------------- -------------- ----------------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Separate Account KG is a separate investment account of Allmerica Financial
Life Insurance and Annuity Company (the Company), established on November 13,
1996 for the purpose of separating from the general assets of the Company those
assets used to fund certain variable annuity contracts issued by the Company.
The Company is a wholly-owned subsidiary of First Allmerica Financial Life
Insurance Company (First Allmerica). First Allmerica is a wholly-owned
subsidiary of Allmerica Financial Corporation (AFC). Under applicable insurance
law, the assets and liabilities of Separate Account KG are clearly identified
and distinguished from the other assets and liabilities of the Company. Separate
Account KG cannot be charged with liabilities arising out of any other business
of the Company.
Separate Account KG is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). Separate Account KG
currently offers twenty-four Sub-Accounts under the variable annuity contracts.
Each Sub-Account invests exclusively in a corresponding investment portfolio of
Investors Fund Series (Kemper INFS) or Scudder Variable Life Investment Fund
(Scudder VLIF) managed by Scudder Kemper Investments, Inc. (Scudder Kemper).
Kemper INFS and Scudder VLIF (the Funds) are open-end, management investment
companies registered under the 1940 Act.
Separate Account KG funds 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 Section 401, 403, or 408 of the Internal Revenue Code (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.
Effective May 1, 1998, Kemper Value Portfolio was renamed Kemper Contrarian
Value Portfolio.
Certain prior year balances have been reclassified to conform with current
year presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Funds. Net realized gains and
losses on securities sold are determined using the average cost method.
Dividends and capital gain distributions are recorded on the ex-dividend date
and are reinvested in additional shares of the respective investment portfolio
of the Funds at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Code and files a consolidated federal income tax
return with First Allmerica. The Company anticipates no tax liability resulting
from the operations of Separate Account KG. Therefore, no provision for income
taxes has been charged against Separate Account KG.
SA-9
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Funds at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
--------------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- ---------------------------------------- ------------ ------------ ----------
<S> <C> <C> <C>
Small Cap Value......................... 49,805,676 $ 58,640,343 $ 1.065
Small Cap Growth........................ 27,105,842 49,089,360 1.972
Contrarian Value*....................... 80,276,491 119,986,134 1.757
International........................... 32,886,267 55,034,184 1.700
Growth.................................. 25,887,620 75,383,136 2.957
Value+Growth............................ 55,880,820 81,143,063 1.671
Horizon 20+............................. 17,091,272 23,937,607 1.507
Total Return............................ 41,203,066 110,381,032 2.735
Horizon 10+............................. 25,946,834 33,718,981 1.394
Horizon 5............................... 17,906,456 21,886,918 1.302
High Yield.............................. 121,403,646 153,097,448 1.227
Investment Grade Bond................... 28,578,292 32,001,508 1.165
Government Securities................... 27,030,272 32,089,787 1.208
Money Market............................ 30,929,817 30,929,817 1.000
Global Income........................... 2,775,936 2,884,793 1.109
Blue Chip............................... 48,582,723 56,108,896 1.260
Dreman Financial Services............... 12,372,502 11,731,531 0.978
Dreman High Return Equity............... 45,338,469 43,981,107 1.029
International Growth and Income......... 2,198,136 2,014,214 0.912
Global Blue Chip........................ 2,405,929 2,270,266 0.979
VLIF International...................... 310,834 4,460,192 14.560
VLIF Global Discovery................... 329,080 2,445,087 8.040
VLIF Capital Growth..................... 194,265 4,172,450 23.950
VLIF Growth and Income.................. 955,328 10,446,340 11.220
</TABLE>
* Name changed. See Note 1.
NOTE 4 -- RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The Company also charges each Sub-Account 0.15% per annum based on the
average daily net assets of each Sub-Account for administrative expenses. These
charges are deducted from the daily value of each Sub-Account and are paid to
the Company on a daily basis.
A contract fee is currently deducted on the contract anniversary and upon
full surrender of the contract when the accumulated value is less than $50,000
on contracts issued on Form A3025-96 (Kemper Gateway Elite) and when the
accumulated value is less than $75,000 for contracts issued on Form A3027-98
(Kemper
SA-10
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
Gateway Advisor). The fee is currently waived for contracts issued to and
maintained by the trustee of a 401(k) plan.
Allmerica Investments, Inc. (Allmerica Investments), a wholly-owned
subsidiary of First Allmerica, is principal underwriter and general distributor
of Separate Account KG, and does not receive any compensation for sales of the
contracts. Commissions are paid by the Company to registered representatives of
Allmerica Investments and to certain independent broker-dealers. The current
series of contracts have a contingent deferred sales charge and no deduction is
made for sales charges at the time of the sale. For the years ended December 31,
1998 and 1997, the Company received $388,553 and $34,464, respectively, for
contingent deferred sales charges applicable to Separate Account KG.
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
1998 1997
---------------------------- ----------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Small Cap Value
Issuance of Units.......................... 30,508,718 $ 36,271,264 31,975,472 $ 36,833,168
Redemption of Units........................ (10,697,842) (12,407,181) (2,692,444) (2,459,343)
------------ ------------- ------------ -------------
Net increase (decrease).................. 19,810,876 $ 23,864,083 29,283,028 $ 34,373,825
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Small Cap Growth
Issuance of Units.......................... 25,270,847 $ 34,309,129 17,793,898 $ 20,525,939
Redemption of Units........................ (6,616,756) (8,893,954) (1,664,217) (1,599,488)
------------ ------------- ------------ -------------
Net increase (decrease).................. 18,654,091 $ 25,415,175 16,129,681 $ 18,926,451
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Contrarian Value*
Issuance of Units.......................... 53,828,717 $ 78,198,319 57,737,606 $ 68,909,586
Redemption of Units........................ (17,414,571) (25,383,160) (4,420,566) (3,905,523)
------------ ------------- ------------ -------------
Net increase (decrease).................. 36,414,146 $ 52,815,159 53,317,040 $ 65,004,063
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
International
Issuance of Units.......................... 25,663,270 $ 30,713,284 34,446,548 $ 37,444,700
Redemption of Units........................ (9,622,473) (11,188,955) (4,016,781) (3,711,285)
------------ ------------- ------------ -------------
Net increase (decrease).................. 16,040,797 $ 19,524,329 30,429,767 $ 33,733,415
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Growth
Issuance of Units.......................... 40,910,361 $ 52,587,397 26,615,425 $ 29,159,670
Redemption of Units........................ (8,488,197) (10,716,880) (2,799,269) (2,703,720)
------------ ------------- ------------ -------------
Net increase (decrease).................. 32,422,164 $ 41,870,517 23,816,156 $ 26,455,950
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Value+Growth
Issuance of Units.......................... 45,219,480 $ 59,935,502 33,482,451 $ 38,000,583
Redemption of Units........................ (11,234,167) (14,838,487) (2,733,249) (2,466,264)
------------ ------------- ------------ -------------
Net increase (decrease).................. 33,985,313 $ 45,097,015 30,749,202 $ 35,534,319
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
* Name changed. See Note 1.
SA-11
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
1998 1997
---------------------------- ----------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Horizon 20+
Issuance of Units.......................... 13,603,712 $ 17,394,100 7,925,733 $ 8,720,181
Redemption of Units........................ (1,834,502) (2,350,791) (383,808) (279,817)
------------ ------------- ------------ -------------
Net increase (decrease).................. 11,769,210 $ 15,043,309 7,541,925 $ 8,440,364
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Total Return
Issuance of Units.......................... 66,620,582 $ 82,298,961 33,289,148 $ 36,351,700
Redemption of Units........................ (12,639,486) (15,493,462) (2,358,846) (2,086,942)
------------ ------------- ------------ -------------
Net increase (decrease).................. 53,981,096 $ 66,805,499 30,930,302 $ 34,264,758
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Horizon 10+
Issuance of Units.......................... 20,573,123 $ 25,005,402 10,824,499 $ 11,378,438
Redemption of Units........................ (2,221,057) (2,785,873) (664,570) (128,284)
------------ ------------- ------------ -------------
Net increase (decrease).................. 18,352,066 $ 22,219,529 10,159,929 $ 11,250,154
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Horizon 5
Issuance of Units.......................... 13,744,682 $ 15,912,248 8,218,267 $ 8,735,360
Redemption of Units........................ (2,296,765) (2,655,601) (383,398) (347,746)
------------ ------------- ------------ -------------
Net increase (decrease).................. 11,447,917 $ 13,256,647 7,834,869 $ 8,387,614
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
High Yield
Issuance of Units.......................... 108,622,190 $ 123,713,400 76,297,806 $ 81,860,370
Redemption of Units........................ (40,936,497) (46,503,445) (12,305,958) (13,201,130)
------------ ------------- ------------ -------------
Net increase (decrease).................. 67,685,693 $ 77,209,955 63,991,848 $ 68,659,240
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Investment Grade Bond
Issuance of Units.......................... 25,923,174 $ 28,946,187 8,795,744 $ 8,964,639
Redemption of Units........................ (5,168,841) (5,754,230) (562,272) (407,950)
------------ ------------- ------------ -------------
Net increase (decrease).................. 20,754,333 $ 23,191,957 8,233,472 $ 8,556,689
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Government Securities
Issuance of Units.......................... 36,939,375 $ 40,481,355 10,864,889 $ 10,997,891
Redemption of Units........................ (15,757,395) (17,208,650) (3,547,883) (3,467,708)
------------ ------------- ------------ -------------
Net increase (decrease).................. 21,181,980 $ 23,272,705 7,317,006 $ 7,530,183
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Money Market
Issuance of Units.......................... 72,056,560 $ 76,090,252 103,574,850 $ 99,792,728
Redemption of Units........................ (59,123,922) (62,318,755) (89,719,351) (85,764,223)
------------ ------------- ------------ -------------
Net increase (decrease).................. 12,932,638 $ 13,771,497 13,855,499 $ 14,028,505
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Global Income
Issuance of Units.......................... 2,184,199 $ 2,290,081 1,502,424 $ 1,418,266
Redemption of Units........................ (740,944) (774,686) (185,296) (87,782)
------------ ------------- ------------ -------------
Net increase (decrease).................. 1,443,255 $ 1,515,395 1,317,128 $ 1,330,484
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
SA-12
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
1998 1997
---------------------------- ----------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Blue Chip
Issuance of Units.......................... 41,977,198 $ 48,966,392 14,107,528 $ 14,719,710
Redemption of Units........................ (5,836,077) (6,785,377) (928,588) (478,549)
------------ ------------- ------------ -------------
Net increase (decrease).................. 36,141,121 $ 42,181,015 13,178,940 $ 14,241,161
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Dreman Financial Services
Issuance of Units.......................... 14,384,298 $ 13,534,406 -- $ --
Redemption of Units........................ (1,897,243) (1,655,524) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 12,487,055 $ 11,878,882 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Dreman High Return Equity
Issuance of Units.......................... 50,434,830 $ 48,454,494 -- $ --
Redemption of Units........................ (4,676,526) (4,289,705) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 45,758,304 $ 44,164,789 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
International Growth and Income
Issuance of Units.......................... 2,372,606 $ 2,157,411 -- $ --
Redemption of Units........................ (154,237) (132,636) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 2,218,369 $ 2,024,775 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Global Blue Chip
Issuance of Units.......................... 2,508,836 $ 2,383,694 -- $ --
Redemption of Units........................ (126,536) (104,350) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 2,382,300 $ 2,279,344 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
VLIF International
Issuance of Units.......................... 6,075,894 $ 5,956,552 -- $ --
Redemption of Units........................ (1,483,663) (1,403,178) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 4,592,231 $ 4,553,374 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
VLIF Global Discovery
Issuance of Units.......................... 2,893,238 $ 2,546,075 -- $ --
Redemption of Units........................ (123,549) (90,955) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 2,769,689 $ 2,455,120 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
VLIF Capital Growth
Issuance of Units.......................... 4,473,686 $ 4,253,512 -- $ --
Redemption of Units........................ (78,182) (72,958) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 4,395,504 $ 4,180,554 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
VLIF Growth and Income
Issuance of Units.......................... 13,104,373 $ 11,926,667 -- $ --
Redemption of Units........................ (1,680,473) (1,501,251) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 11,423,900 $ 10,425,416 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
SA-13
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable annuity
contract, other than a contract issued in connection with certain types of
employee benefit plans, will not be treated as an annuity contract for federal
income tax purposes for any period for which the investments of the segregated
asset account on which the contract is based are not adequately diversified. The
Code provides that the "adequately diversified" requirement may be met if the
underlying investments satisfy either a statutory safe harbor test or
diversification requirements set forth in regulations issued by the Secretary of
the Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that Separate Account KG satisfies the current
requirements of the regulations, and it intends that Separate Account KG will
continue to meet such requirements.
NOTE 7 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of the Funds by Separate
Account KG during the year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------- ------------ -----------
<S> <C> <C>
Small Cap Value........................................ $ 27,977,260 $ 3,651,601
Small Cap Growth....................................... 32,353,425 2,484,493
Contrarian Value*...................................... 60,420,808 5,987,051
International.......................................... 24,230,838 3,402,150
Growth................................................. 49,880,761 2,214,944
Value+Growth........................................... 48,311,485 2,669,109
Horizon 20+............................................ 16,231,167 944,702
Total Return........................................... 78,545,770 3,192,267
Horizon 10+............................................ 23,121,759 701,257
Horizon 5.............................................. 14,371,454 925,338
High Yield............................................. 102,644,951 19,829,947
Investment Grade Bond.................................. 24,882,542 1,467,596
Government Securities.................................. 31,376,639 7,486,425
Money Market........................................... 49,184,818 34,631,835
Global Income.......................................... 2,107,370 566,325
Blue Chip.............................................. 42,553,190 643,904
Dreman Financial Services.............................. 12,529,576 711,170
Dreman High Return Equity.............................. 44,354,526 382,726
International Growth and Income........................ 2,042,671 25,514
Global Blue Chip....................................... 2,335,322 64,912
VLIF International..................................... 5,807,390 1,275,061
VLIF Global Discovery.................................. 2,448,168 2,752
VLIF Capital Growth.................................... 4,178,521 6,497
VLIF Growth and Income................................. 10,885,814 439,322
------------ -----------
Totals............................................... $712,776,225 $93,706,898
------------ -----------
------------ -----------
</TABLE>
* Name changed. See Note 1.
SA-14
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
Financial Statements Included in Part A
None
Financial Statements Included in Part B
Financial Statements for Allmerica Financial Life Insurance and
Annuity Company Financial Statements for Separate Account KG of
Allmerica Financial Life Insurance and Annuity Company
Financial Statements Included in Part C
None
(b) EXHIBITS
EXHIBIT 1 Vote of Board of Directors Authorizing Establishment of
Registrant dated June 13, 1996 was previously filed on
August 9, 1996 in Registrant's Initial Registration
Statement, and is incorporated by reference herein.
EXHIBIT 2 Not Applicable. Pursuant to Rule 26a-2, the Insurance
Company may hold the assets of the Registrant NOT
pursuant to a trust indenture or other such instrument.
EXHIBIT 3 (a) Wholesaling Agreement was previously filed on
August 9, 1996 in Registrant's Initial
Registration Statement, and is incorporated by
reference herein.
(b) Underwriting and Administrative Services Agreement
was previously filed on April 30, 1998 in
Registration Statement No. 333-09965, 811-7767
Post-Effective Amendment No. 2, and is
incorporated by reference herein.
(c) Bonus Product Commissions Schedule is filed
herewith. Sales Agreements with Commission
Schedule were previously filed on April 30,
1998 in Registration Statement No. 333-09965,
811-7767 Post-Effective Amendment No. 2, and are
incorporated by reference herein.
(d) General Agent's Agreement was previously filed
on April 30, 1998 in Registration Statement No.
333-09965, 811-7767 Post-Effective Amendment No.
2, and is incorporated by reference herein.
(e) Career Agent Agreement was previously filed on
April 30, 1998 in Registration Statement No.
333-09965, 811-7767 Post-Effective Amendment No.
2, and is incorporated by reference herein.
