<PAGE> 1
Registration No. 333-15053
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Pre-Effective Amendment No. 1
to
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT TWO
----------------------------------------------------------
(Exact Name of Trust)
THE TRAVELERS LIFE AND ANNUITY COMPANY
--------------------------------------
(Name of Depositor)
One Tower Square, Hartford, Connecticut 06183
---------------------------------------------
(Complete Address of Depositor's Principal Executive Offices)
Ernest J. Wright
Secretary
The Travelers Life and Annuity Company
One Tower Square
Hartford, Connecticut 06183
---------------------------
(Name and address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
____ immediately upon filing pursuant to paragraph (b)
____ on ___________ pursuant to paragraph (b)
____ 60 days after filing pursuant to paragraph (a)(1)
____ on __________ pursuant to paragraph (a)(1) of Rule 485.
TITLE AND AMOUNT OF SECURITIES BEING REGISTERED: Pursuant to Rule 24f-2 of the
Investment Company Act of 1940, the Registrant hereby declares that an
indefinite amount of Variable Life Insurance Contracts is being registered under
the Securities Act of 1933. Proposed maximum aggregate offering price to the
public of the securities being registered:
- --------------------------------------------------------------------
AMOUNT OF FILING FEE: $500.00
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable following
the effectiveness of the Registration Statement.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
Check the box if it is proposed that this filing will become effective on
_______ at _____ pursuant to Rule 487. ______
<PAGE> 2
RECONCILIATION AND TIE BETWEEN
FORM N-8B-2 AND PROSPECTUS
<TABLE>
<CAPTION>
Item No. of
Form N-8B-2 CAPTION IN PROSPECTUS
- ----------- ---------------------
<S> <C>
1 Cover page
2 Cover page
3 Safekeeping of the Separate Account's Assets
4 Distribution of the Policy
5 The Separate Account
6 The Separate Account
7 Not applicable
8 Not applicable
9 Legal Proceedings and Opinion
10 Prospectus Summary; The Insurance Company; The Separate
Account; The Investment Options; The Policy; Transfers of
Cash Value; Policy Surrenders and Cash Surrender Value;
Voting Rights; Dividends
11 The Separate Account; The Investment Options
12 The Investment Options
13 Charges and Deductions; Distribution of the Policies
14 The Policy
15 The Policy
16 The Separate Account; The Investment Options; Allocation of
Premium Payments
17 Prospectus Summary; Right to Cancel Period; Policy
Surrenders and Cash Surrender Value; Policy Loans;
Exchange Rights
18 The Investment Options; Charges and Deductions; Federal Tax
Considerations
19 Reports to Policy Owners
20 The Insurance Company
21 Policy Loans
22 Not applicable
23 Not applicable
24 Not applicable
25 The Insurance Company
26 Not applicable
27 The Insurance Company
28 The Insurance Company; Management
29 The Insurance Company
30 Not applicable
31 Not applicable
32 Not applicable
33 Not applicable
34 Not applicable
35 Distribution of the Policy
36 Not applicable
37 Not applicable
38 Distribution of the Policy
39 Distribution of the Policy
40 Not applicable
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Item No. of
Form N-8B-2 CAPTION IN PROSPECTUS
- ----------- ---------------------
<S> <C>
41 Distribution of the Policy
42 Not applicable
43 Not applicable
44 Valuation of the Separate Account
45 Not applicable
46 The Policy; Valuation of the Separate Account; Transfers of
Cash Value; Policy Surrenders and Cash Surrender Value
47 The Separate Account; The Investment Options
48 The Insurance Company
49 Safekeeping of the Separate Account's Assets
50 Not applicable
51 Prospectus Summary; The Insurance Company; The Policy;
Death Benefits; Policy Lapse and Reinstatement
52 The Separate Account; The Investment Options; Investment
Managers
53 Federal Tax Considerations
54 Not applicable
55 Not applicable
56 Not applicable
57 Not applicable
58 Not applicable
59 Financial Statements
</TABLE>
<PAGE> 4
THE TRAVELERS VARIABLE LIFE INSURANCE
SEPARATE ACCOUNT TWO
PROSPECTUS
This Prospectus describes a modified single premium individual variable life
insurance policy (the "Policy") offered by The Travelers Life and Annuity
Company (the "Company") and funded by a segment of The Travelers Variable Life
Insurance Separate Account Two ("Separate Account Two"). Separate Account Two is
a unit investment trust and is used as a funding mechanism for the variable life
policy described in this prospectus. Other segments of the Separate Account may
be used in connection with insurance products that the company offers. The
Separate Account in accordance with your allocation instructions, invests in
certain underlying mutual funds that are referred to in this Prospectus as
"Investment Options."
These underlying Investment Options are available for purchase only through
variable insurance contracts. Although the Policy can operate as a single
premium policy, additional premium payments may be made under certain
circumstances provided there are no outstanding policy loans. The minimum
Initial Premium required to issue a Policy is $10,000.
The Policy provides for the payment of a Death Benefit upon the death of the
Insured, and for a Cash Value that can be obtained through policy loans (subject
to certain restrictions) or full or partial surrenders of the Policy. The Death
Benefit and Cash Value of a Policy will vary based on the performance of the
underlying Investment Options. There is no guaranteed minimum Cash Value for a
Policy. Additionally, the Cash Value is reduced by the various fees and charges
assessed under the Policy, as described in this Prospectus. Regardless of the
performance of the Investment Options, so long as the Policy is in force, the
Death Benefit can never be less than the current Stated Amount (with proceeds
payable reduced by outstanding policy loans and unpaid interest). The Policy
will remain in force for as long as the Cash Surrender Value is sufficient to
pay the monthly charges imposed under the Policy.
(continued on next page)
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES FOR
THE UNDERLYING INVESTMENT OPTIONS. THESE PROSPECTUSES SHOULD BE READ AND
RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO DEALER, SALESMAN, OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THE PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE INSURANCE
PROTECTION. LIFE INSURANCE IS A LONG-TERM INVESTMENT. PROSPECTIVE POLICY OWNERS
SHOULD CONSIDER THEIR NEED FOR INSURANCE COVERAGE AND THE POLICY'S LONG-TERM
INVESTMENT POTENTIAL. NO CLAIM IS MADE THAT THE POLICY IS IN ANY WAY SIMILAR OR
COMPARABLE TO AN INVESTMENT IN A MUTUAL FUND.
VARIABLE LIFE INSURANCE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
ENDORSED OR GUARANTEED BY ANY BANK, NOR ARE THEY FEDERALLY INSURED OR OTHERWISE
PROTECTED BY THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY; THEY ARE
SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL INVESTMENT.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
<PAGE> 5
From the Issue Date through the end of the Right to Cancel Period, the Initial
Premium will be allocated to the Cash Income Trust, a money market portfolio.
Thereafter, the Cash Value may be allocated to one or more of the following
Investment Options: Alliance Growth Portfolio, Putnam Diversified Income
Portfolio, MFS Total Return Portfolio of the Travelers Series Fund Inc., and the
Federated Stock, Federated High Yield, Large Cap, Equity-Income, Lazard
International Stock Portfolios, Travelers Quality Bond Portfolio, MFS Emerging
Growth, Travelers MidCap Disciplined Equity Portfolios, and three Zero Coupon
Bond Fund Portfolios (Series 1998, 2000, and 2005) of The Travelers Series
Trust, Cash Income Trust and Capital Appreciation Fund. The Policy Owner bears
the investment risk for all amounts allocated to the underlying Investment
Options and amounts allocated to such Investment Options will accumulate on a
variable basis.
The Policy has a Right to Cancel Period during which the applicant may return
the Policy to the Company for a refund, as described under "Right To Cancel
Period. "
It may not be advantageous to purchase this Policy as a replacement for another
type of life insurance or as a means to obtain additional insurance protection
if you already own a variable life insurance policy. Because the Policy is
designed to operate generally as a single premium policy, in all but very
limited circumstances the Policy will be treated as a modified endowment
contract ("MEC") for federal income tax purposes. As a modified endowment
contract, any loan, partial withdrawal, or surrender may result in adverse tax
consequences, including possible penalties. As with any life insurance contract,
however, (1) a Policy Owner generally should not be considered in constructive
receipt of the Policy's Cash Value, including incremental increases therein,
unless and until he or she is in actual receipt of distributions from the
Policy, and (2) Death Benefit payments should generally be excluded from the
gross income of the Policy beneficiary. A prospective Policy Owner who wants to
purchase a Policy that is not a modified endowment contract should consult his
or her personal tax adviser.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
GLOSSARY OF SPECIAL TERMS.............................................................. 4
PROSPECTUS SUMMARY..................................................................... 6
THE INSURANCE COMPANY.................................................................. 12
THE SEPARATE ACCOUNT................................................................... 12
Separate Account Two................................................................. 12
THE INVESTMENT OPTIONS................................................................. 13
Investment Managers.................................................................. 15
Substitutions and Additions.......................................................... 15
Mixed and Shared Funding............................................................. 15
THE POLICY............................................................................. 16
The Policy Application............................................................... 16
Eligible Purchasers.................................................................. 16
Payments Made Under the Policy....................................................... 16
Allocation of Premium Payments....................................................... 17
Right to Cancel Period............................................................... 18
CHARGES AND DEDUCTIONS................................................................. 18
MONTHLY DEDUCTION AMOUNT............................................................. 18
Cost of Insurance Charge.......................................................... 18
State Premium Tax Charges and Deferred Acquisition Cost (DAC) Tax Charges......... 19
CHARGES AGAINST THE INVESTMENT OPTIONS OF SEPARATE ACCOUNT TWO....................... 19
Mortality and Expense Risk Charge................................................. 19
Administrative Expense Charges.................................................... 20
Income Taxes...................................................................... 20
INVESTMENT OPTION EXPENSES............................................................. 20
SURRENDER CHARGES...................................................................... 20
TRANSFER CHARGE........................................................................ 21
REDUCTION OR ELIMINATION OF CHARGES.................................................... 21
VALUATION OF THE SEPARATE ACCOUNT...................................................... 21
How the Cash Value Varies............................................................ 21
How the Investment Experience is Determined.......................................... 22
Accumulation Unit Value.............................................................. 22
Net Investment Factor................................................................ 22
Valuation Periods and Valuation Dates................................................ 22
TRANSFERS OF CASH VALUE................................................................ 22
Telephone Transfers.................................................................. 23
Automated Transfers (Dollar Cost Averaging).......................................... 23
DEATH BENEFIT.......................................................................... 23
Changes in Death Benefit Option...................................................... 24
Changes in Stated Amount............................................................. 25
Maturity and Maturity Extension Benefits............................................. 25
Policy Lapse and Reinstatement....................................................... 26
Lapse Protection Guarantee Rider..................................................... 26
</TABLE>
2
<PAGE> 7
<TABLE>
<S> <C>
Accelerated Benefit Rider............................................................ 26
Exchange Rights...................................................................... 27
POLICY SURRENDERS AND CASH SURRENDER VALUE............................................. 27
Right to Surrender................................................................... 27
Full Surrenders...................................................................... 27
Partial Surrenders................................................................... 27
POLICY LOANS........................................................................... 28
Risks Associated with Loans Taken Against a Variable Life Insurance Policy........... 28
PAYMENT OPTIONS........................................................................ 29
OTHER MATTERS.......................................................................... 29
Voting Rights........................................................................ 29
Reports to Policy Owners............................................................. 30
Limit on Right to Contest and Suicide Exclusion...................................... 30
Misstatement as to Sex and Age....................................................... 31
Suspension of Valuation.............................................................. 31
Beneficiary.......................................................................... 31
Assignment........................................................................... 31
Dividends............................................................................ 31
FEDERAL TAX CONSIDERATIONS............................................................. 31
General.............................................................................. 31
TAX STATUS OF THE POLICY............................................................... 32
Definition of Life Insurance......................................................... 32
Diversification...................................................................... 32
Investor Control..................................................................... 32
TAX TREATMENT OF POLICY BENEFITS....................................................... 33
In General........................................................................... 33
Modified Endowment Contracts......................................................... 33
Exchanges............................................................................ 34
Aggregation of Modified Endowment Contracts.......................................... 34
Policies which are not Modified Endowment Contracts.................................. 34
Treatment of Loan Interest........................................................... 34
THE COMPANY'S INCOME TAXES............................................................. 34
MANAGEMENT............................................................................. 35
SENIOR OFFICERS OF THE TRAVELERS INSURANCE COMPANY..................................... 36
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS........................................... 36
DISTRIBUTION OF THE POLICY............................................................. 36
LEGAL PROCEEDINGS AND OPINION.......................................................... 37
REGISTRATION STATEMENT................................................................. 37
INDEPENDENT ACCOUNTANTS................................................................ 37
FINANCIAL STATEMENTS................................................................... 37
ILLUSTRATIONS.......................................................................... 37
APPENDIX A: PERFORMANCE INFORMATION.................................................... 43
APPENDIX B: DEATH BENEFIT EXAMPLES..................................................... 45
APPENDIX C: REPRESENTATIVE STATED AMOUNTS.............................................. 47
</TABLE>
3
<PAGE> 8
GLOSSARY OF SPECIAL TERMS
- --------------------------------------------------------------------------------
The following terms are used throughout the Prospectus, and have the indicated
meanings:
ACCUMULATION UNIT -- a standard of measurement used to calculate the values
allocated to the investment options.
AVERAGE NET GROWTH RATE -- an annual measurement of growth, used to determine
the next year's mortality and expense risk charge. For each Policy Owner, the
rate is determined each Policy Year as follows: total daily earnings of the
Investment Option(s) you select, divided by the average amount you allocated
during the Policy Year. The daily earnings are measured using the net asset
value per share of the Investment Options.
BENEFICIARY(IES) -- the person(s) named to receive the benefits of this Policy
at the Insured's death.
CASH SURRENDER VALUE -- the Cash Value less any Loan Account Value and surrender
charges.
CASH VALUE -- the current value of Accumulation Units credited to each of the
Investment Options available under the Policy, plus the value of the Loan
Account.
COMPANY'S HOME OFFICE -- the principal executive offices of The Travelers Life
and Annuity Company located at One Tower Square, Hartford, Connecticut 06183.
COVERAGE AMOUNT -- an amount equal to the Death Benefit minus the Cash Value.
DEATH BENEFIT -- the amount payable to the Beneficiary if the Insured dies while
the Policy is in force.
DEDUCTION DATE -- the day in each Policy Month on which the Monthly Deduction
Amount is deducted from the Policy's Cash Value.
GRACE PERIOD -- the period during which the Policy remains in force after the
Company has given notice to the Policy Owner that the Cash Surrender Value of
the Policy is insufficient to pay the Monthly Deduction Amount due.
INITIAL PREMIUM -- the Premium Payment made in connection with the issuance of a
Policy.
INSURED -- the person on whose life the Policy is issued.
INVESTMENT OPTIONS -- the open-end management investment companies or portfolios
thereof to which you may allocate premiums under Separate Account Two.
ISSUE DATE -- the date on which the Policy is issued by the Company for delivery
to the Policy Owner.
LOAN ACCOUNT -- an account in the Company's general account to which we transfer
the amount of any policy loan, and to which we credit a fixed rate of interest.
LOAN ACCOUNT VALUE -- the amount of any policy loan, plus capitalized loan
interest, plus the net rate of return credited to the Loan Account.
MATURITY DATE -- the anniversary of the Policy Date on which the Insured is age
100.
MINIMUM AMOUNT INSURED -- a percentage of Cash Value required to qualify this
Policy as life insurance under federal tax law.
MONTHLY DEDUCTION AMOUNT -- a monthly charge, deducted from the Policy's Cash
Value, which is comprised of the Cost of Insurance charge, the deductions for
premium tax and deferred acquisition charge ("DAC") taxes, any administrative
charge and any charge for supplemental benefits.
POLICY DATE -- the date on which the Policy becomes effective, which date is
used to determine all future cyclical transactions under the Policy (i.e.,
Deduction Dates, Policy Months, Policy Years).
POLICY MONTH -- monthly periods computed from the Policy Date.
POLICY OWNER (YOU, YOUR OR OWNER) -- the person(s) having rights to benefits
under the Policy during the lifetime of the Insured; the Policy Owner may or may
not be the Insured.
4
<PAGE> 9
POLICY YEARS -- annual periods computed from the Policy Date.
SEPARATE ACCOUNT TWO -- The Travelers Variable Life Insurance Separate Account
Two, a separate account established by The Travelers Life and Annuity Company, a
portion of which is designated to fund Portfolio Architect life insurance
policies. The Separate Account consists of segments that correspond to each
Investment Option.
STATED AMOUNT -- the amount used to determine the Death Benefit under the
Policy.
VALUATION DATE -- a day on which Accumulation Units are valued. A Valuation Date
is any day on which the New York Stock Exchange is open for trading. The value
of Accumulation Units will be determined as of the close of trading on the New
York Stock Exchange.
VALUATION PERIOD -- the period between the close of business on successive
Valuation Dates.
5
<PAGE> 10
PORTFOLIO ARCHITECT LIFE INSURANCE
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------
INTRODUCTION
The Policy described in this Prospectus is an individual variable life insurance
contract which provides for Cash Value to be allocated to one or more of the
available Investment Options available under Separate Account Two. The Policy is
credited with Accumulation Units of the applicable Investment Options.
The Policy has a death benefit, cash surrender value and other features
traditionally associated with a fixed benefit whole life insurance policy. The
Policy is "variable" because unlike the fixed benefits of an ordinary whole life
insurance contract, the Cash Value and, under certain circumstances, the Death
Benefit of the Policy may increase or decrease depending on the investment
experience of the Investment Options to which the premium payment(s) have been
allocated. The Cash Value will also vary to reflect partial cash surrenders and
Monthly Deduction Amounts. In accordance with the Continuation of Insurance
provision of the Policy, the Policy will remain in effect until the Cash
Surrender Value is insufficient to cover the Monthly Deduction Amount due. There
is no minimum guaranteed Cash Value or Cash Surrender Value and the Policy Owner
bears the investment risk associated with an investment in the Investment
Options. (See "Valuation of the Separate Account.")
WHAT TYPES OF INVESTMENT OPTIONS ARE AVAILABLE UNDER THE POLICY?
The Travelers Variable Life Insurance Separate Account Two ("Separate Account
Two"), a registered unit investment trust separate account was established by
The Travelers Life and Annuity Company (the "Company"), to fund the Policy. A
Policy Owner may allocate Cash Value among one or more of the following
investment options ("Investment Options"):
Alliance Growth Portfolio
Putnam Diversified Income Portfolio
MFS Total Return Portfolio
Federated Stock Portfolio
Federated High Yield Portfolio
Large Cap Portfolio
Equity-Income Portfolio
Lazard International Stock Portfolio
Travelers Quality Bond Portfolio
MFS Emerging Growth Portfolio
MidCap Disciplined Equity Portfolio
Zero Coupon Bond Fund Portfolio 1998
Zero Coupon Bond Fund Portfolio 2000
Zero Coupon Bond Fund Portfolio 2005
Cash Income Trust
Capital Appreciation Fund (Janus subadviser)
Additional Portfolios may be added from time to time.
Further information regarding the investment objectives for each Investment
Option (including the investment manager) is contained under "The Investment
Options" Section. Refer to each Investment Option's prospectus for a complete
description of the investment objectives, restrictions and other material
information.
WHAT ARE THE REQUIRED AND PERMISSIBLE PREMIUM PAYMENTS?
The minimum Initial Premium is $10,000. Although the Policy can operate as a
single premium policy, additional payments may be made under certain
circumstances, provided there are no outstanding policy loans. If there are any
outstanding loans, any payment received will be treated first as a repayment of
the loan rather than an additional premium payment. (See "Additional Premium
Payments." For a more detailed discussion concerning modified endowment status
as well as the procedures we will use to test for such status, please see
"Modified Endowment Contract.") No premiums can be accepted if they would
disqualify the Policy as life insurance under federal tax law. (We will test any
payment received to ensure the Policy's continued status as life insurance).
6
<PAGE> 11
The Initial Premium purchases a Death Benefit initially equal to the Policy's
Stated Amount (if Option 1 is selected), or to the Stated Amount plus the Cash
Value (if Option 2 is selected). The relationship between the Initial Premium
and the Stated Amount depends on the age and sex of the Insured (as permitted by
state law). Generally, the same Initial Premium will purchase a slightly higher
stated amount for a female Insured than for a male Insured of the same age.
Representative Stated Amounts per dollar of Initial Premium are set forth in
Appendix C.
HOW WILL PREMIUM PAYMENTS BE ALLOCATED?
During the Right to Cancel Period (as described below), the Initial Premium will
be allocated to the Cash Income Trust, a money market portfolio. After the
expiration of the Right to Cancel Period, the values in the Cash Income Trust
will be allocated to the Investment Options selected on the Policy Application
(or according to your most recent instructions), and the Policy will be credited
with the applicable Accumulation Units. (See "Allocation of Premium Payments.")
AFTER THE INITIAL ALLOCATION, MAY I CHANGE THE ALLOCATION OF MY CASH VALUE?
As long as the Policy remains in force, you may transfer all or a portion of
your Policy's Cash Value (not including the Loan Account Value) among any of the
Investment Options. Currently, transfers may be made at any time without charge.
You may request a reallocation of your investment either through written
request, or by telephone in accordance with the Company's telephone transfer
procedures. (See "Transfers of Cash Value.")
You may also request that the Company establish automated transfers of Cash
Values from any Investment Option to any other Investment Option through written
request in good order or other method acceptable to the Company. The minimum
automated transfer amount is $100 per month. (See "Automated Transfers.")
DOES THIS POLICY HAVE A RIGHT TO CANCEL PERIOD?
You have a limited right to return the Policy for cancellation and receive a
full refund. You must return the Policy, by mail or hand delivery, to the
Company or to the agent who sold the Policy during the Right to Cancel Period,
which ends 10 days after the Policy has been delivered to you, 45 days after
completion of the application, or 10 days after the Notice of Right to Cancel
has been mailed or delivered to you, whichever is latest. Within seven (7) days
following our receipt of your request for a refund, we will refund to you the
greater of (1) any premium paid, or (2) the Cash Value of the Policy on the date
we receive the returned policy, plus any charges and expenses which may have
been deducted, less any Loan Account Value. (See "Right to Cancel Period.")
WHAT TYPES OF CHARGES ARE DEDUCTED UNDER THE POLICY?
MONTHLY DEDUCTION AMOUNT. Beginning on the Policy Date, the Company will make
monthly deductions from the Policy's Cash Value on a pro rata basis from amounts
allocated to the Investment Options. The Deduction Amount may vary from month to
month and includes the cost of insurance charges, the deduction for premium tax
and Deferred Acquisition Cost (DAC) charges, any administrative charge and any
charges for certain supplemental benefits. For Policies with an initial premium
of less than $25,000, a monthly charge of $5.00 will apply for the life of the
Policy. (See "Monthly Deduction Amount.")
CHARGES AGAINST THE INVESTMENT OPTIONS UNDER SEPARATE ACCOUNT TWO. In order to
cover the Company's assumption of mortality and expense risks under the Policy,
the Company assesses a daily charge against the assets of each of the Investment
Options on a pro rata basis at an annual rate of 0.90% of such assets. This rate
will be reduced to 0.75% for the current Policy Year if the Average Net Growth
Rate of the investment options which you have selected under your Policy was
6.5% or greater for the previous Policy Year. This determination will be made
annually on the Policy Anniversary Date.
7
<PAGE> 12
The Company also assesses a daily charge against the amounts allocated to the
Investment Options at an annual rate of 0.40% to cover administrative expenses
assumed by the Company. This administrative expense charge does not exceed the
expected cost of administrative services provided by the Company under the
Policy and the Company does not expect to make a profit from the application of
this charge. (See "Charges Against the Investment Options of Separate Account
Two.")
SUMMARY OF ASSET BASED POLICY CHARGES (ASSUMING A SINGLE PREMIUM PAYMENT):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
STATE PREMIUM MORTALITY &
POLICY AND DAC EXPENSE ADMINISTRATIVE
YEARS TAX CHARGES RISK CHARGE CHARGE* TOTAL
1-10 .35% .90% .40% 1.65% (+$5 per month)
11+ N/A .90% .40% 1.30% (+$5 per month)
</TABLE>
SUMMARY OF ASSET BASED POLICY CHARGES IF THE AVERAGE NET GROWTH RATE IS 6.5% OR
MORE (ASSUMING A SINGLE PREMIUM PAYMENT):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
STATE PREMIUM MORTALITY &
POLICY AND DAC EXPENSE ADMINISTRATIVE
YEARS TAX CHARGES RISK CHARGE CHARGE* TOTAL
2-10 .35% .75% .40% 1.50% (+$5 per month)
11+ N/A .75% .40% 1.15% (+$5 per month)
</TABLE>
* Additionally a $5.00 per month administrative charge will apply if the initial
premium is less than $25,000.
SURRENDER CHARGES. A percent of premium surrender charge will be assessed upon
a full surrender of the Policy during the first nine policy years after a
Premium Payment is received by the Company. For the first two years following a
Premium Payment, the surrender charge will be 7.5% of such Premium Payment.
Thereafter, the charge will decline in years three (3) through nine (9),
respectively, as follows: 7%, 7%, 6.5%, 6%, 5%, 4% and 3%. The surrender charge
will be 0% starting in the tenth year following a Premium Payment. Partial
surrenders will also be subject to a surrender charge, except that after the
first Policy Year the Company will permit partial surrenders of the Policy's
earnings in an amount of up to 10% of the Policy's Cash Value as of the
beginning of the current Policy Year. For partial surrenders in excess of the
free withdrawal amount, a charge equal to a percentage of the amount
surrendered, not to exceed the charge that would apply to a full surrender, will
apply. (See "Surrender Charges.")
TRANSFER CHARGES. The Company reserves the right to charge up to $10 for each
transfer in excess of four (4) per Policy Year, and reserves the right to assess
a processing fee for the Automated Transfer (Dollar Cost Averaging) service.
INVESTMENT OPTION EXPENSES
Separate Account Two purchases shares of the Investment Options at net asset
value. This net asset value reflects the deduction of investment advisory fees
and other fees as follows:
8
<PAGE> 13
FUNDING OPTION EXPENSES
(as a percentage of average daily net assets of the Funding Option)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
OTHER
EXPENSES
FUNDING ---------------
PORTFOLIO NAME TOTAL
EXPENSES (AFTER EXPENSES ANNUAL OPTION
- ----------------------------------------------- ARE REIMBURSED) -------------
MANAGEMENT
FEE
----------------
(AS A PERCENTAGE
OF ASSETS)
Capital Appreciation Fund 0.75% 0.08%(2) 0.83%
- ---------------------------------------------------------------------------------------------------
Cash Income Trust 0.32% 0.46%(1)(2) 0.78%
- ---------------------------------------------------------------------------------------------------
Alliance Growth Portfolio 0.80% 0.07%(4) 0.87%
- ---------------------------------------------------------------------------------------------------
MFS Total Return Portfolio 0.80% 0.11%(2) 0.91%
- ---------------------------------------------------------------------------------------------------
Putnam Diversified Income Portfolio 0.75% 0.21%(2) 0.96%
- ---------------------------------------------------------------------------------------------------
Travelers Quality Bond Portfolio 0.32% 0.43%(2)(3) 0.75%
- ---------------------------------------------------------------------------------------------------
Lazard International Stock Portfolio 0.83% 0.42%(2)(3) 1.25%
- ---------------------------------------------------------------------------------------------------
MFS Emerging Growth Portfolio 0.75% 0.20%(2)(3) 0.95%
- ---------------------------------------------------------------------------------------------------
Federated Stock Portfolio 0.63% 0.32%(2)(3) 0.95%
- ---------------------------------------------------------------------------------------------------
Federated High Yield Portfolio 0.65% 0.30%(2)(3) 0.95%
- ---------------------------------------------------------------------------------------------------
Large Cap Portfolio (Sub-Adv. Fidelity) 0.75% 0.20%(2)(4) 0.95%
- ---------------------------------------------------------------------------------------------------
Equity Income Portfolio (Sub-Adv. Fidelity) 0.75% 0.20%(2)(4) 0.95%
- ---------------------------------------------------------------------------------------------------
Mid Cap Disciplined Equity Fund 0.70% 0.25%(2)(5) 0.95%
- ---------------------------------------------------------------------------------------------------
Zero Coupon Bond Fund Portfolio (Series 1998) 0.10% 0.05%(6) 0.15%
- ---------------------------------------------------------------------------------------------------
Zero Coupon Bond Fund Portfolio (Series 2000) 0.10% 0.05%(6) 0.15%
- ---------------------------------------------------------------------------------------------------
Zero Coupon Bond Fund Portfolio (Series 2005) 0.10% 0.05%(6) 0.15%
</TABLE>
NOTES:
1 Other Expenses take into account the current expense reimbursement arrangement
with the Company. The Company has agreed to reimburse the Fund for the amount
by which its aggregate expenses (including the management fee, but excluding
brokerage commissions, interest charges and taxes) exceeds 0.60%. This 0.60%
cap became effective during 1996 and was applied prospectively. Without such
arrangements, Other Expenses would have been 1.71% for Cash Income Trust.