(f) Registered Representative's Agreement was
previously filed on April 30, 1998 in
Registration Statement No. 333-09965, 811-7767
Post-Effective Amendment No. 2, and is
incorporated by reference herein.
<PAGE>
(g) Form of Indemnification Agreement with Scudder
Kemper was previously filed on April 30, 1998 in
Post-Effective Amendment No. 2, and is
incorporated by reference herein.
EXHIBIT 4 The following are filed herewith:
(a) Contract Form A3028-99;
(b) Specification Pages Form A8028-99;
(c) Enhanced Death Benefit "EDB" Rider (Form 3263-99);
(d) Enhanced Death Benefit "EDB" Rider (Form 3264-99);
(e) Enhanced Death Benefit "EDB" Rider (Form 3265-99);
(f) Minimum Guaranteed Annuity Payout ("M-GAP") Rider
(Form 3269-99);
(g) Minimum Annuitization Floor ("MAF") Rider (Form
3267-99);
(h) Annuitization Payment Ratchet ("APR") Rider (Form
3270-99);
(i) Trail Employee Program Endorsement (Form 3274-99);
and
(j) Trail Employee Program Endorsement (Form 3275-99).
EXHIBIT 5 Application Form SML-1460K is filed herewith.
EXHIBIT 6 The Depositor's Articles of Incorporation, as amended,
effective October 1, 1995 to reflect its new name, and
Bylaws were previously filed on August 9, 1996 in
Registrant's Initial Registration Statement, and are
incorporated by reference herein.
EXHIBIT 7 Not Applicable.
EXHIBIT 8 (a) BFDS Agreements for lockbox and mailroom
services were previously filed on April 30, 1998 in
Registration Statement No. 333-09965, 811-7767
Post-Effective Amendment No. 2, and are incorporated
by reference herein.
(b) Form of Scudder Services Agreement was
previously filed on April 30, 1998 in Registration
Statement No. 333-09965, 811-7767 Post-Effective
Amendment No. 2, and is incorporated by reference
herein.
(c) Directors' Power of Attorney is filed herewith.
EXHIBIT 9 Opinion of Counsel is filed herewith.
EXHIBIT 10 Consent of Independent Accountants is filed herewith.
EXHIBIT 11 None.
EXHIBIT 12 None.
EXHIBIT 13 Not Applicable.
EXHIBIT 14 Not Applicable.
EXHIBIT 15 (a) Participation Agreement with Kemper was
previously filed on November 6, 1996 in Registration
Statement No. 333-09965, 811-7767 Pre-Effective
Amendment No. 1, and is incorporated by reference
herein.
(b) Form of Participation Agreement with Scudder
Kemper was previously filed on April 30, 1998 in
Registration Statement No. 333-09965, 811-7767
Post-Effective Amendment No. 2, and is incorporated
by reference herein.
<PAGE>
ITEM 25. DIRECTORS AND EXECUTIVE OFFICERS OF THE DEPOSITOR
The principal business address of all the following Directors and Officers
is:
440 Lincoln Street
Worcester, Massachusetts 01653
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
NAME AND POSITION WITH PRINCIPAL OCCUPATION(s) DURING PAST FIVE YEARS
COMPANY
Bruce C. Anderson Director (since 1996), Vice President (since
Director 1984) and Assistant Secretary (since 1992) of
First Allmerica
Warren E. Barnes Vice President (since 1996) and Corporate
Vice President and Controller (since 1998) of First Allmerica
Corporate Controller
Robert E. Bruce Director and Chief Information Officer (since
Director and Chief 1997) and Vice President (since 1995) of First
Information Officer Allmerica; and Corporate Manager (1979 to 1995)
of Digital Equipment Corporation
Mary Eldridge Secretary (since 1999) of First Allmerica;
Secretary Secretary (since 1999) of Allmerica Investments,
Inc.; and Secretary (since 1999) of Allmerica
Financial Investment Management Services, Inc.
John P. Kavanaugh Director and Chief Investment Officer (since
Director, Vice President 1996) and Vice President (since 1991) of First
and Chief Investment Allmerica; and Vice President (since 1998) of
Officer Allmerica Financial Investment Management
Services, Inc.
John F. Kelly Director (since 1996), Senior Vice President
Director, Vice President (since 1986), General Counsel (since 1981) and
and General Counsel Assistant Secretary (since 1991) of First
Allmerica; Director (since 1985) of Allmerica
Investments, Inc.; and Director (since 1990) of
Allmerica Financial Investment Management
Services, Inc.
J. Barry May Director (since 1996) of First Allmerica;
Director Director and President (since 1996) of The
Hanover Insurance Company; and Vice President
(1993 to 1996) of The Hanover Insurance Company
James R. McAuliffe Director (since 1996) of First Allmerica;
Director Director (since 1992), President (since 1994) and
Chief Executive Officer (since 1996) of Citizens
Insurance Company of America
John F. O'Brien Director, President and Chief Executive Officer
Director and Chairman (since 1989) of First Allmerica; Director (since
of the Board 1989) of Allmerica Investments, Inc.; and
Director and Chairman of the Board (since 1990)
of Allmerica Financial Investment Management
Services, Inc.
Edward J. Parry, III Director and Chief Financial Officer (since 1996)
Director, Vice President, and Vice President and Treasurer (since 1993) of
Chief Financial Officer First Allmerica; Treasurer (since 1993) of
and Treasurer Allmerica Investments, Inc.; and Treasurer (since
1993) of Allmerica Financial Investment
Management Services, Inc.
Richard M. Reilly Director (since 1996) and Vice President (since
Director, President and 1990) of First Allmerica; Director (since 1990)
Chief Executive Officer of Allmerica Investments, Inc.; and Director and
President (since 1998) of Allmerica Financial
Investment Management Services, Inc.
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First
Director Allmerica; Chief Executive Officer (1996 to 1998)
of Travelers Property & Casualty; Senior Vice
President (1993 to 1996) of Aetna Life & Casualty
Company
Eric A. Simonsen Director (since 1996) and Vice President (since
Director and Vice 1990) of First Allmerica; Director (since 1991)
President of Allmerica Investments, Inc.; and Director
(since 1991) of Allmerica Financial Investment
Management Services, Inc.
Phillip E. Soule Director (since 1996) and Vice President (since
Director 1987) of First Allmerica
<PAGE>
ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT
<TABLE>
<CAPTION>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | |
______________________________________________________________________________________________________________
Financial 100% 100% 100% 100% 100% 100%
Profiles, Inc. Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica First Sterling
Funding Corp. Financial Life Trust I Services Limited
Insurance Corporation
Company
California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| |
30% _________________ _____________
| |
100% 100%
SMA First Sterling
Financial Corp. Reinsurance
Company
Limited
Massachusetts Bermuda
|
______________________________________________________________________________________________________________________
| | | | | |
70% 100% 99.2% 100% 100% 100%
Allmerica Sterling Risk Allmerica Allmerica Allmerica Allmerica
Property Management Trust Investments, Financial Financial Life
& Casualty Services, Inc. Company, N.A. Inc. Investment Insurance and
Companies, Inc. Management Annuity Company
Services, Inc.
Federally
Delaware Delaware Chartered Massachusetts Massachusetts Delaware
|
___________________________________________________________________________
| | | |
100% 100% 100% 100%
APC The Hanover Allmerica Citizens
Funding Corp. Insurance Financial Insurance
Company Insurance Company of
Brokers, Inc. Illinois
Massachusetts New Hampshire Massachusetts Illinois
|
______________________________________________________________________________________________________________________
| | | | |
100% 100% 100% 100% 82.5% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts
Financial Plus American Insurance Corporation Bay Insurance
Benefit Insurance Insurance Management Company
Insurance Agency, Inc. Company Company, Inc.
Company
Pennsylvania Massachusetts New Hampshire Texas Delaware New Hampshire
|
________________________________________________________
| | |
100% 100% 100%
Citizens Citizens Insurance Citizens
Insurance Company of Insurance
Company of Ohio America Company of the
Midwest
Ohio Michigan Indiana
|
_______________
100%
Citizens
Management Inc.
Michigan
</TABLE>
<TABLE>
<CAPTION>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | |
_______________________________________________________________________________________________________________________
Financial 100% 100% 100% 100% 100% 100%
Profiles, Inc. Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica First Sterling
Funding Corp. Financial Life Trust I Services Limited
Insurance Corporation
Company
California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| |
_____________________________________________________________________________________________________________________
| | | | |
100% 100% 100% 100% 100%
Allmerica Allmerica Allmerica Allmerica Allmerica
Investment Asset Financial Services Asset Benefits
Management Management, Insurance Management, Inc.
Company, Inc. Inc. Agency, Inc. Limited
Massachusetts Massachusetts Massachusetts Bermuda Florida
________________ _________________________________
Allmerica Equity Greendale AAM
Index Pool Special Equity Fund
Placements
Fund
Massachusetts Massachusetts Massachusetts
_____________________________________
| | -------------- Grantor Trusts established for the benefit of First
100% 100% Allmerica, Allmerica Financial Life, Hanover and
Allmerica AMGRO, Inc. Citizens
Financial Allmerica Allmerica
Alliance Investment Trust Securities
Insurance Trust
Company
Massachusetts Massachusetts
New Hampshire Massachusetts
|
_______________
|
100% -------------- Affiliated Management Investment Companies
Lloyds
Credit Hanover Lloyd's
Corporation Insurance
Company
Massachusetts Texas
-------------- Affiliated Lloyd's plan company, controlled by
Underwriters for the benefit of The Hanover
Insurance Company
AAM AAM
Growth & High
Income Fund Yield Fund,
L.P. L.L.C.
Delaware Massachusetts
-------------- L.P. or L.L.C. established for the benefit of
First Allmerica, Allmerica
Financial Life, Hanover and
Citizens
</TABLE>
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
NAME ADDRESS TYPE OF BUSINESS
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor
Worcester MA 01653 Trust Limited
Partnership
AAM Growth & Income Fund, L.P. 440 Lincoln Street
Worcester MA 01653
AFC Capital Trust I 440 Lincoln Street Statutory Business
Worcester MA 01653 Trust
Allmerica Asset Management 440 Lincoln Street Investment advisory
Limited Worcester MA 01653 services
Allmerica Asset Management, 440 Lincoln Street Investment advisory
Inc. Worcester MA 01653 services
Allmerica Benefits, Inc. 440 Lincoln Street Non-insurance medical
Worcester MA 01653 services
Allmerica Equity Index Pool 440 Lincoln Street Massachusetts Grantor
Worcester MA 01653 Trust
Allmerica Financial Alliance 100 North Parkway Multi-line property
Insurance Company Worcester MA 01605 and casualty
insurance
Allmerica Financial Benefit 100 North Parkway Multi-line property
Insurance Company Worcester MA 01605 and casualty insurance
Allmerica Financial Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Financial Insurance 440 Lincoln Street Insurance Broker
Brokers, Inc. Worcester MA 01653
Allmerica Financial Life 440 Lincoln Street Life insurance,
Insurance and Annuity Company Worcester MA 01653 accident and health
(formerly known as SMA Life insurance, annuities,
Assurance Company) variable annuities and
variable life
insurance
Allmerica Financial Services 440 Lincoln Street Insurance Agency
Insurance Agency, Inc. Worcester MA 01653
Allmerica Funding Corp. 440 Lincoln Street Special purpose
Worcester MA 01653 funding vehicle for
commercial paper
Allmerica, Inc. 440 Lincoln Street Common employer for
Worcester MA 01653 Allmerica Financial
Corporation entities
Allmerica Financial Investment 440 Lincoln Street
Management Services, Inc. Worcester MA 01653 Investment advisory
(formerly known as Allmerica services
Institutional Services, Inc.
and 440 Financial Group of
Worcester, Inc.)
Allmerica Investment Management 440 Lincoln Street Investment advisory
Company, Inc. Worcester MA 01653 services
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail
Worcester MA 01653 broker-dealer
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Plus Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
<PAGE>
Allmerica Property & Casualty 440 Lincoln Street Holding Company
Companies, Inc. Worcester MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services Corporation 440 Lincoln Street Internal
Worcester MA 01653 administrative
services provider to
Allmerica Financial
Corporation entities
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose
Worcester MA 01653 national trust company
AMGRO, Inc. 100 North Parkway Premium financing
Worcester MA 01605
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance Company of 645 West Grand River Multi-line property
America Howell MI 48843 and casualty insurance
Citizens Insurance Company of 333 Pierce Road Multi-line property
Illinois Itasca IL 60143 and casualty insurance
Citizens Insurance Company of 3950 Priority Way Multi-line property
the Midwest South Drive, Suite and casualty insurance
200
Indianapolis IN
46280
Citizens Insurance Company of 8101 N. High Street Multi-line property
Ohio P.O. Box 342250 and casualty insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management
Howell MI 48843 company
Financial Profiles 5421 Avenida Encinas Computer software
Carlsbad, CA 92008 company
First Allmerica Financial Life 440 Lincoln Street Life, pension,
Insurance Company (formerly Worcester MA 01653 annuity, accident and
State Mutual Life Assurance health insurance
Company of America) company
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
First Sterling Reinsurance 440 Lincoln Street Reinsurance Company
Company Limited Worcester MA 01653
Greendale Special Placements 440 Lincoln Street Massachusetts Grantor
Fund Worcester MA 01653 Trust
The Hanover American Insurance 100 North Parkway Multi-line property
Company Worcester MA 01605 and casualty insurance
The Hanover Insurance Company 100 North Parkway Multi-line property
Worcester MA 01605 and casualty insurance
<PAGE>
Hanover Texas Insurance 801 East Campbell Attorney-in-fact for
Management Company, Inc. Road Hanover Lloyd's
Richardson TX 75081 Insurance Company
Hanover Lloyd's Insurance 801 East Campbell Multi-line property
Company Road and casualty insurance
Richardson TX 75081
Lloyds Credit Corporation 440 Lincoln Street Premium financing
Worcester MA 01653 service franchises
Massachusetts Bay Insurance 100 North Parkway Multi-line property
Company Worcester MA 01605 and casualty insurance
SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester MA 01653
Sterling Risk Management 440 Lincoln Street Risk management
Services, Inc. Worcester MA 01653 services
ITEM 27. NUMBER OF CONTRACT OWNERS
As of April 30, 1999, the Variable Account had 5,507 Contract holders of
qualified Contracts and 15,222 Contract Holders of non-qualified Contracts.
ITEM 28. INDEMNIFICATION
Article VIII of the Bylaws of Allmerica Financial Life Insurance and
Annuity Company (the Depositor) states: Each Director and each Officer of
the Corporation, whether or not in office, (and his executors or
administrators), shall be indemnified or reimbursed by the Corporation
against all expenses actually and necessarily incurred by him in the
defense or reasonable settlement of any action, suit, or proceeding in
which he is made a party by reason of his being or having been a Director
or Officer of the Corporation, including any sums paid in settlement or to
discharge judgment, except in relation to matters as to which he shall be
finally adjudged in such action, suit or proceeding to be liable for
negligence or misconduct in the performance of his duties as such Director
or Officer; and the foregoing right of indemnification or reimbursement
shall not affect any other rights to which he may be entitled under the
Articles of Incorporation, any statute, bylaw, agreement, vote of
stockholders, or otherwise.