2 Includes a Sub-Administrator Charge of 0.06%.
3 The Company has waived all of its fees for the period ended December 31, 1996.
In addition, the Company has agreed to reimburse the Portfolios' expenses for
the same period. Without such arrangements, Other Expenses for the The
Travelers Series Trust Travelers Quality Bond Portfolio, Lazard International
Stock Portfolio, MFS Emerging Growth Portfolio, Federated High Yield
Portfolio, and Federated Stock Portfolios would have been 1.76%, 2.87%, 2.09%,
2.19%, and 3.03% respectively.
4 Other Expenses take into account the current expense reimbursement arrangement
with the Company. The Company has agreed to reimburse the Fund for the amount
by which its aggregate expenses (including the management fee, but excluding
brokerage commissions, interest charges and taxes) exceeds 0.95%. Without such
arrangements, Other Expenses for the Travelers Series Trust Large Cap
Portfolio and Equity Income Portfolios would have been 1.55%.
5 Other Expenses for the Mid Cap Disciplined Equity Fund are based on estimated
expenses for 1996 since the portfolio has no investment history. They also
take into account the current expense reimbursement arrangement with the
Company in which The Company has agreed to reimburse the Fund for the amount
by which its aggregate expenses (including the management fee, but excluding
brokerage commissions, interest charges and taxes) exceeds 0.95%.
6 Other Expenses for the Zero Coupon Bond Fund Portfolios takes into account the
current expense reimbursement arrangement with the Company. The Company has
agreed to reimburse each Fund for the amount by which its aggregate expenses
(including the management fee, but excluding brokerage commissions, interest
charges and taxes) exceeds 0.15%. Without such arrangements Other Expenses for
the Series 1998, 2000 and 2005 portfolios would have been 6.51%, 6.51% and
6.48%, respectively.
9
<PAGE> 14
WHAT IS THE DEATH BENEFIT UNDER THE POLICY?
The Policy provides for a death benefit upon the death of the Insured. You may
choose one of two options to be used for the calculation of the Death Benefit
payable under the Policy. Under Option 1 (the Level Option), the Death Benefit
will be equal to the greater of the Stated Amount of the Policy or the Minimum
Amount Insured. Under Option 2 (the Variable Option), the Death Benefit will be
equal to the greater of the Stated Amount of the Policy plus the Cash Value
(determined as of the date of the Insured's death) or the Minimum Amount
Insured. Under both options, the Death Benefit will be reduced by any applicable
Loan Account Value, unpaid Monthly Deduction Amount, and any amount payable to
an assignee pursuant to a collateral assignment of the Policy or amounts
advanced as an accelerated death benefit to pay costs associated with a long
term care rider. You may change the Death Benefit option or the Stated Amount
subject to certain conditions. (See "Death Benefit.")
MAY I TAKE A POLICY LOAN AGAINST THE CASH VALUE OF MY POLICY?
You may request a Policy Loan in an amount not to exceed 90% of the Policy's
Cash Value minus surrender penalties (determined at the time the Company
receives the written loan request). If there is a loan outstanding at the time a
subsequent loan request is made, the amount of the outstanding loan will be
added to the new loan amount. The Company will charge interest on the
outstanding amounts of the loan. Such interest must be paid in advance by the
Policy Owner.
The amount of any loan will be transferred on a pro rata basis from each of the
Investment Options (unless the Owner states otherwise in writing) to the Loan
Account, which is part of the Company's general account. The Loan Account is
credited with a fixed annual rate of interest set forth in the Policy. The Loan
Account Value does not vary with the performance of the Investment Options;
therefore, the Policy's Death Benefit and Cash Value will be permanently
affected by a loan. Additionally, any outstanding Loan Account Value will be
subtracted from any Death Benefit or surrender proceeds payable under the
Policy. Subject to state law, no loan requests may be made for amounts of less
than $500. Policy loans may have federal income tax consequences, especially
when the contract is a Modified Endowment Contract. (See "Policy Loans" and
"Federal Tax Considerations.")
WHAT ARE THE CONDITIONS UNDER WHICH MY POLICY MIGHT LAPSE?
If the Cash Surrender Value of a Policy on any Deduction Date is insufficient to
cover the Monthly Deduction Amount due, the Company will send you a written
notice of the required premium. If the required premium is not paid within 31
days after notice is sent, the Policy may lapse. In addition, outstanding loans
decrease the Cash Surrender Value and could, therefore, cause the Policy to
lapse. (See "Policy Loans" and "Policy Lapse and Reinstatement.") If a Policy
lapses with a loan outstanding, adverse tax consequences may result. (See
"Federal Tax Considerations.")
ARE THERE ANY OTHER POLICY PROVISIONS THAT I SHOULD KNOW ABOUT?
SURRENDERS AND PARTIAL WITHDRAWALS. The Policy may be surrendered at any time
for its Cash Surrender Value. In addition, subject to surrender charges, partial
withdrawals may be made. Surrenders or partial withdrawals made within nine
years of a premium payment may be subject to a surrender charge. (See "Policy
Surrenders and Cash Surrender Value.")
RIGHT TO EXCHANGE THE POLICY. Once the Policy is in effect, you may exchange it
at any time during the first two Policy Years for a fixed fund universal life
insurance policy issued by the Company (or one of its affiliates, if allowed) on
the life of the Insured without submitting proof of insurability. (See "Exchange
Rights.")
PAYMENT OF POLICY BENEFITS. The Policy's Cash Value or full or partial
surrender and the death benefits under the Policy may be paid in a lump sum or
under one of the payment options set forth in the Policy. (See "Payment
Options.")
10
<PAGE> 15
ACCELERATED BENEFITS FOR LONG TERM CARE RIDER. Subject to underwriting
guidelines and state availability, a policy owner may elect a long term care
accelerated benefits rider. This rider is optional and may only be added at the
time the Policy is issued. The Company will take such action as may be necessary
to qualify for such favorable tax treatment.
Under this rider, an owner may be reimbursed up to specified amounts (48% of the
Policy's Eligible Stated Amount) for the costs of "qualified long term care
services," as this term is defined in section 7702B of the Internal Revenue Code
of 1986, as amended (the "Code").
In order to receive benefits under this rider an insured must be "chronically
ill." The Code defines a chronically ill individual as one who has a loss of
functional capacity which renders the person unable to perform two out of five
specified activities of daily living (including for example eating, dressing,
etc.). Additionally, an individual who is chronically ill due to a cognitive
impairment which results in the need for substantial human assistance is also
considered to be chronically ill. We require that a licensed health care
practitioner (as that term is defined in the Code) certify that the insured is
chronically ill for at least 90 days. We will reimburse you for expenses
incurred for qualified long term care services (up to a stated monthly limit) on
a monthly basis in a total amount of up to 48% of the Policy's Eligible Stated
Amount on the date the claim is processed. Payments made will be held as a lien
against the Policy's Death Benefit. The amount your beneficiary(s) will receive
will be reduced by the amounts paid under the accelerated benefits for long term
care rider.
The Company believes that benefits received under this rider will be treated as
death benefits for federal tax purposes. As a result, benefits should not be
includible as income for tax purposes.
SPECIAL TAX CONSIDERATIONS. The Company believes that a Policy issued on a
standard rate class basis generally should meet the Section 7702 definition of a
life insurance contract. With respect to a Policy issued on a substandard basis,
there is insufficient guidance to determine if such a Policy would satisfy the
Section 7702 definition of a life insurance contract, particularly if you pay
the full amount of premiums permitted under such a Policy. Assuming that a
Policy qualifies as a life insurance contract for federal income tax purposes,
you should not be deemed to be in constructive receipt of Cash Value under a
Policy until there is a distribution from the Policy. Moreover, death benefits
payable under a Policy should be completely excludable from the gross income of
the Beneficiary. As a result, the Beneficiary generally should not be taxed on
these proceeds. (See "Tax Status of the Policy.")
In almost all cases, the Policy will be a modified endowment contract ("MEC").
If a Policy is a MEC, certain distributions made during an Insured's lifetime,
such as loans and partial withdrawals from, and collateral assignments of, the
Policy, are taxable to you on an income-first basis. A 10% penalty tax may be
imposed on income distributed before you attain age 59 1/2. Policies that are
not MECs receive preferential tax treatment with respect to certain
distributions. For a discussion of the tax issues associated with this Policy,
see "Federal Tax Considerations."
WRITTEN REQUESTS
Certain changes and elections must be made in writing to the Company. Where the
term "written request" is used, it means that written information must be sent
to the Company's Home Office in a form and content satisfactory to the Company.
11
<PAGE> 16
THE INSURANCE COMPANY
- --------------------------------------------------------------------------------
The Travelers Life and Annuity Company (the "Company") is a stock insurance
company which has been continuously engaged in the insurance business since its
incorporation in the state of Connecticut in 1973. The Company writes individual
life insurance and individual and group annuity contracts on a nonparticipating
basis, and acts as the depositor for Separate Account Two. The Company is
licensed to conduct life insurance business in a majority of the states of the
United States, and intends to seek licensure in the remaining states, except New
York. The Company's obligations as depositor for Separate Account Two may not be
transferred without notice to and consent of Policy Owners.
The Company is a wholly owned subsidiary of The Travelers Insurance Company,
which is an indirect wholly owned subsidiary of Travelers Group Inc. The
Company's principal executive offices are located at One Tower Square, Hartford,
Connecticut 06183, telephone number (860) 277-0111.
The Company is subject to Connecticut law and regulations governing insurance
companies. It is regulated and supervised by the Connecticut Insurance
Commissioner ("Commissioner"). An annual statement in a prescribed form must be
filed with the Commissioner on or before March 1 in each year covering the
operations of the Company for the preceding year and its financial condition on
December 31 of such year. The Company's books and assets are subject to review
or examination by the Commissioner or his agents at all times, and a full
examination of its operations is conducted by the National Association of
Insurance Commissioners at least once every four years. In addition, the Company
is subject to the insurance laws and regulations of any jurisdiction in which it
sells its insurance contracts, as well as to various federal and state
securities laws and regulations.
THE SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT TWO
The Company established the Separate Account Two on October 16, 1996 pursuant to
the insurance laws of the state of Connecticut. Separate Account Two is
registered with the Securities and Exchange Commission ("SEC") as a unit
investment trust under the Investment Company Act of 1940, as amended (the "1940
Act"). Separate Account Two meets the definition of a separate account under the
federal securities laws. Registration of Separate Account Two with the SEC does
not involve supervision by the SEC of the management or investment policies of
Separate Account Two. It was established to accept premiums paid by policy
holders of the Contract. Subject to Policy Owner approval and applicable law,
the Company reserves the right to end Separate Account Two's registration under
the 1940 Act.
Additionally, the operations of Separate Account Two are subject to the
provisions of Section 38a-433 of the Connecticut General Statutes which
authorizes the Connecticut Insurance Commissioner to adopt regulations under it.
Connecticut law provides that the assets of Separate Account Two will be held
for the exclusive benefit of Policy Owners and the persons entitled to payments
under the Policy offered by this Prospectus and other policies that may be
funded through the Portfolio Architect segment of Separate Account Two. The
Policies provide that the assets of Separate Account Two are not chargeable with
liabilities arising out of any other business which the Company may conduct. Any
obligations arising under the Policy are general corporate obligations of the
Company.
12
<PAGE> 17
THE INVESTMENT OPTIONS
- --------------------------------------------------------------------------------
You may allocate Premium Payments and Cash Value to one or more of the available
Investment Options. The investments of each option are subject to the risks of
changing economic conditions and the ability of each Investment Option's
investment manager or subadviser to anticipate such changes. There is no
assurance that the Investment Options will achieve their stated objectives.
Since there are varying degrees of risk inherent in each option, please read
carefully the complete risk disclosure in each Portfolio's prospectus before
investing.
The Investment Options and their investment objectives are as follows:
CASH INCOME TRUST. Cash Income Trust, a management investment company, seeks to
provide high current income while emphasizing preservation of capital and
maintaining a high degree of liquidity by investing in short-term money market
securities deemed to present minimal credit risks.
CAPITAL APPRECIATION FUND. The objective of the Capital Appreciation Fund, a
management investment company, is growth of capital through the use of common
stocks. Income is not an objective. The Fund invests principally in common
stocks of small to large companies which are expected to experience wide
fluctuations in price in both rising and declining markets.
TRAVELERS SERIES FUND, INC.
ALLIANCE GROWTH PORTFOLIO. The objective of the Growth Portfolio is long-term
growth of capital by investing predominantly in equity securities of companies
with a favorable outlook for earnings and whose rate of growth is expected to
exceed that of the U.S. economy over time. Current income is only an incidental
consideration.
PUTNAM DIVERSIFIED INCOME PORTFOLIO. The objective of the Diversified Income
Portfolio is to seek high current income consistent with preservation of
capital. The Portfolio will allocate its investments among the U.S. Government
Sector, the High Yield Sector, and the International Sector of the fixed income
securities markets.
MFS TOTAL RETURN PORTFOLIO. The Total Return Portfolio's objective is to obtain
above-average income (compared to a portfolio entirely invested in equity
securities) consistent with the prudent employment of capital. Generally, at
least 40% of the Portfolio's assets will be invested in equity securities.
THE TRAVELERS SERIES TRUST
TRAVELERS QUALITY BOND PORTFOLIO. The basic investment objective of Travelers
Bond Portfolio is to seek current income, moderate capital volatility and total
return.
LAZARD INTERNATIONAL STOCK PORTFOLIO. The investment objective of the
International Stock Portfolio is to seek capital appreciation through investing
primarily in the equity securities of non-United States companies (i.e.,
incorporated or organized outside the United States).
MFS EMERGING GROWTH PORTFOLIO. MFS Portfolio's investment objective is to seek
to provide long-term growth of capital. Dividend and interest income from
portfolio securities, if any, is incidental to the MFS Portfolio's investment
objective.
FEDERATED STOCK PORTFOLIO. The investment objective of the Portfolio is to
provide growth of income and capital by investing principally in a
professionally managed and diversified portfolio of common stock of high-quality
companies. These companies generally are leaders in their industries and are
characterized by sound management and the ability to finance expected growth.
FEDERATED HIGH YIELD PORTFOLIO. The investment objective of the Federated High
Yield Portfolio is to seek high current income by investing primarily in a
professionally managed, diversified portfolio
13
<PAGE> 18
of fixed income securities. Some of the fixed income securities in which
Federated High Yield Portfolio invests are high risk investments.
LARGE CAP PORTFOLIO. Large Cap Portfolio seeks long-term growth of capital by
investing primarily in equity securities of companies with large market
capitalizations. Normally, at least 65% of the Portfolio's total assets will be
invested in these securities. The Portfolio has the flexibility, however, to
invest the balance in other market capitalizations and security types.
EQUITY INCOME PORTFOLIO. The Portfolio seeks reasonable income by investing
primarily in income-producing equity securities. Normally, at least 65% of the
Portfolio's total assets will be invested in these securities. The Portfolio has
the flexibility, however, to invest the balance in all types of domestic and
foreign securities, including bonds. The Portfolio seeks to achieve a yield that
exceeds that of the securities comprising the S&P 500. The Portfolio does not
expect to invest in debt securities of companies that do not have proven
earnings or credit. When choosing the Portfolio's investments, the Subadviser
also considers the potential for capital appreciation.
MID CAP DISCIPLINED EQUITY FUND. The investment objective of the Portfolio is
to seek growth of capital by investing primarily in a broadly diversified
portfolio of common stocks.
ZERO COUPON BOND FUND PORTFOLIOS (THREE PORTFOLIOS: SERIES 1998, 2000 AND
2005). The investment objectives of each of the Zero Coupon Bond Fund
Portfolios is to provide as high an investment return as is consistent with the
preservation of capital investing in primarily zero coupon securities that pay
cash income but are acquired by the Portfolio at substantial discounts from
their values at maturity. THE ZERO COUPON BOND FUND PORTFOLIOS MAY NOT BE
APPROPRIATE FOR POLICY OWNERS WHO DO NOT PLAN TO HAVE THEIR PREMIUMS INVESTED IN
SHARES OF THE PORTFOLIOS FOR THE LONG-TERM OR UNTIL MATURITY.
14
<PAGE> 19
FUNDING OPTION INVESTMENT MANAGERS:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
FUNDING OPTION INVESTMENT ADVISER SUB-ADVISER
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Capital Appreciation Fund Travelers Asset Management Janus Capital Corporation
International Corporation
("TAMIC")
- ----------------------------------------------------------------------------------------------
Cash Income Trust TAMIC
- ----------------------------------------------------------------------------------------------
Alliance Growth Portfolio Travelers Investment Adviser, Alliance Capital Management
Inc. ("TIA") L.P.
- ----------------------------------------------------------------------------------------------
MFS Total Return Portfolio TIA Massachusetts Financial
Services Company
- ----------------------------------------------------------------------------------------------
Putnam Diversified Income TIA Putnam Investment Management,
Portfolio Inc.
- ----------------------------------------------------------------------------------------------
Travelers Quality Bond TAMIC
Portfolio
- ----------------------------------------------------------------------------------------------
Lazard International Stock TAMIC Lazard Freres Asset
Portfolio Management
- ----------------------------------------------------------------------------------------------
MFS Emerging Growth Portfolio TAMIC MFS
- ----------------------------------------------------------------------------------------------
Federated Stock Portfolio TAMIC Federated Management, Inc.
- ----------------------------------------------------------------------------------------------
Federated High Yield TAMIC Federated Management, Inc.
Portfolio
- ----------------------------------------------------------------------------------------------
Large Cap Portfolio TAMIC Fidelity Management &
Research Company
- ----------------------------------------------------------------------------------------------
Equity Income Portfolio TAMIC Fidelity Management &
Research Company
- ----------------------------------------------------------------------------------------------
Mid-Cap Disciplined Equity TAMIC TIMCO
Fund
- ----------------------------------------------------------------------------------------------
Zero Coupon Bond Fund TAMIC
Portfolios (Series 1998, 2000
and 2005)
- ----------------------------------------------------------------------------------------------
</TABLE>
SUBSTITUTIONS AND ADDITIONS
If any of the Investment Options become unavailable for allocating purchase
payments, or if, in our judgment further investment in an Investment Option
becomes inappropriate for the purposes of the Policy, we may substitute another
registered, open-end management investment company. Substitution may be made
with respect to both existing investments and the investment of any future
Premium Payments. No such substitution will be made without notice to Contract
Owners, state approval if applicable, and without prior approval of the SEC, to
the extent required by the 1940 Act, or other applicable law. Additional
Investment Options may also be added at our discretion.
MIXED AND SHARED FUNDING
It is conceivable that in the future it may be disadvantageous for both variable
annuity accounts and variable life accounts, or for variable accounts of
different insurance companies, to invest simultaneously in the same portfolios
(called "mixed" and "shared" funding). Currently neither the insurance companies
nor the portfolios foresee any such disadvantages to the companies or to
variable contract owners. Each portfolio's board of trustees, directors or
managers intends to monitor events in order to identify any material conflicts
between such policy owners and to determine what action, if any, should be taken
in response thereto.
15
<PAGE> 20
THE POLICY
- --------------------------------------------------------------------------------
The Policy is subject to the insurance laws and regulations of each state or
jurisdiction in which it is available for distribution. There may be differences
between the Policy issued and the general policy description contained in this
Prospectus because of requirements of the state where your Policy is issued. Any
such differences will be described in your Policy.
THE POLICY APPLICATION
Individuals wishing to purchase a Policy must submit an application to the
Company. The initial premium must be at least $10,000. You may request an
increase or decrease in the Stated Amount of the Policy in writing from time to
time. (See "Changes in Stated Amount.") No change in the terms or conditions of
the Policy will be made without your consent.
ELIGIBLE PURCHASERS
A person can purchase a Policy to insure the life of another person provided
that the Policy Owner has an insurable interest in the life of the Insured, and
the Insured consents to the purchase. In most states, any person between the
ages of 16 and 80 is eligible to be insured subject to the submission of a
Policy Application to the Company. In some states, the maximum issue age may be
lower. Insurance coverage under a Policy will begin only after the applicant has
satisfied all outstanding underwriting delivery requirements, and after the
Company has received the Initial Premium. Acceptance of an application is
subject to the Company's underwriting rules. The Company reserves the right to
reject an application for any lawful reason, provided that such rejection is
made in a manner consistent with that with which similarly situated risks are
treated and provided that unfair discrimination is avoided.
The Company assigns Insureds to risk classes which determine the current cost of
insurance rates used in calculating the cost of insurance charge under the
Policy. Policies are issued in either the standard non-smoker or smoker risk
class. To the extent permitted by state law, Policies may also be issued on the
basis of the sex of the Insured. Policies may also be issued on Insureds in a
sub-standard underwriting class. (For a discussion of the effect of risk class
on the cost of insurance charge, see "Cost of Insurance Charge.")
PAYMENTS MADE UNDER THE POLICY
INITIAL PREMIUM. The Initial Premium is due on or before the Policy Date and is
payable in full at the Company's Home Office. The Initial Premium is the
guideline single premium for the life insurance coverage provided under the
Policy, as determined in accordance with the Internal Revenue Code of 1986, as
amended (the "Code"). The minimum Initial Premium is $10,000. Additional Premium
Payments may be made under the Policy, as described below.
The Initial Premium purchases a Death Benefit equal to the Policy's Stated
Amount (if Option 1 is selected), or to the Policy's Stated Amount plus the Cash
Value (if Option 2 is selected). The relationship between the Initial Premium
and the Stated Amount depends on the age, sex (where permitted by state law) and
risk class of the Insured. Generally, the same Initial Premium will purchase a
higher Stated Amount for a younger insured than for an older insured. Likewise,
the same Initial Premium will purchase a slightly higher Stated Amount for a
female insured than for a male insured of the same age. Also, the same Initial
Premium will purchase a higher Stated Amount for a standard Insured than for a
substandard Insured. Representative Stated Amounts per dollar of Initial Premium
are set forth in Appendix C.
ADDITIONAL PREMIUM PAYMENTS. Although the Policy can operate as a single
premium policy, additional Premium Payments may be made under certain
circumstances, provided there are no outstanding loans. If there are any
outstanding loans, any payment received by the Company will
16
<PAGE> 21
be considered repayment of that debt. The circumstances under which additional
Premium Payments can be made under the Policy are as follows:
1. Increases in Stated Amount -- Subject to applicable underwriting
guidelines, you may request an increase in Stated Amount at any time
(prior to the Insured's attaining age 80). If your request is approved,
the Company will require you to make an additional Premium Payment in
order for an increase in Stated Amount to become effective. The minimum
additional Premium Payment that the Company permits in connection with
an increase in Stated Amount is $1,000. (See "Changes in Stated
Amount.")
2. To Prevent Lapse -- If the Cash Surrender Value on any Deduction Day is
insufficient to cover the Monthly Deduction Amount due on that day, then
you must make an additional Premium Payment during the Grace Period
sufficient to cover the Monthly Deduction Amount in order to prevent
lapse. The minimum amount of any payment that may be required to be made
in this circumstance will be stated in the Notice mailed to you in
accordance with the Policy; payments in excess of the amount required to
prevent lapse will be considered a payment "at your discretion" and
consequently subject to the rules described below. If you do not make a
sufficient payment, the Policy will lapse and terminate without value.
(See "Policy Lapse and Reinstatement.")
3. At Your Discretion -- Additional Premium Payments may be made at your
discretion so long as the payment plus the total of all premiums
previously paid does not exceed the maximum premium limitation derived
from the guideline premium test for life insurance prescribed by the
Internal Revenue Code. Because of the test, the maximum premium
limitation will ordinarily equal the Initial Premium for a number of
years after the Policy has been issued. Therefore, discretionary
additional Premium Payments normally will not be permitted during the
early years of the Policy. Discretionary additional Premium Payments
must be at least $250, and may not be paid on or after the Maturity
Date.
Any Additional Premium Payments made under the Policy may be subject to new
evidence of insurability. Payments received in excess of any Loan Account Value
will be treated as an additional Premium Payment.
ALLOCATION OF PREMIUM PAYMENTS
You specify on the Policy Application how the Initial Premium will be allocated
among the Investment Options of Separate Account Two. You may allocate premium
to one or more Investment Options, provided that such allocation is made in
whole percentages of at least five 5%.
Regardless of the allocation made in the application, during the period between
premium receipt and policy issuance (the "Underwriting Period"), the Initial
Premium will be held by the Company in a general suspense account established
for such purposes. At the time a Policy is issued, the Initial Premium
attributable to such Policy will be credited with interest comparable to the
effective yield during the Underwriting Period of the Cash Income Trust (e.g.,
as if the Policy had been issued and the premium allocated to the Cash Income
Trust on the date the premium was received in good order by the Company), which
amount will become the initial Cash Value of the Policy. The Cash Value will
then be allocated to the Cash Income Trust until the expiration of the Right to
Cancel Period. At the end of the Right to Cancel Period, the Cash Value in the
Cash Income Trust will be allocated (in whole percentages of 5% or more) among
the Investment Options designated on the Policy Application. The number of
Accumulation Units to be credited to the Policy once a Premium Payment has been
received by the Company will be determined by dividing the amount of Premium
Payment applied to each Investment Option by the Accumulation Unit Value of that
Investment Option, as computed on the next Valuation Date following receipt of
the payment.
17
<PAGE> 22
You may change the allocation of Cash Value or any Additional Premiums received
on or after the expiration of the Right to Cancel Period among any of the
Investment Options then available under the Policy. (See "Transfers of Cash
Value.") You should periodically review the allocation of Cash Value in light of
market conditions and overall financial planning requirements to ensure that
such allocation continues to be consistent with your investment objectives.
RIGHT TO CANCEL PERIOD
A Policy may be returned to the Company for cancellation by mailing or
delivering it to the Company or to the agent who sold the Policy within the
latest of (1) 10 days after delivery of the Policy to you, (2) 45 days of
completion of the policy application, or (3) 10 days after the Notice of Right
to Cancel has been mailed or delivered to you (or later, if state law requires).
Within seven days following the Company's receipt of your request for a refund,
the Company will refund the greater of (1) any premium paid, or (2) the Cash
Value of the Policy on the date we receive the returned policy. For options (1)
and (2), the amounts will be increased by any charges or expenses which may have
been deducted and will be decreased by any Loan Account Value. After the Policy
is returned, it will be considered as if it were never in effect.
CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
MONTHLY DEDUCTION AMOUNT
The Company will deduct a Monthly Deduction Amount from the Policy's Cash Value
attributable to the Investment Options to cover certain charges and expenses
incurred in connection with the Policy. The Monthly Deduction Amount will be
deducted pro rata from each of the Investment Options attributable to the Policy
on the first day of each Policy Month (the "Deduction Date"), beginning on the
Policy Date. The dollar amount of the Deduction Amount may vary from month to
month.
The following is a summary of monthly charges and expenses which make up the
Monthly Deduction Amount.
COST OF INSURANCE CHARGE
The cost of insurance charge is to cover the Company's expected mortality
cost for basic insurance coverage, not including supplemental benefit
provisions. The cost of insurance charge is deducted monthly, and is equal
to the difference between the Death Benefit payable under the Policy
(discounted at the rate set forth in the Policy) and the Cash Value of the
Policy (each determined on the Deduction Date) (the "Coverage Amount"),
multiplied by a monthly "cost of insurance rate," i.e., a monthly rate
charged for each dollar of insurance coverage. The cost of insurance rate
varies annually and is based on the attained age, sex (where permitted by
state law) and risk class of the Insured.
The cost of insurance rate for standard risks will not exceed those based
on the 1980 Commissioners Standard Ordinary Mortality Tables ("1980
Tables"). Substandard risks will have monthly deductions based on cost of
insurance rates which may be higher than those set forth in the 1980
Tables. A table of guaranteed cost of insurance rates per $1,000 will be
included in each Policy; however, the Company reserves the right to use
rates lower than those shown in the Policy. Any changes in the cost of
insurance rates will be made uniformly for all Insureds in the same class.
Because the Cash Value and, under certain conditions, the Death Benefit of
a Policy may vary from month to month, the cost of insurance charge may
also vary on each Deduction Date. In addition, you should note that the
cost of insurance charge is based on the difference between the Death
Benefit payable under the Policy and the Cash Value of the Policy. An
18
<PAGE> 23
increase in the Cash Value or a decrease in the Death Benefit would result in a
smaller cost of insurance charge assuming that everything else remains the same;
while a decrease in the Cash Value or an increase in the Death Benefit would
result in a larger cost of insurance charge.
Changes in the Policy's Death Benefit option and in the Stated Amount will
affect how the cost of insurance charge is calculated. See "Changes in
Death Benefit Option" and "Changes in Stated Amount" for a discussion of
the effect of changes in the Stated Amount on the cost of insurance.
STATE PREMIUM TAX CHARGES AND DAC TAX CHARGES
Premium tax charges are not deducted at the time that a premium payment is
made, although the Company does pay state premium taxes attributable to a
particular Policy when those taxes are incurred. To reimburse the Company
for the payment of such taxes, during the first ten years following a
premium payment made before the 10th Policy Anniversary, a premium tax
charge of .20% per year will apply.
Premium taxes vary from state to state and currently range from 0.75% to
3.5%. Because there is a range of premium tax rates, you may pay premium
tax charges in total that are higher or lower than the premium tax actually
assessed in your jurisdiction. In addition, a DAC (deferred acquisition
cost) tax of 0.15% annually will apply for the first ten years after each
premium payment.
An annual total of 0.0291667% will be deducted from the Policy's Cash Value
on each Deduction Date (0.0166667% for the premium tax, and 0.0125% for the
DAC tax). If no additional Premium Payments are made during the first ten
Policy Years, no deductions for the premium and DAC tax charges will be
made after Policy Year 10.
If an additional Premium Payment is made during the first ten Policy Years,
then after Policy Year 10, the Company will deduct a total tax charge of
0.0291667% of the portion of the Cash Value attributable to the additional
Premium Payment. The portion of the Cash Value attributable to the
additional Premium Payment is calculated by dividing (a) by (b), where (a)
is the amount of the additional Premium Payment, and (b) is the Policy's
Cash Value immediately after receipt of the additional Premium Payment. In
calculating the charges described above, the Company will use this ratio to
determine the portion of Cash Value in the Separate Account attributable to
that payment until an additional Premium Payment is made.
CHARGES AGAINST THE INVESTMENT OPTIONS OF SEPARATE ACCOUNT TWO
MORTALITY AND EXPENSE RISK CHARGE
A mortality and expense risk charge of 0.90% on a current basis annually is
deducted from amounts allocated to each Investment Option. The charge is
deducted daily and equals 0.002466% for each day in the Valuation Period.
The annual rate of the mortality and expense risk charge will be reduced to
0.75% for the current Policy Year if the Average Net Growth Rate is 6.5% or
greater during the previous Policy Year. This determination is made
annually.
The mortality risk assumed is that Insureds may live for a shorter period
of time than estimated and, therefore, a greater amount of Death Benefit
proceeds than expected will be payable. The expense risk assumed is that
expenses incurred in issuing and administering the Policy will be greater
than estimated and, therefore, will exceed the administrative expense
charge imposed by the Policy. The Company reserves the right to adjust this
charge, although it guarantees that the adjusted charge will not exceed
0.90%. If not all money collected by the Company from this charge is needed
to cover the mortality and expense costs, the excess will be contributed to
the Company's general account.
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<PAGE> 24
ADMINISTRATIVE EXPENSE CHARGES
A charge will be deducted from amounts allocated to each Investment Option
to compensate the Company for certain administrative expenses incurred in
connection with the Policy. The charge will be deducted daily and equals
0.001096% for each day in a Valuation Period. The annual rate of this
charge is 0.40%. Additionally, for policies with an initial premium of less
than $25,000, a monthly fee of $5 will apply for the life of the policy.
The administrative expense charges will compensate the Company for the
issuance, underwriting, processing, start-up and ongoing administrative
expenses of the Policy and the Separate Account. These expenses include the
cost of processing applications; conducting medical examinations;
determining insurability; establishing and maintaining policy and Separate
Account records; processing death benefit claims, surrenders, transfers,
policy loans and changes; and reporting and overhead costs. The Company has
set this charge at a level which is intended to recover no more than the
actual expected costs of the administrative services to be provided while
the Policies are in force, and it does not expect to make a profit from the
application of such administrative charges.
INCOME TAXES
Although the Company does not currently incur any charge for income taxes
as a result of the operations of the Investment Options, the Company
reserves the right to assess a charge for such taxes if it determines that
such taxes will be incurred. (See "Federal Tax Considerations.")
INVESTMENT OPTION EXPENSES
- --------------------------------------------------------------------------------
Separate Account Two purchases shares of the Investment Options at net asset
value. The net asset value of the Investment Option shares reflects investment
advisory fees and other expenses already deducted. The investment advisory fees
and other expenses applicable to each of the Investment Options are described in
the individual Investment Option prospectuses.
SURRENDER CHARGES
- --------------------------------------------------------------------------------
A percent of premium surrender charge will be imposed upon full surrenders of
the Policy that occur within nine (9) years after the Company has received any
Premium Payments under the Policy. For partial surrenders a percentage of amount
surrendered will be charged. This charge is intended to cover certain expenses
relating to the sale of the Policy, including commissions to registered
representatives and other promotional expenses. To the extent that the surrender
charges assessed under the Policy are less than the sales commissions paid with
respect to the Policy, the Company will pay the shortfall from its general
account assets, which will include any profits it may derive from charges
imposed under the Policy. (See also "Policy Surrenders and cash Surrender
Value.") Surrenders charges are determined as follows:
<TABLE>
<CAPTION>
LENGTH OF TIME AFTER FROM FULL SURRENDERS FROM PARTIAL SURRENDERS
PREMIUM PAYMENT (% OF PREMIUM) (% OF AMOUNT SURRENDERED)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
1-2 years 7.5% 7.5%
3-4 7% 7%
5 6.5% 6.5%
6 6% 6%
7 5% 5%
8 4% 4%
9 3% 3%
Year 10 and Thereafter 0% 0%
</TABLE>
20
<PAGE> 25
PARTIAL SURRENDERS. The Company will impose a surrender charge equal to a
percentage of the amount surrendered for partial surrenders in excess of the
free withdrawal amount described below. The surrender charge will be limited so
that the total charge for partial surrenders will not exceed the charge that
would apply to a full surrender of the Policy.
For purposes of determining the surrender charge percentage that will apply to a
partial surrender, in most states surrender charges are calculated on a
"last-in, first-out basis." This means that any partial withdrawal in excess of
the free withdrawal amount will be taken against premiums in the reverse order
in which they were made, if more than one premium was paid under the Policy.
Surrender charges will be assessed only against that portion of the partial
withdrawal taken from premium payment(s).
FREE WITHDRAWAL ALLOWANCE. The Company will permit partial surrenders of the
Policy's earnings in an amount of up to 10% of the Policy's Cash Value each year
(beginning with the Second Policy Year) without the imposition of a surrender
charge. The amount of Cash Value available for free withdrawal will be
determined on the Policy Anniversary on or immediately prior to the date that
the partial surrender request is received. The amount of earnings available for
withdrawal will be determined on the date the request for such withdrawal is
received by the Company.
TRANSFER CHARGE
- --------------------------------------------------------------------------------
Although there are currently no charges for transfers among the investment
alternatives provided under this Policy, the Company reserves the right to limit
the number of free transfers to no more than four in any Policy Year, and to
charge up to $10 for any transfer request in excess of four in any Policy Year.
The Company also reserves the right to assess a processing fee for the Automated
Transfer (Dollar Cost Averaging) service. (See "Transfers of Cash Value.")
REDUCTION OR ELIMINATION OF CHARGES
- --------------------------------------------------------------------------------
The Company may offer the Policy in arrangements where an employer or trustee
will own a group of policies on the lives of certain employees, or in other
situations where groups of policies will be purchased at one time, or where
policies are sold on a discretionary group basis. The Company may reduce or
eliminate sales charges and administrative charges in such arrangements to
reflect the reduced sales expenses and administrative costs expected as a result
of sales to a particular group. The Company makes any reductions according to
rules in effect when an application for a Policy or additional Premium Payment
is approved. While it may change these rules from time to time, the Company will
attempt not to discriminate unfairly against any person.
VALUATION OF THE SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
HOW THE CASH VALUE VARIES
The Policy's Cash Value is determined daily. A Policy's Cash Value is not
guaranteed, and will vary to reflect a number of factors, including Premium
Payments made, partial withdrawals, loans, charges assessed in connection with
the Policy, and the investment experience of each Investment Option to which
Cash Value is allocated. The Policy's total Cash Value on a Valuation Date
equals the Accumulation Unit Value(s) times the number of Accumulation Units for
each applicable Investment Option, plus the Loan Account Value, on that date.
Separate Account Two purchases the shares of each Investment Option at net asset
value (i.e., without a sales charge). All dividends and capital gains
distributions received from an Investment Option are reinvested by Separate
Account Two in that Fund's shares at net asset value and will increase the
associated Accumulation Unit Value. Investment Option shares will be redeemed by
Separate Account Two at their net asset value to the extent necessary to make
payments under the Policy.
21
<PAGE> 26
All valuations made under the Policy (e.g., the determination of Cash Value or
Cash Surrender Value, policy loans, and the determination of the number of
Accumulation Units to be credited to a Policy), will be determined as of the
Valuation Date on which the Company receives the Policy Owner's written request
for a transaction under the Policy, or on which the Company is assessing charges
under the Policy.
HOW THE INVESTMENT EXPERIENCE IS DETERMINED
The Cash Value is related to the rate of return of the Investment Option(s) to
which Premium Payments made under the Policy have been allocated. The Cash Value
on any Valuation Date is calculated by multiplying the number of Accumulation
Units credited to the Policy for each Investment Option by the corresponding
Accumulation Unit Value, then adding the result for each Investment Option
credited to the Policy, and adding any value of the Loan Account.
ACCUMULATION UNIT VALUE
The value of an Accumulation Unit for each Investment Option of Separate Account
Two (the "Accumulation Unit Value") is established on each Valuation Date. For
each Investment Option, the Accumulation Unit Value for a Valuation Period is
determined by multiplying the Accumulation Unit Value on the preceding Valuation
Period by the Net Investment Factor for the Investment Option during the
subsequent Valuation Period.
The Accumulation Unit Value may increase or decrease from Valuation Period to
Valuation Period. The number of Accumulation Units credited to your Policy will
not change as a result of the investment experience of the Investment Options.
The Accumulation Unit Value of the Investment Options reflects the reinvestment
of any dividends or capital gains distributions declared by the Investment
Option.
NET INVESTMENT FACTOR
The value of an Accumulation Unit for each subsequent Valuation Period
fluctuates based upon the net rate of return for that period. The Company
determines the net rate of return for each Investment Option at the end of each
Valuation Period. The net rate of return reflects the investment performance of
the Investment Option for the Valuation Period and is net of the charges to
Separate Account Two described above.
VALUATION PERIODS AND VALUATION DATES
A Valuation Period is the period commencing at the close of business of the New
York Stock Exchange on any Valuation Date and ending at the close of business on
the next succeeding Valuation Date. A Valuation Date is each day that the New
York Stock Exchange is open for trading.
TRANSFERS OF CASH VALUE
- --------------------------------------------------------------------------------
As long as the Policy remains in effect, the Policy Owner may transfer all or a
portion of the Cash Value (less the Loan Account) among any of the Investment
Option(s) then available. Although there are currently no charges, penalties or
restrictions on the amount or frequency of free transfers between the Investment
Options, the Company reserves the right to limit the number of free transfers to
no more than four in any Policy Year, and to charge an administrative fee (not
to exceed $10) for any transfer request in excess of four per Policy Year.
Some Investment Options have higher investment advisory fees and/or other
expenses than others; therefore, a transfer from one Investment Option to
another could result in a Policy becoming subject to higher or lower fees and
expenses. A transfer between Investment Options has no other effect on the
amount or timing of any of the other charges under the Policy.
22
<PAGE> 27
The number of Accumulation Units credited to the Investment Options involved in
the transfer will be determined by dividing the amount transferred from or to
that Investment Option by the Accumulation Unit Value of that Investment Option.
The Accumulation Unit Values will be determined on the Valuation Date on which
the Company receives the written request for a transfer.
TELEPHONE TRANSFERS
You may request a transfer of Cash Value either in writing or by telephone. The
telephone transfer privilege is available automatically; no special election is
necessary for a Policy Owner to elect this option. All transfers must be in
accordance with the terms of the Policy. Transfer instructions are currently
accepted on each Valuation Date between 9:00 a.m. and 4:00 p.m., Eastern time,
by calling 1-800-334-4298. Once instructions have been accepted, they may not be
rescinded; however, new telephone instructions may be given the following day.
If the transfer instructions are not in good order, the Company will not execute
the transfer and will promptly notify the caller. The Company will make
reasonable efforts to make certain that telephone transfer requests are genuine.
These measures may include taping telephone requests and/or requiring the use of
a personal identification number. If it fails to take such measures, the Company
may be liable for losses resulting from fraudulent transfer requests.
AUTOMATED TRANSFERS (DOLLAR COST AVERAGING)
You may establish automated transfers of Cash Value on a monthly basis from any
Investment Option to any other Investment Option through a written request or
other method acceptable to the Company. You must have a minimum Cash Value of
$5,000 allocated to the Investment Option(s) from which the transfers are to be
made in order to enroll in the Dollar Cost Averaging Program. The minimum
automated transfer amount is $100 per month. Such transfers will be effected on
a certain date each month, as specified by the Policy Owner at the time of
election.
You may start or stop participation in the Dollar Cost Averaging Program at any
time, but you must give the Company at least 30 days' notice to change any
automated transfer instructions that are currently in place. Automated transfers
are subject to all of the provisions and terms of the Policy, including
provisions relating to the transfer of money between Investment Options. The
Company reserves the right to suspend or modify automated transfers at any time
and to assess a processing fee for this service.
Before transferring any part of the Cash Value, Policy Owners should consider
the risks involved in switching between investments available under the Policy.
Dollar cost averaging requires regular investments regardless of fluctuating
price levels, and does not guarantee profits or prevent losses in a declining
market. A potential investor should consider his or her financial ability to
continue purchases through periods of low price levels.
DEATH BENEFIT
- --------------------------------------------------------------------------------
As long as the Policy remains in force, the Policy provides a Death Benefit upon
the death of the Insured. The death benefit proceeds will be paid to a named
Beneficiary. The amount of the death benefit proceeds will be determined on the
date on which the Insured's death occurred. The death benefit proceeds may be
paid in a lump sum or under any optional payment plan.
Death Benefits are payable within seven days of the Company's receipt of
satisfactory proof of the Insured's death. To the extent permitted by state law,
the amount of Death Benefit actually paid to the Policy beneficiary may be
adjusted to reflect any policy loan, suicide by the Insured within two years
after the Issue Date of the Policy, any material misstatements in the policy
application as to age or sex of the Insured, and any amounts payable to an
assignee under a collateral assignment of the Policy. (See "Assignment.") In
addition, if the Insured dies during the Grace Period, the Death Benefit
actually paid to the Policy Owner's beneficiary will be reduced by the amount of
the
23
<PAGE> 28
Deduction Amount that is due and unpaid, and by the amount of any outstanding
Policy Loan. (See "Policy Surrenders and Cash Surrender Value" for the effects
of partial cash surrenders on Death Benefits.)
The Policy provides for two Death Benefit options. Under Option 1 (the Level
Option), the Death Benefit will be equal to the Policy's Stated Amount or, if
greater, a specified multiple of Cash Value determined as of the date of the
Insured's death (the "Minimum Amount Insured"). Under Option 2 (the Variable
Option), the Death Benefit will be equal to the Policy's Stated Amount plus the
Cash Value (determined as of the date of the Insured's death) or, if greater,
the Minimum Amount Insured. The Minimum Amount Insured is the amount required to
qualify the Policy as a life insurance contract under the current federal tax
law. Under that law, the Minimum Amount Insured is equal to a stated percentage
of the Cash Value of the Policy determined daily. The percentages, which differ
according to the attained age of the Insured, may change as federal income tax
laws or regulations change. The percentages used to calculate the Minimum Amount
Insured decrease after the Insured is age 40. The following is a schedule of the
applicable percentages:
<TABLE>
<CAPTION>
- ------------------------------------------------
% SHALL
DECREASE BY
A RATABLE
PORTION FOR
EACH FULL
ATTAINED AGE YEAR:
- ------------------------------- ------------
MORE THAN BUT NOT MORE THAN FROM TO
- ------------------------------------------------
<S> <C> <C> <C>
0 40 250 250
40 45 250 215
45 50 215 185
50 55 185 150
55 60 150 130
60 65 130 120
65 70 120 115
70 75 115 105
75 90 105 105
90 95 105 100
</TABLE>
Federal tax law imposes another cash funding limitation on cash value life
insurance policies that, when applicable, may increase the Minimum Amount
Insured in excess of the figures shown in the schedule above. (See Appendix B
for examples demonstrating the relationship between the Death Benefit, the Cash
Surrender Value and the Minimum Amount Insured under the Level and Variable
Options of the Policy.)
CHANGES IN DEATH BENEFIT OPTION
The Company will change your Death Benefit Option at any time prior to the
Insured's death, upon receipt in good order of a written request to do so, and,
if required, acceptable evidence of insurability. There is no direct tax
consequence of changing a Death Benefit option, except as described under
"Modified Endowment Contracts". However, the change could affect future values
of the Coverage Amount, and with some Variable Option to Level Option changes
involving substantially funded policies, there may be a cash distribution which
is included in the gross income of the Policy Owner. Additionally, the cost of
insurance charge, which is based on the Coverage Amount, may be different in the
future. A change from the Level Option to the Variable Option will not be
permitted if the change would result in a Stated Amount of less than the minimum
amount of $10,000. (See "Changes in Stated Amount" below.) Contact your
registered representative for more information. IF YOU ACCELERATED YOUR STATED
AMOUNT PURSUANT TO THE ACCELERATED BENEFIT RIDER FOR LONG TERM CARE AVAILABLE
UNDER THE POLICY, YOU MAY NOT CHANGE YOUR DEATH BENEFIT OPTION.
24
<PAGE> 29
CHANGES IN STATED AMOUNT
A Policy Owner may request in writing that the Stated Amount of the Policy be
increased or decreased. A minimum premium payment of $1,000 is required for any
increase and the Company will require satisfactory evidence of insurability. An
increase may only be requested prior to the earlier of the Policy anniversary in
the year in which the Insured attains age 81 and the date of the Insured's
death. The effective date of any increase will be as shown on the new Policy
Summary Page which the Company will send to the Policy Owner. The effective date
of any increase in the Stated Amount will generally be the Deduction Date next
following either the date of a new application or, if different, the date
requested by the Policy Owner.
There is no additional charge for a decrease in Stated Amount. However, the
Stated Amount after any decrease may not be less than $10,000. A decrease in
Stated Amount in a substantially funded Policy may cause a cash distribution
that is includable in the gross income of the Policy Owner. (See "Federal Tax
Considerations.")
For purposes of determining the cost of insurance charge, a decrease in the
Stated Amount will reduce the Stated Amount in the following order:
1) against the most recent increase in the Stated Amount;
2) to other increases in the reverse order in which they occurred;
3) to the initial Stated Amount.
MATURITY AND MATURITY EXTENSION BENEFITS
If the Insured is living on the Maturity Date (the anniversary of the Policy
Date on which the Insured is age 100), the Company will pay the Policy Owner the
Cash Value of the Policy as of the Maturity Date, less any Loan Account Value,
amounts payable to an assignee under a collateral assignment of the Policy, and
any Deduction Amount due and unpaid. The Policy Owner must surrender the Policy
to the Company before such payment can be made, at which point the Policy will
terminate and the Company will have no further obligations under the Policy.
Where permitted by state law, the Policy provides for a Maturity Extension
Benefit which effectively allows the Policy Owner to request that coverage be
extended beyond the Maturity Date. Such request may only be made during the
twelve months following the Policy anniversary for the year in which the Insured
attains age 99. If the Maturity Extension Benefit is elected, any past due
Monthly Deduction Amounts must first be paid in order for the benefit to become
effective on the Maturity Date. After the Company receives a request for the
Maturity Extension Benefit, the Policy will continue in force until the earlier
of the death of the Insured or the date on which the Policy Owner surrenders the
Policy for its Cash Surrender Value. After the Maturity Date, the Death Benefit
will be the Cash Value less any Loan Account Value and any amounts payable to an
assignee under a collateral assignment of the Policy. The Death Benefit is based
on the experience of the Investment Options selected and is variable and is not
guaranteed. After the Maturity Date, the Monthly Deduction Amount will no longer
be charged against the Cash Value, and additional premiums will not be accepted.
Any loan outstanding need not be extinguished as of the Maturity Date. The loan
may be continued into the maturity extension period. New loans may also be
initiated during the maturity extension period. Restrictions on loans prior to
the Maturity Date of the Policy are still valid.
The Company intends that the Policy and the Maturity Extension Benefit be
considered life insurance for tax purposes. The Death Benefit is designed to
comply with Section 7702 of the Code, or other equivalent section of the Code.
Please note, however, that the Company does not give tax advice, and cannot
guarantee that the Death Benefit and Cash Value will be exempt from any future
tax liability. The tax results of any benefits under the Maturity Extension
provision depend upon interpretation of the Internal Revenue Code. The Policy
Owner should consult his or
25
<PAGE> 30
her own personal tax adviser prior to the exercise of the Maturity Extension
Benefit to assess any potential tax liability.
POLICY LAPSE AND REINSTATEMENT
The Policy will remain in effect until the Cash Surrender Value of the Policy is
insufficient to cover the Monthly Deduction Amount. 30 days after such event
occurs, the Company will give written notice to the Policy Owner indicating that
if the amount shown in the notice (which will be sufficient to cover the
Deduction Amount due) is not paid within 31 days, the Policy will lapse. The
Policy will continue through the Grace Period, but if the required payment is
not received, the Policy will terminate without value at the end of the Grace
Period. If the Insured dies during the Grace Period, the Death Benefit payable
under the Policy will be reduced by the Monthly Deduction Amount due plus the
amount of any Loan Account Balance. (See "Death Benefit.") If the Policy is
surrendered during the Grace Period, the Policy's Cash Surrender Value will be
reduced by the Monthly Deduction Amount due. (See "Policy Surrenders and Cash
Surrender Value.")
If the Policy lapses, the Policy Owner may reinstate the Policy upon payment of
the reinstatement premium (and any applicable charges) shown in the Policy. A
request for reinstatement may be made at any time within three years of lapse
(five years for policies issued in Missouri and North Carolina) provided that
(1) the Policy was not surrendered for cash; (2) satisfactory evidence of
insurability is provided; (3) all Monthly Deduction Amounts past due are paid,
subject to state law; (4) premium at least equal to three Monthly Deduction
Amounts is paid, subject to state law; and (5) all Loan Account Value is repaid
or restored. The Cash Value of the Policy upon reinstatement will be equal to
the amount provided by the premium paid.
The tax consequences of a lapse may not be reversible by a reinstatement. Policy
Owners should also refer to "Risks Associated with Loans Taken Against a
Variable Life Insurance Policy.") to consider the effects of loans on their
Policy.
LAPSE PROTECTION GUARANTEE RIDER
A Policy Owner may add a Lapse Protection Guarantee Rider. This rider will
prevent a policy from lapsing if the Policy's Cash Surrender Value is
insufficient to pay the Monthly Deduction Amount due. The guarantee will be in
effect only if Premium Payments less amounts surrendered and outstanding loans
is greater than or equal to the initial Premium Payment plus any premiums paid
for increases in Stated Amount. The premium requirement will increase in
connection with an increase in Stated Amount. This rider is available only with
Death Benefit 1, for standard risks, and only at issue. A charge equal to
0.0041667% of the Policy's Cash Value will be deducted on each Deduction Date to
pay for the cost of this benefit.
ACCELERATED BENEFIT RIDER
Subject to state availability, an accelerated benefit rider may be added to the
Policy. This rider must be added at issue and is a supplemental benefit to the
Policy. The Company intends that the rider will be a qualified accelerated death
benefit rider as that term is defined under Section 7702B of the Code.
Under this rider, an owner may be reimbursed up to specified amounts (48% of the
Policy's Eligible Stated Amount for the costs of "qualified long term care
services," as this term is defined in section 7702B of the Internal Revenue Code
of 1986, as amended (the "Code").
In order to receive benefits under this rider an insured must be "chronically
ill." The Code defines a chronically ill individual as one who has a loss of
functional capacity which renders the person unable to perform two out of five
specified activities of daily living (including for example eating, dressing,
etc.). Additionally, an individual who is chronically ill due to a severe
cognitive impairment which results in the need for substantial human assistance
is also considered to be chronically ill. We require that a licensed health care
practitioner (as that term is defined in the Code) certify that
26
<PAGE> 31
the insured is chronically ill for at least 90 days. We will reimburse you for
expenses incurred for qualified long term care services (up to a stated monthly
limit) on a monthly basis in a total amount of up to 48% of the Policy's
Eligible Stated Amount on the date the claim is processed. Payments made will be
held as a lien against the Policy's Death Benefit. The amount your
beneficiary(s) will receive will be reduced by the amounts actually paid under
this rider.
The Company believes that benefits received under this rider will be treated as
death benefits for federal tax purposes. As a result, benefits should not be
includible as income for tax purposes.
We encourage you to discuss electing this rider with your tax adviser prior to
making such an election.
Once you have begun to receive benefits under this rider, you may not reduce
your Coverage Amount. Further, if you have incurred loans against the policy,
the amount of your Coverage Amount that you may use for this benefit will be
reduced by an amount equal to the outstanding loan balance.
EXCHANGE RIGHTS
Once the Policy is in effect, it may be exchanged at any time during the first
24 months after its issuance for a fixed fund universal life insurance policy
issued by the Company (or an affiliated company, if allowed) on the life of the
Insured. Benefits under the new life insurance policy will be as described in
that policy. No evidence of insurability will be required. The Policy Owner has
the right to select the same Death Benefit or Coverage Amount as the former
Policy had at the time of the exchange. Cost of insurance rates will be based on
the same risk classification as those of the former Policy. Any outstanding
policy loan must be repaid before the Company will make an exchange. In
addition, there may be an adjustment for the difference in Cash Value between
the two policies.
POLICY SURRENDERS AND CASH SURRENDER VALUE
- --------------------------------------------------------------------------------
RIGHT TO SURRENDER
At any time during the lifetime of the Insured and while the Policy is in force,
the Policy Owner may make a written request for a full or partial surrender of
the Policy, without the consent of the Beneficiary (provided the designation of
Beneficiary is not irrevocable). In the case of full surrenders, the Policy
should be returned to the Company. The amount available upon surrender is the
Cash Surrender Value (i.e., the Cash Value of the Policy determined as of the
Valuation Date on which the Company receives the Policy Owner's written request,
less any outstanding policy loan, and less any applicable Surrender Charges).
(See "Surrender Charges.")
Upon full or partial surrender, the Company will generally pay the Cash
Surrender Value of the Policy within seven days following its receipt of the
written request, or on the date requested by the Policy Owner, whichever is
later.