ITEM 29. PRINCIPAL UNDERWRITERS
a) Allmerica Investments, Inc. also acts as principal underwriter for the
following:
X VEL Account, VEL II Account, VEL Account III, Select Account III,
Inheiritage Account, Separate Accounts VA-A, VA-B, VA-C, VA-G,
VA-H, VA-K, VA-P, Allmerica Select Separate Account II, Group VEL
Account, Separate Account KG, Separate Account KGC, Fulcrum
Separate Account, Fulcrum Variable Life Separate Account, and
Allmerica Select Separate Account of Allmerica Financial Life
Insurance and Annuity Company
X Inheiritage Account, VEL II Account, Separate Account I, Separate
Account VA-K, Separate Account VA-P, Allmerica Select Separate
Account II, Group VEL Account, Separate Account KG, Separate
Account KGC, Fulcrum Separate Account, and Allmerica Select
Separate Account of First Allmerica Financial Life Insurance
Company
- Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors and
Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
<PAGE>
NAME POSITION OR OFFICE WITH UNDERWRITER
Emil J. Aberizk, Jr. Vice President
Edward T. Berger Vice President and Chief Compliance Officer
Richard F. Betzler, Jr. Vice President
Mary Eldridge Secretary
Philip L. Heffernan Vice President
John F. Kelly Director
Daniel Mastrototaro Vice President
William F. Monroe, Jr. Vice President
David J. Mueller Vice President and Controller
John F. O'Brien Director
Stephen Parker President, Director and Chief Executive Officer
Edward J. Parry, III Treasurer
Richard M. Reilly Director
Eric A. Simonsen Director
Mark G. Steinberg Senior Vice President
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Each account, book or other document required to be maintained by Section
31(a) of the 1940 Act and Rules 31a-1 to 31a-3 thereunder are maintained by
the Company at 440 Lincoln Street, Worcester, Massachusetts.
ITEM 31. MANAGEMENT SERVICES
The Company provides daily unit value calculations and related services for
the Company's separate accounts.
ITEM 32. UNDERTAKINGS
(a) Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to
file with the Securities and Exchange Commission ("SEC") such
supplementary and periodic information, documents, and reports as may
be prescribed by any rule or regulation of the SEC heretofore or
hereafter duly adopted pursuant to authority conferred in that
section.
(b) The Registrant hereby undertakes to include in the prospectus a
postcard that the applicant can remove to send for a Statement of
Additional Information.
(c) The Registrant hereby undertakes to deliver a Statement of Additional
Information promptly upon written or oral request, according to the
requirements of Form N-4.
<PAGE>
(d) Insofar as indemnification for liability arising under the 1933 Act
may be permitted to Directors, Officers and Controlling Persons of
Registrant under any registration statement, underwriting agreement or
otherwise, Registrant has been advised that, in the opinion of
the SEC, such indemnification is against public policy as expressed in
the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by Registrant of expenses incurred or paid by a Director,
Officer or Controlling Person of Registrant in the successful defense
of any action, suit or proceeding) is asserted by such Director,
Officer or Controlling Person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1933 Act and will be
governed by the final adjudication of such issue.
(e) The Company hereby represents that the aggregate fees and charges
under the Contracts are reasonable in relation to the services
rendered, expenses expected to be incurred, and risks assumed by the
Company.
ITEM 33. REPRESENTATIONS CONCERNING WITHDRAWAL RESTRICTIONS ON SECTION
403(b)PLANS AND UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Registrant, a separate account of Allmerica Financial Life Insurance and
Annuity Company ("Company"), states that it is (a) relying on Rule 6c-7
under the 1940 Act with respect to withdrawal restrictions under the Texas
Optional Retirement Program ("Program") and (b) relying on the "no-action"
letter (Ref. No. IP-6-88) issued on November 28, 1988 to the American
Council of Life Insurance, in applying the withdrawal restrictions of
Internal Revenue Code Section 403(b)(11). Registrant has taken the
following steps in reliance on the letter:
1. Appropriate disclosures regarding the redemption restrictions imposed
by the Program and by Section 403(b)(11) have been included in the
prospectus of each registration statement used in connection with the
offer of the Company's variable contracts.
2. Appropriate disclosures regarding the redemption restrictions imposed
by the Program and by Section 403(b)(11) have been included in sales
literature used in connection with the offer of the Company's variable
contracts.
3. Sales Representatives who solicit participants to purchase the
variable contracts have been instructed to specifically bring the
redemption restrictions imposed by the Program and by Section
403(b)(11) to the attention of potential participants.
4. A signed statement acknowledging the participant's understanding of
(I) the restrictions on redemption imposed by the Program and by
Section 403(b)(11) and (ii) the investment alternatives available
under the employer's arrangement will be obtained from each
participant who purchases a variable annuity contract prior to or at
the time of purchase.
Registrant hereby represents that it will not act to deny or limit a
transfer request except to the extent that a Service-Ruling or written
opinion of counsel, specifically addressing the fact pattern involved and
taking into account the terms of the applicable employer plan, determines
that denial or limitation is necessary for the variable annuity contracts
to meet the requirements of the Program or of Section 403(b). Any transfer
request not so denied or limited will be effected as expeditiously as
possible.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant has duly caused this initial Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Worcester, and Commonwealth of Massachusetts, on
the 15th day of June, 1999.
SEPARATE ACCOUNT KG OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Mary Eldridge
-------------------------------
Mary Eldridge, Secretary
Pursuant to the requirements of the Securities Act of 1933, this initial
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Warren E. Barnes Vice President and Corporate June 15, 1999
- ------------------------ Controller
Warren E. Barnes
Edward J. Parry III* Director, Vice President, Chief
- ------------------------ Financial Officer and Treasurer June 15, 1999
Richard M. Reilly* Director, President and
- ------------------------ Chief Executive Officer June 15, 1999
John F. O'Brien* Director and Chairman of the June 15, 1999
- ------------------------ Board
Bruce C. Anderson* Director June 15, 1999
- ------------------------
Robert E. Bruce* Director and Chief Information June 15, 1999
- ------------------------ Officer
John P. Kavanaugh* Director, Vice President and June 15, 1999
- ------------------------ Chief Investment Officer
John F. Kelly* Director, Vice President and June 15, 1999
- ------------------------ General Counsel
J. Barry May* Director June 15, 1999
- ------------------------
James R. McAuliffe* Director June 15, 1999
- ------------------------
Robert P. Restrepo, Jr.* Director June 15, 1999
- ------------------------
Eric A. Simonsen* Director and Vice President June 15, 1999
- ------------------------
Phillip E. Soule* Director June 15, 1999
- ------------------------
*Sheila B. St. Hilaire, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named Directors and Officers of the
Registrant pursuant to the Power of Attorney dated April 1, 1999 duly executed
by such persons.
/s/ Sheila B. St. Hilaire
- ---------------------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
<PAGE>
EXHIBIT TABLE
Exhibit 3(c) Bonus Product Commission Schedule
Exhibit 4 Contract Form A-3028-99, Specification Pages Form
A8028-99, Riders and Endorsements
Exhibit 5 Application Form SML-1460K
Exhibit 8(c) Directors' Power of Attorney
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
KEMPER 5.00% credit
Issue Issue
Ages 80 & Ages 81 &
Under Over
Trail Trail
------------------------ --------------------------
During During
Upfront SC period Thereafter Upfront SC period Thereafter
----------------------------------------------------------------------------------
Trail
Commission
Option
A 5.00% 0.00% 0.00% 3.00% 0.00% 0.00%
B 4.25% 0.25% 0.25% 2.75% 0.20% 0.25%
C 3.25% 0.25% 1.00% 2.25% 0.20% 1.00%
D 2.50% 0.50% 1.00% 1.75% 0.40% 1.00%
E 1.00% 1.00% 1.00% 0.75% 0.80% 1.00%
----- -------
4.00% credit
</TABLE>
<PAGE>
Exhibit 4(a)
PLEASE READ THIS CONTRACT CAREFULLY
Annuity benefit payments and other values provided by this contract, when
based on the investment performance of the Variable Account, may increase or
decrease and are not guaranteed as to fixed dollar amount. Please refer to
the Value of the Variable Account section for additional information.
Values removed from a Guarantee Period Account prior to the end of its
Guarantee Period may be subject to a Market Value Adjustment that may
increase or decrease the values. A negative Market Value Adjustment will
never be applied to the Death Benefit. A positive Market Value Adjustment,
if applicable, will be added to the Death Benefit when the benefit paid is
the contract's Accumulated Value. Please refer to the Market Value Adjustment
section for additional information.
RIGHT TO EXAMINE CONTRACT
The Owner may cancel this contract by returning it to the Company or one of
its authorized representatives within ten days after receipt. If returned,
the Company will refund an amount equal to the Accumulated Value, after
application of any Market Value Adjustment, plus any fees or other charges
imposed and less any Payment Credits. These values are determined as of the
date the contract is returned to the Company. If, however, the contract is
issued as an Individual Retirement Annuity (IRA), the Company will refund
gross payments.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
Home Office: Dover, Delaware
Principal Office: 440 Lincoln Street, Worcester, Massachusetts 01653
This is a legal contract between Allmerica Financial Life Insurance and
Annuity Company (the Company) and the Owner and is issued in consideration of
the Initial Payment shown on the Specifications page. Additional Payments
are permitted. Payments may be allocated to Variable Sub-Accounts, the Fixed
Account or Guarantee Period Accounts. While this contract is in effect, the
Company agrees to pay annuity benefits payments beginning on the Annuity Date
or to pay a Death Benefit to the Beneficiary if an Owner dies prior to the
Annuity Date.
Flexible Payment Deferred Variable and Fixed Annuity
Annuity Benefit Payments Payable on the Annuity Date
Death Benefit Payable to Beneficiary if Owner Dies prior to Annuity Date
Non-Participating
FORM A3028-99
<PAGE>
TABLE OF CONTENTS
SPECIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
OWNER, ANNUITANT AND BENEFICIARY . . . . . . . . . . . . . . . . . . . . . . 9
THE ACCUMULATION PHASE . . . . . . . . . . . . . . . . . . . . . . . . . . .
PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
PAYMENT CREDITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
VALUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
TRANSFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
WITHDRAWAL AND SURRENDER . . . . . . . . . . . . . . . . . . . . . . . . . .14
DEATH BENEFIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
THE PAYOUT PHASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ANNUITY BENEFIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
TRANSFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
WITHDRAWAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
PRESENT VALUE OF ANNUITY BENEFIT PAYMENTS. . . . . . . . . . . . . . . . . .23
DEATH OF THE ANNUITANT . . . . . . . . . . . . . . . . . . . . . . . . . . .23
ANNUITY BENEFIT PAYMENT OPTIONS. . . . . . . . . . . . . . . . . . . . . . .24
ANNUITY BENEFIT PAYMENT GUARANTEE OPTIONS. . . . . . . . . . . . . . . . . .24
ANNUITY OPTION RATES . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
FORM A3028-99
<PAGE>
DEFINITIONS
Accumulated Value The aggregate value of all accounts in this contract
before the Annuity Date. As long as the Accumulated
Value is greater than zero, the contract will stay
in effect.
Accumulation Unit A measure used to calculate the value of a
Sub-Account before annuity benefit payments begin.
Annuitant On and after the Annuity Date, the person upon whose
continuation of life annuity benefit payments
involving life contingency depend. Joint Annuitants
are permitted and unless otherwise indicated, any
reference to Annuitant shall include joint
Annuitants.
Annuity Date The date annuity benefit payments begin. The
Annuity Date is shown on the Specifications page.
Annuity Unit A measure used to calculate annuity benefit payments
under a variable annuity option.
Beneficiary The person, persons or entity entitled to the Death
Benefit prior to the Annuity Date or any annuity
benefit payments upon the death of the Owner on or
after the Annuity Date.
Company Allmerica Financial Life Insurance and Annuity
Company.
Contract Year A one-year period based on the issue date or an
anniversary thereof.
Effective Valuation Date The Valuation Date on or immediately following the
day a payment, request for transfer, withdrawal or
surrender, or proof of death is received at the
Principal Office.
Fixed Account The part of the Company's General Account to which
all or a portion of a Payment or transfer may be
allocated.
Fund Each separate investment company, investment series
or portfolio eligible for investment by a
Sub-Account of the Variable Account.
General Account All assets of the Company that are not allocated to
a Separate Account.
Gross Payment Base Total gross payments made to the contract reduced by
withdrawals which exceed the Withdrawal Without
Surrender Charge amount.
Guarantee Period The number of years that a Guaranteed Interest Rate
applies to a Guarantee Period Account.
Guarantee Period Account An account which corresponds to a Guaranteed
Interest Rate for a specified Guarantee Period and
is supported by assets in a Separate Account. The
Owner may only invest in a Guarantee Period Account
prior to the Annuity Date.
Guaranteed Interest Rate The annual effective rate of interest after daily
compounding credited to a Guarantee Period Account.
Market Value Adjustment A positive or negative adjustment to earnings in a
Guarantee Period Account assessed if any portion of
a Guarantee Period Account is withdrawn or
transferred prior to the end of its Guarantee
Period.
FORM A3028-99 7
<PAGE>
Owner The person, persons or entity entitled to exercise
the rights and privileges under this contract.
Joint Owners are permitted and unless otherwise
indicated, any reference to Owner shall include
Joint Owners.
Payment Credit The amount credited to the contract by the Company
each time a Payment is made into the contract.
Pro Rata How a Payment or withdrawal may be allocated among
the accounts. A Pro Rata allocation or withdrawal
will be made in the same proportion that the value
of each account bears to the Accumulated Value.
Request A request or notice made by the Owner, in a manner
consistent with the Company's current procedures,
which is received by the Company.
Qualified Contract A contract that is purchased in connection with a
retirement plan which meets the requirements of
Sections 401, 403, 408 and 408A, of the Internal
Revenue Code.
Separate Account A segregated account established by the Company.
The assets in a Separate Account are not commingled
with the Company's general assets and obligations.
The assets of a Separate Account are not subject to
claims arising out of any other business the Company
may conduct.
State The state or jurisdiction in which the contract is
issued.
Sub-Account A Variable Account subdivision that invests
exclusively in shares of a corresponding Fund.
Surrender Value The amount payable to the Owner on full surrender
after application of any Market Value Adjustment,
surrender charge and Contract Fee.
Survivor Annuity Benefit The number of Annuity Units (under a variable joint
Percentage life annuitization option) or the dollar value of
the annuity benefit payments (under a fixed joint
life annuitization option) paid during the
surviving Annuitant's life may be less than or
equal to the amount paid when both individuals are
living. The Survivor Annuity Benefit Percentage is
the percentage of total Annuity Units or dollars
paid in each annuity benefit during the survivor's
life. For example, with a Joint and Two-thirds
Survivor Option, the Survivor Annuity Benefit
Percentage is 66 2/3 %. This percentage is only
applicable after the death of the first Annuitant.
Valuation Date A day the values of all units are determined.
Valuation Dates occur on each day the New York Stock
Exchange is open for trading, or such other dates
when there is sufficient trading in a Fund's
portfolio securities such that the current unit
value may be materially affected.
Valuation Period The interval between two consecutive Valuation
Dates.
Variable Account The Company's Separate Account, consisting of
Sub-Accounts that invest in the underlying Funds.
FORM A3028-99 8
<PAGE>
OWNER, ANNUITANT AND BENEFICIARY
Owner When the contract is issued, the Owner will be as
shown on the Specifications page. The Owner may be
changed in accordance with the terms of this
contract. Upon the death of an Owner prior to the
Annuity Date, a Death Benefit is paid. The Maximum
Alternative Annuity Date is based upon the age of
the Owner.
The Owner may exercise all rights and options
granted in this contract or by the Company, subject
to the consent of any irrevocable Beneficiary.
Where there are joint Owners, the consent of both is
required in order to exercise any ownership rights.
Assignment Prior to the Annuity Date and prior to the death of
an Owner, the Owner may be changed at any time.
Only the Owner may assign this contract. An
absolute assignment will transfer ownership to the
assignee. This contract may also be collaterally
assigned as security. The limitations on ownership
rights while the collateral assignment is in effect
are stated in the assignment. Additional
limitations may exist for contracts issued under
provisions of the Internal Revenue Code.
An assignment will take place only when the Company
has actually received a Request in writing and
recorded the change at the Principal Office. The
Company will not be deemed to know of the assignment
until such time. When recorded, the assignment will
take effect as of the date it was signed. The
assignment will be subject to payments made or
actions taken by the Company before the change was
recorded.
The Company will not be responsible for the validity
of any assignment nor the extent of any assignee's
interest. The interests of the Beneficiary will be
subject to any assignment.
Annuitant When the contract is issued, the Annuitant will be
as shown on the Specifications page. The Annuitant
may be changed in accordance with the terms of this
contract. Prior to the Annuity Date, an Annuitant
may be replaced or added unless the Owner is a
non-natural person. At all times there must be at
least one Annuitant. If the Annuitant dies and a
replacement is not named, the Owner will be
considered to be the new Annuitant. Upon the death
of an Annuitant prior to the Annuity Date, a Death
Benefit is not paid unless the Owner is a
non-natural person.
A change of Annuitant will take place only when the
Company has actually received a Request in writing
and recorded the change at the Principal Office.
The Company will not be deemed to know of the change
of Annuitant until such time. When recorded, the
change of Annuitant will take effect as of the date
it was signed. The change of Annuitant will be
subject to payments made or actions taken by the
Company before the change was recorded.
FORM A3028-99 9
<PAGE>
Beneficiary The Beneficiary is as named on the Specifications
page unless subsequently changed. The Owner may
declare any Beneficiary to be revocable or
irrevocable. A revocable Beneficiary may be changed
at any time prior to the Annuity Date and before the
death of an Owner or after the Annuity Date and
before the death of the Annuitant. An irrevocable
Beneficiary must consent in writing to any change.
Unless otherwise indicated, the Beneficiary will be
revocable.
A Beneficiary change must be made in writing in a
form acceptable to the Company and will be subject
to the rights of any assignee of record. When the
Company receives the form, the change will take
place as of the date it was signed, even if an Owner
or the Annuitant dies after the form is signed but
prior to the Company's receipt of the form. Any
rights created by the change will be subject to
payments made or actions taken by the Company before
the change was recorded.
All benefits payable to the Beneficiary under this
contract will be divided equally among the surviving
Beneficiaries of the same class, unless the Owner
directs otherwise. If there is no surviving
Beneficiary in a particular class, then the benefit
is divided equally among the surviving Beneficiaries
of the next class. If there is no surviving
Beneficiary, the deceased Beneficiary's interest
will pass to the Owner or the Owner's estate. At
the death of the first joint Owner prior to the
Annuity Date, the surviving joint Owner is the sole,
primary Beneficiary notwithstanding that the
designated Beneficiary may be different.
The Beneficiary can not assign, transfer, commute,
anticipate or encumber the proceeds or payments
unless given that right by the Owner.
Protection of Proceeds To the extent allowed by law, this contract and any
payments made under it will be exempt from the
claims of creditors.
FORM A3028-99 10
<PAGE>
THE ACCUMULATION PHASE
PAYMENTS
Payments Each Payment is equal to the gross payment less the
amount of any applicable premium tax. The Company
reserves the right to deduct the amount of the
premium tax from the Accumulated Value at a later
date rather than when the premium tax liability is
first incurred by the Company. In no event will an
amount be deducted for premium taxes before the
Company has incurred a tax liability under
applicable State law.
Initial Payment The Initial Payment is shown on the Specifications
page.
Additional Payments Prior to the Annuity Date and before the death of an
Owner, the Owner may make additional Payments of at
least the Minimum Additional Payment Amount (see
Specifications page). Total Payments made may not
exceed [$5,000,000] without the Company's consent.
Payment Allocations The Initial Payment is allocated in accordance with
the Payment Allocation, shown on the Specifications
page. Each subsequent Payment will be allocated in
the same manner unless allocation instructions
accompany the Payment or the Payment Allocation is
changed by the Owner.
The minimum amount that may be allocated to a
Guarantee Period Account is shown on the
Specifications page. If the Owner requests an
allocation less than the minimum amount, the Company
reserves the right to apply that amount to the
[money market Sub-Account.]
PAYMENT CREDITS
Each time the Owner makes a Payment to the contract,
the Company will credit an amount equal to or
greater than such Payment multiplied by the Payment
Credit Percentage (see Specifications page). This
amount will be credited to the contract's
Accumulated Value. Each Payment Credit will be
allocated in the same manner as its corresponding
Payment.
The Payment Credit will be deducted from the amount
paid to the Owner if the Owner exercises the Right
To Examine Contract provision.
VALUES
Value of the Variable The value of a Sub-Account on a Valuation Date is
Account determined by multiplying the Accumulation Units in
that Sub-Account by the Accumulation Unit Value as
of the Valuation Date.
FORM A3028-99 11
<PAGE>
Accumulation Units are purchased when an amount is
allocated to a Sub-Account. The number of
Accumulation Units purchased equals that amount
divided by the applicable Accumulation Unit Value as
of the Valuation Date.
Accumulation Unit The value of a Sub-Account Accumulation Unit as of
Values any Valuation Date is determined by multiplying the
value of an Accumulation Unit for the preceding
Valuation Date by the Net Investment Factor for
that Valuation Period.
Net Investment Factor The Net Investment Factor 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 (which may be positive or
negative) 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 the Mortality and Expense Risk Charge
applicable to the current Valuation Period
(see Specifications page) plus any applicable
Rider charges; and
(d) is the Administrative Charge applicable to
the current Valuation Period (see
Specifications page).
The Company assumes the risk that its actual
mortality expense experience may exceed the amounts
provided under the contract. The Company guarantees
that the charge for mortality and expense risks and
the administrative charge will not be increased.
Subject to applicable State and federal laws, these
charges may be decreased or the method used to
determine the Net Investment Factor may be changed.
Value of the Fixed Amounts allocated to the Fixed Account receive
Account interest at rates periodically set by the Company.
The Company guarantees that the initial rate of
interest in effect when an amount is allocated to
the Fixed Account will remain in effect for that
amount for one year or until such amount is
transferred out of the Fixed Account, whichever is
sooner. Thereafter, the rate of interest for that
amount will be the Company's current interest rate,
but no less than the Minimum Fixed Account
Guaranteed Interest Rate (see Specifications page).
The value of the Fixed Account on any date is the
sum of amounts allocated to the Fixed Account plus
interest compounded and credited daily at the rates
applicable to those amounts. The value of the Fixed
Account will be at least equal to the minimum
required by law in the State in which this contract
is delivered.
FORM A3028-99 12
<PAGE>
Value of the Guarantee Amounts allocated to the same Guarantee Period
Period Accounts Account on the same day will be treated as one
Guarantee Period Account. The interest rate in
effect when an amount is allocated to a Guarantee
Period Account is guaranteed for the duration of
the Guarantee Period. Each time the Guaranteed
Interest Rate changes for a particular Guarantee
Period, a new Guarantee Period Account is
established.
The value of a Guarantee Period Account on any date
is the sum of amounts allocated to that Guarantee
Period Account plus interest compounded and credited
daily at the rate applicable to that amount.
Guaranteed Interest The Company will periodically set Guaranteed
Rates Interest Rates for each available Guarantee Period.
These rates will be guaranteed for the duration of
the respective Guarantee Periods. A Guaranteed
Interest Rate will never be less than the Guarantee
Period Account Minimum Interest Rate (see
Specifications page).
Renewal Guarantee At least 45 days (but not more than 75 days) prior
Periods to the end of a Guarantee Period, the Company will
notify the Owner in writing of the expiration of
that 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 as of the day
following the expiration of the Guarantee Period.
The transfer will not be subject to a Market Value
Adjustment; see "Market Value Adjustment", page [8].
Guaranteed Interest Rates corresponding to the
available Guarantee Periods may be higher or lower
than the previous Guaranteed Interest Rates. If
reallocation instructions are not received at the
Principal Office before the end of a Guarantee
Period, the Guarantee Period Account value will be
automatically applied to a new Guarantee Period
Account with the same Guarantee Period unless:
(a) less than the Guarantee Period Account Minimum
Allocation Amount (see Specifications page)
remains in the Guarantee Period Account on its
expiration date; or
(b) 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
Sub-Account.]
Contract Fee Prior to the Annuity Dates on each contract
anniversary and when the contract is surrendered,
the Company will deduct a Contract Fee (see
Specifications page) Pro Rata.
FORM A3028-99 13
<PAGE>
TRANSFER
Prior to the Annuity Date, the Owner may transfer
amounts among accounts by Request to the Principal
Office. Transfers to a Guarantee Period Account
must be at least equal to the Guarantee Period
Account Minimum Allocation Amount (see
Specifications page). If the Owner requests the
transfer of a smaller amount to the Guarantee Period
Account, the Company may transfer that amount to the
[money market Sub-Account.]
Any transfer from a Guarantee Period Account prior
to the end of its Guarantee Period will be subject
to a Market Value Adjustment.
There is no charge for the first twelve transfers
per contract year. A transfer charge of up to $25
may be imposed on each additional transfer.
The Company reserves the right to establish and
impose reasonable rules restricting transfers. All
transfers are subject to the Company's consent.
WITHDRAWAL AND SURRENDER
Prior to the Annuity Date, the Owner may, by
Request, withdraw a part of the Surrender Value or
surrender the contract for its Surrender Value.
Any withdrawal must be at least the Minimum
Withdrawal Amount (see Specifications page). A
withdrawal will not be permitted if the Accumulated
Value remaining in the contract would be less than
the Minimum Accumulated Value After Withdrawal (see
Specifications page). The Request must indicate the
dollar amount to be paid and the accounts from which
it is to be withdrawn. A withdrawal from a Guarantee
Period Account will be subject to a Market Value
Adjustment.
When surrendered, this contract terminates and the
Company has no further liability under it. The
Surrender Value will be based on the Accumulated
Value on the Effective Valuation Date.
Amounts taken from the Variable Account will be paid
within 7 days of the date a Request is received.
The Company reserves the right to delay payments
subject to applicable laws, rules and regulations
governing variable annuities.
Amounts taken from the Fixed Account or the
Guarantee Period Accounts will normally be paid
within 7 days of the date a Request is received.
The Company may defer payment for up to six months
from the receipt date.
If deferred for 30 days or more, the amount payable
will be credited interest at a rate of at least 3%
or the rate mandated by the appropriate State.
FORM A3028-99 14
<PAGE>
Withdrawal Without In each calendar year, withdrawals up to the
Surrender Charge greater of (a) or (b) may be made without a
surrender charge where:
(a) is cumulative earnings excluding Payment
Credits, calculated by determining the
Accumulated Value as of the Effective Valuation
Date reduced by total gross payments and
Payment Credits not previously withdrawn; and
(b) is a percent (see Specifications page) of the
Gross Payment Base as of the Effective
Valuation Date, reduced by any prior Withdrawal
Without Surrender Charge made in the same
calendar year.
The Withdrawal Without Surrender Charge will first
be deducted from cumulative earnings even if it is
based upon (b) above. To the extent that it exceeds
cumulative earnings, the excess will be considered
withdrawn on a last-in, first-out basis from
Payments not previously 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.
Life Expectancy For Qualified Contracts and contracts funding
Distribution Benefit employer-sponsored Internal Revenue Code section
457 plans, in each calendar year, the amount of the
Life Expectancy Distribution ("LED") benefit
available under the Company's then current LED
rules that exceeds the Withdrawal Without Surrender
Charge amount may also be withdrawn without charge.
Each calendar year the LED benefit available is
reduced by any prior Withdrawal Without Surrender
Charge in the same year. LED benefits are based on
the life expectancy of the Owner or the joint life
expectancies of the Owner and the Beneficiary.
Withdrawal With Any amounts withdrawn or surrendered in excess of
Surrender Charge the Withdrawal Without Surrender Charge amount or
Life Expectancy Distribution benefit, if
applicable, may be subject to a surrender charge.
These amounts will be taken on a first-in, first-out
basis from Payments not previously considered
withdrawn. The Company will compute applicable
charges using the Surrender Charge Table (see
Specifications page).
FORM A3028-99 15
<PAGE>
Waiver of Surrender The surrender charge will be waived if an Owner, or
Charge the Annuitant if the Owner is a non-natural person,
is:
(a) admitted to a "medical care facility" after
being named Owner or Annuitant 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
and after being named Owner or Annuitant; or
(c) "physically disabled" after the issue date
and after being named Owner or Annuitant and
before attaining age 65. The Company may
require proof of continuing disability, and
reserves the right to obtain an examination by
a licensed "physician" of its choice and at
its expense.
"Medical care facility" means any State licensed
facility 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. "Physician" means a person other than
the Owner, the 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. "Physically disabled" means the Owner or
Annuitant has been unable to engage in an occupation
or to conduct daily activities for a period of at
least 12 consecutive months as a result of disease
or bodily injury.
No additional Payments are permitted after this
provision becomes effective.
Market Value Adjustment A transfer, withdrawal or surrender from a Guarantee
Period Account after the expiration of its Guarantee
Period will not be subject to a Market Value
Adjustment. A Market Value Adjustment will apply to
all other transfers, withdrawals or surrenders from
a Guarantee Period Account. Amounts in a Guarantee
Period Account that are 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 by
the market value factor. The market value factor
for each Guarantee Period Account is equal to:
n/365
(1+i)
-----
(1+j)- 1
where:
i - is the Guaranteed Interest Rate expressed
as a decimal (for example: 3% = 0.03) being
credited to the current Guarantee Period;
FORM A3028-99 16
<PAGE>
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 an amount based on the
Guarantee Period Account Minimum Interest Rate (see
Specifications page).
DEATH BENEFIT
At the death of an Owner prior to the Annuity Date,
the Company will pay to the Beneficiary a Death
Benefit upon receipt at the Principal Office of
proof of death. If the Owner is a non-natural
person, prior to the Annuity Date, a Death Benefit
is paid on the death of an Annuitant upon receipt at
the Principal Office of proof of death.
Death Benefit The Death Benefit will be the greater of:
(a) the Accumulated Value on the Effective
Valuation Date, increased by any positive
Market Value Adjustment; or
(b) the sum of the gross payments made under this
contract prior to the date of death,
proportionately reduced to reflect all partial
withdrawals.
For each withdrawal, the proportionate
reduction is calculated by multiplying the
Death Benefit under the (b) option, immediately
prior to the withdrawal, by the following:
Amount of the withdrawal
------------------------
Accumulated Value immediately
prior to the withdrawal
FORM A3028-99 17
<PAGE>
Payment of the Death Unless the Owner has specified otherwise, the Death
Benefit Benefit will be paid to the Beneficiary within 7
days of the Effective Valuation Date.
Alternatively, the Beneficiary may, by a Request in
writing, elect to:
(a) defer distribution of the Death Benefit for a
period no more than 5 years from the date of
death; or
(b) receive distributions over his/her life
expectancy (or over a period not extending
beyond such life expectancy). Distributions
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 [money market
Sub-Account]. The excess, if any, of the Death
Benefit over the Accumulated Value will also be
transferred to the [money market Sub-Account.] The
Beneficiary may, by Request, effect transfers and
withdrawals, but may not make additional Payments.
If there are multiple Beneficiaries, the consent of
all is required.
If the sole Beneficiary is the deceased Owner's
spouse, the Beneficiary may, by Request in writing,
continue the contract and become the new 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
transferred to the [money market Sub-Account];
(c) additional Payments may be made; and
(d) any subsequent spouse of the new Owner, if
named as the Beneficiary, may not continue the
contract.
FORM A3028-99 18
<PAGE>
THE PAYOUT PHASE
ANNUITY BENEFIT
Annuity Options Annuity Options are available on a fixed, variable
or combination fixed and variable basis. The
Annuity Options described below or any alternative
option offered by the Company may be chosen. If no
option is chosen, monthly annuity benefit payments
will be made under the Fixed Life Annuity with Cash
Back option.
The Owner may also elect to have the Death Benefit
applied under any Annuity Option not extending
beyond the Beneficiary's life expectancy. Such an
election may not be altered by the Beneficiary.
Fixed annuity options are funded through the General
Account. Variable annuity options may be funded
through one or more of the Sub-Accounts. Not all
Sub-Accounts may be made available.
Selection of Annuity The Owner must select an Annuity Benefit Payment
Benefit Payments Option (see page 24 for a list of such options).
Annuity benefit payments will be paid monthly or at
any other frequency currently offered by the
Company. If the first payment would be less than
the Minimum Annuity Benefit Payment (see
Specifications page), a single payment will be made
instead. If a life annuity option has been
elected, satisfactory proof of the date of birth of
the Annuitant must be received at the Principal
Office before any payment is made. Also, if a life
annuity option has been elected, the Company may
require from time to time satisfactory proof that
the Annuitant is alive.