FULL SURRENDERS
If the Policy is fully surrendered, the Policy will terminate on the surrender
effective date . The Policy must be returned to the Company along with a written
release and surrender of all claims under the Policy in a form satisfactory to
the Company. The Policy Owner may elect to have the surrender amount paid in a
lump sum or under a payment option.
PARTIAL SURRENDERS
The Company will permit partial surrenders of the Cash Value in the Policy at
any time during the lifetime of the Insured and while the Policy is in effect. A
partial surrender reduces the Policy's Cash Value by the amount of the partial
surrender requested, plus the amount of the surrender charge imposed in
connection with the partial surrender. The deduction from Cash Value for a
27
<PAGE> 32
partial surrender will be made on a pro rata basis against the Cash Value of
each of the Investment Options attributable to the Policy (unless the Policy
Owner states otherwise in writing).
In addition to reducing the Cash Value of the Policy, partial cash surrenders
will reduce the Death Benefit payable under the Policy and may reduce the Stated
Amount. The Company may require return of the Policy to record such reduction.
After a partial surrender, the remaining Stated Amount must not be less than
$10,000. Partial surrenders will not be permitted if they would cause the Policy
to fail to qualify as "life insurance" under applicable federal income tax laws.
Reductions in Stated Amount will be processed as described under "Changes in
Stated Amount."
POLICY LOANS
- --------------------------------------------------------------------------------
A Policy Owner may obtain a cash loan from the Company secured by the Policy not
to exceed 90% of the Policy's Cash Value minus surrender charges (determined on
the day on which the Company receives the written loan request). The Company
generally will make the loan to the Policy Owner within seven days after receipt
of the written request. No loan requests may be made for amounts of less than
$500 (subject to state law). If there is a loan outstanding at the time a
subsequent loan request is made, the amount of the outstanding loan will be
added to the new loan request. The amount of the loan will be transferred as of
the date the loan is made on a pro rata basis from the Investment Options
(unless the Policy Owner states otherwise) to another temporary account (the
"Loan Account").
The Company will charge interest on the outstanding amounts of the loan, which
interest must be paid in advance by the Policy Owner at the beginning of each
Policy Year. Interest not paid when due will be capitalized, and an amount equal
to such interest will be transferred to the Loan Account pro rata from the
Investment Options. Loans made during the first ten Policy Years will be made at
a 2% net cost on principal, and a 2% net cost on earnings. Loans made after the
tenth Policy Year will be made at 2% net cost on principal and up to 2% net cost
on earnings (we currently charge 0% net cost on earnings).
For these purposes, "earnings" represents any unloaned Cash Value, minus the
total premiums paid under the Policy. Loans will be taken from earnings first,
and then from principal. Loans taken against earnings will be charged an
interest rate of 5.65% during the first ten Policy Years, and currently 3.85%
(5.65% maximum) for Policy Year 11 and thereafter. Loans taken against principal
will be charged an interest rate of 5.65% in all Policy Years. Amounts in the
Loan Account will be credited by the Company with a fixed annual rate of return
of 4%, and will not be affected by the investment performance of the Investment
Options. The rate of return credited to amounts held in the Loan Account will be
transferred back to the Investment Options on a pro rata basis after each Policy
Year. The Policy's "Loan Account Value" is equal to amounts transferred from the
Investment Options to the Loan Account when a loan is taken, plus capitalized
loan interest, plus the net rate of return credited to the Loan Account that has
not yet been transferred back to the Investment Options.
While the Insured is living and the Policy is in effect, loans may be repaid.
Loan repayments will be first applied to that portion of the loan comprised of
principal. Loan repayments reduce the Loan Account Value, and increase the Cash
Value in the Investment Options. The amount of the repayment will be transferred
from the Loan Account and will be allocated among the Investment Options in
proportion to the outstanding loan amount associated with each Investment
Option.
RISKS ASSOCIATED WITH LOANS TAKEN AGAINST A VARIABLE LIFE INSURANCE POLICY
An outstanding loan amount decreases the Cash Surrender Value. If a loan is not
repaid, it permanently decreases the Cash Surrender Value, which could cause the
Policy to lapse (see "Policy Lapse and Reinstatement."). For example, if a
Policy has a Cash Surrender Value of $100,000, the Policy Owner may take a loan
of 90% or $90,000, leaving a new Cash Surrender Value of $10,000 In addition,
the Death Benefit actually payable would be decreased because of the outstanding
loan. Furthermore, even if the loan is repaid, the Death Benefit and Cash
28
<PAGE> 33
Surrender Value may be permanently affected since the Policy Owner was not
credited with the investment experience of an Investment Option on the amount in
the Loan Account while the loan was outstanding. All or any part of a loan
secured by a Policy may be repaid while the Policy is still in force. Any
payment received while there is an outstanding loan on the Policy will be
considered a loan repayment rather than an additional Premium Payment. A loan
outstanding at the end of the Grace Period cannot be repaid unless the Policy is
reinstated. Loans from a modified endowment contract are treated as
distributions to the Policy Owner (see "Federal Tax Considerations, Tax
Treatment of Policy Benefits -- Modified Endowment Contracts.")
PAYMENT OPTIONS
- --------------------------------------------------------------------------------
Proceeds payable upon the death of the Insured or upon surrender of the Policy,
and the benefits payable upon maturity, may be paid in a lump sum, or in whole
or in part under any of the payment options available under the Policy. Payment
of proceeds which exceed the Death Benefit may be deferred for up to six months
from the date of the request for the payment. A combination of options may be
used. The minimum amount that may be placed under a payment option is $5,000
unless the Company consents to a lesser amount. Proceeds applied under an option
will no longer be affected by the investment experience of the Investment
Options or Trusts. Once in effect, some of the payment options may not provide
any surrender rights.
The following payment options are available under the Policy:
OPTION 1 -- PAYMENTS OF A FIXED AMOUNT
OPTION 2 -- PAYMENTS FOR A FIXED PERIOD
OPTION 3 -- AMOUNTS HELD AT INTEREST
OPTION 4 -- MONTHLY LIFE INCOME
OPTION 5 -- JOINT AND SURVIVOR LEVEL AMOUNT MONTHLY LIFE INCOME
OPTION 6 -- JOINT AND SURVIVOR MONTHLY LIFE INCOME -- TWO-THIRDS TO SURVIVOR
OPTION 7 -- JOINT AND LAST SURVIVOR MONTHLY LIFE INCOME -- MONTHLY PAYMENT
REDUCES ON DEATH OF FIRST PERSON NAMED
OPTION 8 -- OTHER OPTIONS
The Company will make any other arrangements for periodic payments as may be
agreed upon. If any periodic payment due any payee is less than $100, the
Company may make payments less often. If the Company has declared a higher rate
under an option at the date the first payment under an option is due, the
Company will base the payments on the higher rate.
OTHER MATTERS
- --------------------------------------------------------------------------------
VOTING RIGHTS
VOTING RIGHTS OF THE INVESTMENT OPTIONS. In accordance with its view of present
applicable law, the Company will vote the shares of the Investment Options at
regular and special meetings of the shareholders of the Investment Options in
accordance with instructions from Policy Owners having a voting interest in
Separate Account Two. The Company will vote shares for which no instructions
have been given or shares which are not otherwise attributable to Policy Owners
in the same proportion as it votes shares for which it has received
instructions. If the 1940 Act or any rule promulgated thereunder should be
amended, however, or if the Company's present interpretation should change and,
as a result, the Company determines it is permitted to vote the shares of the
Investment Options in its own right, it may elect to do so.
29
<PAGE> 34
The voting interests of the Policy Owner in the Investment Options will be
determined as follows: Policy Owners may cast one vote for each $100 of Cash
Value of the Policy allocated to the Investment Option, the assets of which are
invested in the particular Investment Option on the record date for the
shareholder meeting for that Fund. Fractional votes are counted. If, however, a
Policy Owner has taken a loan secured by the Policy, amounts transferred from
the Investment Option(s) to the Loan Account in connection with the loan will
not be considered in determining the voting interests of the Policy Owner.
Policy Owners should review the prospectuses for the Investment Options to
determine matters on which shareholders may vote and the definition of a
majority vote required on some matters.
DISREGARD OF VOTING INSTRUCTIONS. When permitted by state insurance regulatory
authorities, the Company may disregard voting instructions if the instructions
require that the shares be voted so as to cause a change in the investment
objective or policies of Separate Account Two or one of the Investment Options,
or to approve or disapprove an investment advisory contract of one of the
Investment Options. In addition, the Company may disregard voting instructions
in favor of changes in the investment policies or the investment adviser of any
of the Investment Options which are initiated by a Policy Owner if the Company
reasonably disapproves of such changes. A change would be disapproved only if
the proposed change is contrary to state law or prohibited by state regulatory
authorities, or if the Company determines that the change would have an adverse
effect on its general account in that the proposed investment policy for an
Investment Option may result in overly speculative or unsound investments.
Should the Company disregard voting instructions, a summary of that action and
the reasons for such action would be included in the next annual report to
Policy Owners.
REPORTS TO POLICY OWNERS
The Company will maintain all records relating to Separate Account Two and the
Investment Options. At least once in each Policy Year, the Company will send to
Policy Owners a statement containing the following information: (1) the Stated
Amount and the Cash Value of the Policy (indicating the number of Accumulation
Units credited to the Policy in each Investment Option and the corresponding
Accumulation Unit Value); (2) the date and amount of each Premium Payment; (3)
the date and amount of each Monthly Deduction; (4) the amount of any outstanding
policy loan as of the date of the statement, and the amount of any loan interest
charged on the Loan Account; (5) the date and amount of any partial cash
surrenders and the amount of any partial surrender charges; (6) the annualized
cost of any supplemental benefits purchased under the Policy; and (7) a
reconciliation since the last report of any change in Cash Value and Cash
Surrender Value. The Company will also send any other reports required by any
applicable state or federal laws or regulations.
Each Policy Owner will also receive semiannual and annual reports containing
financial statements for each of the Investment Options in which premium
payments are allocated at the time of the report.
LIMIT ON RIGHT TO CONTEST AND SUICIDE EXCLUSION
The Company may not contest the validity of the Policy after it has been in
effect during the Insured's lifetime for two years from the Issue Date. If the
Policy is reinstated, the two-year period will be measured from the date of
reinstatement (subject to state regulation). Each requested increase in Stated
Amount is contestable for two years from its effective date (subject to state
regulation).
In addition, if the Insured commits suicide during the two-year period following
issue, subject to state law, the Death Benefit will be limited to the premiums
paid less the amount of any partial surrender and the amount of any Loan Account
Value. During the two-year period following an increase, the portion of the
Death Benefit attributable to the increase in the case of suicide will be
limited to an amount equal to the premium paid for such increase (subject to
state law).
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<PAGE> 35
MISSTATEMENT AS TO SEX AND AGE
If there has been a misstatement with regard to sex or age in the Policy
Application, benefits payable will be adjusted to what the Policy would have
purchased at the correct age or sex based on the most recent cost of insurance
charge. A misstatement with regard to sex or age in a substantially funded
Policy may cause a cash distribution that is includable in whole or in part in
the gross income of the Policy Owner.
SUSPENSION OF VALUATION
The Company reserves the right to suspend or postpone the date of any payment of
any benefit or values for any Valuation Period (1) when the New York Stock
Exchange is closed (except holidays or weekends); (2) when trading on the
Exchange is restricted; (3) when an emergency exists as determined by the SEC so
that disposal of the securities held in the Investment Options is not reasonably
practicable or it is not reasonably practicable to determine the value of the
Investment Options' net assets; or (4) during any other period when the SEC, by
order, so permits for the protection of security holders.
BENEFICIARY
The Applicant names the beneficiary in the application for the Policy. The
Policy Owner may change the beneficiary (unless irrevocably named) during the
Insured's lifetime, and while the Policy is in force, by sending a written
request to the Company. Any change will be effective from the date the written
request was signed. The Company has no responsibility for payments made or
actions taken prior to receipt of the written request. If no beneficiary is
living when the Insured dies, the Death Benefit will be paid to the Policy
Owner, if living; otherwise, the Death Benefit will be paid to the Policy
Owner's estate.
The rights of any collateral assignee may affect the interest of the
Beneficiary.
ASSIGNMENT
The Policy Owner is specified in the Policy Application. The Policy may be
assigned as collateral for a loan or other obligation. The Company is not
responsible for any payment made or action taken before receipt of written
notice of such assignment, and is not responsible for determining the validity
of any assignment. Proof of interest must be filed with any claim under a
collateral assignment.
DIVIDENDS
No dividends will be paid under the Policy.
FEDERAL TAX CONSIDERATIONS
- --------------------------------------------------------------------------------
GENERAL
The following is a general discussion of the federal income tax considerations
relating to the Policies. This discussion is based upon the Company's
understanding of the federal income tax laws as they are currently interpreted
by the Internal Revenue Service ("IRS"). These laws are complex, and tax results
may vary among individuals. A person contemplating the purchase of or the
exercise of elections under a Policy should seek competent tax advice.
IT SHOULD BE UNDERSTOOD THAT THIS IS NOT AN EXHAUSTIVE DISCUSSION OF ALL TAX
QUESTIONS THAT MIGHT ARISE UNDER THE POLICIES. NO ATTEMPT HAS BEEN MADE TO
ADDRESS ANY FEDERAL ESTATE TAX OR STATE AND LOCAL TAX CONSIDERATIONS WHICH MAY
ARISE IN CONNECTION WITH A POLICY. FOR COMPLETE INFORMATION, A QUALIFIED TAX
ADVISOR SHOULD BE CONSULTED.
THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF ANY POLICY AND THE FOLLOWING
TAX DISCUSSION IS BASED ON THE COMPANY'S UNDERSTANDING OF FEDERAL INCOME TAX
LAWS AS THEY ARE CURRENTLY INTERPRETED. THE COMPANY CANNOT GUARANTEE THAT THOSE
LAWS OR INTERPRETATIONS WILL REMAIN UNCHANGED.
31
<PAGE> 36
TAX STATUS OF THE POLICY
- --------------------------------------------------------------------------------
DEFINITION OF LIFE INSURANCE
Section 7702 of the Code sets forth a definition of a life insurance contract
for federal tax purposes. Guidance as to how Section 7702 is to be applied,
however, is limited. Although the Secretary of the Treasury (the "Treasury") is
authorized to prescribe regulations implementing Section 7702, and while
proposed regulations and other limited, interim guidance has been issued, final
regulations have not been adopted. If a Policy were determined not to be a life
insurance contract for purposes of Section 7702, such Policy would not provide
the tax advantages normally provided by a life insurance policy.
With respect to a Policy issued on the basis of a standard rate class, the
Company believes (largely in reliance on IRS Notice 88-128 and the proposed
regulations under Section 7702) that such a Policy should meet the Section 7702
definition of a life insurance contract. There is less guidance on the
application of the rules with respect to a Policy that is issued on a
substandard basis (i.e., a premium class involving higher than standard
mortality risk). Thus, it is not clear whether such a Policy would satisfy
Section 7702, particularly if the Policy Owner pays the full amount of premiums
permitted under the Policy.
The Company reserves the right to make changes in the Policy if such changes are
deemed necessary to attempt to assure its qualification as a life insurance
contract for tax purposes.
DIVERSIFICATION
Section 817(h) of the Code provides that separate account investments (or the
investments of a mutual fund, the shares of which are owned by separate accounts
of insurance companies) underlying the Policy must be "adequately diversified"
in accordance with Treasury regulations in order for the Policy to qualify as
life insurance. The Treasury Department has issued regulations prescribing the
diversification requirements in connection with variable contracts. Separate
Account Two, through the Investment Options, intends to comply with these
requirements. Although the Company does not control the Investment Options, it
intends to monitor the investments of the Investment Options to ensure
compliance with the diversification requirements prescribed by the Treasury
Department.
INVESTOR CONTROL
In certain circumstances, owners of variable life insurance contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate accounts used to support their contract. In those circumstances, income
and gains from the separate account assets would be includable in the variable
contract owner's gross income each year. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate 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
has also announced, in connection with the issuance of regulations concerning
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor (i.e., the Policy Owner), rather than the
insurance company, to be treated as the owner of the assets in the account."
This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular Investment Options without being treated as owners of
the underlying assets." As of the date of this prospectus, no such guidance has
been issued.
The ownership rights under the Policy are similar to, but different in certain
respects from, those described by the IRS in rulings in which it determined that
the policy owners received the desired tax benefits because they were not
treated as owning the separate account assets. For example, a Policy
32
<PAGE> 37
Owner of this Policy has additional flexibility in allocating payments and cash
values. These differences could result in the Policy Owner being treated as the
owner of the assets of Separate Account Two. In addition, the Company does not
know what standard will be set forth in the regulations or rulings which the
Treasury is expected to issue, nor does the Company know if such guidance will
be issued. The Company therefore reserves the right to modify the Policy as
necessary to attempt to prevent the Policy Owner from being considered the owner
of a pro rata share of the assets of Separate Account Two.
The remaining tax discussion assumes that the Policy qualifies as a life
insurance contract for federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
- --------------------------------------------------------------------------------
IN GENERAL
The Company believes that the proceeds and cash value increases of a Policy
should be treated in a manner consistent with a fixed-benefit life insurance
policy for federal income tax purposes. Thus, the Death Benefit under the Policy
should be excludable from the gross income of the Beneficiary.
In addition, the Policy Owner will generally not be deemed to be in constructive
receipt of the Cash Value, including increments thereof, until there is a
distribution. The tax consequences of distribution from, and loans taken from or
secured by, a Policy depend on whether the Policy is classified as a "Modified
Endowment Contract." However, whether a Policy is or is not a Modified Endowment
Contract, upon a complete surrender or lapse of a Policy or when benefits are
paid at a Policy's maturity date, if the amount received plus the amount of
indebtedness exceeds the total investment in the Policy, the excess will
generally be treated as ordinary income subject to tax.
Depending on the circumstances, the exchange of a Policy, a change in the
Policy's Death Benefit Option, a Policy loan, a partial withdrawal, a surrender,
a change in ownership, or an assignment of the Policy may have federal income
tax consequences. In addition, federal, state and local transfer, and other tax
consequences of ownership or receipt of Policy proceeds depend on the
circumstances of each Owner or beneficiary. Therefore, it is important to check
with a tax adviser prior to the purchase of a policy.
MODIFIED ENDOWMENT CONTRACTS
In light of Policy premium requirements, a Policy will, in almost all cases, be
a modified endowment contract. (See, however, the discussion below on a Policy
issued in exchange for another life insurance contract.)
Loans and partial withdrawals from, as well as collateral assignments of,
Policies that are modified endowment contracts will be treated as distributions
to the Policy Owner for tax purposes. All pre-death distributions (including
loans, partial withdrawals and collateral assignments) from these Policies will
be included in gross income on an income-first basis to the extent of any income
in the Policy (the cash value less the Policy Owner's investment in the Policy)
immediately before the distribution.
The law also imposes a 10% penalty tax on pre-death distributions (including
loans, collateral assignments, partial withdrawals and complete surrenders) from
modified endowment contracts to the extent they are included in income, unless a
specific exception to the penalty applies. The penalty does not apply to amounts
which are distributed on or after the date on which the taxpayer attains age 59
1/2, because the taxpayer is disabled, or as substantially equal periodic
payments over the taxpayer's life (or life expectancy) or over the joint lives
(or joint life expectancies) of the taxpayer and his or her beneficiary.
Furthermore, if the loan interest is capitalized by adding the amount due to the
balance of the loan, the amount of the capitalized
33
<PAGE> 38
interest will be treated as an additional distribution subject to income tax as
well as the 10% penalty tax, if applicable, to the extent of income in the
Policy.
EXCHANGES
Any Policy issued in exchange for a modified endowment contract will be subject
to the tax treatment accorded to modified endowment contracts. However, the
Company believes that any Policy received in exchange for a life insurance
contract that is not a modified endowment contract will generally not be treated
as a modified endowment contract if the face amount of the Policy is greater
than or equal to the death benefit of the policy being exchanged. The payment of
any premiums at the time of or after the exchange may, however, cause the Policy
to become a modified endowment contract. A prospective purchaser should consult
a qualified tax advisor before authorizing the exchange of his or her current
life insurance contract for a Policy.
AGGREGATION OF MODIFIED ENDOWMENT CONTRACTS
In the case of a pre-death distribution (including a loan, partial withdrawal,
collateral assignment or complete surrender) from a Policy that is treated as a
modified endowment contract, a special aggregation requirement may apply for
purposes of determining the amount of the income on the Policy. Specifically, if
the Company or any of its affiliates issues to the same Policy Owner more than
one modified endowment contract within a calendar year, then for purposes of
measuring the income on the Policy with respect to a distribution from any of
those Policies, the income on the Policy for all those Policies will be
aggregated and attributed to that distribution.
POLICIES WHICH ARE NOT MODIFIED ENDOWMENT CONTRACTS
Unlike loans from modified endowment contracts, a loan from a Policy that is not
a modified endowment contract will be considered indebtedness of the owner and
no part of a loan will constitute income to the owner. However, the treatment of
loans taken on earnings after the tenth Policy Year, or of loans taken to
acquire a Travelers long-term care policy is unclear; such loans might be
considered a withdrawal instead of indebtedness for federal tax purposes.
Pre-death distributions from a Policy that is not a modified endowment contract
will generally not be included in gross income to the extent that the amount
received does not exceed the Policy Owner's investment in the Policy. (An
exception to this general rule may occur in the case of a decrease or change
that reduces the benefits provided under a Policy in the first 15 years after
the Policy is issued and that results in a cash distribution to the Policy
Owner. Such a cash distribution may be taxed in whole or in part as ordinary
income to the extent of any gain in the Policy.) Further, the 10% penalty tax on
pre-death distributions does not apply to Policies that are not modified
endowment contracts.
Certain changes to Policies that are not modified endowment contracts may cause
such Policies to be treated as modified endowment contracts. A Policy Owner
should therefore consult a tax advisor before effecting any change to a Policy
that is not a modified endowment contract.
TREATMENT OF LOAN INTEREST
If there is any borrowing against the Policy, the interest paid on loans may not
be tax deductible.
THE COMPANY'S INCOME TAXES
- --------------------------------------------------------------------------------
The Company currently makes no charge to Separate Account Two for any federal,
state or local taxes that it incurs that may be attributable to Separate Account
Two or to the Policies. The Company reserves the right, however, to make a
charge for any tax or other economic burden responsibility from the application
of tax laws that it determines to be properly attributable to Separate Account
Two or to the Policies.
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<PAGE> 39
MANAGEMENT
- --------------------------------------------------------------------------------
DIRECTORS OF THE TRAVELERS LIFE AND ANNUITY COMPANY
The following are the Directors and Executive Officers of The Travelers Life and
Annuity Company. Unless otherwise indicated, the principal business address for
all individuals is the Company's Home Office at One Tower Square, Hartford,
Connecticut 06183. References to Travelers Group Inc. include, prior to December
31, 1993, Primerica Corporation or its predecessors.
<TABLE>
<CAPTION>
DIRECTOR
NAME AND POSITION SINCE PRINCIPAL BUSINESS
- ------------------------- -------- -------------------------------------------------------
<S> <C> <C>
Jay S. Benet............. 1996 Senior Vice President since February 1994 and Vice
Director President (1990-1994) of The Travelers Insurance
Company; Partner (1986-1990) of Coopers & Lybrand.
Ian R. Stuart............ 1996 Senior Vice President since November, 1996; Chief
Director Financial Officer; Chief Accounting Officer and
Controller since March 1996, Vice President --
(1991-1996) of The Travelers Life and Annuity Company.
Katherine M. Sullivan.... 1996 Senior Vice President and General Counsel since May
Director 1996 of The Travelers Insurance Company; Senior Vice
President and General Counsel (1994-1996) Connecticut
Mutual; Special Counsel & Chief of Staff (1988-1994)
Aetna Life & Casualty.
George C. Kokulis........ 1996 Senior Vice President since September 1995, Vice
Director President (1993-1995) of The Travelers Insurance
Company.
Michael A. Carpenter..... 1995 Chairman since June 1996 and President and Chief
Director Executive Officer since June 1995 of The Travelers
Insurance Company; Executive Vice President of
Travelers Group Inc. since January 1995; Chairman,
President and Chief Executive Officer (1989-1994),
Kidder Peabody Group Inc.
Robert I. Lipp........... 1992 Chairman, President and Chief Executive Officer since
Director April 1996 of Travelers/Aetna Property Casualty Corp.;
Chief Executive Officer and Director since December
1993 of The Travelers Insurance Group Inc.; Vice
Chairman and Director of Travelers Group Inc. since
1991; Chairman and Chief Executive Officer of
Commercial Credit Company (1991-1993); Executive Vice
President (1986-1991), Primerica Corporation.
Marc P. Weill............ 1994 Senior Vice President-Investments since 1993 and Chief
Director Investment Officer since 1995 of The Travelers
Insurance Group Inc.; Senior Vice President and Chief
Investment Officer of Travelers Group Inc. since 1992;
Vice President (1990-1992), Primerica Corporation; Vice
President (1989-1990), Smith Barney Inc.
</TABLE>
- ---------------
* Principal business address: Travelers Group Inc., 388 Greenwich Street, New
York, New York
35
<PAGE> 40
SENIOR OFFICERS OF THE TRAVELERS LIFE AND ANNUITY COMPANY
- --------------------------------------------------------------------------------
The following are the Senior Officers of The Travelers Life and Annuity Company,
other than the Directors listed above, as of the date of this Prospectus. Unless
otherwise indicated, the principal business address for all individuals listed
is One Tower Square, Hartford, Connecticut 06183.
<TABLE>
<CAPTION>
NAME POSITION WITH INSURANCE COMPANY
- --------------------------------------------------------------- -------------------------------
<S> <C>
Stuart Baritz.................................................. Senior Vice President
Elizabeth C. Georgakopoulos.................................... Senior Vice President
Barry Jacobson................................................. Senior Vice President
Russell H. Johnson............................................. Senior Vice President
Warren H. May.................................................. Senior Vice President
Christine M. Modie............................................. Senior Vice President
David A. Tyson................................................. Senior Vice President
F. Denney Voss................................................. Senior Vice President
</TABLE>
Information relating to the management of the Investment Options is contained in
the Investment Option prospectuses.
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS
- --------------------------------------------------------------------------------
The assets of Separate Account Two are held by the Company and are kept
physically segregated and held separate and apart from the Company's general
account. Premium payments allocated under the Portfolio Architect Life Insurance
policies are held in a segment of Separate Account Two. The Company maintains
records of all of Separate Account Two's purchases and redemptions of shares of
the Investment Options.
DISTRIBUTION OF THE POLICY
- --------------------------------------------------------------------------------
The Company intends to sell the Policy in all jurisdictions where it is licensed
to do business and where the Policy is approved.
Policies may be purchased from agents who are licensed by state insurance
authorities to sell variable life insurance policies issued by the Company, and
who are also registered representatives of Tower Square Securities Inc. ("Tower
Square") or of broker-dealers who have entered into Selling Agreements with
Tower Square. Tower Square, whose principal business address is One Tower
Square, Hartford, Connecticut, serves as the principal underwriter for the
variable life insurance policies described herein. Tower Square is registered as
a broker-dealer with the Securities and Exchange Commission under the Securities
Exchange Act of 1934, and is a member of the National Association of Securities
Dealers, Inc. ("NASD"). Tower Square is an affiliate of the Company and an
indirect wholly owned subsidiary of Travelers Group Inc., and serves as
principal underwriter pursuant to an Underwriting Agreement to which Separate
Account Two, the Company, and Tower Square are parties. No amounts have been or
will be retained by Tower Square for acting as principal underwriter for the
Policies. It is anticipated that an affiliated broker-dealer will become the
principal underwriter during 1997.
Agents will be compensated for sales of the Policies on a commission and service
fee basis. The maximum sales commissions to be paid under the Policy will be
8.20% of premiums. In addition, certain production, persistency and managerial
bonuses may be paid.
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<PAGE> 41
LEGAL PROCEEDINGS AND OPINION
- --------------------------------------------------------------------------------
There are no pending material legal proceedings affecting the Policy, Separate
Account Two or any of the Investment Options.