Annuity Benefit In the case of a variable annuity option, the Owner
Payment Change Frequency must select an Annuity Benefit Payment Change
Frequency. This is the frequency of change in the
dollar value of the variable annuity benefit
payments. For example, if an annual Annuity
Benefit Payment Change Frequency is chosen, the
dollar value of variable annuity benefit payments
will remain constant within each one-year period.
The Owner must also select the date of the first
change.
Assumed Investment In the case of a variable annuity option, the Owner
Return must select an Assumed Investment Return ("AIR").
This rate is used to determine the initial variable
annuity benefit payment and how the payment will
change over time in response to the performance of
the selected Sub-Accounts. If the actual
performance of the selected Sub-Account (as
measured by the Net Investment Factor) is equal to
the AIR, the annuity benefit payment attributable
to that Sub-Account will be constant. If the
actual performance is greater than the AIR, the
annuity benefit payment will increase. If the
actual performance is less than the AIR, the
annuity benefit payment will decrease.
Reversal of Decision The Owner may reverse the decision to annuitize by
To Annuitize a Request in writing within 90 days after the
Annuity Date. Upon receipt of such notice, the
Company will place the contract back to the
Accumulation Phase subject to the following:
FORM A3028-99 19
<PAGE>
(a) The funds applied under a variable annuity
option during this period will be treated as if
they had been invested in the Accumulation
Phase of the contract, with the same
allocations that were in effect since the
Annuity Date.
(b) The funds applied under a fixed annuity
option during this period will be treated as if
they had been invested in the Accumulation
Phase of the contract in the Fixed Account,
since the Annuity Date.
(c) Any annuity benefit payment paid or
withdrawal taken during this period will
treated as a withdrawal of the Surrender Value
as of the date of the payment or withdrawal.
Fixed annuity benefit payments will be treated
as withdrawals from the Fixed Account. Variable
annuity benefit payments will be treated as
withdrawals from the variable Sub-Accounts.
Surrender charges may apply to these
withdrawals.
(d) If the Company learns of the Owner's
decision to reverse after the Maximum
Alternative Annuity Date (see Specifications
page) the Owner must immediately select another
Annuity Benefit Payment Option.
Annuity Value The Annuity Value will be the Accumulated Value,
after application of any applicable Market Value
Adjustment less any applicable premium tax. For a
Death Benefit annuity, the Annuity Value will be the
amount of the Death Benefit, less any applicable
premium tax. The Annuity Value applied under a
variable Annuity Option is based on the Accumulation
Unit Value on a Valuation Date not more than four
weeks, uniformly applied, before the Annuity Date.
The amount of the first annuity benefit payment
under all available options except period certain
options will depend on the age and/or sex of the
Annuitant on the Annuity Date and the Annuity Value
applied. Period certain options are based only on
the duration of payments and the Annuity Value.
Annuity Unit Values A Sub-Account Annuity Unit Value on any Valuation
Date is equal to its value on the preceding
Valuation Date multiplied by the product of:
(a) a discount factor equivalent to the Assumed
Investment Return; and
(b) the Net Investment Factor of the Sub-Account
funding the annuity benefit payments for the
applicable Valuation Period.
The value of an Annuity Unit as of any date other
than a Valuation Date is equal to its value as of
the preceding Valuation Date.
Each variable annuity benefit payment is equal to
the number of Annuity Units multiplied by the
applicable value of an Annuity Unit, except that
under a Joint and Survivor Option, after the first
death, the number of units in each payment is equal
to the total number of units multiplied by the
Survivor Annuity Benefit Percentage.
FORM A3028-99 20
<PAGE>
Variable annuity benefit payments will increase or
decrease with the value of the Annuity Units as of
the date of the first payment of each Annuity
Benefit Payment Change Frequency. The Company
guarantees that the amount of each variable annuity
benefit payment will not be affected by changes in
mortality and expense experience.
Number of Annuity Units For each Sub-Account the number of Annuity Units
determining the benefit payable is equal to the
amount of the first annuity benefit payment divided
by the value of the Annuity Unit as of the Valuation
Date used to calculate the amount of the first
payment. Once annuity benefit payments begin, the
number of Annuity Units will not change unless a
split, a withdrawal or a transfer is made.
Payment of Annuity Annuity benefit payments are paid to the Owner. By
Benefit Payments request in writing, the Owner may direct that
payments are made to another person, persons or
entity. If an Owner, who is not also an Annuitant,
dies on or after the Annuity Date, the following
occurs:
(a) If the deceased Owner was the sole Owner,
then the remaining annuity benefit payments
will be payable to the Beneficiary in
accordance with the terms of the Annuity Option
selected. Upon the death of a sole Owner, the
Beneficiary becomes the Owner of the contract.
(b) If the contract has joint Owners, then the
remaining annuity benefit payments will be
payable to the surviving joint Owner in
accordance with the terms of the Annuity Option
selected. Upon the death of the surviving
joint Owner, the Beneficiary becomes the Owner
of the contract.
TRANSFER
After the Annuity Date and prior to the death of the
Annuitant, the Owner may transfer among Sub-Accounts
by Request to the Principal Office.
Transfers may increase or decrease the number of
Annuity Units in each subsequent payment.
There is no charge for the first twelve transfers
per contract year. A transfer charge of up to $25
may be imposed on each additional transfer.
The Company reserves the right to establish and
impose reasonable rules restricting transfers. All
transfers are subject to the Company's consent.
WITHDRAWAL
After the Annuity Date and prior to the death of the
Annuitant, the Owner may have the right, based on
the Annuity Option selected, to make withdrawals.
If the Death Benefit is applied under an Annuity
Option the Beneficiary may also make withdrawals in
accordance with this provision.
FORM A3028-99 21
<PAGE>
Amounts withdrawn that were applied under a variable
Annuity Option will be paid within 7 days of the
date a Request is received. The Company reserves
the right to delay payments subject to applicable
laws, rules and regulations governing variable
annuities.
Amounts withdrawn that were applied under a fixed
Annuity Option will normally be paid within 7 days
of the date a Request is received. The Company may
defer payment for up to six months from the date a
Request is received. If deferred for 30 days or
more, the amount payable will be credited interest
at a rate of at least 3% or the appropriate rate
mandated by the State.
Only one Request for withdrawal under each of the
following provisions may be made each calendar year.
Payment Withdrawal Each calendar year, the Owner can request a
Amount Option withdrawal up to an amount equal to the Payment
Withdrawal Amount (see Specifications page)
multiplied by the previous annuity benefit payment.
For fixed Annuity Options, each withdrawal
proportionately reduces the dollar amount of each
future annuity benefit payment. The proportionate
reduction is calculated by multiplying the dollar
amount of each future annuity benefit payment by the
following:
Amount of the withdrawal
------------------------
Present Value of all remaining
fixed annuity benefit payments
immediately prior to the withdrawal.
For variable Annuity Options, each withdrawal
proportionately reduces the number of Annuity Units
in each future annuity benefit payment. The
proportionate reduction is calculated by multiplying
the number of Annuity Units in each future annuity
benefit payment by the following:
Amount of the withdrawal
------------------------
Present Value of all remaining
variable annuity benefit payments
immediately prior to the withdrawal.
Present Value Over the life of the contract, for period certain,
Withdrawal Option life with period certain and cash back Annuity
Options when there are remaining guaranteed
payments, the Owner may request withdrawals which
represent a percentage of the Present Value of
those remaining guaranteed annuity benefit
payments. Each year a withdrawal is taken under
this provision, the Company records the percentage
withdrawn. Each withdrawal proportionately reduces
future annuity benefit payments. (See
proportionate reduction calculation below.) The
total percentage withdrawn over the life of the
contract cannot exceed the Present Value Withdrawal
Amount (see Specifications page).
FORM A3028-99 22
<PAGE>
For fixed Annuity Options, each withdrawal
proportionately reduces the dollar amount of each
future annuity benefit payment. The proportionate
reduction is calculated by multiplying the dollar
amount of each future annuity benefit payment by the
following:
Amount of the withdrawal
------------------------
Present Value of all remaining
fixed guaranteed annuity benefit payments
immediately prior to the withdrawal.
For variable Annuity Options, each withdrawal
proportionately reduces any remaining guaranteed
payments. The proportionate reduction is calculated
by multiplying the number of Annuity Units in each
future annuity benefit payment by the following:
Amount of the withdrawal
------------------------
Present Value of all remaining
variable guaranteed annuity benefit payments
immediately prior to the withdrawal.
If an Annuitant is still living after there are no
remaining guaranteed payments under a life with
period certain or life with cash back payout:
(a) for variable Annuity Options, the number of
Annuity Units will increase to the number of
Annuity Units payable prior to any withdrawals,
adjusted for transfers.
(b) for fixed Annuity Options, the dollar amount
of the annuity benefit payments will increase
to the amount payable prior to any withdrawals,
adjusted for transfers.
PRESENT VALUE OF ANNUITY BENEFIT PAYMENTS
For a variety of purposes, it is at times necessary
to determine the Present Value of either all future
annuity benefit payments or of future guaranteed
annuity benefit payments. Present Values are
calculated based on the Annuity 2000 Mortality
Table, male, female or unisex rates as appropriate,
and the interest rate or AIR used to determine the
annuity benefit payments increased by the following
adjustments:
Adjustment
<TABLE>
<S> <C>
Death of the Annuitant 0.00%
Withdrawals
5 or more years after the issue date 0.00%
Within 5 years of issue date:
15 or more years of annuity benefit payments being valued 1.00%
10-14 years of annuity benefit payments being valued 1.50%
Less than 10 years of annuity benefit payments being valued 2.00%
</TABLE>
DEATH OF THE ANNUITANT
Unless otherwise indicated by the Owner, upon the
death of the Annuitant, the Present Value of the
remaining guaranteed annuity benefit payments may be
paid to the Owner.
FORM A3028-99 23
<PAGE>
ANNUITY BENEFIT PAYMENT OPTIONS
PERIOD CERTAIN ANNUITY:
Periodic annuity benefit payments for a chosen
number of years. The number of years selected may
be from 5 to 30.
LIFE ANNUITY:
(a) Single Life - Periodic annuity benefit
payments during the Annuitant's life. The
annuity benefit payments do not continue after
the death of the Annuitant.
(b) Joint and Survivor - Periodic annuity benefit
payments during the joint lifetime of the joint
Annuitants. For variable options, after the
first death, the number of units in each
payment during the lifetime of the survivor is
equal to the total number of units multiplied
by the Survivor Annuity Benefit Percentage.
For fixed options, after the first death, the
dollar amount of each payment during the
lifetime of the survivor is equal to the dollar
value of each payment paid prior to such death
multiplied by the Survivor Annuity Benefit
Percentage.
ANNUITY BENEFIT PAYMENT GUARANTEE OPTIONS
If a life Annuity Option has been elected, the Owner
may also select one of the following guarantees:
PERIOD CERTAIN
Periodic guaranteed payments for a period of ten
years, or any other period currently made available
by the Company.
CASH BACK:
Upon notification of the Annuitant's death, any
excess of the Annuity Value applied over the total
amount of annuity benefit payments made will be paid
to the Owner or Beneficiary, whichever is
applicable.
ANNUITY OPTION RATES
The first variable annuity benefit payment will be
based on the Annuity Option Rates made available by
the Company on the rate basis available at the time
the Annuity Option is selected. The fixed annuity
benefit payments will be based on the greater of
the guaranteed Annuity Option Rates shown in the
tables on the following pages or the Company's
non-guaranteed current Annuity Option Rates
applicable to this class of contracts. The Company
guarantees that once an Annuity Option is selected,
the annuity benefit payments will not be affected
by changes in mortality and expense experience.
FORM A3028-99 24
<PAGE>
ANNUITY OPTION TABLES
FIRST MONTHLY ANNUITY BENEFIT PAYMENT
FOR EACH $1,000 OF ANNUITY VALUE APPLIED
<TABLE>
<CAPTION>
Age Life Annuity with Life Life Annuity
Nearest Payments Guaranteed Annuity with Cashback
Payment for 10 Years
Male Female Unisex Male Female Unisex Male Female Unisex
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
50 4.05 3.81 3.91 4.08 3.83 3.93 3.90 3.72 3.79
51 4.11 3.87 3.97 4.15 3.89 3.99 3.96 3.77 3.85
52 4.18 3.93 4.03 4.22 3.95 4.06 4.01 3.82 3.90
53 4.25 3.99 4.10 4.30 4.01 4.13 4.07 3.88 3.96
54 4.33 4.06 4.17 4.38 4.08 4.20 4.14 3.94 4.02
55 4.41 4.13 4.24 4.46 4.15 4.28 4.20 3.99 4.07
56 4.49 4.20 4.32 4.55 4.23 4.36 4.27 4.06 4.14
57 4.58 4.28 4.40 4.65 4.31 4.45 4.34 4.12 4.21
58 4.68 4.36 4.49 4.75 4.40 4.54 4.42 4.19 4.28
59 4.78 4.45 4.58 4.86 4.49 4.64 4.50 4.26 4.36
60 4.88 4.54 4.67 4.98 4.59 4.74 4.58 4.34 4.44
61 4.99 4.63 4.77 5.10 4.69 4.85 4.67 4.42 4.52
62 5.10 4.73 4.88 5.23 4.80 4.97 4.76 4.50 4.60
63 5.23 4.84 4.99 5.37 4.92 5.10 4.85 4.59 4.69
64 5.35 4.95 5.11 5.52 5.04 5.24 4.95 4.68 4.79
65 5.48 5.07 5.24 5.69 5.18 5.38 5.06 4.78 4.89
66 5.62 5.20 5.37 5.86 5.32 5.54 5.17 4.89 5.00
67 5.77 5.33 5.51 6.04 5.47 5.70 5.28 4.99 5.11
68 5.92 5.47 5.65 6.24 5.64 5.88 5.40 5.11 5.23
69 6.07 5.62 5.80 6.45 5.82 6.07 5.52 5.23 5.35
70 6.23 5.78 5.96 6.67 6.01 6.27 5.66 5.36 5.48
71 6.39 5.94 6.12 6.90 6.21 6.49 5.79 5.49 5.61
72 6.56 6.11 6.29 7.16 6.44 6.72 5.94 5.63 5.75
73 6.73 6.29 6.47 7.43 6.68 6.98 6.09 5.78 5.90
74 6.90 6.48 6.65 7.71 6.94 7.25 6.24 5.94 6.06
75 7.08 6.67 6.83 8.02 7.22 7.54 6.41 6.11 6.23
</TABLE>
These tables are based on an annual interest rate of 3%
and the Annuity 2000 Mortality Tables.
FORM A3028-99 25
<PAGE>
ANNUITY OPTION TABLES (CONTINUED)
FIRST MONTHLY ANNUITY BENEFIT PAYMENT
FOR EACH $1,000 OF ANNUITY VALUE APPLIED
Joint and Survivor Life Annuity
Older Age
50 55 60 65 70 75 80
Y 50 3.53 3.61 3.68 3.73 3.76 3.79 3.80
O
U 55 3.77 3.88 3.97 4.04 4.08 4.11
N
G 60 4.10 4.25 4.36 4.45 4.50
E
R 65 4.55 4.74 4.90 5.01
70 5.16 5.43 5.64
A
G 75 6.02 6.41
E
80 7.25
Joint and Two-Thirds Survivor Life Annuity
Older Age
50 55 60 65 70 75 80
Y 50 3.80 3.93 4.09 4.25 4.43 4.61 4.80
O
U 55 4.11 4.29 4.49 4.70 4.91 5.13
N
G 60 4.53 4.77 5.02 5.29 5.55
E
R 65 5.09 5.42 5.75 6.07
A 70 5.88 6.31 6.75
G
E 75 6.99 7.59
80 8.58
These tables are based on an annual interest rate of 3%
and the Annuity 2000 Mortality Tables.
FORM A3028-99 26
<PAGE>
ANNUITY OPTION TABLES (CONTINUED)
FIRST MONTHLY ANNUITY BENEFIT PAYMENT
FOR EACH $1,000 OF ANNUITY VALUE APPLIED
Number Variable or Certain Annuity
of Years for a Certain Period
5 17.91
10 9.61
15 6.87
20 5.51
25 4.71
30 4.18
These tables are based on an annual interest rate of 3%.
and the Annuity 2000 Mortality Tables.
FORM A3028-99 27
<PAGE>
GENERAL PROVISIONS
Entire Contract The entire contract consists of this contract, any
application attached at issue, riders,
Specifications pages and endorsements.
Misstatement of Age If the age or sex of an individual is misstated,
or Sex the Company will adjust all benefits payable to
that which would be available at the correct age or
sex. Any underpayments already made by the Company
will be paid immediately. Any overpayments will be
deducted from future annuity benefit payments.
Failure to Notify Company After the Annuity Date and once notified of the
of Annuitant Death Annuitant's death, the Company reserves the right
to recover any overpaid annuity benefit payments.
Modifications Only the President or Vice President of the Company
may modify or waive any provisions of this contract.
Agents or Brokers are not authorized to do so.
Incontestability The Company cannot challenge the validity of this
contract after it has been in force for more than
two years from the issue date.
Change of Annuity Date The Owner may change the Annuity Date by Request at
any time after the issue date. The request must be
received at the Principal Office at least one month
before the new Annuity Date. To the extent
permitted by applicable laws, rules and regulations
governing variable annuities, the new Annuity Date
must be no later than the Maximum Alternative
Annuity Date shown on the Specifications page.
Minimums All values and benefits available under this
contract equal or exceed those required by the State
in which the contract is delivered.
Annual Report The Company will furnish an annual report to the
Owner containing a statement of the number and value
of Accumulation Units credited to the Sub-Accounts,
the value of the Fixed Account and the Guarantee
Period Accounts and any other information required
by applicable law, rules and regulations.
Addition, Deletion, or The Company reserves the right, subject to
Substitution of compliance with applicable law, to add to, delete
Investments from, or substitute for the shares of a Fund that
are held by the Sub-Accounts or that the
Sub-Accounts may purchase. The Company also
reserves the right to eliminate the shares of any
Fund no longer available for investment or if the
Company believes further investment in the Fund is
no longer appropriate for the purposes of the
Sub-Accounts.
FORM A3028-99 28
<PAGE>
The Company will not substitute shares attributable
to any interest in a Sub-Account without notice to
the Owner and prior approval of the Securities and
Exchange Commission as required by the Investment
Company Act of 1940. This will not prevent the
Variable Account from purchasing other securities
for other series or classes of contracts, or from
permitting a conversion between series or classes of
contracts on the basis of requests made by Owners.
The Company reserves the right, subject to
compliance with applicable laws, to establish
additional Separate Accounts, Guarantee Period
Accounts and Sub-Accounts and to make them available
to any class or series of contracts as the Company
considers appropriate. Each new Separate Account or
Sub-Account will invest in a new investment company,
or in shares of another open-end investment company,
or such other investments as may be permitted under
applicable law. The Company also reserves the right
to eliminate or combine existing Sub-Accounts and to
transfer the assets of any Sub-Accounts to any other
Sub-Accounts. In the event of any substitution or
change, the Company may, by appropriate notice, make
such changes in this and other contracts as may be
necessary or appropriate to reflect the substitution
or change. If the Company considers it to be in the
best interests of the owners, the Variable Account
or any Sub-Account may be operated as a management
company under the Investment Company Act of 1940 or
in any other form permitted by law, or may be
de-registered under the Act in the event
registration is no longer required, or may be
combined with other accounts of the Company.
Changes in Law The Company reserves the right to make any changes
to provisions of the contract to comply with, or
give Owners the benefit of, any federal or State
statute, rule, or regulation.
Change of Name Subject to compliance with applicable law, the
Company reserves the right to change the names of
the Variable Account or the Sub-Accounts.
Federal Tax The Variable Account is not currently subject to
Considerations tax, but the Company reserves the right to assess a
charge for taxes if the Variable Account becomes
subject to tax.
Splitting of Units The Company reserves the right to split the value of
a unit, either to increase or decrease the number of
units. Any splitting of units will have no material
effect on the benefits, provisions or investment
return of this contract or upon the Owner, the
Annuitant, any Beneficiary, or the Company.
Insulation of Separate The investment performance of Separate Account
Account assets is determined separately from the other
assets of the Company. The assets of a Separate
Account equal to the reserves and liabilities of
the contracts supported by the account will not be
charged with liabilities from any other business
that the Company may conduct.
FORM A3028-99 29
<PAGE>
Flexible Payment Deferred Variable and Fixed Annuity
Annuity Benefit Payments Payable on the Annuity Date
Death Benefit Payable to Beneficiary if Owner Dies prior to Annuity Date
Non-Participating
FORM A3028-99 30
<PAGE>
Exhibit 4(b)
SPECIFICATIONS
<TABLE>
<CAPTION>
<S> <C>
Contract Type:[Non Qualified] Contract Number:[00000000000]
Issue Date:[04/01/1999] Annuity Date:[10/01/2025]
(Must be at least [2] years after issue date)
Owner:[John Doe] Owner Date of Birth:[10/25/1960]
Joint Owner:[Jack Doe] Joint Owner Date of Birth:[07/12/1960]
Annuitant:[Mary Doe] Annuitant Date of Birth:[03/19/1945]
Joint Annuitant:[Michael Doe] Joint Annuitant Date of Birth:[08/20/1954]
Annuitant Sex:[Female] Beneficiary(ies):
Joint Annuitant Sex:[Male] Primary:Surviving Joint Owner, if any
1st Contingent:[Michael Doe]
2nd Contingent:[Jack Doe]
Payment Credit Percentage: [No less than 5% of each payment under $x]
[No less than 5% of each payment
equal to or over $x]
Minimum Fixed Account Minimum Additional Payment
Guaranteed Interest Rate:[3%] Amount:[$100.00]
Guarantee Period Account Guarantee Period Account
Minimum Interest Rate:[3%] Minimum Allocation Amount:[$1,000.00]
Minimum Withdrawal Minimum Accumulated Value
Amount:[$100.00] After Withdrawal:[$1,000.00]
Minimum Annuity Maximum Alternative Annuity Date:[04/01/2045]
Benefit Payment:[$50.00] (Must be at least [2] years after the issue date)
Surrender Charge Table:
<CAPTION>
Years From Surrender Charge as a
Date of Payment Percent of the Payments
To Date of Withdrawal Withdrawn
<S> <C>
[Less than: 1 8 1/2%
2 8 1/2%
3 8 1/2%
4 8 1/2%
5 7 1/2%
6 6 1/2%
7 5 1/2%
8 3 1/2%
9 1 1/2%
Thereafter 0%"""""]
</TABLE>
Withdrawal Without Surrender Charge Percentage:"[15% of Gross Payment Base]
Mortality and Expense Risk Charge:"[1.25%] on an annual basis of the daily value
of the Sub-Account assets.
Administrative Charge:"[1.5%] on an annual basis of the daily value of the
Sub-Account assets.
Contract Fee:"[$35, if the Accumulated Value is less than $75,000.00. Waived for
401(k)s.]
Principal Office:"440 Lincoln St, Worcester, Massachusetts 01653. ({PROD PHONE})
FORM A8028-99 3 {JURISDICTION}({FORM PROD})
<PAGE>
SPECIFICATIONS (CONTINUED)
Owner:[John Doe] Contract Number:[00000000000]
Joint Owner:[Jack Doe]
Initial Payment:[$25,000.00]
Payment Allocation: (The Initial Payment is allocated in the following manner:)
VARIABLE SUB-ACCOUNTS:
[Select Emerging Markets Select Gr. & Inc.
Select Int'l Equity Fidelity VIP Eq. Inc.
T. Rowe Price Int'l Fidelity VIP High Inc.
Select Aggr. Growth Select Income
Select Capital Appr.
Select Value Opp. Allmerica Money Market]
Select Growth
Select Strategic Gr.
Fidelity VIP Growth
FIXED ACCOUNT
FORM A8028-99 4
<PAGE>
SPECIFICATIONS (CONTINUED)
Owner:[John Doe] Contract Number:[00000000000]
Joint Owner:[Jack Doe]
GUARANTEE PERIOD ACCOUNTS
GUARANTEE INTEREST EXPIRATION
"PERIOD"RATE "DATE
["2 years
"3 years
"4 years
"5 years
"6 years
"7 years
"8 years
"9 years
10 years]
----
100% TOTAL
FORM A8028-99 5
<PAGE>
SPECIFICATIONS (CONTINUED)
Owner:[John Doe] Contract Number:[00000000000]
Joint Owner:[Jack Doe]
RIDER(S) SELECTED:
<TABLE>
<CAPTION>
<S> <C>
[Enhanced Death Benefit Rider:]
[EDB Effective Annual Yield [5%]]
[EDB Charge: [.25%] on an annual basis of the Accumulated Value
of the contract deducted Pro Rata on the last day of each contract
month]
[Minimum Guaranteed Annuity Payout Rider:]
[M-GAP Effective Date: 04/01/1999
M-GAP Waiting Period: [10] years
M-GAP Effective Annual Yield: [5%]
M-GAP Annual Rider Charge: [x%]]
[Guaranteed Principal Protection Rider:]
[GPP Effective Date: 04/01/1999
GPP Waiting Period: [10] years
GPP Principal Protection Rate: [100%]
GPP Annual Rider Charge: [x%]]
ACCOUNTS:
---------
[Select Emerging Markets Select Gr. & Inc.
Select Int'l Equity Fidelity VIP Eq. Inc.
T. Rowe Price Int'l Fidelity VIP High Inc.
Select Aggr. Growth Select Income
Select Capital Appr.
Select Value Opp. Allmerica Money Market]
Select Growth
Select Strategic Gr.
Fidelity VIP Growth
</TABLE>
FORM A8028-99 6
<PAGE>
SPECIFICATIONS (SUPPLEMENT)
<TABLE>
<CAPTION>
<S> <C>
Contract Type:[Non Qualified] Contract Number:[0000000000]
Owner:[John Doe] Owner Date of Birth:[10/25/1960]
Joint Owner:[Jack Doe] Joint Owner Date of Birth:[07/12/1960]
Annuitant:[Mary Doe] Annuitant Date of Birth:[03/19/1945]
Joint Annuitant:[Michael Doe] Joint Annuitant Date of Birth:[08/20/1954]
Annuitant Sex:[Female] Beneficiary(ies):
Joint Annuitant Sex:[Male] Primary:Surviving Joint Owner, if any
1st Contingent:[Michael Doe]
2nd Contingent:[Jack Doe]
Payee: [John Doe]
Payee Address: [1 Main St, Anywhere, USA 00000]
Annuity Date: [07/06/1999]
Expiration of 90-Day Period: [10/06/1999]
Annuity Benefit Payment Option: [Joint with 2/3 Survivor Option]
Survivor Annuity Benefit Percentage: [66 2/3%]
Percentage under a Fixed Annuity Option: [30%]
Percentage under a Variable Annuity Option: [70%]
Assumed Investment Return: [4%]
Annuity Benefit Payment Change Frequency
: [Annual, beginning on 07/07/2000]
Annuity Benefit Frequency: [Monthly, Quarterly,
Semi-annual, Annual]
Variable Allocation on Annuity Date:
"SUB-ACCOUNTS
[Select Emerging Markets Select Gr. & Inc.
Select Int'l Equity Fidelity VIP Eq. Inc.
T. Rowe Price Int'l Fidelity VIP High Inc.
Select Aggr. Growth Select Income
Select Capital Appr.
Select Value Opp. Allmerica Money Market]
Select Growth
Select Strategic Gr.
Fidelity VIP Growth
</TABLE>
FORM A8028-99 3A
<PAGE>
SPECIFICATIONS (SUPPLEMENT)
<TABLE>
<CAPTION>
<S> <C>
[Variable Annuitization Rider:]
"[Payment Rachet:
APR Maximum Benefit Increase Percentage: [x%]
"[Payment Floor:
MAF Amount: [$xxx]
Amount of First Monthly Annuity Benefit Payment: [$xxx]
[Without the rider, the first monthly annuity benefit payment would have been $xxx]
Payment Withdrawal Amount: [[x] times the previous annuity benefit payment but not
more than the remaining guaranteed annuity benefit
payments.]
Present Value Withdrawal Amount: [[x%] of Present Value of remaining guaranteed
annuity payments.]
Mortality and Expense Risk Charge: [1.25%]on an annual basis of the daily value of the Sub-Account assets.
Administrative Charge: [.15%]on an annual basis of the daily value of the Sub-Account assets.
Principal Office: 440 Lincoln Street, Worcester, Massachusetts 01653. ({PROD PHONE})
</TABLE>
FORM A8028-99 4A
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ENHANCED DEATH BENEFIT "EDB" RIDER
OVERVIEW:
The EDB Rider ("Rider") is an optional rider the Owner has selected. It
provides an enhanced Death Benefit, which guarantees [7%] growth, has an
investment cap and provides a ratchet.
APPLICABILITY:
The Rider is made a part of the contract to which it is attached and is
effective on the issue date.
BENEFIT:
The "Death Benefit" provision on [page XX] of the contract is replaced by the
following:
I. If an Owner, or an Annuitant if the Owner is a non-natural person, dies
before the Annuity Date and before his/her [90th birthday, the Death
Benefit will be the greatest of:
(a) the Accumulated Value on the Effective Valuation Date increased
for any positive Market Value Adjustment ("MVA");
(b) gross payments accumulated daily at the "EDB Effective Annual
Yield" shown on the Specifications page, starting on the Effective
Valuation Date of each gross payment and ending on the date of
death, proportionately reduced for subsequent withdrawals; and
(c) the highest Accumulated Value on any contract anniversary prior
to the date of death, as determined after being increased for
any positive MVA and subsequent payments and proportionately
reduced for subsequent withdrawals.
Investment Cap - The value determined in section (b) above cannot exceed
[200%] of the total of gross payments and Payment Credits, proportionately
reduced for subsequent withdrawals.
II. If an Owner, or an Annuitant if the Owner is a non-natural person, dies
before the Annuity Date but after his/her [90th birthday, the Death
Benefit will be the greater of:
(a) the Accumulated Value on the Effective Valuation Date increased for
any positive MVA; or
(b) the Death Benefit, as calculated under Section I, that would have
been payable on the contract anniversary prior to the deceased's
[90th birthday, increased for subsequent payments and
proportionately reduced for subsequent withdrawals.
PROPORTIONATE REDUCTION:
Sections I(b), I(c) and II(b) refer to a proportionate reduction. This
proportionate reduction is calculated by multiplying the (b) or (c) value,
whichever is applicable, determined immediately prior to the withdrawal by
the following:
Amount of the withdrawal
------------------------
Accumulated Value determined immediately prior to the withdrawal
FORM 3264-99
<PAGE>
CHARGE FOR BENEFIT:
While this Rider is in effect, the Company will assess the EDB Charge (see
the Specifications page).
TERMINATION:
This Rider will terminate on the earliest of the following:
(a) the Annuity Date;
(b) when a Death Benefit is payable and the contract is not
continued under a spousal takeover; or
(c) surrender of the contract.
Signed for the Company at Dover, Delaware
FORM 3264-99
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ENHANCED DEATH BENEFIT "EDB" RIDER
OVERVIEW:
The EDB Rider ("Rider") is an optional rider the Owner has selected. It
provides an enhanced Death Benefit with a ratchet.
APPLICABILITY:
The Rider is made a part of the contract to which it is attached and is
effective on the issue date.
BENEFIT:
The "Death Benefit" provision on [page XX] of the contract is replaced by the
following:
I. If an Owner, or an Annuitant if the Owner is a non-natural person, dies
before the Annuity Date and before his/her [90th birthday, the Death
Benefit will be the greatest of:
(a) the Accumulated Value on the Effective Valuation Date increased
for any positive Market Value Adjustment ("MVA");
(b) gross payments made to the contract until the date of death,
proportionately reduced for subsequent withdrawals; and
(c) the highest Accumulated Value on any contract anniversary prior
to the date of death, as determined after being increased for any
positive MVA and subsequent payments and proportionately reduced
for subsequent withdrawals.