Legal matters in connection with federal laws and regulations affecting the
issue and sale of the Policy described in this Prospectus and the organization
of the Company, its authority to issue the Policy under Connecticut law and the
validity of the forms of the Policy under Connecticut law have been passed on by
the General Counsel of the Company.
REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended. This Prospectus does
not contain all information set forth in the Registration Statement, its
amendments and exhibits, to which reference is made for further information
concerning Separate Account Two, the Company and the Policy.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
Coopers & Lybrand L.L.P., independent accountants, 100 Pearl Street, Hartford,
Connecticut, are the independent auditors for Separate Account Two. The services
to be provided to Separate Account Two will include primarily the audit of
Separate Account Two's financial statements. Separate Account Two had no assets
as of the effective date of this prospectus.
The financial statements of The Travelers Life and Annuity Company as of
December 31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996, have been included herein and in the registration
statement in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The financial statements of the Company contained herein (see page F-1) should
be considered only as bearing upon the Company's ability to meet its obligations
under the Policy, and they should not be considered as bearing on the investment
performance of Separate Account Two or its Investment Options.
ILLUSTRATIONS
- --------------------------------------------------------------------------------
The following pages are intended to illustrate hypothetically how the Cash
Value, Cash Surrender Value and Death Benefit can change over time for Policies
issued to a 45-year old male. The difference between the Cash Value and the Cash
Surrender Value in these illustrations reflects the Surrender Charge that would
be incurred upon a full surrender of the Policy.
Two pages of values are shown for each Death Benefit Option (Level and
Variable). One page illustrates the assumption that the maximum Guaranteed Cost
of Insurance Rates allowable under the Policy are charged in all years. The
other page illustrates the assumption that the current scale of Cost of
Insurance Rates are charged in all years. The Cost of Insurance Rates charged
vary by age, sex (where permitted by state law) and underwriting classification.
The illustrations also reflect a monthly deduction of 0.0291667% for the first
ten years following the Initial Premium
37
<PAGE> 42
(.0166667 for premium tax and .0125% for DAC tax.). In addition, a monthly
maintenance fee of $5.00 is charged for contracts with an initial premium of
less than $25,000.
The values shown in these illustrations vary according to assumptions used for
charges, and gross rates of investment returns. The charges consist of 0.90% for
mortality and expense risks, 0.40% for administrative expenses, and .79% for
Investment Option expenses. The 12% illustration will assume that the mortality
and expense risk charge has been reduced to 0.77% in the second policy year and
thereafter. The charge for Investment Option expenses reflected in the
illustrations uses an average of the investment advisory fees and other expenses
charged by each of the Investment Options during 1996 and assumes that no Policy
Loans are outstanding. After deduction of these amounts, the illustrated gross
annual investment rates of return of 0% and 6% correspond to approximate net
annual rates of -2.07% and 3.93%, respectively. The illustrated gross annual
investment rate of return of 12% corresponds to an approximate net annual rate
of return of 9.93% in the first Policy Year, and 10.08% thereafter. The actual
charges under a Policy for expenses of the Investment Options will depend on the
actual allocation of Cash Value and may be higher or lower than those
illustrated.
As stated above, the examples illustrate values that would result based upon
hypothetical uniform gross investment rates of return of 0%, 6% and 12%. The
values would be different from those shown if the gross rates averaged 0%, 6%,
and 12% over a period of years, but fluctuated above and below those averages.
The illustrations also assume that premiums are paid as indicated, no policy
loans are made, no increases or decreases to the Stated Amount are requested, no
partial surrenders are made, and no charges for transfers between funds are
incurred.
The illustrations do not reflect any charges for federal income taxes against
Separate Account Two, since the Company is not currently deducting such charges
from Separate Account Two. However, such charges may be made in the future, and
in that event, the gross annual investment rates of return would have to exceed
0%, 6% and 12% by an amount sufficient to cover the tax charges in order to
produce the Death Benefits, Cash Values and Cash Surrender Values illustrated.
The second column of each Illustration shows the amount that would accumulate if
an amount equal to the Premium Payment was invested to earn interest (after
taxes) at 5%, compounded annually.
Upon request, the Company will provide a comparable personalized illustration
based upon the proposed Insured's age, sex, underwriting classification, the
specified insurance benefits, and the premium requested. The hypothetical gross
annual investment return assumed in such an illustration will not exceed 12%.
38
<PAGE> 43
PORTFOLIO ARCHITECT
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
LEVEL DEATH BENEFIT OPTION
ILLUSTRATED WITH GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<S> <C>
Male, Issue Age 45 Face Amount: $38,791
Non-Smoker Single Premium: $10,000
</TABLE>
<TABLE>
<CAPTION>
CASH SURRENDER
DEATH BENEFIT* CASH VALUE* VALUE*
--------------------------------- --------------------------------- --------------------
TOTAL PREMIUMS 0% 6% 12% 0% 6% 12% 0% 6%
YEAR WITH 5% INTEREST (-2.08%) (3.92%) (9.92%)# (-2.06%) (3.92%) (9.92%)# (-2.08%) (3.92%)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 38,791 38,791 38,791 9,563 10,156 10,749 8,813 9,406
2 11,025 38,791 38,791 38,791 9,124 10,307 11,578 8,374 9,557
3 11,576 38,791 38,791 38,791 8,681 10,453 12,481 7,981 9,753
4 12,155 38,791 38,791 38,791 8,233 10,591 13,464 7,533 9,891
5 12,763 38,791 38,791 38,791 7,778 10,722 14,536 7,128 10,072
6 13,401 38,791 38,791 38,791 7,314 10,842 15,706 6,714 10,242
7 14,071 38,791 38,791 38,791 6,839 10,950 16,984 6,339 10,450
8 14,775 38,791 38,791 38,791 6,349 11,042 18,380 5,949 10,642
9 15,513 38,791 38,791 38,791 5,841 11,115 19,908 5,541 10,815
10 16,289 38,791 38,791 38,791 5,312 11,167 21,582 5,312 11,167
15 20,789 38,791 38,791 44,763 2,304 11,216 33,405 2,304 11,216
20 26,533 0 38,791 63,694 0 10,119 52,209 0 10,119
<CAPTION>
12%
YEAR (9.92%)#
- ----
<S> <C>
1 9,999
2 10,828
3 11,781
4 12,764
5 13,886
6 15,106
7 16,484
8 17,980
9 19,608
10 21,582
15 33,405
20 52,209
</TABLE>
These hypothetical rates of return are illustrative only and should not be
considered a representation of past or future investment results. Actual
investment results may be more or less than those shown and will depend on a
number of factors. The Account Values and Cash Surrender Values will be
different from those shown if the actual rates of return averaged 0%, 6% or 12%
over a period of years but fluctuated above or below the average for individual
contract years. No representations can be made that these rates of return can be
achieved for any one year or sustained over a period of time.
<TABLE>
<C> <S>
# 9.92% is increased to 10.07% in years 2 and thereafter due to a reduction in the
mortality and expense risk charge.
* Net Interest Rates are shown in parenthesis.
** Insufficient cash value would be developed to continue the contract without additional
premium payments.
</TABLE>
39
<PAGE> 44
PORTFOLIO ARCHITECT
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
LEVEL DEATH BENEFIT OPTION
ILLUSTRATED WITH CURRENT COST OF INSURANCE CHARGES
<TABLE>
<S> <C>
Male, Issue Age 45 Face Amount: $38,791
Non-Smoker Single Premium: $10,000
</TABLE>
<TABLE>
<CAPTION>
CASH SURRENDER
DEATH BENEFIT* CASH VALUE* VALUE*
--------------------------------- --------------------------------- --------------------
TOTAL PREMIUMS 0% 6% 12% 0% 6% 12% 0% 6%
YEAR WITH 5% INTEREST (-2.08%) (3.92%) (9.92%)# (-2.08%) (3.92%) (9.92%)# (-2.08%) (3.92%)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 38,791 38,791 38,791 9,616 10,210 10,804 8,866 9,460
2 11,025 38,791 38,791 38,791 9,234 10,422 11,697 8,484 9,672
3 11,576 38,791 38,791 38,791 8,852 10,634 12,672 8,152 9,934
4 12,155 38,791 38,791 38,791 8,470 10,847 13,739 7,770 10,147
5 12,763 38,791 38,791 38,791 8,087 11,060 14,905 7,437 10,410
6 13,401 38,791 38,791 38,791 7,702 11,272 16,180 7,102 10,672
7 14,071 38,791 38,791 38,791 7,312 11,481 17,577 6,812 10,981
8 14,775 38,791 38,791 38,791 6,917 11,688 19,106 6,517 11,288
9 15,513 38,791 38,791 38,791 6,517 11,891 20,785 6,217 11,591
10 16,289 38,791 38,791 38,791 6,107 12,089 22,626 6,107 12,089
15 20,789 38,791 38,791 47,667 4,018 13,255 35,573 4,018 13,255
20 26,533 38,791 38,791 68,652 1,389 14,185 56,272 1,389 14,185
<CAPTION>
12%
YEAR (9.92%)#
- ----
<S> <C>
1 10,054
2 10,947
3 11,972
4 13,039
5 14,255
6 15,580
7 17,077
8 18,706
9 20,485
10 22,626
15 35,573
20 56,272
</TABLE>
These hypothetical rates of return are illustrative only and should not be
considered a representation of past or future investment results. Actual
investment results may be more or less than those shown and will depend on a
number of factors. The Account Values and Cash Surrender Values will be
different from those shown if the actual rates of return averaged 0%, 6%, or 12%
over a period of years but fluctuated above or below the average for individual
contract years. No representations can be made that these rates of return can be
achieved for any one year or sustained over a period of time.
<TABLE>
<C> <S>
# 9.92% is increased to 10.07% in years 2 and thereafter due to a reduction in the
mortality and expense risk charge.
* Net Interest Rates are shown in parenthesis.
** Insufficient cash value would be developed to continue the contract without additional
premium payments.
</TABLE>
40
<PAGE> 45
PORTFOLIO ARCHITECT
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
VARIABLE DEATH BENEFIT OPTION
ILLUSTRATED WITH GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<S> <C>
Male, Issue Age 45 Face Amount: $38,791
Non-Smoker Single Premium: $10,000
</TABLE>
<TABLE>
<CAPTION>
CASH SURRENDER
DEATH BENEFIT* CASH VALUE* VALUE*
--------------------------------- --------------------------------- --------------------
TOTAL PREMIUMS 0% 6% 12% 0% 6% 12% 0% 6%
YEAR WITH 5% INTEREST (-2.08%) (3.92%) (9.92%)# (-2.08%) (3.92%) (9.92%)# (-2.08%) (3.92%)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 48,308 48,898 49,489 9,517 10,107 10,698 8,767 9,357
2 11,025 47,823 48,995 50,253 9,032 10,204 11,462 8,282 9,454
3 11,576 47,333 49,078 51,074 8,542 10,287 12,283 7,842 9,587
4 12,155 46,839 49,146 51,957 8,048 10,355 13,166 7,348 9,655
5 12,763 46,337 49,198 52,906 7,546 10,407 14,115 6,896 9,757
6 13,401 45,827 49,230 53,924 7,036 10,439 15,133 6,436 9,839
7 14,071 45,305 49,239 55,015 6,514 10,448 16,224 6,014 9,948
8 14,775 44,769 49,219 56,183 5,978 10,428 17,392 5,578 10,028
9 15,513 44,215 49,168 57,432 5,424 10,377 18,641 5,124 10,077
10 16,289 43,640 49,079 58,765 4,849 10,288 19,974 4,849 10,288
15 20,789 40,444 48,130 67,442 1,653 9,339 28,651 1,653 9,339
20 26,533 0 45,428 79,673 0 6,637 40,882 0 6,637
<CAPTION>
12%
YEAR (9.92%)#
- ----
<S> <C>
1 9,948
2 10,712
3 11,583
4 12,466
5 13,465
6 14,533
7 15,724
8 16,992
9 18,341
10 19,974
15 28,651
20 40,882
</TABLE>
These hypothetical rates of return are illustrative only and should not be
considered a representation of past or future investment results. Actual
investment results may be more or less than those shown and will depend on a
number of factors. The Account Values and Cash Surrender Values will be
different from those shown if the actual rates of return averaged 0%, 6%, or 12%
over a period of years but fluctuated above or below the average for individual
contract years. No representations can be made that these rates of return can be
achieved for any one year or sustained over a period of time.
<TABLE>
<C> <S>
# 9.92% is increased to 10.07% in years 2 and thereafter due to a reduction in the
mortality and expense risk charge.
* Net Interest Rates are shown in parenthesis.
** Insufficient cash value would be developed to continue the contract without additional
premium payments.
</TABLE>
41
<PAGE> 46
PORTFOLIO ARCHITECT
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
VARIABLE DEATH BENEFIT OPTION
ILLUSTRATED WITH CURRENT COST OF INSURANCE CHARGES
<TABLE>
<S> <C>
Male, Issue Age 45 Face Amount: $38,791
Non-Smoker Single Premium: $10,000
</TABLE>
<TABLE>
<CAPTION>
CASH SURRENDER
DEATH BENEFIT* CASH VALUE* VALUE*
--------------------------------- --------------------------------- --------------------
TOTAL PREMIUMS 0% 6% 12% 0% 6% 12% 0% 6%
YEAR WITH 5% INTEREST (-2.08%) (3.92%) (9.92%)# (-2.08%) (3.92%) (9.92%)# (-2.08%) (3.92%)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 48,379 48,971 49,564 9,588 10,180 10,773 8,838 9,430
2 11,025 47,968 49,149 50,417 9,177 10,358 11,626 8,427 9,608
3 11,576 47,558 49,323 51,342 8,767 10,532 12,551 8,067 9,832
4 12,155 47,146 49,492 52,346 8,355 10,701 13,555 7,655 10,001
5 12,763 46,734 49,656 53,435 7,943 10,865 14,644 7,293 10,215
6 13,401 46,319 49,812 54,616 7,528 11,021 15,825 6,928 10,421
7 14,071 45,899 49,959 55,895 7,108 11,168 17,104 6,608 10,668
8 14,775 45,473 50,094 57,281 6,682 11,303 18,490 6,282 10,903
9 15,513 45,042 50,218 58,785 6,251 11,427 19,994 5,951 11,127
10 16,289 44,601 50,325 60,413 5,810 11,534 21,622 5,810 11,534
15 20,789 42,364 50,855 71,507 3,573 12,064 32,716 3,573 12,064
20 26,533 39,638 50,679 88,487 847 11,888 49,696 847 11,888
<CAPTION>
12%
YEAR (9.92%)#
- ----
<S> <C>
1 10,023
2 10,876
3 11,851
4 12,855
5 13,994
6 15,225
7 16,604
8 18,090
9 19,694
10 21,622
15 32,716
20 49,696
</TABLE>
These hypothetical rates of return are illustrative only and should not be
considered a representation of past or future investment results. Actual
investment results may be more or less than those shown and will depend on a
number of factors. The Account Values and Cash Surrender Values will be
different from those shown if the actual rates of return averaged 0%, 6%, or 12%
over a period of years but fluctuated above or below the average for individual
contract years. No representations can be made that these rates of return can be
achieved for any one year or sustained over a period of time.
<TABLE>
<C> <S>
# 9.92% is increased to 10.07% in years 2 and thereafter due to a reduction in the
mortality and expense risk charge.
* Net Interest Rates are shown in parenthesis.
** Insufficient cash value would be developed to continue the contract without additional
premium payments.
</TABLE>
42
<PAGE> 47
APPENDIX A
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, Separate Account Two Investment Options may show the
percentage change in the value of an Accumulation Unit based on the performance
of the Investment Option over a period of time, determined by dividing the
increase (decrease) in value for that unit by the Accumulation Unit Value at the
beginning of the period. Separate Account Two invests in Investment Options that
were in existence prior to the date on which the Investment Options became
available under the Policy. Average annual rates of return include periods prior
to the inception of the Investment Option, and are calculated by adjusting the
actual returns of the Investment Options to reflect the charges that would have
been assessed under the Investment Options had the Investment Option been
available under Separate Account Two during the period shown.
The following performance information represents the percentage change in the
value of an Accumulation Unit of the Investment Options for the periods
indicated, and reflects all expenses of the Investment Options, as well as the
0.90% mortality and expense risk charge and the 0.40% administrative expense
charge assessed against the Investment Options. The rates of return do not
reflect surrender charges or Monthly Deduction Amounts (which are depicted in
the Example following the Rates of Return), nor do they reflect a reduction in
mortality and expense risk charges which may apply under certain circumstances.
For information about the Charges and Deductions assessed under the Policy, see
the illustrations. For illustrations of how these charges affect Cash Values and
Death Benefits, see the Illustrations.
AVERAGE RATES OF RETURN (SINCE INCEPTION) FOR
PERIODS ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
AVERAGE ANNUAL INCEPTION
INVESTMENT OPTION RATE OF RETURN DATE
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Federated High Yield Bond Portfolio*.............................. 7.13% 7/31/96
Cash Income Trust................................................. 3.93% 10/1/81
Travelers Quality Bond Portfolio.................................. 3.10% 7/31/96
Large Cap Portfolio............................................... 12.80% 7/31/96
Equity-Income Portfolio........................................... 11.20% 7/31/96
Lazard International Stock Portfolio.............................. 7.22% 7/31/96
MFS Emerging Growth Portfolio..................................... 5.53% 7/31/96
Capital Appreciation Fund (Janus subadviser)...................... 8.36% 5/83
Federated Stock Portfolio......................................... 12.11% 7/31/96
Alliance Growth Portfolio......................................... 25.50% 6/20/94
Putnam Diversified Income Portfolio............................... 9.11% 6/20/94
MFS Total Return Portfolio........................................ 13.27% 6/20/94
Zero Coupon Bond Fund Portfolio 1998.............................. 3.91% 10/11/95
Zero Coupon Bond Fund Portfolio 2000.............................. 3.60% 10/11/95
Zero Coupon Bond Fund Portfolio 2005.............................. 4.29% 10/11/95
Mid Cap Disciplined Equity Fund................................... N/A 1/15/97
</TABLE>
43
<PAGE> 48
EXAMPLE OF POLICY CHARGES
- --------------------------------------------------------------------------------
The following chart illustrates the surrender charges and Monthly Deduction
Amounts (including the Cost of Insurance charges, deduction for premium and DAC
tax and a monthly administrative charge of $5.00 for contracts with initial
premium of less than $25,000) that would apply under a Policy based on the
assumptions listed below. Surrender charges and Monthly Deduction Amounts
generally will be higher for an Insured who is older than the assumed Insured,
and lower for an Insured who is younger (assuming the Insureds have the same
risk classification). Cost of insurance rates increase each year as the Insured
becomes a year older.
<TABLE>
<S> <C>
Male, Age 35, Non-Smoker Face Amount: $60,051
$10,000 Single Premium Level Death Benefit Option
Hypothetical Gross Annual Investment Rate of Return: 10%* Current Charges
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MONTHLY DEDUCTION AMOUNTS:
CUMULATIVE SURRENDER CHARGE AS ----------------------------------------- ADMINISTRATIVE
YEAR PREMIUMS % OF CUM PREM. COST OF INSURANCE CHARGES PREMIUM TAX CHARGE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 $ 10,000 7.5% 75.60 35.95 60.00
2 $ 10,000 7.5% 78.46 38.19 60.00
3 $ 10,000 7.0% 81.82 40.62 60.00
5 $ 10,000 6.5% 89.68 46.01 60.00
10 $ 10,000 0% 113.50 63.22 60.00
</TABLE>
* Hypothetical investment results shown above are illustrative only and should
not be deemed a representation of past or future investment results. Actual
investment results may be more or less than those shown. Hypothetical
investment results may be different from those shown if the actual rates of
return averaged 10%, but fluctuated above or below that average for individual
policy years. No representations can be made that the hypothetical rates
assumed can be achieved for any one year or sustained over any period of time.
44
<PAGE> 49
APPENDIX B
DEATH BENEFIT EXAMPLES
- --------------------------------------------------------------------------------
The following examples demonstrate the relationship between the Death Benefit,
the Cash Surrender Value and the Minimum Amount Insured under the Level and
Variable Death Benefit Options available under the Policy. Both sets of examples
assume an Insured of age 40, a Minimum Amount Insured of 250% of Cash Value (in
accordance with the table on page 24 of this Prospectus), no outstanding policy
loans and a Stated Amount of $25,000.
OPTION 1 -- LEVEL DEATH BENEFIT
- --------------------------------------------------------------------------------
Under a "Level" Death Benefit, the Death Benefit under the Policy is generally
equal to the Stated Amount of $25,000. Since the Policy is designed to qualify
as a life insurance contract, the Death Benefit cannot be less than the Minimum
Amount Insured (or, in this example, 250% of the Cash Value).
EXAMPLE ONE. If the Cash Value of the Policy equals $8,000, the Minimum Amount
Insured would be $20,000 ($8,000 X 250%). If the Death Benefit in the Policy is
the greater of the Stated Amount ($25,000) or the Minimum Amount Insured
($20,000), then the Death Benefit would be $25,000.
EXAMPLE TWO. If the Cash Value of the Policy equals $40,000, the Minimum Amount
Insured would be $100,000 ($40,000 X 250%). The resulting Death Benefit would be
$100,000 since the Death Benefit is the greater of the Stated Amount ($25,000)
or the Minimum Amount Insured ($100,000).
EXAMPLE THREE. If the Insured is age 41, and the Cash Value of the Policy
equals $44,000, the Minimum Amount Insured would be $106,920 ($44,000 X 243%)
(243% is the applicable percentage for a 41-year old insured). The Death Benefit
would be equal to $106,920 which is the greater of the Stated Amount ($25,000)
and the Minimum Amount Insured ($106,920).
EXAMPLE FOUR. The Death Benefit may also increase or decrease with the
investment experience of the applicable Underlying Funds to the extent the
Minimum Amount Insured exceeds the Stated Amount. Consequently, if the 41-year
old Insured has a Cash Value equal to $35,000 instead of $44,000, the Death
Benefit would be $85,050 ($35,000 X 243%).
OPTION 2 -- VARIABLE DEATH BENEFIT
- --------------------------------------------------------------------------------
Under a "Variable" Death Benefit, the Death Benefit under the Policy will vary
with the investment experience of the Investment Option(s) to which Premium
Payments are allocated under the Policy. The Variable Death Benefit will
generally be equal to the Stated Amount ($25,000) plus the Cash Value of the
Policy (determined on the date of the Insured's death). The Death Benefit
cannot, however, be less than the Minimum Amount Insured (or, in this example,
250% of the Cash Value).
EXAMPLE ONE. If the Cash Value of the Policy equals $10,000, the Minimum Amount
Insured would be $25,000 ($10,000 X 250%). The Death Benefit ($35,000) would be
equal to the Stated Amount ($25,000) plus the Cash Value ($10,000), unless the
Minimum Amount Insured ($25,000) was greater.
EXAMPLE TWO. If the Cash Value of the Policy equals $60,000, then the Minimum
Amount Insured would be $150,000 ($60,000 X 250%). The resulting Death Benefit
would be $150,000 because the Minimum Amount Insured ($150,000) is greater than
the Stated Amount plus the Cash Value ($25,000 + $60,000 = $85,000).
EXAMPLE THREE. If the Insured is age 41, and the Cash Value of the Policy
equals $65,000, the Minimum Amount Insured would be $157,950 ($65,000 X 243%)
(243% is the applicable
45
<PAGE> 50
percentage for a 41-year old insured). The resulting Death Benefit under the
Policy would be equal to $157,950 because the Minimum Amount Insured ($157,950)
is greater than the Stated Amount plus the Cash Value ($25,000 + $65,000 =
$90,000).
As long as the Policy remains in effect, the Company guarantees that the Death
Benefit under either option will not be less than the current Stated Amount of
the Policy less any outstanding policy loan, Deduction Amount due but unpaid,
and any amount payable pursuant to a collateral assignment of the Policy. The
Death Benefit under either option may vary with the Cash Value of the Policy.
Under Option 1, the Death Benefit equals the Stated Amount and will vary only
when the Minimum Amount Insured exceeds the Stated Amount of the Policy. Under
Option 2, the Death Benefit equals the greater of the Stated Amount plus the
Cash Value, and the Minimum Amount Insured.
46
<PAGE> 51
APPENDIX C
REPRESENTATIVE STATED AMOUNTS
- --------------------------------------------------------------------------------
The following table represents the Single Premium Factors for the determination
of the Stated Amount per dollar of Gross Premium, varying by Male and Female
(applicable to standard lives).