II. If an Owner, or an Annuitant if the Owner is a non-natural person, dies
before the Annuity Date but after his/her [90th birthday, the Death
Benefit will be the greater of:
(a) the Accumulated Value on the Effective Valuation Date increased
for any positive MVA;
(b) the Death Benefit, as calculated under Section I, that would have
been payable on the contract anniversary prior to the deceased's
[90th birthday, increased for subsequent payments and
proportionately reduced for subsequent withdrawals.
PROPORTIONATE REDUCTION:
Sections I(b), I(c) and II(b) refer to a proportionate reduction. This
proportionate reduction is calculated by multiplying the (b) or (c) value,
whichever is applicable, determined immediately prior to the withdrawal by
the following:
Amount of the withdrawal
--------------------------
Accumulated Value determined immediately prior to the withdrawal
FORM 3265-99
<PAGE>
CHARGE FOR BENEFIT:
While this Rider is in effect, the Company will assess the EDB Charge (see
the Specifications page).
TERMINATION:
This Rider will terminate on the earliest of the following:
(a) the Annuity Date;
(b) when a Death Benefit is payable and the contract is not continued
under a spousal takeover; or
(c) surrender of the contract.
Signed for the Company at Dover, Delaware
FORM 3265-99
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ENHANCED DEATH BENEFIT "EDB" RIDER
OVERVIEW:
The EDB Rider ("Rider") is an optional rider the Owner has selected. It
provides an enhanced Death Benefit, which guarantees [7%] growth and has an
investment cap.
APPLICABILITY:
The Rider is made a part of the contract to which it is attached and is
effective on the issue date.
BENEFIT:
The "Death Benefit" provision on [page XX] of the contract is replaced by the
following:
I. If an Owner, or an Annuitant if the Owner is a non-natural person, dies
before the Annuity Date and before his/her [90th birthday, the Death
Benefit will be the greater of:
(a) the Accumulated Value on the Effective Valuation Date increased
for any positive Market Value Adjustment ("MVA"); or
(b) gross payments accumulated daily at the "EDB Effective Annual Yield"
shown on the Specifications page, starting on the Effective
Valuation Date of each gross payment and ending on the date of death,
proportionately reduced for subsequent withdrawals.
Investment Cap - The value determined in section (b) above cannot exceed
[200%] of the total of gross payments and Payment Credits, proportionately
reduced for subsequent withdrawals.
II. If an Owner, or an Annuitant if the Owner is a non-natural person, dies
before the Annuity Date but after his/her [90th birthday, the death
benefit will be the greater of:
(a) the Accumulated Value on the Effective Valuation Date increased
for any positive MVA;
(b) the Death Benefit, as calculated under Section I, that would
have been payable on the contract anniversary prior to deceased's
[90th birthday, increased for subsequent payments and
proportionately reduced for subsequent withdrawals.
PROPORTIONATE REDUCTION:
Sections I(b) and II(b) refer to a proportionate reduction. This
proportionate reduction is calculated by multiplying the applicable (b)
value, determined immediately prior to the withdrawal by the following:
Amount of the withdrawal
------------------------
Accumulated Value determined immediately prior to the withdrawal
FORM 3266-99
<PAGE>
CHARGE FOR BENEFIT:
While this Rider is in effect, the Company will assess the EDB Charge (see
the Specifications page).
TERMINATION:
This Rider will terminate on the earliest of the following:
(a) the Annuity Date;
(b) when a Death Benefit is payable and the contract is not continued
under a spousal takeover; or
(c) surrender of the contract.
Signed for the Company at Dover, Delaware
FORM 3266-99
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
MINIMUM GUARANTEED ANNUITY PAYOUT ("M-GAP") RIDER
OVERVIEW:
The M-GAP Rider ("Rider") is an optional rider the Owner has selected. It
guarantees a minimum Annuity Value provided the Owner elects to begin annuity
benefit payments in accordance with the provisions of the Rider.
DEFINITIONS:
"M-GAP Effective Date" - [xx/yy/zz]
The date on which the Rider is effective. If the Rider is selected (1)
at issue or within the 30-day period immediately thereafter,
the "M-GAP Effective Date" is the contract issue date. If the Rider is
selected on a contract anniversary or within the 30-day period immediately
thereafter, the "M-GAP Effective Date" is that contract anniversary. If
the Rider is selected at any other time, the "M-GAP Effective Date" is
the next contract anniversary following the date of selection of the
Rider.
"M-GAP Effective Annual Yield" - [5%]
"M-GAP Initial Payment Amount" - The Accumulated Value on the "M-GAP
Effective Date."
"M-GAP Waiting Period" - the [ 10 ] - year period which begins on the "M-GAP
Effective Date." The Rider can only be exercised after the expiration of the
"M-GAP Waiting Period" and during a "M-GAP Benefit Window."
"M-GAP Annual Rider Charge" - [.25%]
"M-GAP Benefit Window" - the 30-day periods during which the Rider can be
exercised. The "M-GAP Benefit Window" always begins on a contract
anniversary. The first "M-GAP Benefit Window" begins on the contract
anniversary immediately following the "M-GAP Waiting Period." Subsequent
"M-GAP Benefit Windows" occur on each contract anniversary thereafter.
APPLICABILITY:
This Rider is part of the contract to which it is attached and is effective
on the "M-GAP Effective Date." The Rider can be exercised only when the
Owner elects to begin annuity benefit payments under all of the following
conditions:
(a) during an "M-GAP Benefit Window;"
(b) under a fixed annuity option involving a life contingency; and
(c) at the guaranteed annuity purchase rates specified under the
Annuity Option Tables in the contract.
(1) In order to be "selected," the Company must have received and recorded the
Owner's selection of the Rider.
FORM 3269-99
<PAGE>
BENEFIT:
When the Rider is exercised, the M-GAP Benefit Base, less any applicable
premium tax, is the Annuity Value. On each contract anniversary, commencing
with the "M-GAP Effective Date," the M-GAP Benefit Base is determined. The
M-GAP Benefit Base is equal to the greatest of the following:
(a) the Accumulated Value increased by any positive Market Value
Adjustment ("MVA"), if applicable;
(b) the sum of:
1) the "M-GAP Initial Payment Amount" accumulated daily at the
"M-GAP Effective Annual Yield" starting on the "M-GAP Effective
Date" and
2) gross payments to the contract after the "M-GAP Effective Date"
accumulated daily at the "M-GAP Effective Annual Yield" starting
on the Effective Valuation Date of each gross payment,
Proportionately reduced to reflect withdrawals; and
(c) the highest Accumulated Value on any contract anniversary since
the "M-GAP Effective Date" as determined after being increased for
any positive MVA and proportionately reduced for subsequent
withdrawals.
PROPORTIONATE REDUCTION:
Sections b(2) and (c) refer to a proportionate reduction. This proportionate
reduction is calculated by multiplying the (b) or (c) value, whichever is
applicable, determined immediately prior to the withdrawal by the following:
Amount of the withdrawal
------------------------
Accumulated Value determined immediately prior to the withdrawal
The M-GAP Benefit Base does not create an Accumulated Value. It is used
solely to determine the Annuity Value when the Rider is exercised.
REVERSAL OF DECISION TO ANNUITIZE:
If the Owner reverses the decision to annuitize, the excess of the M-GAP
Benefit Base over the Annuity Value without the Rider, if any, will not be
credited to the contract's Acccumulated Value.
CHARGE FOR BENEFITS:
From the "M-GAP Effective Date" until the date the Rider is terminated, the
Company will assess a monthly rider charge which will be deducted Pro Rata on
the last day of each contract month and on the date the Rider terminates.
The charge will be equal to the Accumulated Value on such date multiplied by
1/12 th of the "M-GAP Annual Rider Charge."
FORM 3269-99
<PAGE>
TERMINATION:
This Rider will terminate on the earliest of the following dates:
(a) the Annuity Date;
(b) when a Death Benefit is payable and the contract is not continued
under a spousal takeover;
(c) surrender of the contract; or
(d) receipt of the Owner's Written Request to terminate the Rider. The
Owner may terminate the Rider anytime after the end of the 7-year
period beginning on the "M-GAP Effective Date." The Rider may be
terminated prior to the end of such 7-year period only if such
termination occurs on a contract anniversary or within the 30-day
period immediately thereafter and in conjunction with the Owner's
exercise of the "Repurchase Option," described below.
REPURCHASE OPTION:
If an Owner terminates the Rider on a contract anniversary or within the
30-day period immediately thereafter, the Owner may purchase another M-GAP
Rider, at its then current charge, only if on the date of termination:
1) an M-GAP Rider is still being offered by the Company and
2) the Owner purchases an M-GAP Rider, with an "M-GAP Waiting Period"
equal to or longer than the "M-GAP Waiting Period" for this Rider.
For purposes of determining the "M-GAP Effective Date" of the new Rider, the
date of termination of this Rider will be considered to be the date of
selection of the new Rider.
Signed for the Company at Dover, Delaware
FORM 3269-99
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
MINIMUM ANNUITIZATION FLOOR ("MAF") RIDER
OVERVIEW:
The "MAF" Rider ("Rider") is an optional rider the Owner has selected. It
guarantees that although monthly variable annuity benefit payments may
increase or decrease, they will never be lower than the "MAF Amount."
DEFINITIONS:
"MAF Amount" - [$100]
The "MAF Amount" is [100%] of the Annuity Unit Value of the first annuity
benefit payment on the Annuity Date.
APPLICABILITY:
This Rider is a part of the contract to which it is attached and it is
effective on the Annuity Date.
BENEFIT:
While this Rider is in effect, each monthly variable annuity benefit payment
will never be less than the "MAF Amount," subject to the following
adjustments:
(a) Proportionately reduced for any withdrawal from the variable
Sub-Accounts after the Annuity Date and
(b) For joint and survivor options after the death of the first Annuitant,
the number of Annuity Units in each payment to the survivor is equal
to the total number of units multiplied by the Survivor Annuity
Benefit Percentage.
PROPORTIONATE REDUCTION:
In section (a) above, the proportionate reduction is calculated by
multiplying the "MAF Amount," determined immediately prior to the withdrawal,
by the following:
Amount of the withdrawal
------------------------
The Present Value of future annuity benefit payments
immediately prior to the withdrawal
CHARGE FOR BENEFITS:
There is no periodic charge for the Rider. Instead, lower Annuity Option
Rates are used to determine the first annuity benefit payment. The first
annuity benefit payment is lower than it would have been had the Rider not
been selected. Future annuity benefit payments will also be lower except
when the "MAF Amount" takes effect and provides a greater benefit. (See
Specifications page.)
FORM 3267-99
<PAGE>
TERMINATION:
This Rider will terminate upon payment of the last annuity benefit payment.
Signed for the Company at Dover, Delaware
FORM 3267-99
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ANNUITIZATION PAYMENT RATCHET ("APR") RIDER
OVERVIEW:
The "APR" Rider ("Rider") is an optional rider the Owner has selected. It
guarantees that variable annuity benefit payments within each Annuity Benefit
Payment Change Frequency will be equal to or exceed the "Current Rachet
Amount."
DEFINITIONS:
"APR Maximum Benefit Increase Percentage" - [yy%]
"Current Rachet Amount" - The amount of the last monthly variable annuity
beneift payment in the previous Annuity Benefit Payment Change Frequency
cycle. For joint annuitization options, upon the death of the first
Annuitant the Current Rachet Amount is adjusted by multiplying it by the
Survivor Annuity Benefit Percentage.
APPLICABILITY:
This Rider is a part of the contract to which it is attached and it is
effective on the Annuity Date.
BENEFIT:
While this Rider is in effect, the following is guaranteed:
The first monthly variable annuity benefit payment will not be less
than its Annuity Unit Value on the Annuity Date.
Subsequent monthly variable annuity benefit payments will never be less
than the "Current Ratchet Amount," proportionately reduced for any
subsequent withdrawals from the variable Sub-Accounts after the Annuity
Date.
The first annuity benefit payment of any Annuity Benefit Payment Change
Frequency cycle will never exceed the last payment of the previous cycle by
an amount greater than such last payment multiplied by the "APR Maximum
Benefit Increase Percentage."
PROPORTIONATE REDUCTION:
The proportionate reduction is calculated by multiplying the "Current Rachet
Amount," determined immediately prior to the withdrawal, by the following:
Amount of the withdrawal
------------------------
The Present Value of future annuity benefit payments
immediately prior to the withdrawal
CHARGE FOR BENEFITS:
There is no periodic charge for the Rider. Instead, lower Annuity Option
Rates are used to determine the first annuity benefit payment. The first
annuity benefit payment is lower than it would have been had the Rider not
been selected. Future annuity benefit payments will also be lower except
when the "Current Rachet Amount" takes effect and provides a greater benefit.
(See Specifications page.)
FORM 3270-99
<PAGE>
TERMINATION:
This Rider will terminate upon the payment of the last annuity benefit payment.
Signed for the Company at Dover, Delaware
FORM 3270-99
<PAGE>
TRAIL EMPLOYEE PROGRAM ENDORSEMENT
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ENDORSEMENT
This endorsement applies to the following class of individuals when the
Owner, Joint Owner (if applicable), Annuitant and Joint Annuitant (if
applicable) are all within the group set forth below:
[Any employee of the Company located at its Principal Office or at
off-site locations if such employees are on the Company's Principal
Office payroll; any director of the Company; any retiree who elects to
retire on his/her retirement date; the immediate family members of
those persons identified above residing in the same household; and any
beneficiary who receives a death benefit under a deceased employee's
or retiree's progess sharing plan.
For purposes of the above class of individuals, "the Company" includes
affiliates and subsidiaries; "immediate family members" means children,
siblings, parents and grandparents; "retirement date" means an employee's
early, normal or late retirement date as defined in the Company's Pension
Plan or any successor plan; and "progress sharing" means the First
Allmerica Financial Life Insurance Company Employee's Incentive and Pofit
Sharing Plan or any successor plan.]
Eligibility for the class is based upon the Owner's, Joint Owner's (if
applicable), Annuitant's and Joint Annuitant's (if applicable) status on the
Issue Date.
This contract is amended as of its Issue Date as follows:
1. The Payment Credit Percentage on page [3] of the contract is replaced by
8.5%.
Signed for the Company by:
FORM 3274-99{FORM PROD}
<PAGE>
TRAIL EMPLOYEE PROGRAM ENDORSEMENT
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ENDORSEMENT
This endorsement applies to the following class of individuals when the
Owner, Joint Owner (if applicable), Annuitant and Joint Annuitant (if
applicable) are all within the group set forth below:
[Employees and registered representatives of any broker/dealer who
have entered into a Sales Agreement with Allmerica Financial Life
Insurance and Annuity Company ("the Company") to sell the contract;
Officers, directors, and employees of the portfolios, investment
managers or sub-advisors; and
The above-referenced person's spouses and children, siblings,
parents and grandparents who reside in the same household as the
above-referenced persons.]
Eligibility for the class is based upon the Owner's, Joint Owner's (if
applicable), Annuitant's and Joint Annuitant's (if applicable) status on the
Issue Date.
This contract is amended as of its Issue Date as follows:
1. The Payment Credit Percentage on page [3] of the contract is replaced by
[5%.]
2. The first paragraph of the "Payment Credits" provision on page [14] of the
contract is replaced by the following:
"Each time the Owner makes a Payment to the contract, the Company will
credit an amount equal to or greater than the product of such Payment
and (1% plus the Payment Credit Percentage). This amount will be
credited to the contract's Accumulated Value. Each Payment Credit will
be allocated in the same manner as its corresponding Payment."
3. The second paragraph of the "Value of the Fixed Account" on page [15] of
the contract is replaced by the following:
"The value of the Fixed Account on any date is the sum of amounts
allocated to the Fixed Account plus interest compounded and credited daily
at the rates applicable to those amounts. The value of the Fixed Account
will be at least equal to the minimum required by law in the State in which
this contract is delivered.
In addition, on each contract anniversary, an amount equal to 1.0% of the
contract's Accumulated Value, net of any contract loan, if applicable,
will be credited to the Fixed Account.
Signed for the Company by:
FORM 3275-99{FORM PROD}
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
[LOGO] KEMPER GATEWAY PLUS [440 LINCOLN STREET, WORCESTER, MA 01653]
- -----------------------------------------------------------------------------
1. OWNER(S) PLEASE PRINT CLEARLY
- -----------------------------------------------------------------------------
First MI Last
- -----------------------------------------------------------------------------
Street Address
- -----------------------------------------------------------------------------
City State Zip
- -----------------------------------------------------------------------------
Social Security/Tax I.D. Date of Birth/Trust / /Male
-- -- / / / / Female
- -----------------------------------------------------------------------------
Daytime Telephone
( )
- -----------------------------------------------------------------------------
JOINT OWNER First MI Last
- -----------------------------------------------------------------------------
Social Security/Tax I.D. Date of Birth / /Male
-- -- / / / /Female
- -----------------------------------------------------------------------------
Daytime Telephone
( )
- -----------------------------------------------------------------------------
2. ANNUITANT(S) PLEASE PRINT CLEARLY
- -----------------------------------------------------------------------------
First MI Last
- -----------------------------------------------------------------------------
Social Security/Tax I.D. Date of Birth / /Male
-- -- / / / /Female
- -----------------------------------------------------------------------------
JOINT ANNUITANT First MI Last
- -----------------------------------------------------------------------------
Social Security/Tax I.D. Date of Birth / /Male
-- -- / / / /Female
- -----------------------------------------------------------------------------
3. BENEFICIARY (IF BENEFICIARY IS A TRUST, PROVIDE DATE OF TRUST)
- -----------------------------------------------------------------------------
If there are Joint Owners, the survivor is always Primary Beneficiary.
- -----------------------------------------------------------------------------
Primary Beneficiary Relationship to Owner
- -----------------------------------------------------------------------------
Primary Beneficiary Relationship to Owner
- -----------------------------------------------------------------------------
Contingent Beneficiary Relationship to Owner>
- -----------------------------------------------------------------------------
4. OPTIONAL RIDERS
- -----------------------------------------------------------------------------
[I/We elect: / /Enhanced Death Benefit Option: / /A / /B / /C
/ /Guaranteed Principal Protection: / /10 yr. / /15 yr.
/ /Minimum Guaranteed Annuity Payout: / /10 yr. / /15 yr.]
- -----------------------------------------------------------------------------
5. TYPE OF PLAN TO BE ISSUED:
- -----------------------------------------------------------------------------
[/ /Nonqualified / /IRA
/ /Nonqualified Def. Comp. / /Roth IRA
/ /401(a) Pension/Profit Sharing* / /SEP-IRA*
/ /401(k) Profit Sharing* / /457 Def. Comp.*]
/ /403(b) TSA*
*Attach required additional forms. Existing Case # _______________
- -----------------------------------------------------------------------------
6. INITIAL PAYMENT
- -----------------------------------------------------------------------------
Initial Payment $
-----------------------------------------------------------
[($2,000 minimum-Make check payable to Allmerica Financial.)
If IRA, Roth IRA or SEP-IRA application, this payment is a:]
Rollover/Conversion / /Trustee to Trustee Transfer
Payment for Tax Year _____________
- -----------------------------------------------------------------------------
7. ALLOCATIONS OF PAYMENTS
- -----------------------------------------------------------------------------
KEMPER SUBACCOUNTS
[_______% Aggressive Growth _______% Value+Growth
_______% Technology Growth _______% Horizon 20+
_______% Dreman Financial Services _______% Total Return
_______% Small Cap Growth _______% Horizon 10+
_______% Small Cap Value _______% High Yield
_______% Dreman High Return Equity _______% Horizon 5
_______% International _______% Global Income
_______% Int'l. Growth and Income _______% Inv. Grade Bond
_______% Global Blue Chip _______% Gov't. Securities
_______% Growth _______% Money Market
_______% Contrarian Value _______% _____________
_______% Blue Chip _______% _____________]
SCUDDER VLIF (VARIABLE LIFE INVESTMENT FUND) (CLASS A)
[_______% International _______% Capital Growth
_______% Global Discovery _______% Growth and Income
_______% Fixed Account]
Guarantee Period Accounts (GPA) [($1,000 minimum per Account)]
GPA'S ARE NOT AVAILABLE IN MARYLAND, OREGON AND PENNSYLVANIA.
[____% ____Year, ____% ____Year, ____% ____Year (2-10 Years)]
All allocations above must total 100%
- -----------------------------------------------------------------------------
[8. SECURE YOUR FUTURE PROGRAM]
- -----------------------------------------------------------------------------
Allocate a portion of my/our initial payment to the _______ year GPA such that,
at the end of the Guarantee Period, the GPA will have grown to an amount equal
to the total initial payment assuming no withdrawals or transfers of any kind.
The remaining balance will be applied as indicated above in Section 7.
- -----------------------------------------------------------------------------
9. AUTOMATIC ACCOUNT REBALANCING (AAR)>
- -----------------------------------------------------------------------------
/ / I/We elect [Automatic Account Rebalancing (AAR)] among the above variable
accounts every:
[/ / 1 Mo. / / 2 Mos. / / 3 Mos. / / 6 Mos. / / 12 Mos.]
- -----------------------------------------------------------------------------
10. TELEPHONE AUTHORIZATION
- -----------------------------------------------------------------------------
I/We authorize and direct Allmerica Financial to accept telephone
instructions from any person who can furnish proper identification to effect
transfers, future payment allocation changes and obtain values. Neither
Allmerica Financial nor its affiliates and their collective directors,
officers, employees and agents will be responsible for any claim arising from
such action if Allmerica Financial acted on instructions in good faith in
reliance on this authorization.
/ /I/We DO NOT accept this telephone authorization.
- -----------------------------------------------------------------------------
11. REPLACEMENT
- -----------------------------------------------------------------------------
Will the proposed contract replace or change any existing annuity
or insurance policy?
/ / No / / Yes (If yes, list company name and policy number)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<PAGE>
- -----------------------------------------------------------------------------
12. ATTACH VOIDED CHECK
- -----------------------------------------------------------------------------
(Not available with Automatic Account Rebalancing)
Please transfer $_____________ from (check one source account):
($100 minimum)
(Be sure you have allocated money to the Source Account in Section 7.)
[/ /Fixed Account / /Government Securities / /Money Market]
[Every: / /1 Mo. / /2 Mos. / /3 Mos. / /6 Mos. / /12 Months ]
TO: KEMPER SUBACCOUNTS
$_______ Aggressive Growth $_______ Value+Growth
$_______ Technology Growth $_______ Horizon 20+
$_______ Dreman Financial Services $_______ Total Return
$_______ Small Cap Growth $_______ Horizon 10+
$_______ Small Cap Value $_______ High Yield
$_______ Dreman High Return Equity $_______ Horizon 5
$_______ International $_______ Global Income
$_______ Int'l. Growth and Income $_______ Inv. Grade Bond
$_______ Global Blue Chip $_______ Gov't. Securities
$_______ Growth $_______ Money Market
$_______ Contrarian Value $_______ _____________
$_______ Blue Chip $_______ _____________
[SCUDDER VLIF (VARIABLE LIFE INVESTMENT FUND) (CLASS A)
$_______ International $_______ Capital Growth
$_______ Global Discovery $_______ Growth and Income]
[DCA into the Fixed or Guarantee Period Account is not available.
- -----------------------------------------------------------------------------
13. SYSTEMATIC WITHDRAWALS
- -----------------------------------------------------------------------------
A. Frequency (Please choose one):
/ /1 Mo. / /12 Mos. / /3 Mos. / /6 Mos. / /12 Mos.
Withdrawals begin later of 15 days after issue or _____ /______ /______.
- -----------------------------------------------------------------------------
B. Program (Please choose one):
1. / /Systematic Withdrawal without surrender charge
/ /Maximum (15% of payment)
/ /$_______________ per frequency
OR
2. / /Systematic Withdrawal (May incur surrender charges)
/ /$_______________ per frequency
- -----------------------------------------------------------------------------
C. Withdraw from:
Systematic withdrawals are not available from the Guarantee Period Accounts
/ /Pro-Rata from all accounts, OR:
__________% From _______________________________________________
__________% From _______________________________________________
__________% From _______________________________________________
__________% From _______________________________________________
- -----------------------------------------------------------------------------
D. PLEASE / / Do Not Withhold Federal Income Taxes
/ / Do Withhold at 10% or _______________ (% or $)
- -----------------------------------------------------------------------------
E. / / I/We wish to use Electronic Funds Transfer (Direct Deposit). I/We
authorize Allmerica Financial to correct electronically any overpayments or
erroneous credits made to my contract.
Attach Voided Check
- -----------------------------------------------------------------------------
14. REMARKS
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
NOTICE TO ARKANSAS/NEW JERSEY/OHIO RESIDENTS ONLY: "Any person who includes
any false or misleading information on an application for an insurance
policy/certificate is subject to criminal and civil penalties."
NOTICE TO COLORADO/KENTUCKY/MAINE/NEW MEXICO/PENNSYLVANIA RESIDENTS ONLY:
"Any person who knowingly and with intent to defraud any insurance company or
other person files an application for insurance or statement of claim
containing any materially false information or conceals for the purpose of
misleading, information concerning any fact material thereto commits a
fraudulent insurance act, which is a crime and subjects such person to
criminal and civil penalties."
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
15. SIGNATURES
- -----------------------------------------------------------------------------
I/We represent to the best of my/our knowledge and belief that the statements
made in this application are true and complete. I/We agree to all terms and
conditions as shown on the front and back. It is indicated and agreed that
the only statements which are to be construed as the basis of the contract
are those contained in this application. I/We acknowledge receipt of a
current prospectus describing the contract applied for. If IRA, Roth, or
SEP-IRA application, I/WE HAVE RECEIVED A DISCLOSURE BUYER'S GUIDE. I/WE
UNDERSTAND THAT ALL PAYMENTS AND VALUES BASED ON THE VARIABLE ACCOUNTS MAY
FLUCTUATE AND ARE NOT GUARANTEED AS TO DOLLAR AMOUNTS AND ALL PAYMENTS AND
VALUES BASED ON THE GUARANTEE PERIOD ACCOUNTS (WHERE GPAS ARE AVAILABLE) ARE
SUBJECT TO A MARKET VALUE ADJUSTMENT FORMULA, THE OPERATION OF WHICH MAY
RESULT IN EITHER UPWARD OR DOWNWARD ADJUSTMENT.
- -----------------------------------------------------------------------------
Signature of Owner Signed at (City and State) Date
- -----------------------------------------------------------------------------
Signature of Joint Owner Signed at (City and State) Date
- -----------------------------------------------------------------------------
16. REGISTERED REPRESENTATIVE / DEALER INFORMATION
- -----------------------------------------------------------------------------
DOES THE CONTRACT APPLIED FOR REPLACE AN EXISTING ANNUITY OR LIFE INSURANCE
POLICY? / /YES (ATTACH REPLACEMENT FORMS AS REQUIRED) / /NO I certify that
the information provided by the owner has been accurately recorded; a current
prospectus was delivered; no written sales materials other than those
approved by the Principal Office were used; and I have reasonable grounds to
believe the purchase of the contract applied for is suitable for the owner.
( )
- -----------------------------------------------------------------------------
Signature of Registered Representative Comm. Code SSN# Telephone
- -----------------------------------------------------------------------------
Printed Name of Registered Representative B/D Client Acct. # Printed
Name of
Broker/Dealer
- -----------------------------------------------------------------------------
Branch Office Street Address for Contract Delivery Telephone of Broker/Dealer
------------------------------------------------------
OVERNIGHT MAIL TO: 2 Heritage Drive, Quincy, MA 02171
Mail To: P.O. Box 8632, Boston, MA 02266-8632
------------------------------------------------------
<PAGE>
POWER OF ATTORNEY
We, the undersigned, hereby severally constitute and appoint Richard M. Reilly,
John F. Kelly, Joseph W. MacDougall, Jr., and Sheila B. St. Hilaire, and each of
them singly, our true and lawful attorneys, with full power to them and each of
them, to sign for us, and in our names and in any and all capacities, any and
all amendments, including post-effective amendments, to the Registration
Statements on Form N-4 of Separate Account VA-K, Separate Account VA-P,
Allmerica Select Separate Account, Separate Account KG, Separate Account KGC and
Fulcrum Separate Account of Allmerica Financial Life Insurance and Annuity
Company, and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys and each of them, acting alone, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
the premises, as fully to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys or any of
them may lawfully do or cause to be done by virtue hereof. Witness our hands on
the date set forth below.
Signature Title Date
- --------- ----- ----
/s/ John F. O'Brien Director and Chairman of the Board 4/1/99
- ------------------------------ ------
John F. O'Brien
/s/ Bruce C. Anderson Director 4/1/99
- ------------------------------ ------
Bruce C. Anderson
/s/ Robert E. Bruce Director and Chief Information 4/1/99
- ------------------------------ Officer ------
Robert E. Bruce
/s/ John P. Kavanaugh Director, Vice President and 4/1/99
- ------------------------------ Chief Investment Officer ------
John P. Kavanaugh
/s/ John F. Kelly Director, Vice President and 4/1/99
- ------------------------------ General Counsel ------
John F. Kelly
/s/ J. Barry May Director 4/1/99
- ------------------------------ ------
J. Barry May
/s/ James R. McAuliffe Director 4/1/99
- ------------------------------ ------
James R. McAuliffe
/s/ Edward J. Parry, III Director, Vice President, Chief 4/1/99
- ------------------------------ Financial Officer and Treasurer ------
Edward J. Parry, III
/s/ Richard M. Reilly Director, President and 4/1/99
- ------------------------------ Chief Executive Officer ------
Richard M. Reilly
/s/ Robert P. Restrepo, Jr. Director 4/1/99
- ------------------------------ ------
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen Director and Vice President 4/1/99
- ------------------------------ ------
Eric A. Simonsen
/s/ Phillip E. Soule Director 4/1/99
- ------------------------------ ------
Phillip E. Soule
<PAGE>
June 15, 1999
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
RE: SEPARATE ACCOUNT KG OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY
Gentlemen:
In my capacity as Assistant Vice President and Counsel of Allmerica Financial
Life Insurance and Annuity Company (the "Company"), I have participated in
the preparation of this initial Registration Statement for Separate Account
KG on Form N-4 under the Securities Act of 1933 and amendment under the
Investment Company Act of 1940, with respect to the Company's qualified and
non-qualified variable annuity contracts.
I am of the following opinion:
1. Separate Account KG is a separate account of the company validly existing
pursuant to the Delaware Insurance Code and the regulations issued
thereunder.
2. The assets held in Separate Account KG are not chargeable with liabilities
arising out of any other business the Company many conduct.
3. The variable annuity contracts, when issued in accordance with the
Prospectus contained in the initial Registration Statement and upon
compliance with applicable local law, will be legal and binding
obligations of the Company in accordance with their terms and when sold
will be legally issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to this initial
Registration Statement for Separate Account KG on Form N-4 filed under the
Securities Act of 1933 and amendment under the Investment Company Act of 1940.
Very truly yours,
/s/ Sheila B. St. Hilaire
Sheila B. St. Hilaire
Assistant Vice President and Counsel
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this initial Registration Statement of Separate Account
KG of Allmerica Financial Life Insurance and Annuity Company on Form N-4 of
our report dated February 2, 1999, except for paragraph 2 of Note 12, which
is as of March 19, 1999, relating to the financial statements of Allmerica
Financial Life Insurance and Annuity Company, and our report dated March 26,
1999, relating to the financial statements of Separate Account KG of
Allmerica Financial Life Insurance and Annuity Company, both of which appear
in such Statement of Additional Information. We also consent to the
reference to us under the heading "Experts" in such Statement of Additional
Information.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
June 15, 1999