<TABLE>
<CAPTION>
MALE FEMALE
- ------------------------------------- -------------------------------------
AGE SP FAC AGE SP FAC AGE SP FAC AGE SP FAC
- --- -------- --- -------- --- -------- --- --------
<S> <C> <C> <C> <C> <C> <C> <C>
20 12.65742 51 3.32670 20 16.15463 51 4.13678
21 12.20773 52 3.19482 21 15.48558 52 3.97060
22 11.76323 53 3.06987 22 14.83810 53 3.81237
23 11.32222 54 2.95167 23 14.21155 54 3.66170
24 10.88482 55 2.83985 24 13.60662 55 3.51803
25 10.45123 56 2.73405 25 13.02272 56 3.38078
26 10.02300 57 2.63380 26 12.45932 57 3.24928
27 9.60257 58 2.53865 27 11.91653 58 3.12290
28 9.19198 59 2.44827 28 11.39430 59 3.00125
29 8.79287 60 2.36238 29 10.89240 60 2.88420
30 8.40647 61 2.28087 30 10.41067 61 2.77188
31 8.03383 62 2.20360 31 9.94865 62 2.66457
32 7.67547 63 2.13053 32 9.50535 63 2.56258
33 7.33157 64 2.06153 33 9.08002 64 2.46607
34 7.00238 65 1.99645 34 8.67288 65 2.37482
35 6.68772 66 1.93500 35 8.28367 66 2.28843
36 6.38750 67 1.87688 36 7.91217 67 2.20637
37 6.10155 68 1.82180 37 7.55883 68 2.12805
38 5.82963 69 1.76950 38 7.22327 69 2.05307
39 5.57132 70 1.71990 39 6.90517 70 1.98132
40 5.32610 71 1.67297 40 6.60400 71 1.91287
41 5.09358 72 1.62875 41 6.31898 72 1.84795
42 4.87303 73 1.58733 42 6.04912 73 1.78683
43 4.66378 74 1.54873 43 5.79305 74 1.72965
44 4.46520 75 1.51285 44 5.54958 75 1.67632
45 4.27672 76 1.47945 45 5.31792 76 1.62663
46 4.09775 77 1.44823 46 5.09715 77 1.58023
47 3.92765 78 1.41890 47 4.88652 78 1.53675
48 3.76588 79 1.39115 48 4.68553 79 1.49587
49 3.61205 80 1.36485 49 4.49387 80 1.45742
50 2.46573 50 4.31108
</TABLE>
47
<PAGE> 52
PORTFOLIO ARCHITECT
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
PROSPECTUS
INDIVIDUAL VARIABLE LIFE INSURANCE POLICIES
ISSUED BY
THE TRAVELERS LIFE AND ANNUITY COMPANY
HARTFORD, CONNECTICUT
May, 1997
<PAGE> 53
Independent Auditors' Report
The Board of Directors and Shareholder
The Travelers Life and Annuity Company:
We have audited the accompanying balance sheets of The Travelers Life and
Annuity Company as of December 31, 1996 and 1995, and the related statements of
income and retained earnings and cash flows for each of the years in the
three-year period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Travelers Life and Annuity
Company as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
January 17, 1997
8
<PAGE> 54
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
(for the year ended December 31, in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums $ 9,357 $ 2,652 $ 3,498
Net investment income 89,040 63,209 66,093
Realized investment gains (losses) (9,613) 18,713 (2,074)
Other 16,223 17,466 18,702
- ----------------------------------------------------------------------------------------------------------
Total revenues 105,007 102,040 86,219
- ----------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 56,448 52,390 55,596
Amortization of deferred acquisition costs
and value of insurance in force 3,286 1,563 -
Other operating expenses 5,691 4,651 2,758
- ----------------------------------------------------------------------------------------------------------
Total benefits and expenses 65,425 58,604 58,354
- ----------------------------------------------------------------------------------------------------------
Income before federal income taxes 39,582 43,436 27,865
- ----------------------------------------------------------------------------------------------------------
Federal income taxes:
Current 29,456 2,555 4,742
Deferred expense (benefit) (15,665) 11,964 4,798
- ----------------------------------------------------------------------------------------------------------
Total federal income taxes 13,791 14,519 9,540
- ----------------------------------------------------------------------------------------------------------
Net income 25,791 28,917 18,325
Retained earnings beginning of year 157,907 128,990 110,665
Dividends to parent 16,000 - -
- ----------------------------------------------------------------------------------------------------------
Retained earnings end of year $167,698 $157,907 $128,990
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
9
<PAGE> 55
THE TRAVELERS LIFE AND ANNUITY COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
(at December 31, in thousands) 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value
(cost, $672,173; $678,293) $ 694,535 $ 724,639
Equity securities, at fair value (cost, $6,654; $9,453) 9,554 13,099
Mortgage loans 90,542 125,813
Real estate held for sale, net of accumulated depreciation of $0; $524 10,111 8,995
Policy loans 1,750 -
Short-term securities 70,755 51,381
Other investments 69,754 65,805
- -----------------------------------------------------------------------------------------------------------------
Total investments 947,001 989,732
- -----------------------------------------------------------------------------------------------------------------
Separate accounts 1,187,812 886,688
Deferred acquisition costs and value of insurance in force 40,027 22,560
Deferred federal income taxes 57,616 41,158
Other assets 21,827 24,501
- -----------------------------------------------------------------------------------------------------------------
Total assets $2,254,283 $1,964,639
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES
Future policy benefits $ 654,534 $ 671,027
Contractholder funds 86,097 11,947
Separate accounts 1,124,605 856,867
Other liabilities 17,179 61,247
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 1,882,415 1,601,088
- -----------------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $100; 100,000
shares authorized, 30,000 issued and outstanding 3,000 3,000
Additional paid-in capital 167,314 167,314
Retained earnings 167,698 157,907
Unrealized investment gains, net of taxes 33,856 35,330
- -----------------------------------------------------------------------------------------------------------------
Total shareholder's equity 371,868 363,551
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $2,254,283 $1,964,639
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
10
<PAGE> 56
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
(for the year ended December 31, in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 6,472 $ 1,950 $ 3,498
Net investment income received 71,083 66,219 57,240
Benefits and claims paid (70,331) (71,710) (72,298)
Interest credited to contractholders (813) - -
Operating expenses paid (5,482) (3,013) (4,400)
Income taxes refunded (paid) (23,931) (35,305) 1,030
Other (6,857) (6,772) 22,507
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (29,859) (48,631) 7,577
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 20,301 11,752 29,043
Mortgage loans 37,789 24,137 60,260
Proceeds from sales of investments
Fixed maturities 978,970 459,971 41,671
Equity securities 12,818 11,823 9,373
Mortgage loans 22,437 7,013 23,327
Real estate held for sale - - 34,181
Purchases of investments
Fixed maturities (994,443) (515,098) (204,412)
Equity securities (5,412) (156) (375)
Mortgage loans (21,450) (4,890) (5,607)
Policy loans (1,750) - -
Short-term securities, (purchases) sales, net (19,688) (5,051) (1,146)
Other investments, (purchases) sales, net (6,160) 9,274 682
Securities transactions in course of settlement (51,703) 45,727 5,722
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (28,291) 44,502 (7,281)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 96,490 5,707 -
Contractholder fund withdrawals (22,340) (1,874) -
Dividends to parent company (16,000) - -
- -------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 58,150 3,833 -
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash $ - $ (296) $ 296
- -------------------------------------------------------------------------------------------------------------
Cash at December 31 $ - $ - $ 296
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
11
<PAGE> 57
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Travelers Life and Annuity Company (the Company) is a wholly owned
subsidiary of The Travelers Insurance Company (TIC), which is a wholly
owned subsidiary of The Travelers Insurance Group Inc. (TIGI), which is
an indirect wholly owned subsidiary of Travelers Group Inc. (Travelers
Group), a financial services holding company engaged, through its
subsidiaries, principally in four business segments: (i) Investment
Services; (ii) Consumer Finance Services; (iii) Property & Casualty
Insurance Services; and (iv) Life Insurance Services (through TIC and its
subsidiaries). The periodic reports of Travelers Group provide additional
business and financial information concerning that company and its
consolidated subsidiaries.
The Company offers fixed and variable deferred annuities and individual
life insurance to individuals and small businesses. It also provides
single premium group annuity close-out contracts and individual
structured settlement annuities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the
accompanying financial statements follow.
Basis of presentation
The financial statements and accompanying footnotes of the Company are
prepared in conformity with generally accepted accounting principles. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and benefits
and expenses during the reporting period. Actual results could differ
from those estimates.
Certain prior year amounts have been reclassified to conform with the
1996 presentation.
Investments
Fixed maturities include bonds, notes and redeemable preferred stocks.
Fixed maturities are valued based upon quoted market prices, or if quoted
market prices are not available, discounted expected cash flows using
market rates commensurate with the credit quality and maturity of the
investment. Fixed maturities are classified as "available for sale" and
are reported at fair value, with unrealized investment gains and losses,
net of income taxes, charged or credited directly to shareholder's
equity.
Equity securities, which include common and nonredeemable preferred
stocks, are classified as "available for sale" and are carried at fair
value based primarily on quoted market prices. Changes in fair values of
equity securities are charged or credited directly to shareholder's
equity, net of income taxes.
12
<PAGE> 58
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Mortgage loans are carried at amortized cost. A mortgage loan is
considered impaired when it is probable that the Company will be unable
to collect principal and interest amounts due. For mortgage loans that
are determined to be impaired, a reserve is established for the
difference between the amortized cost and fair market value of the
underlying collateral. In estimating fair value, the Company uses
interest rates reflecting the higher returns required in the current real
estate financing market. Impaired loans were insignificant at December
31, 1996 and 1995.
Real estate held for sale is carried at the lower of cost or fair value
less estimated costs to sell. Fair value of foreclosed properties is
established at the time of foreclosure by internal analysis or external
appraisers, using discounted cash flow analyses and other acceptable
techniques. Thereafter, an allowance for losses on real estate held for
sale is established if the carrying value of the property exceeds its
current fair value less estimated costs to sell. There was no such
allowance at December 31, 1996 and 1995.
Short-term securities, consisting primarily of money market instruments
and other debt issues purchased with a maturity of less than one year,
are carried at amortized cost which approximates market.
Accrual of income, included in other assets, is suspended on fixed
maturities or mortgage loans that are in default, or on which it is
likely that future payments will not be made as scheduled. Interest
income on investments in default is recognized only as payment is
received.
Investment Gains and Losses
Realized investment gains and losses are included as a component of
pre-tax revenues based upon specific identification of the investments
sold on the trade date. Also included are gains and losses arising from
the remeasurement of the local currency value of foreign investments to
U.S. dollars, the functional currency of the Company.
Policy Loans
Policy loans are carried at the amount of the unpaid balances that are
not in excess of the net cash surrender values of the related insurance
policies. The carrying value of policy loans, which have no defined
maturities, is considered to be fair value.
Separate Accounts
Separate account liabilities primarily represent structured settlement
annuity obligations, which provide guaranteed levels of return or
benefits to contractholders. The separate account assets supporting these
obligations, which are legally segregated and are not subject to claims
that arise out of any other business of the Company, are primarily
carried at fair value. Earnings on structured settlement contracts,
generally net investment income less policyholder benefits and operating
expenses, are included in other revenues.
13
<PAGE> 59
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
In addition, the Company has other separate accounts, representing funds
for which investment income and investment gains and losses accrue
directly to, and investment risk is borne by, the contractholders. Each
of these accounts have specific investment objectives. The assets and
liabilities of these accounts are carried at fair value, and amounts
assessed to the contractholders for management services are included in
revenues. Deposits, net investment income and realized investment gains
and losses for these accounts are excluded from revenues, and related
liability increases are excluded from benefits and expenses.
Deferred Acquisition Costs and Value of Insurance In Force
Costs of acquiring individual life insurance and annuity business,
principally commissions and certain expenses related to policy issuance,
underwriting and marketing, all of which vary with and are primarily
related to the production of new business, are deferred. Acquisition
costs relating to traditional life insurance are amortized in relation
to anticipated premiums; universal life in relation to estimated
gross profits; and annuity contracts employing a level yield method. A
10- to 25-year amortization period is used for life insurance, and a 10-
to 20-year period is employed for annuities. Deferred acquisition costs
are reviewed periodically for recoverability to determine if any
adjustment is required. Adjustments, if any are charged to income.
The value of insurance in force represents the actuarially determined
present value of anticipated profits to be realized from annuities
contracts at the date of acquisition using the same assumptions that were
used for computing related liabilities where appropriate. The value of
insurance in force was the actuarially determined present value of the
projected future profits discounted at an interest rate of 16% for the
business acquired. The value of the business in force is amortized using
current interest crediting rates to accrete interest and amortized
employing a level yield method. The value of insurance in force is
reviewed periodically for recoverability to determine if any adjustment
is required. Adjustments, if any are charged to income.
Future Policy Benefits
Benefit reserves represent liabilities for future insurance policy
benefits. Benefit reserves for life insurance and annuity policies have
been computed based upon mortality, morbidity, persistency and interest
assumptions applicable to these coverages, which range from 4.5% to 7.5%,
including a provision for adverse deviation. These assumptions consider
Company experience and industry standards. The assumptions vary by plan,
age at issue, year of issue and duration.
14
<PAGE> 60
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Contractholder Funds
Contractholder funds represent receipts from the issuance of universal
life and certain individual annuity contracts. Contractholder Fund
balances are increased by such receipts and credited interest and reduced
by withdrawals, mortality charges and administrative expenses charged to
the contractholders. Interest rates credited to contractholder funds
range from 3.9% to 7.0%.
Permitted Statutory Accounting Practices
The Company, domiciled in the State of Connecticut, prepares statutory
financial statements in accordance with the accounting practices
prescribed or permitted by the State of Connecticut Insurance Department.
Prescribed statutory accounting practices include certain publications
of the National Association of Insurance Commissioners as well as state
laws, regulations, and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so
prescribed. The impact of any permitted accounting practices on the
statutory surplus of the Company is not material.
Premiums
Premiums are recognized as revenues when due. Reserves are established
for the portion of premiums that will be earned in future periods.
Other Revenues
Other revenues include surrender, mortality and administrative charges
and fees as earned on investment and other insurance contracts. Other
revenues also include structured settlement policyholder revenues, which
relate to contracts issued through a separate account of the Company, net
of the related policyholder benefits and expenses.
Federal Income Taxes
The provision for federal income taxes is comprised of two components,
current income taxes and deferred income taxes. Deferred federal income
taxes arise from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and
liabilities. The deferred federal income tax asset is recognized to the
extent that future realization of the tax benefit is more likely than
not, with a valuation allowance for the portion that is not likely to be
recognized.
15
<PAGE> 61
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Future Application of Accounting Standards
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 125 (FAS 125),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." FAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. These standards are based on consistent
application of a financial-components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control
has been surrendered and derecognizes liabilities when extinguished. FAS
125 provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. The requirements of FAS No. 125 are effective for transfers
and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and are to be applied prospectively.
However, in December 1996 the FASB issued FAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125," which
delays until January 1, 1998 the effective date for certain provisions.
The adoption of the provisions of this statement effective January 1,
1997 will not have a material impact on results of operations, financial
condition or liquidity and the Company is currently evaluating the impact
of the provisions whose effective date has been delayed until January 1,
1998.
3. CHANGES IN ACCOUNTING PRINCIPLES
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement establishes accounting standards for the impairment of
long-lived assets and certain identifiable intangibles to be disposed.
This statement requires a write down to fair value when long-lived assets
to be held and used are impaired. The statement also requires long-lived
assets to be disposed (e.g., real estate held for sale) be carried at the
lower of cost or fair value less cost to sell, and does not allow such
assets to be depreciated. The adoption of this standard did not have a
material impact on the Company's financial condition, results of
operations or liquidity.
Accounting for Stock-Based Compensation
The Company participates in a stock option plan sponsored by Travelers
Group that provides for the granting of stock options in Travelers Group
common stock to officers and key employees. The Company applies
Accounting Principles Board Opinion No. 25 (APB 25) and related
interpretations in accounting for stock options. Since stock options are
issued at fair market value on the date of award, no compensation cost
has been recognized for these awards. In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123).
This statement provides an alternative to APB 25 whereby fair values may
be ascribed to options using a valuation model and amortized to
compensation cost over the vesting period of the options. Had the Company
applied FAS 123 in accounting for stock options, net income would have
been reduced by an insignificant amount in 1996 and 1995.
16
<PAGE> 62
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
3. CHANGES IN ACCOUNTING PRINCIPLES, Continued
Accounting by Creditors for Impairment of a Loan
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of
a Loan," and Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures," which describe how impaired loans should be measured
when determining the amount of a loan loss accrual. These statements
amended existing guidance on the measurement of restructured loans in a
troubled debt restructuring involving a modification of terms. Their
adoption did not have a material impact on the Company's financial
condition, results of operations or liquidity.
4. REINSURANCE
The Company participates in reinsurance in order to limit losses,
minimize exposure to large risks, provide capacity for future growth and
to effect business-sharing arrangements. The Company remains primarily
liable as the direct insurer on all risks reinsured.
Life insurance in force ceded to TIC at December 31, 1996 and 1995 was
$90.7 million and $97.7 million, respectively. At December 31, 1996 and
1995, $2.2 billion and $601.2 million, respectively, was ceded to
non-affiliates.
5. SHAREHOLDER'S EQUITY
Unrealized Investment Gains (Losses)
An analysis of the change in unrealized gains and losses on investments
is shown in Note 12.
Shareholder's Equity and Dividend Availability
The Company's statutory net income was $17.9 million, $23.0 million and
$5.7 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
Statutory capital and surplus was $254.1 million and $257.8 million at
December 31, 1996 and 1995, respectively.
The Company is currently subject to various regulatory restrictions that
limit the maximum amount of dividends available to be paid to its parent
without prior approval of insurance regulatory authorities. Statutory
surplus of $14.8 million is available in 1997 for dividend payments by
the Company without prior approval of the Connecticut Insurance
Department.
17
<PAGE> 63
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
6. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company does not hold or issue derivative instruments for trading
purposes. The carrying value of derivative instruments was not
significant at December 31, 1996 and 1995.
Fair Value of Certain Financial Instruments
The Company uses various financial instruments in the normal course of
its business. Fair values of financial instruments which are considered
insurance contracts are not required to be disclosed and are not included
in the amounts discussed.
At December 31, 1996, investments in fixed maturities had a carrying
value and a fair value of $694.5 million, compared with a carrying value
and a fair value of $724.6 million at December 31, 1995. See Note 12.
At December 31, 1996 and 1995, mortgage loans had a carrying value of
$90.5 million and $125.8 million, respectively, which approximates fair
value. In estimating fair value, the Company used interest rates
reflecting the higher returns required in the current real estate
financing market.
The carrying values of $2.1 million and $1.9 million of financial
instruments classified as other assets approximated their fair values at
December 31, 1996 and 1995, respectively. The carrying values of $13.3
million and $55.3 million of financial instruments classified as other
liabilities also approximated their fair values at December 31, 1996 and
1995, respectively. Fair value is determined using various methods
including discounted cash flows, as appropriate for the various financial
instruments.
The assets of separate accounts providing a guaranteed return had a
carrying value and a fair value of $896.9 million and $901.0 million,
respectively, at December 31, 1996, compared to a carrying value and a
fair value of $869.1 million and $923.0 million, respectively, at
December 31, 1995. The liabilities of separate accounts providing a
guaranteed return had a carrying value and a fair value of $808.7 million
and $695.3 million, respectively, at December 31, 1996, compared to a
carrying value and a fair value of $839.1 million and $766.3 million,
respectively, at December 31, 1995.
The carrying values of short-term securities and policy loans
approximated their fair values.
18
<PAGE> 64
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
7. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
The Company has, in the normal course of business, provided fixed rate
loan commitments and commitments to partnerships.
The off-balance sheet risks of fixed rate loan commitments, commitments
to partnerships and forward contracts were not significant at December
31, 1996 and 1995.
Litigation
The Company is a defendant in various litigation matters in the normal
course of business. Although there can be no assurances, as of December
31, 1996, the Company believes, based on information currently available,
that the ultimate resolution of these legal proceedings would not be
likely to have a material adverse effect on its results of operations,
financial condition or liquidity.
8. BENEFIT PLANS
Pension Plans
The Company participates in a qualified, noncontributory defined benefit
pension plan sponsored by Travelers Group covering the majority of
Travelers Group's U.S. employees. Benefits for the qualified plan are
based on an account balance formula. Under this formula, each employee's
accrued benefit can be expressed as an account that is credited with
amounts based upon the employee's pay, length of service and a specified
interest rate, all subject to a minimum benefit level. This plan is
funded in accordance with the Employee Retirement Income Security Act of
1974 and the Internal Revenue Code.
The Company also participates in a nonqualified, noncontributory defined
benefit pension plan sponsored by an affiliate covering the majority of
the Company's U.S. employees. Contributions are based on benefits paid.
The Company's share of net pension expense was not significant for 1996,
1995 or 1994.
Other Benefit Plans
In addition to pension benefits, the Company provides certain health care
and life insurance benefits for retired employees through a plan
sponsored by TIGI. Retirees may elect certain prepaid health care benefit
plans. Life insurance benefits are generally set at a fixed amount.
Beginning January 1, 1996, these plans were amended to restrict benefit
eligibility to retirees and certain retiree-eligible employees. The cost
recognized by the Company for these benefits represents its allocated
share of the total costs of the plan, net of retiree contributions. The
Company's share of the total cost of the plan for 1996, 1995 and 1994 was
not significant.
19
<PAGE> 65
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
8. BENEFIT PLANS, Continued
Savings, Investment and Stock Ownership Plan
Under the savings, investment and stock ownership plan available to
substantially all employees of TIGI, the Company matches a portion of
employee contributions. Effective April 1, 1993, the match decreased from
100% to 50% of an employee's first 5% contribution and a variable match
based on the profitability of TIGI and its subsidiaries was added through
December 31, 1995. Effective January 1, 1996, the match remained at 50%
of an employee's first 5% contribution with a maximum of $1,000.
Effective January 1, 1997, employee contributions will be matched with
Travelers Group stock options. The Company's expense was not significant
for 1996, 1995 or 1994.
9. RELATED PARTY TRANSACTIONS
The principal banking functions, including payment of salaries and
expenses, for certain subsidiaries and affiliates of TIGI, including the
Company, are handled by TIC. Settlements for these functions between TIC
and its affiliates are made regularly. TIC provides various employee
benefit coverages to certain subsidiaries of TIGI. The premiums for these
coverages were charged in accordance with cost allocation procedures
based upon salaries or census. In addition, investment advisory and
management services, data processing services and claims processing
services are provided by affiliated companies. Charges for these services
are shared by the companies on cost allocation methods based generally on
estimated usage by department.
TIGI and its subsidiaries maintain a short-term investment pool in which
the Company participates. The position of each company participating in
the pool is calculated and adjusted daily. At December 31, 1996 and 1995,
the pool totaled approximately $2.9 billion and $2.2 billion,
respectively. The Company's share of the pool amounted to $68.2 million
and $49.5 million at December 31, 1996 and 1995, respectively, and is
included in short-term securities in the balance sheet.
The Company's TTM Modified Guaranteed Annuity Contracts are subject to a
limited guarantee agreement by TIC in a principal amount of up to $250
million. TIC's obligation is to pay in full to any owner or beneficiary
of the TTM Modified Guaranteed Annuity Contracts principal and interest
as and when due under the annuity contract to the extent that the Company
fails to make such payment. In addition, TIC guarantees that the Company
will maintain a minimum statutory capital and surplus level.
The Company sells structured settlement annuities to an affiliate,
Travelers Property Casualty Corp., (TAP), formerly Travelers/Aetna
Property Casualty Corp. Such deposits were $36.9 million, $36.6 million
and $37.6 million for 1996, 1995 and 1994, respectively.
The Company began marketing variable annuity products through its
affiliate, Smith Barney, Inc., in 1995. Deposits related to these
products were $300.0 million and $20.5 million in 1996 and 1995,
respectively.
Most leasing functions for TIGI and its subsidiaries are handled by TAP.
Rent expense related to these leases are shared by the companies on a
cost allocation method based generally on estimated usage by department.
The company's rent expense was insignificant in 1996, 1995 and 1994.
20
<PAGE> 66
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
10. FEDERAL INCOME TAXES
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Effective tax rate
Income before federal income taxes $ 39,582 $43,436 $27,865
Statutory tax rate 35% 35% 35%
-------------------------------------------------------------------------------------------
Expected federal income taxes $ 13,854 $15,203 $ 9,753
Tax effect of:
Nontaxable investment income (15) (13) (90)
Adjustments to benefit and other reserves - - (117)
Other, net (48) (671) (6)
--------------------------------------------------------------------------------------------
Federal income taxes $ 13,791 $14,519 $ 9,540
--------------------------------------------------------------------------------------------
Effective tax rate 35% 33% 34%
-------------------------------------------------------------------------------------------
Composition of federal income taxes
Current:
United States $ 29,435 $ 2,555 $ 4,742
Foreign 21 - -
--------------------------------------------------------------------------------------------
Total 29,456 2,555 4,742
--------------------------------------------------------------------------------------------
Deferred:
United States (15,665) 11,964 4,798
--------------------------------------------------------------------------------------------
Federal income taxes $ 13,791 $14,519 $ 9,540
--------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 67
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
10. FEDERAL INCOME TAXES, Continued
The net deferred tax assets at December 31, 1996 and 1995 were comprised
of the tax effects of temporary differences related to the following
assets and liabilities:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Benefit, reinsurance and other reserves $79,484 $ 67,104
Other 3,043 2,570
------------------------------------------------------------------------------------------
Total 82,527 69,674
------------------------------------------------------------------------------------------
Deferred tax liabilities:
Investments, Net 12,113 19,625
Deferred acquisition costs and
value of insurance in force 10,066 6,285
Other 662 536
------------------------------------------------------------------------------------------
Total 22,841 26,446
------------------------------------------------------------------------------------------
Net deferred tax asset before valuation allowance 59,686 43,228
Valuation allowance for deferred tax assets (2,070) (2,070)
------------------------------------------------------------------------------------------
Net deferred tax asset after valuation allowance $57,616 $41,158
------------------------------------------------------------------------------------------
</TABLE>
Starting in 1994 and continuing for at least five years, TIC and its life
insurance subsidiaries, including the Company, will file a consolidated
federal income tax return. Federal income taxes are allocated to each
member on a separate return basis adjusted for credits and other amounts
required by the consolidation process. Any resulting liability will be
paid currently to TIC. Any credits for losses will be paid by TIC to the
extent that such credits are for tax benefits that have been utilized in
the consolidated federal income tax return.
A net deferred tax asset valuation allowance of $2.1 million has been
established to reduce the deferred tax asset on investment losses to the
amount that, based upon available evidence, is more likely than not to be
realized. Reversal of the valuation allowance is contingent upon the
recognition of future capital gains in the Company's consolidated life
insurance company federal income tax return through 1998, and the
consolidated federal income tax return of Travelers Group commencing in
1999, or a change in circumstances which causes the recognition of the
benefits to become more likely than not. There was no change in the
valuation allowance during 1996. The initial recognition of any benefit
provided by the reversal of the valuation allowance will be recognized by
reducing goodwill.
22
<PAGE> 68
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
10. FEDERAL INCOME TAXES, Continued
In management's judgment, the $57.6 million "net deferred tax asset after
valuation allowance" as of December 31, 1996, is fully recoverable
against expected future years' taxable ordinary income and capital gains.
At December 31, 1996, the Company has no ordinary or capital loss
carryforwards.
The "policyholders surplus account", which arose under prior tax law, is
generally that portion of the gain from operations that has not been
subjected to tax, plus certain deductions. The balance of this account,
which, under provisions of the Tax Reform Act of 1984, will not increase
after 1983, is estimated to be $2.0 million. This amount has not been
subjected to current income taxes but, under certain conditions that
management considers to be remote, may become subject to income taxes in
future years. At current rates, the maximum amount of such tax (for which
no provision has been made in the financial statements) would be
approximately $700 thousand.
11. NET INVESTMENT INCOME
<TABLE>
<CAPTION>
(For the year ended December 31, in thousands) 1996 1995 1994
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross investment income
Fixed maturities $54,029 $49,486 $44,354
Equity securities 411 497 827
Mortgage loans 15,491 11,644 17,178
Real estate held for sale 3,480 2,476 6,299
Other 19,770 2,552 4,480
---------------------------------------------------------------------------------------
93,181 66,655 73,138
---------------------------------------------------------------------------------------
Investment expenses 4,141 3,446 7,045
---------------------------------------------------------------------------------------
Net investment income $89,040 $63,209 $66,093
---------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 69
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
12. INVESTMENTS AND INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) for the periods were as follows:
<TABLE>
<CAPTION>
(For the year ended December 31, in thousands) 1996 1995 1994
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized
Fixed maturities $(11,491) $(4,240) $ (908)
Equity securities 4,613 6,138 1,675
Mortgage loans 1,979 725 36
Real estate held for sale (73) (35) -
Other (4,641) 16,125 (2,877)
-----------------------------------------------------------------------------------------
Realized investment gains (losses) $ (9,613) $18,713 $(2,074)
-----------------------------------------------------------------------------------------
</TABLE>
Changes in net unrealized investment gains (losses) that are included as
a separate component of shareholder's equity were as follows:
<TABLE>
<CAPTION>
(For the year ended December 31, in thousands) 1996 1995 1994
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized
Fixed maturities $(23,953) $111,551 $(65,205)
Equity securities (746) 1,834 (27)
Other 22,431 4,390 (28)
------------------------------------------------------------------------------------------
(2,268) 117,775 (65,260)
Related taxes (794) 41,221 (22,841)
------------------------------------------------------------------------------------------
Change in unrealized investment gains (losses) (1,474) 76,554 (42,419)
Balance beginning of year 35,330 (41,224) 1,195
------------------------------------------------------------------------------------------
Balance end of year $ 33,856 $ 35,330 $(41,224)
------------------------------------------------------------------------------------------
</TABLE>
Fixed Maturities
Proceeds from sales of fixed maturities classified as available for sale
were $979.0 million and $460.0 million in 1996 and 1995, respectively.
Gross gains of $8.4 million and $7.9 million and gross losses of $19.9
million and $10.3 million in 1996 and 1995, respectively, were realized
on those sales.
24
<PAGE> 70
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
12. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
The amortized cost and fair values of investments in fixed maturities
were as follows:
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
(in thousands) cost gains losses value
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities -
CMOs and pass through
securities $ 88,138 $ 1,637 $ 629 $ 89,146
U.S. Treasury securities
and obligations of U.S.
Government and
government agencies
and authorities 115,059 10,371 61 125,369
Obligations of states and
political subdivisions 3,500 255 -- 3,755
Debt securities issued
by foreign governments 56,097 1,473 1,269 56,301
All other corporate bonds 409,294 13,862 3,277 419,879
Redeemable preferred stock 85 -- -- 85
----------------------------------------------------------------------------------------------------
Total $672,173 $27,598 $5,236 $694,535
----------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 71
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
12. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
(in thousands) cost gains losses value
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities -
CMOs and pass through
securities $ 89,044 $ 2,545 $ 378 $ 91,211
U.S. Treasury securities
and obligations of U.S.
Government and
government agencies
and authorities 160,988 24,267 1 185,254
Obligations of states and
political subdivisions 3,500 499 - 3,999
All other corporate bonds 424,676 21,576 2,162 444,090
Redeemable preferred stock 85 - - 85
------------------------------------------------------------------------------------------
Total $678,293 $48,887 $2,541 $724,639
------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of fixed maturities available for sale
at December 31, 1996, by contractual maturity, are shown below. Actual
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Maturity Amortized Fair
(in thousands) cost value
-------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 11,184 $ 11,204
Due after 1 year through 5 years 50,397 50,366
Due after 5 years through 10 years 169,634 173,049
Due after 10 years 352,820 370,770
-------------------------------------------------------------------------
584,035 605,389
Mortgage-backed securities 88,138 89,146
-------------------------------------------------------------------------
Total $672,173 $694,535
-------------------------------------------------------------------------
</TABLE>
The Company makes significant investments in collateralized mortgage
obligations (CMOs). CMOs typically have high credit quality, offer good
liquidity, and provide a significant advantage in yield and total return
compared to U.S. Treasury securities. The Company's investment strategy
is to purchase CMO tranches which are protected against prepayment risk,
including planned amortization class (PAC) tranches. Prepayment protected
tranches are preferred because they provide stable cash flows in a
variety of interest rate scenarios. The Company does invest in other
types of CMO tranches if a careful assessment indicates a favorable
risk/return tradeoff. The Company does not purchase residual interests in
CMOs.
26
<PAGE> 72
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
12. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
At December 31, 1996 and 1995, the Company held CMOs with a market value
of $67.7 million and $68.6 million, respectively. The Company's CMO
holdings are 100% and approximately 94% collateralized by GNMA, FNMA or
FHLMC securities at December 31, 1996 and 1995, respectively.
Equity Securities
The cost and market values of investments in equity securities were as
follows:
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------------------------------------
Gross Gross
unrealized unrealized Fair
(in thousands) Cost gains losses value
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stocks $1,630 $2,845 $83 $4,392
Nonredeemable preferred stocks 5,024 138 - 5,162
----------------------------------------------------------------------------------------------------
Total $6,654 $2,983 $83 $9,554
----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------------------------------------------------------
Gross Gross
unrealized unrealized Fair
(in thousands) Cost gains losses value
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stocks $3,310 $3,374 $ 68 $ 6,616
Nonredeemable preferred stocks 6,143 340 - 6,483
----------------------------------------------------------------------------------------------------
Total $9,453 $3,714 $ 68 $13,099
----------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of equity securities were $12.8 million and $11.8
million in 1996 and 1995, respectively. Gross gains of $4.7 million and
$4.9 million and gross losses of $155 thousand and $474 thousand in 1996
and 1995, respectively, were realized on those sales.
Real estate held for sale and mortgage loans
Underperforming assets include delinquent mortgage loans, loans in the
process of foreclosure, foreclosed loans and loans modified at interest
rates below market.
27
<PAGE> 73
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
12. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
At December 31, 1996 and 1995, the Company's real estate held for sale
and mortgage loan portfolios consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
---------------------------------------------------------------------------
<S> <C> <C>
Current mortgage loans $ 90,394 $108,142
Underperforming mortgage loans 148 17,671
---------------------------------------------------------------------------
Total 90,542 125,813
---------------------------------------------------------------------------
Real estate held for sale 10,111 8,995
---------------------------------------------------------------------------
Total $100,653 $134,808
---------------------------------------------------------------------------
</TABLE>
Aggregate annual maturities on mortgage loans at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
(in thousands)
---------------------------------------------------
<S> <C>
Past maturity $ 1,677
1997 5,662
1998 316
1999 5,088
2000 5,734
2001 5,678
Thereafter 66,387
---------------------------------------------------
Total $90,542
---------------------------------------------------
</TABLE>
Concentrations
At December 31, 1996 the Company had investments of $75.1 million in the
State of Israel and $40.6 million in Merrill Lynch Trust Series 45. In
1995, the Company had no concentration of credit risk in a single
investee exceeding 10% of shareholder's equity.
The Company participates in a short-term investment pool maintained by an
affiliate. See Note 9.
Included in fixed maturities are below investment grade assets totaling
$40.7 million and $59.0 million at December 31, 1996 and 1995,
respectively. The Company defines its below investment grade assets as
those securities rated "Ba1" or below by external rating agencies, or the
equivalent by internal analysts when a public rating does not exist. Such
assets include publicly traded below investment grade bonds and certain
other privately issued bonds that are classified as below investment
grade loans.
28
<PAGE> 74
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
12. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
The Company also had concentrations of investments, primarily fixed
maturities, in the following industries:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
------------------------------------------------------------------------------------------
<S> <C> <C>
Foreign governments $108,850 $ -
Finance 90,222 25,853
Transportation 86,819 44,118
------------------------------------------------------------------------------------------
</TABLE>
Below investment grade assets included in the totals of the previous
table were as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C>
Foreign governments $6,567 $ -
Finance 2,386 451
Transportation 776 18,648
----------------------------------------------------------------------------------------
</TABLE>
Concentrations of mortgage loans by property type at December 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
-----------------------------------------------------------------------------------------
<S> <C> <C>
Agricultural $33,501 $29,820
Office 22,533 32,024
Retail 20,024 27,870
-----------------------------------------------------------------------------------------
</TABLE>
The Company monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, limits and
other monitoring procedures. Collateral for fixed maturities often
includes pledges of assets, including stock and other assets, guarantees
and letters of credit. The Company's underwriting standards with respect
to new mortgage loans generally require loan to value ratios of 75% or
less at the time of mortgage origination.
Non-Income Producing Investments
Investments included in the balance sheets that were non-income producing
for the preceding 12 months were insignificant.
Restructured Investments
The Company had mortgage loan and debt securities which were restructured
at below market terms totaling approximately $1.0 million and $17.7
million at December 31, 1996 and 1995, respectively. The new terms
typically defer a portion of contract interest payments to varying future
periods. The accrual of interest is suspended on all restructured assets,
and interest income is reported only as payment is received. Gross
interest income on restructured assets that would have been recorded in
accordance with the original terms of such assets was insignificant in
1996 and amounted to $4.9 million in 1995. Interest on these assets,
included in net investment income, was insignificant in 1996 and amounted
to $2.0 million in 1995.
29
<PAGE> 75
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS, Continued
13. LIFE AND ANNUITY DEPOSIT FUNDS AND RESERVES
At December 31, 1996, the Company had $740.6 million of life and annuity
deposit funds and reserves. Of that total, $659.0 million were not
subject to discretionary withdrawal based on contract terms. The
remaining $81.6 million were life and annuity products that were subject
to discretionary withdrawal by the contractholders. Included in the
amount that is subject to discretionary withdrawal were $50.4 million of
liabilities that are surrenderable with market value adjustments. An
additional $31.2 million of the life insurance and individual annuity
liabilities are subject to discretionary withdrawals with an average
surrender charge of 6.7%. The life insurance risks would have to be
underwritten again if transferred to another carrier, which is considered
a significant deterrent for long-term policyholders. Insurance
liabilities that are surrendered or withdrawn from the Company are
reduced by outstanding policy loans and related accrued interest prior to
payout.
14. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES
The following table reconciles net income to net cash provided by (used
in) operating activities:
<TABLE>
<CAPTION>
(For the year ended December 31, in thousands) 1996 1995 1994
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income from continuing operations $ 25,791 $ 28,917 $ 18,325
Adjustments to reconcile net income to
cash provided by operating activities
Realized (gains) losses 9,613 (18,713) 2,074
Deferred federal income taxes (15,665) 11,964 4,798
Amortization of deferred policy acquisition
costs and value of insurance in force 3,286 1,563 -
Additions to deferred policy acquisition costs (20,753) (3,109) (21,014)
Investment income accrued 1,308 (819) 1,085
Premium balances receivable (3,561) (2,277) -
Insurance reserves and accrued expenses (16,459) (20,081) (16,062)
Other (13,419) (46,076) 18,371
------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $(29,859) $(48,631) $ 7,577
------------------------------------------------------------------------------------------------------------
</TABLE>
15. NONCASH INVESTING AND FINANCING ACTIVITIES
Significant noncash investing and financing activities include: a) the
transfer of $2.6 million of real estate held for sale and mortgage loans
from one of the Company's separate accounts to the general account in
1995, b) acquisition of real estate through foreclosures of mortgage
loans amounting to $1.1 million, $0 and $10.3 million in 1996, 1995 and
1994, respectively.
30
<PAGE> 76
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section.
RULE 484 UNDERTAKING
Section 33-320a of the Connecticut General Statutes regarding indemnification of
directors and officers of Connecticut corporations provides in general that
Connecticut corporations shall indemnify their officers, directors and certain
other defined individuals against judgments, fines, penalties, amounts paid in
settlement and reasonable expenses actually incurred in connection with
proceedings against the corporation. The corporation's obligation to provide
such indemnification generally does not apply unless (1) the individual is
successful on the merits in the defense of any such proceeding; or (2) a
determination is made (by persons specified in the statute) that the individual
acted in good faith and in the best interests of the corporation; or (3) the
court, upon application by the individual, determines in view of all of the
circumstances that such person is fairly and reasonably entitled to be
indemnified, and then for such amount as the court shall determine. With respect
to proceedings brought by or in the right of the corporation, the statute
provides that the corporation shall indemnify its officers, directors and
certain other defined individuals, against reasonable expenses actually incurred
by them in connection with such proceedings, subject to certain limitations.
C.G.S. Section 33-320a provides an exclusive remedy; a Connecticut corporation
cannot indemnify a director or officer to an extent either greater or less than
that authorized by the statute, e.g., pursuant to its certificate of
incorporation, by-laws, or any separate contractual arrangement. However, the
statute does specifically authorize a corporation to procure indemnification
insurance to provide greater indemnification rights. The premiums for such
insurance may be shared with the insured individuals on an agreed basis.
Travelers Group Inc. also provides liability insurance for its directors and
officers and the directors and officers of its subsidiaries, including the
Depositor. This insurance provides for coverage against loss from claims made
against directors and officers in their capacity as such, including, subject to
certain exceptions, liabilities under the federal securities laws.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
UNDERTAKING TO REPRESENT REASONABLENESS OF CHARGES
The Company hereby represents that the aggregate charges under the
Policy of the Registrant described herein are reasonable in relation to the
services rendered, the expenses to be incurred, and the risks assumed by the
Company.
<PAGE> 77
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
o The facing sheet.
o The Prospectus.
o The undertaking to file reports.
o The signatures.
o Written consents of the following persons:
A. Consent of Katherine M. Sullivan, General Counsel, to the filing of
her opinion as an exhibit to this Registration Statement and to the
reference to her opinion under the caption "Legal Proceedings and
Opinion" in the Prospectus. (See Exhibit 11 below.) (Incorporated
herein by reference to Exhibit 11 to the Registration Statement filed
October 30, 1996.)
B. Consent and Actuarial Opinion of Mahir A. Dugentas, ASA,
pertaining to the illustrations contained in the Prospectus.
(Incorporated herein by reference to Exhibit B to the Registration
Statement filed October 30, 1996.)
C. Consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.
o The following Exhibits:
1. Resolution of the Board of Directors of The Travelers Life and
Annuity Company authorizing the establishment of the Registrant.
(Incorporated herein by reference to Exhibit 1 to the Registration
Statement on Form S-6, filed October 30, 1996.)
2. Not applicable.
3(a). Form of Distribution Agreement among the Registrant, The Travelers
Life and Annuity Company and Tower Square Securities, Inc.
(Incorporated herein by reference to Exhibit 3(a) to the Registration
Statement on Form S-6, filed October 30, 1996.)
3(b). Specimen Form of Selling Agreement. (Incorporated herein by
reference to Exhibit 3(b) to the Registration Statement on Form
S-6, filed October 30, 1996.)
3(c). Agents Agreement, including schedule of sales commissions.
4. None
5. Variable Life Insurance Policy. (Incorporated herein by reference
to Exhibit 5 to the Registration Statement on Form S-6, filed
October 30, 1996.)
6(a). Charter of The Travelers Life and Annuity Company, as amended on
April 10, 1990. (Incorporated herein by reference to Exhibit 6(a) to
the Registration Statement on Form S-6, filed October 30, 1996.)
6(b). By-Laws of The Travelers Life and Annuity Company, as amended on
October 20, 1994. (Incorporated herein by reference to Exhibit 6(b)
to the Registration Statement on Form S-6, filed October 30, 1996.)
<PAGE> 78
7. None
8. None
9. None
10. Application for Variable Life Insurance Policy.
11. Opinion of Counsel, regarding the legality of securities being
registered. (Incorporated herein by reference to Exhibit 11 to the
Registration Statement filed October 30, 1996.)
12. Powers of Attorney authorizing Ernest J. Wright or Kathleen A.
McGah as signatory for Michael A. Carpenter, Jay S. Benet, George
C. Kokulis, Robert I. Lipp, Ian R. Stuart, Katherine M. Sullivan
and Marc P. Weill. (Incorporated herein by reference to Exhibit
12 to the Registration Statement on Form S-6, filed October 30,
1996.)
13. Memorandum concerning transfer and redemption procedures, as required
by Rule 6e-3(T)(b)(12)(ii). (Incorporated herein by reference to
Exhibit 13 to the Registration Statement on Form S-6, filed October
30, 1996.)
27. Financial Data Schedule of The Travelers Life and Annuity Company.
<PAGE> 79
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant, The
Travelers Variable Life Insurance Separate Account Two, has duly caused this
pre-effective amendment No. 1 to this registration statement to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of Hartford,
and State of Connecticut, on the 16th day of April, 1997.
THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT TWO
(Registrant)
By: *IAN R. STUART
Ian R. Stuart
Vice President, Chief Financial Officer
Chief Accounting Officer and Controller
The Travelers Life and Annuity Company
*By: Ernest J. Wright
Secretary
The Travelers Life and Annuity Company
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Depositor, The
Travelers Life and Annuity Company, has duly caused this pre-effective amendment
No. 1 to this registration statement to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Hartford, and State of
Connecticut, on the 16th day of April, 1997.
THE TRAVELERS LIFE AND ANNUITY COMPANY
(Depositor)
By: *IAN R. STUART
Ian R. Stuart
Senior Vice President, Chief Financial Officer
Chief Accounting Officer and Controller
Pursuant to the requirements of the Securities Act of 1933, this pre-effective
amendment No. 1 to this registration statement has been signed by the following
persons in the capacities indicated on April 16, 1997.
<TABLE>
<S> <C>
*MICHAEL A. CARPENTER Director and Chairman of the Board,
- -------------------------------- President and Chief Executive Officer
(Michael A. Carpenter)
*JAY S. BENET Director
- --------------------------------
(Jay S. Benet)
*GEORGE C. KOKULIS Director
- --------------------------------
(George C. Kokulis)
*ROBERT I. LIPP Director
- --------------------------------
(Robert I. Lipp)
*IAN R. STUART Director, Senior Vice President,
- -------------------------------- Chief Financial Officer, Chief Accounting
Officer and Controller
(Ian R. Stuart) Director
- --------------------------------
*KATHERINE M. SULLIVAN
- --------------------------------
(Katherine M. Sullivan)
*MARC P. WEILL Director
- --------------------------------
(Marc P. Weill)
</TABLE>
*By: Ernest J. Wright, Attorney-in-Fact
<PAGE> 81
EXHIBIT INDEX
<TABLE>
<CAPTION>
Attachment
or
Exhibit
No. Description Method of Filing
- -------- ----------- ----------------
<S> <C> <C>
OPINIONS AND CONSENTS:
A. Consent of Katherine M. Sullivan, General Counsel, to the filing of
her opinion as an exhibit to this Registration Statement and to the
reference to her opinion under the caption "Legal Proceedings and
Opinion" in the Prospectus. (Incorporated herein by reference to
Exhibit 11 to the Registration Statement filed October 30, 1996.)
B. Consent and Actuarial Opinion of Mahir A. Dugentas, ASA,
pertaining to the illustrations contained in the Prospectus.
(Incorporated herein by reference to Exhibit B to the
Registration Statement filed October 30, 1996.)
C. Consent of KPMG Peat Marwick LLP, Independent Electronically
Certified Public Accountants.
The following Exhibits:
1. Resolution of the Board of Directors of The Travelers Life and Annuity
Company authorizing the establishment of the Registrant. (Incorporated
herein by reference to Exhibit 1 to the Registration Statement on Form
S-6, filed October 30, 1996.)
3(a). Form of Distribution Agreement among the Registrant, The Travelers
Life and Annuity Company and Tower Square Securities, Inc.
(Incorporated herein by reference to Exhibit 3(a) to the Registration
Statement on Form S-6, filed October 30, 1996.)
3(b). Specimen Form of Selling Agreement. (Incorporated herein by reference
to Exhibit 3(b) to the Registration Statement on Form S-6, filed
October 30, 1996.)
3(c). Agents Agreement, including schedule of sales commissions. Electronically
5. Variable Life Insurance Policy. (Incorporated herein by reference to
Exhibit 5 to the Registration Statement on Form S-6, filed October 30,
1996.)
6(a). Charter of The Travelers Life and Annuity Company, as amended on April
10, 1990. (Incorporated herein by reference to Exhibit 6(a) to the
Registration Statement on Form S-6, filed October 30, 1996.)
6(b). By-Laws of The Travelers Life and Annuity Company, as amended on
October 20, 1994. (Incorporated herein by reference to Exhibit 6(b) to
the Registration Statement on Form S-6, filed October 30, 1996.)
</TABLE>
<PAGE> 82
<TABLE>
<CAPTION>
Attachment
or
Exhibit
No. Description Method of Filing
- -------- ----------- ----------------
<S> <C> <C>
10. Application for Variable Life Insurance Policy Electronically
11. Opinion of Katherine M. Sullivan, General Counsel,
regarding the legality of securities being registered.
(Incorporated herein by reference to Exhibit 11 to the
Registration Statement filed October 30, 1996.)
12. Powers of Attorney authorizing Ernest J. Wright or
Kathleen A. McGah as signatory for Michael A. Carpenter,
Jay S. Benet, George C. Kokulis, Robert I. Lipp, Ian R.
Stuart, Katherine M. Sullivan and Marc P. Weill.
(Incorporated herein by reference to Exhibit 12 to the
Registration Statement on Form S-6, filed October 30, 1996.)
13. Memorandum concerning transfer and redemption procedures, as required
by Rule 6e-3(T)(b)(12)(ii) (Incorporated herein by reference to
Exhibit 13 to the Registration Statement on Form S-6, filed October
30, 1996.)
27. Financial Data Schedule of The Travelers Life and Annuity Electronically
Company.
</TABLE>
<PAGE> 1
EXHIBIT 3C
LIFE MARKETING GENERAL AGENT CONTRACT
BETWEEN
THE TRAVELERS LIFE AND ANNUITY COMPANY, Hartford, Connecticut (we, us, our) and
(you, your) of
For the considerations hereinafter expressed, it is mutually agreed that your
authority to act as our General Agent is granted by us and accepted by you upon
the following limitations, terms, provisions and conditions:
1. This contract shall become effective on , covering those nonvariable life
insurance and annuity policies issued by our Financial Services Department
and shown on the attached schedules.
2. You are authorized to solicit applications covering such classes of risks
as we may from time to time authorize to be solicited. You are authorized,
subject to our instructions, to collect first or single premiums with an
application and any other premiums we may ask you to collect. You shall
submit completed applications and remit premiums promptly as instructed by
our procedures.
3. In our sole discretion, we will select and price each policy form that you
may sell and we may reject any application.
4. In our sole discretion, we will appoint agents and brokers nominated by
you. Contracts may be made directly between such agents and brokers and us
on forms we supply. All commissions provided for in such contracts shall
be your obligation and deductible from the commissions we pay to you under
this contract.
5. You have no authority for or on behalf of us: to accept risks of any
kind, to make, alter, vary or discharge any policy; to extend the time
for payment of premiums; to waive or extend any policy obligation or
condition; to take payment of premiums other than in current funds; to
incur any liability or expense in our behalf; to deliver any policy
unless the applicant therefor is at the time of delivery in good health
and insurable condition; or to receive any money due or to become due to
us except as set forth in paragraph 2.
6. You acknowledge and warrant that you and your solicitors are licensed
and/or appointed as an agent under applicable state insurance laws to
solicit, negotiate and effect the contracts contemplated hereunder. In the
event that you or your solicitors are not, business will not be solicited,
negotiated or effected by said parties until such requirements are met.
You acknowledge that compensation will only be paid to appropriately
licensed and/or appointed parties.
<PAGE> 2
7. We will pay you as full compensation on premiums paid to us on policies
issued on applications obtained by or through you while this contract is
in effect, the commissions and service fees described in Parts 1, 2, 3
and 4. The commissions quoted in Parts 1 and 2 are vested subject to
Schedules A and B attached to this contract on the policy effective
date. Your right to compensation shall be subject to the limitations of
this contract, its written amendments and the Schedules issued by us
from time to time for attachment to it. If there is more than one
contract between you and us that quotes commissions on the same policy
form we will pay commission under only one such contract.
We, as a condition precedent to any obligation for payment hereunder, have
a right to reduce or set-off any compensation payable under this contract
because of any indebtedness to us.
PART 1
COMMISSIONS ON LIFE PREMIUMS PAYABLE FOR THE FIRST YEAR OF INSURANCE:
See Schedule A
PART 2
COMMISSIONS ON RENEWAL LIFE PREMIUMS:
See Schedule B
PART 3
RENEWAL COMPENSATION (OVERRIDE) IN EVENT OF TERMINATION OF CONTRACT:
At termination, the renewal override, as shown in Schedule B, shall be payable
to you, your executors, administrators or assigns. But in no event will such
override be paid beyond the tenth year of insurance.
PART 4
ALLOWANCES DURING CONTINUANCE OF THIS CONTRACT:
See Schedule C.
2
<PAGE> 3
8. At any time, by written notice to you, we may change the allowances under
this contract, and may change the compensation allowed as to policies
effective on or after the effective date of such change.
9. We will pay commissions and allowances on premiums paid for additional
benefits or increases in benefits of any kind at the same rate as is
being allowed at the time of addition or increase for the premiums of
the policies to which they are added. We will not pay compensation: on
premiums for a policy which is a conversion of Employee Special
Protection Plan, Employee Life Insurance-Plan 1 or group life insurance;
on extra premiums for a policy which are charged due to temporary flat
substandard rating because of physical impairments; or on premiums for a
policy which are waived under any provision of such policy. On policies
issued with Table 7 or above rates (Table 5 for VIP Classic), or its
equivalent in extra rates, we will pay a modified commission for the
first year of insurance in accordance with our rules.
10. If you convert one of our term policies to a different form we will pay
compensation in accordance with our rules applying to such policies at the
time of conversion.
11. Where, in our judgment, a policy replaces a policy previously issued by us
on the same policyholder (other than as a term conversion), the commission
payable for the first year of insurance on the new policy will be adjusted
in accordance with our procedures in effect at the time of such
replacement.
12. Compensation on all universal life policies which would otherwise be
payable, will not be paid on remittances received for policies following a
partial withdrawal until the sum of such remittances equals the amount of
the withdrawal, at which time we will pay compensation, if any, on
subsequent remittances.
13. While recognizing the opportunity for flexibility in policyholder service
options inherent to universal life forms of insurance, evidence of
manipulation by you of any life policies, contributions, loans, surrenders
or replacements, not deemed by us to be in the best interest of the
policyholder or us, shall cause divestiture of your right to continuing
compensation and termination of the contract.
14. If we return the premiums on a policy or any portion of such premiums for
any cause, you will refund to us on demand, the amount of compensation you
received on such returned premiums.
15. No assignment of commissions or allowances payable under this contract
shall be binding upon us without our written consent.
16. You shall not pay or allow, or offer to pay or allow, as an inducement to
any person to insure, any rebate of premium or any inducement whatever not
specified in the policy, nor will you make any misrepresentation or
incomplete comparison for the purpose of inducing a policyholder in any
other company to lapse, forfeit, or surrender insurance therein, nor
3
<PAGE> 4
will you cause any advertisement respecting us to be published or
broadcast in any form whatever without first obtaining our written
consent.
17. Nothing in this contract will be construed to imply that an employment
relationship exists between you and us. Acceptance of compensation under
this contract will constitute ratification by you of your status as an
independent contractor. You will not be treated as an employee for federal
tax purposes and you are responsible for paying your own estimated income
and self-employment tax.
18. This contract cancels all previous contracts or agreements whether oral or
written between you and us covering the lines of insurance referred to in
this contract and may be terminated by either party at any time upon
written notice to the other.
IN WITNESS WHEREOF, the parties hereto have signed this contract in duplicate.
THE TRAVELERS LIFE AND ANNUITY COMPANY
Senior Vice President
Financial Services Department
____________________________________
Agent (Firm Name)
By__________________________________
Title_______________________________
Date________________________________
4
<PAGE> 5
THE TRAVELERS LIFE AND ANNUITY COMPANY
LIFE MARKETING GENERAL AGENT CONTRACT
SCHEDULE A
Commissions on Premiums Payable After the First Year of Insurance:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
COMMISSIONS AS A
FORM OF POLICY PERCENT OF PREMIUM
- --------------------------------------------------------------------------------
<S> <C>
Universal Life
VIP Classic (CLASUL/CLASU2) 50
TSL II 50
Term Life
Special T (APT) 40
Term Policy Fees
Special T policy fees are not commissionable.
</TABLE>
- --------------------------------------------------------------------------------
Commissions on Excess Premiums Payable for the First Year of Insurance:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
COMMISSIONS AS
FORM OF POLICY PERCENT OF EXCESS PREMIUM OVERRIDE AS A
PERCENT TOTAL
OF EXCESS PREMIUM
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Universal Life
VIPClassic (CLASUL/CLASU2) 4 2.5 6.5
On all other forms as quoted
by the Company.
</TABLE>
This schedule of first year commissions and overrides applies to policies
effective on or after and should be filed with the Life Marketing General Agent
Contract, of which it forms a part. This schedule may be amended by the Company
at any time.
THE TRAVELERS LIFE AND ANNUITY COMPANY
Senior Vice President
Financial Services Department
5
<PAGE> 6
THE TRAVELERS LIFE AND ANNUITY COMPANY
LIFE MARKETING GENERAL AGENT CONTRACT
SCHEDULE B
Commissions on Premiums Payable After the First Year of Insurance:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
COMMISSIONS AS A OVERRIDE AS A
FORM OF POLICY INSURANCE YEAR PERCENT OF PREMIUM PERCENT OF PREMIUM
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Universal Life
VIP Classic (CLASUL/CLASU2) 2-10 4 2.5
11-15 - 2.0
TSL II 2-10 4 2.5
11-15 - 2.0
- --------------------------------------------------------------------------------------------------
Term Life
Special T (APT) 2-10 2 2.0
11-15 - 2.0
On all other forms as quoted
by the Company
- --------------------------------------------------------------------------------------------------
</TABLE>
This schedule applies to policies effective on or after and
should be filed with the Life Marketing General Agent Contract, of which it
forms a part. This schedule may be amended by the Company at any time.
THE TRAVELERS LIFE AND ANNUITY COMPANY
Senior Vice President
Financial Services Department
6
<PAGE> 7
THE TRAVELERS LIFE AND ANNUITY COMPANY
LIFE MARKETING GENERAL AGENT CONTRACT (MGL)
SCHEDULE C
UL PRODUCTS: Universal Life policy forms as noted in Schedule A of this Life
Marketing General Agent Contract.
TERM PRODUCTS: Term policy forms as noted in Schedule A of this Life
Marketing General Agent Contract.
TLAC NEW PREMIUM: New premium as defined by Addendum I of this Contract produced
by the Life Marketing General Agent in The Travelers Life and Annuity Company
(TLAC).
LIFE NEW PREMIUM: The sum of all New premium credited for the Life Marketing
General Agent within a calendar year. New premium is defined by Addendum I of
this Contract produced by the Life Marketing General Agent for all products
noted in Schedule A of contracts for both TLAC and The Travelers Insurance
Company (TIC).
GENERAL AGENT COMMISSION (GAC): A payment equal to a percentage of TLAC New
Premium earned by the Life General Agent. This percentage may vary by form of
policy and is applied to TLAC New premium. As Life New Premium exceeds the
threshold in the table below, the New GAC percentage is applied to premiums in
excess of the breakpoint.
GENERAL AGENT BONUS (GAB): A retroactive payment of allowance made when Life New
Premium crosses one of the thresholds indicated below. The retroactive payment
is made on all TLAC New Premium credited to the Life Marketing General Agent
prior to reaching the current threshold. The amount paid is dependent upon
whether the New Premiums credited were for UL or Term products. The GAB is
determined by applying the GAC percent for the current threshold less the GAC
percent for the immediately preceding threshold to the TLAC New Premium credited
to the Life Marketing General Agent prior to reaching the current threshold.
GENERAL AGENT ALLOWANCE: The sum of General Agent Commission (GAC) and
General Agent Bonus (GAB).
The Company in its sole discretion and only during the continuance of your
Contract as Life Marketing General Agent, will, subject to the maximums imposed
by law or regulation, pay the following allowances in accordance with the
schedule.
<TABLE>
<CAPTION>
Percent of TLAC New Premium
Total First Year
General Agent Commission Compensation
Life New Product Schedules A + C
Premium Threshold UL Term UL Term
- ----------------- -- ---- -- ----
<S> <C> <C> <C> <C>
$0-49,999 30 25 80 65
$50,000-124,999 35 30 85 70
$125,000-249,999 45 35 95 75
$250,000-699,999 50 40 100 80
$700,000-999,999 55 45 105 85
$1,000,000 + 60 50 110 90
</TABLE>
This schedule is effective on or after and should be filed with the
Life Marketing General Agent Contract, of which it forms a part. This schedule
may be amended by the Company at any time.
THE TRAVELERS LIFE AND ANNUITY COMPANY
Senior Vice President
Financial Services Department
7
<PAGE> 8
TRAVELERS LIFE CONTRACT
ADDENDUM I
As used in all Travelers Agent Life Contracts:
1. "FLEXIBLE" premium policy means a policy under which the policy holder
can unilaterally vary the amount or timing of premium.
2. "NEW" premium is the premium paid in the first year of the Flexible
Premium policy that is commissioned at the first year rate. Increases in
coverage after policy issue may also generate New premium. For Term
contracts, New premium is the premium required to be paid in the first
year. Certain Term contracts may have non-commissionable policy fees in
the first year.
3. "EXCESS" premium is the premium credited to a Flexible Premium policy in
the first year that is greater than New premium.
4. "RENEWAL" premium is the premium credited to a Flexible Premium policy in
all years following the first policy year with the exception of that
portion of Renewal premium designated by the Company, in its sole
discretion, as an increase.
If, in the opinion of the Company, any payment, or credit or the
acceptance of premium would cause or contribute to the Company's violation
or the exceeding of limits of state or federal law applicable to insurance
companies or life insurance contracts including, but not limited to the
Internal Revenue Code of 1986 as amended, the Company reserves the right,
in its sole discretion, to reduce, postpone, cancel or otherwise fail to
pay or credit any commission, benefit, consideration or right created
hereunder, all without further liability to the agent or the agent's
heirs, assigns, successors or administrators.
Senior Vice President
Financial Services Department
8
<PAGE> 1
EXHIBIT 10
The Travelers
Life Insurance Application
PART ONE
GENERAL INSTRUCTIONS
o Please PRINT legibly with black ink. DO NOT TYPE.
o Answer all appropriate questions fully.
o Please note instructions for each section provided in italicized print.
o Please complete any necessary supplemental forms.
o The Medical Information Bureau/Fair Credit Reporting Act notice must be
o detached and given to the Proposed Insured.
_____________________________________________
Proposed Insured's Name (print full name)
$ ADVANCED PAYMENT AMOUNT ENCLOSED
<TABLE>
<S> <C>
UNDERWRITING REQUIREMENTS ORDERED:
[ ] Blood Profile [ ] Urine Specimen [ ] ECG [ ] Paramed Exam
[ ] Treadmill ECG [ ] Inspection Report [ ] M.D. Exam
ABOVE REQUIREMENTS ORDERED FROM:
[ ] ASB Meditest [ ]EMSI [ ] PMI (Equifax) [ ] Portamedic (Hooper Holmes)
[ ] M.D. Examiner Not Name: ________________________________________________________________ (Facility or MD)
Affiliated with Address: ____________________________________________________________________________________________
the above: Phone: (___) _________________________________ Fax: (____) ________________________________________
[ ] WE HAVE NOT ORDERED UNDERWRITING REQUIREMENTS. PLEASE ARRANGE FOR US AND
ADVISE OUR OFFICE.
ATTACHED FORMS ARE REQUIRED TO PROCESS THIS CASE:
[ ] AIDS Consent Form [ ] Juvenile Supplement
[ ] State Required Replacement Form [ ] State Required Supplement
[ ] Life Financial Supplement [ ] Other (specify):
AGENCY CONTACT: Name: ________________________________________________________________________________________________________
Phone: (____) ___________________________ Fax: (____) ________________________________________________________
</TABLE>
AGENT'S NAME & PRODUCER CODE (Sticker or Plate)
SPECIAL PROCESSING UNDERWRITING INSTRUCTIONS:
________________________________________________________________________________
________________________________________________________________________________
[ ] Comments continued on back page of application.
TL-11855 The Travelers
<PAGE> 2
Life Insurance Application - General Information
PROPOSED INSURED
Questions must be answered by the Proposed Insured. If the Proposed
Insured is under age 16, complete JUVENILE SUPPLEMENT.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1. Print Name in Full _______________________________________________________ Social Security No. _______________________
first middle last
2. Date of Birth __________________ Birthplace _________________________________________ Sex ____ Marital Status ________
city state country if other than U.S.
3. Residence Address __________________________________________________________________________________Apt. No. _________
street and number
City ______________________________________________________________________ State _________________ Zip _____________
Phone Number ____________________ Best Time to Call _______________ Check Billing Preference: [ ]Home [ ] Business
4. If Proposed Insured has resided at address less than one year, show prior address:
Street and Number _________________________________________________________________________________ Apt. No. ________
City ________________________________________________________________ State ____________________ Zip ________________
5. Employer (Name of Firm) ______________________________________________________________________________________________
6. Business Address ___________________________________________________________________________________ Suite No. _______
street and number
City ____________________________________________________________ State ________________________ Zip ________________
Phone Number ___________________ Best Time to Call ________________ Check Calling Preference:[ ] Home [ ] Business
7. Occupation (Position or Title) __________________________________ Annual Salary $ ___________ Other Income $ _________
POLICY INFORMATION
For face amounts of $1,000,000 and over, use Financial Supplement. For spousal or child coverage, use
FAMILY INSURANCE SUPPLEMENT. For Variable Universal Life policies, complete VARIABLE UNIVERSAL
LIFE SUPPLEMENT instead of questions 8 through 12 below.
8. Life Insurance Plan _____________________________ Amount $__________ Death Benefit (UL Only): [ ]Level [ ]Increasing
If increase on existing policy: Current Amount. $______________________________ New Amount $_________________________
9. Supplemental Benefits/Term Riders, where applicable and if available:
[ ] Waiver of Premium or Monthly Deduction Amount [ ] Insured Term Rider $ _________
[ ] Cost of Living Adjustment (COLA) [ ] Accidental Death $ ___________
[ ] Accelerated Benefits Rider (TUL 91 only) [ ] Child Term Rider (Units) ______
[ ] Annual Renewable Term: Insured $ _______; Spouse $___________ [ ] Survivor Insurability Rider (First Life
Other: ______________________________________________________________________________________________________________
10. Premium Payment Plan (Check one block in either the Regular or Statement Bill section)
Regular Bill: [ ] Single [ ] Annual [ ] Semi-Annual [ ] Automatic Premium Check/Payor Soc. Sec. No.
Statement Bill: [ ] Annual [ ] Semi-Annual [ ] Quarterly [ ] Monthly
If increase on existing policy, are you changing the Premium Payment Plan? [ ] Yes [ ] No
11. Planned Premium Amount $_____________________ (Modal)
If increase on existing policy Current Amount ___________________ $ New Amount $ ___________________________________
12. Duration (Interest Sensitive Whole Life Only): [ ] Life Pay [ ] 40 Year [ ] 30 Year [ ] 20 Year [ ]
[ ] 15 Year [ ] 10 Year
[ ] Other, list product and duration(s)
POLICY OWNER
Applicant is the owner of any contract issued on this
application unless otherwise noted below. For
Multiple Ownership: Upon owner's death, indicate
whether owner ship interests pass to: [ ] Surviving
owner(s) (Joint Tenants) or [ ] Deceased Owner's
Estate (Tenants in Common)
13. Full Name and Social Security or Tax ID Number ____________________________
_______________________________________________________________________________
_______________________________________________________________________________
If succeeding ownership is desired, indicate name, address and relationship to
Insured in Agent's Comments section on front cover. Succeeding owner will
become owner upon original owner's death.
BENEFICIARY
Payment due two or more beneficiaries or to the survivor(s)
of them will be in equal shares, unless otherwise requested.
The right to change a beneficiary is reserved.
14. Beneficiary Name (specify full name(s) and relationships)__________________
_______________________________________________________________________________
_______________________________________________________________________________
</TABLE>
THE TRAVELERS LIFE AND ANNUITY COMPANY, ONE TOWER SQUARE,
HARTFORD, CONNECTICUT 06183
TL-11855
<PAGE> 3
Policy Risk Information
TOBACCO USE DECLARATION
Have you smoked cigarettes, cigars or a pipe, chewed or used tobacco in any
other form within the last 12 months? [ ] YES [ ] NO
GENERAL RISK INFORMATION
Please give details to all YES answers in the space provided on the right. If
space insufficient, continue on Additional Information section.
<TABLE>
<CAPTION>
HAS THE PROPOSED INSURED: YES NO
<S> <C> <C> <C>
1. Been postponed, rated or declined for Life, Health, Accident or Sickness
Insurance in the past 5 years? (If YES, state reason(s) and date(s) of such action.) [ ] [ ]
2. Flown within 5 years as a pilot, student pilot or crew member of any aircraft or
as a passenger on other than a scheduled airline, or expect to make such a
flight? (If YES, complete the AVIATION SUPPLEMENT.) [ ] [ ]
3. Engaged in automobile or motorcycle racing, sports parachuting, skin or scuba
diving or hang gliding? (If YES, complete the AVOCATION SUPPLEMENT. [ ] [ ]
4. Been convicted of 2 or more moving violations of any motor vehicle law or had
driver's license suspended in the past 3 years? (If YES, list driver's
license number and details.) [ ] [ ]
5. Does insurance applied for replace existing annuity or life insurance?
(If YES, list company name, amount, replacement date and policy number.) [ ] [ ]
6. Do you intend to change your occupation or reside or travel out of the United
States or Canada? (If YES, give details of occupation change and/or complete
the FOREIGN TRAVEL OR RESIDENCE SUPPLEMENT, as appropriate.) [ ] [ ]
</TABLE>
MEDICAL HISTORY
Answer all questions unless Part Two (Medical Examination) is required. For
all YES responses, give the question number, names and addresses of doctors,
when and why consulted. Include diagnosis dates, duration of illness or injury
and if recovery was full and complete. Complete MEDICAL SUPPLEMENT if Proposed
Insured has or has had a history of high blood pressure, chest pain, diabetes,
headaches, epilepsy, asthma, digestive problems, drug or alcohol abuse. If
space insufficient, continue on Additional Information section.
<TABLE>
<CAPTION>
HAS THE PROPOSED INSURED EVER HAD, BEEN TREATED OR RECEIVED MEDICAL
CONSULTATION FOR: YES NO
<S> <C> <C> <C>
7. Heart trouble, chest pain, angina, stroke or heart murmur? [ ] [ ]
8. High blood pressure, disorder of blood, anemia or varicose veins? [ ] [ ]
9. Nervous or mental problems, paralysis, epilepsy, fainting, or disorder of the
brain, nerves or nervous system? [ ] [ ]
10. Cancer, tumors, cysts or growths, disorder of skin or glands? [ ] [ ]
11. Diabetes, albumin, sugar/blood in urine? Disease of bladder or reproductive
organs or sexually transmitted disease? [ ] [ ]
12. Arthritis, rheumatism, gout, disorder of muscles or bones, spine or joints? [ ] [ ]
13. Ulcer or disorder of stomach, intestines, liver, kidneys, gallbladder, or hernia? [ ] [ ]
14. Asthma, allergy, pleurisy, tuberculosis, lung disorder, emphysema or chronic
cough? [ ] [ ]
15. Alcoholism or use of any habit-forming drugs? [ ] [ ]
16. Disorder of the immune system, Acquired Immune Deficiency Syndrome
(AIDS), AIDS-Related Complex (ARC) or a positive test for infection by the
AIDS (HIV) virus? [ ] [ ]
HAS THE PROPOSED INSURED:
17. Had in the past 5 years any other sickness or injury not referred to above? [ ] [ ]
18. Had health examinations or medical checkups or been a patient in a hospital,
clinic or sanitarium for treatment in the past 5 years? [ ] [ ]
19. Had any surgery or been advised to have surgery which has not been
performed? [ ] [ ]
20. Had or been advised to have electrocardiogram, X-ray or other medical tests
in the past 5 years? [ ] [ ]
21. Height ____ ft. ____ in. Weight _____ lbs. Weight loss past 12 mos. _______ lbs.
</TABLE>
<PAGE> 4
Policy Risk Information, continued
22. Has a parent, brother or sister ever had heart disease, stroke, cancer,
diabetes, high blood pressure or hereditary disease? YES [ ] NO [ ]
23. Please complete the following family history information:
<TABLE>
<CAPTION>
________________________________________________________________________________________________________________________________
| Age(s) | | Age(s) |
| (if Living) | Condition of Health* | (at death) | Cause of Death
| | | |
________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
Father | | | |
________________________________________________________________________________________________________________________________
Mother | | | |
________________________________________________________________________________________________________________________________
Brothers and Sisters | | | |
________________________________________________________________________________________________________________________________
No. Living | | | |
________________________________________________________________________________________________________________________________
No. Dead | | | |
________________________________________________________________________________________________________________________________
</TABLE>
*If not "good", please provide details in Additional Information Section.
ADDITIONAL INFORMATION
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Authorization Section
DECLARATION: APPLICANT declares to the best of his/her knowledge and belief
that all of the statements and answers in Part One and Part Two, if required,
are complete and true. APPLICANT UNDERSTANDS AND AGREES THAT: (a) Part One and
Part Two, if required, and any supplements to it will form the basis for any
insurance issued; (b) Except as stated in the attached Advance Payment Receipt,
no insurance will take effect until: (1) the contract is delivered to the
Applicant; and (2) the first premium is paid in full while the health and other
conditions relating to insurability remain as described in this application;
(c) No agent is authorized: (1) to make, alter, or discharge any contract; (2)
to waive or change any condition or provision of any contract, application, or
receipt; and (3) to accept any risk or to pass on insurability. The Proposed
Insured will be the Applicant of any contract issued on this application unless
otherwise indicated below. The right to privacy is protected as required by
law.
AUTHORIZATION FOR THE RELEASE OF INFORMATION: THE PROPOSED INSURED(S) authorize
The Travelers Life and Annuity Company (referred to as The Travelers), its
Reinsurers, insurance support organizations, and medical and other information
in order to evaluate this application for insurance. The Proposed Insured
authorizes any physician, medical facility, insurance company, the Medical
Information Bureau, Inc., employer, consumer reporting agency, or other
organization, institution, or person having information available as to
employment, other insurance coverage, medical care, treatment, supplies or
advice with respect to the Proposed Insured or his/her children to furnish such
information to The Travelers, its Reinsurers or their authorized
representatives.
This authorization will be valid from the date signed for a period of 2-1/2
years. A photographic copy of this authorization is as valid as the original.
Information given in this application, including health care information, may
be made available without prior authorization to other insurance companies to
which an application for life or health insurance coverage is made, or to which
a claim is submitted.
ACKNOWLEDGMENT: The PROPOSED INSURED(S) acknowledge receipt of the following
notices: "Medical Information Bureau Disclosure Notice," and "Your Privacy and
The Fair Credit Reporting Act." The PROPOSED INSURED(S) and APPLICANT, if
different, have read this authorization and understand that they have a right
to receive a copy.
I have paid to ________________the sum of $_______ and hold a receipt bearing
the number imprinted hereon.
Witnessed by __________________________________________________________________
Licensed Resident Agent Proposed Insured's
Name of Proposed Insured (please print) _______________________________________
Applicant's signature, if different ___________________________________________
If Qualified Pension Plan, name of plan
and signature of Trustee.
Name and telephone number of Agent (please print)______________________________
Dated________________ At (City or Town, State)_________________________________
<PAGE> 5
Advance Payment Form
ADVANCE PAYMENT QUESTIONNAIRE
The attached receipt provides for a LIMITED AMOUNT of Life Insurance
protection, for a LIMITED PERIOD of time, subject to the terms of the receipt.
This section MUST be completed for the proposed insured to be eligible for Life
Insurance protection under the terms of the receipt.
<TABLE>
<S> <C> <C>
Has any person proposed for insurance: YES NO
(1) within the past 90 days, been admitted to a hospital
or other medical facility, been advised to be admitted,
or had surgery performed or recommended? [ ] [ ]
(2) within the past 2 years, been treated for heart
trouble, stroke, or cancer or had such treatment
recommended by a physician or other medical
practitioner? [ ] [ ]
</TABLE>
If any of the above questions are answered YES or LEFT BLANK, no representative
of The Travelers Life and Annuity Company is authorized to accept money, and NO
COVERAGE will take effect under the agreement. The Proposed Insured also
understands and agrees that in no event will insurance take effect at an age or
amount requiring a medical examination as outlined in Item 4 of the attached
receipt until completion of the medical examination.
I declare that the answers to the above questions are true to the best of my
knowledge and belief. I understand and agree to the terms of the attached
receipt.
---------------------------------------------------------
Proposed Insured's signature (parent/guardian if a minor)
---------------------------------------------------------
Applicant's signature (if different)
---------------------------------------------------------
Date
TL-1185-R-1
- -------------------------------------------------------------------------------
ADVANCE PAYMENT RECEIPT
The following receipt is to be given for advance payment at least equal to one
month's premium, but not less than $10. All premium checks must
be made payable to the company.
Do not make checks payable to the agent or leave the payee blank.
For Variable Universal Life use receipt attached to
Variable Universal Life Supplement.
Type of Policy _____________________________________
Received from ______________________________________
the sum of $ _______________________________________
in connection with an application for life insurance to The Travelers Life and
Annuity Company, One Tower Square, Hartford, CT 06183, bearing the number
imprinted on this receipt, upon the following terms and conditions:
1. Insurance under the terms of the policy applied for and subject to the
limits in Item 4 will be effective on the latest of the dates of the Part
One application, Part Two Medical examination or other medical tests if
required by the Company's underwriting rules for the Proposed Insured's
age, plan or amount of insurance applied for, provided that the above sum
is sufficient to pay in full the first premium for the policy. Coverage
under the terms of this receipt will end on the earlier of (a) 60 days
after the date of this application, or (b) the date we notify the
Applicant that there is no coverage. There is no insurance provided if
there is material misrepresentation in the Part One application,
supplement (if required) or Part Two medical examination or if the
Proposed insured commits suicide.
2. If the above sum is less than the full first premium but is at least
equivalent to a monthly premium for the amount and plan of insurance
applied for, then unless the remainder of the first premium is paid within
30 days from the date the insurance becomes effective, the insurance will
be effective as provided in Item 1 only for the fraction of one year as
the amount paid bears to the annual premium for the contract applied for.
If the sum paid is less than the equivalent of a monthly premium, no
insurance will be effected by this receipt.
<PAGE> 6
3. The above sum will be returned to the Applicant if the application is
rejected; or, if a contract is issued upon this application at other than
standard rates or for other than the amount and plan of insurance applied
for, unless acceptable to the Applicant as issued; or, on request of the
Applicant and surrender of this receipt, if within 60 days from the date
of this receipt a contract has not been issued on this application.
4. The maximum limits of insurance which may be effected under the terms of
this receipt are as follows:
<TABLE>
<CAPTION>
AGE OF NON-MEDICAL MEDICAL/PARAMEDICAL
PROPOSED INSURED AMOUNT AMOUNT
<S> <C> <C>
15 days-35 yrs. $250,000 $500,000
36-45 100,000 500,000
46-50 75,000 500,000
51-60 -0- 500,000
61-75 -0- 250,000
</TABLE>
Any insurance applied for in excess of these limits, including accidental death
benefit, and on which any premium is paid in advance, will not take effect
until the policy is delivered to the Applicant and the balance of the first
premium, if any, is paid in full, all while the Proposed Insured's health and
other conditions relating to insurability remain as described in the
application. In the event of the death of the Proposed Insured before the
excess insurance is effected, that portion of the sum received relating to the
excess insurance will be returned.
Licensed Resident Agent ____________________________
Dated ___________________
TL-11855-R
<PAGE> 7
AUTHORIZATION OF AUTOMATIC PREMIUM CHECK PAYMENT
Please attach a voided check. Make sure your address and
the bank address appear correctly on the check.
Name: _______________________________ Phone Number: ___________________________
Policy Number(s): _____________________________________________________________
I hereby authorize you, the bank, to charge my account, to cover monthly
premium payments for my policy(ies) with The Travelers Life and Annuity
Company. I understand and agree that the bank will not be liable for any
payment that may not be honored, intentionally or inadvertently, even if such
dishonor results in forfeiture of insurance. This authority is to remain in
effect until my further written notice.
Please select date of monthly withdrawal
[ ] 8th [ ] 22nd
[ ] 15th [ ] 29th
My signature below is exactly as I sign my personal checks.
Bank Name:_________________________________________
Bank Address: _____________________________________
Checking Account Number: __________________________
SIGNATURE OF DEPOSITOR __________________________________
DATE _____________________
TL-11855-A
- --------------------------------------------------------------------------------
YOUR PRIVACY AND THE FAIR CREDIT REPORTING ACT
This notice must be detached and given to the Proposed Insured
before the application is completed.
Part of our underwriting may include an investigative report prepared with
information obtained in interviews with you, your neighbors, friends or other
acquaintances as to your character, reputation, personal characteristics and
mode of living. If an investigation is made we will handle it in the strictest
confidence.
Your application, with the medical history and other information you furnish,
and the investigative consumer report if made, are the initial basis of our
under writing evaluation. Your agent supplies information about you that serves
underwriting as well as marketing research purposes. The Fair Credit Reporting
Act requires that no investigative report be made on any consumer unless:
1. the person to be reported on has been given written notice that such a
report may be or has been requested, and
2. that person is informed that he/she has the right to ask for disclosure of
the type of information being sought.
If you wish information on the nature and scope of the Consumer Report which
may be requested, or any other investigative report which may be made, write to
The Travelers Life and Annuity Company, FSD Underwriting and Issue Division,
One Tower Square, Hartford, Connecticut 06183.
TL-11855-P
<PAGE> 8
MEDICAL INFORMATION BUREAU DISCLOSURE NOTICE
Any health care information developed is necessary to classify insurance risks,
conduct normal administrative procedures and process claims, and will be used
for those purposes only. No other use of this information will be made without
first obtaining your written consent.
This information will be treated as confidential except that The Travelers Life
and Annuity Company or its Reinsurer(s) may make a brief report to the Medical
Information Bureau, Inc., a non-profit membership corporation of life insurance
companies which operates an information exchange in behalf of its members. Upon
request by another member insurance company to which you have applied for life
or health insurance coverage or to which a claim is submitted, the Bureau will
supply such company with the information it may have in its files.
Upon receipt of a request from you, the Bureau will arrange disclosure of any
information it may have in your file. (Medical information will be disclosed
only to your attending physician, or you if requested.) If you question the
accuracy of information in the Bureau's file, you may contact the bureau and
seek a correction in accordance with the procedures set forth in the federal
Fair Credit Reporting Act. The address of the Bureau's information office is
Post Office Box 105, Essex Station, Boston, Massachusetts 02112, Telephone
(617) 426-3660.
The Travelers Life and Annuity Company or its Reinsurer(s) may release
information given in your application file, including health care information,
to other life insurance companies to which you apply for life or health
insurance or to which a claim is submitted.
TL-11855-M
TO: The Bank named on the reverse side
In consideration of your compliance with the request and authorization of the
depositor named on the reverse side The Travelers Life and Annuity Company
agrees that:
1. It will indemnify and hold you harmless from any liability or loss you may
suffer arising out of payment by you pursuant to said authorization of any
debit entry whether or not genuine, purporting to be initiated by The
Travelers Life and Annuity Company on the account of any of your
depositors, or arising out of the dishonor by you whether with or without
cause, intentionally or inadvertently, of any such debit entry purporting
to be initiated by The Travelers Life and Annuity Company.
2. It will refund to you any amount erroneously paid by you on any such debit
entry if claim for the amount of such erroneous payment is made by you
within 12 months from the date of the debit entry on which such erroneous
payment was made.
3. It will defend at its own cost and expense any action which might be
brought by any depositor or any other persons because of your actions taken
pursuant to the foregoing request or in any manner arising by reason of
your participation in the foregoing plan.
THE TRAVELERS LIFE AND ANNUITY COMPANY
Director
Authorized in resolutions adopted by the Investment Committee of The Travelers
Life and Annuity Company on June 10, 1982.
<PAGE> 9
Agent Information
AGENT'S CERTIFICATE
To help avoid processing delays, answers to the following questions MUST be
furnished with the application.
<TABLE>
<S> <C>
1. If salary allotment or other special plan, give:
Mass Marketing Case/Company Name: _____________________________________________________________
Case/Plan Number: _____________________________________________________________________________
Accounting Location Number:
2. Is the Proposed Insured employed and working regularly?
[ ] Yes [ ] No
3. Did you personally ask the questions and have the application signed in your presence?
[ ] Yes [ ] No
4. Has Proposed Insured applied for insurance elsewhere in past 90 days? (Give details in #17)
[ ] Yes [ ] No
5. Life Premium quoted: $_____________/Yr. Age__________
6. How long have you known the Proposed Insured? _________
7. Will this insurance replace any existing Annuity Life Insurance? (If YES, complete #8)
[ ] Yes [ ] No
8. Is a 1035 exchange involved? [ ] Yes [ ] No
(If YES, attach policies and forms)
Name of Insurer to be replaced and replaced contract #: _________________________________________________
If contract # not available, indicate Application or Receipt #: __________________________________________
9. Is the Proposed Insured applying for any Disability or Long Term Care with The Travelers or any
other company? (If YES, specify form and name of company) [ ] Yes [ ] No
__________________________________________________________________________________________________________
10. Will the Proposed Insured pay the premium? [ ] Yes [ ] No
If NO, who will pay the premium? _________________________________________________________________________
11. Who initiate the inquiry that resulted in this application? ______________________________________________
12. State all Life and Health insurance now in effect on the Proposed Insured. Include The Travelers and other
companies. Indicate "G" for Group and "B" for Business Insurance. If NONE so state.
- --------------------------------------------------------------------------------------------------------------------------------
| | | Total in Force | |
| Type | Year | Indemnity or | |
Company | L-Life H-Health | of Issue | Daily Benefit | PW | Amt. of ADB
| | | | |
- --------------------------------------------------------------------------------------------------------------------------------
| | | | |
- --------------------------------------------------------------------------------------------------------------------------------
| | | | |
- --------------------------------------------------------------------------------------------------------------------------------
| | | | |
- --------------------------------------------------------------------------------------------------------------------------------
13. Purpose of Insurance:
[ ] Personal (check primary reason):
[ ] Income Replacement [ ] Savings/Investment
[ ] Estate Liquidity [ ] Other ____________________
[ ] Business:
[ ] Buy-Sell [ ] Key Person
[ ] Deferred Compensation [ ] Executive Bonus
[ ] Mortgage/Loan Coverage [ ] Other ____________________
14. Is the applicant a small business owner? [ ] Yes [ ] No
If YES, how many employees in the insured's business?
[ ] 1-25 [ ] 26-50 [ ] 51-100 [ ] 100+
15. If available, is preferred rate being applied for? [ ] Yes [ ] No
16. If preferred rate is not available, is standard rate acceptable? [ ] Yes [ ] No
17. Additional Remarks: ______________________________________________________________________________________
______________________________________________________________________________________________________________
______________________________________________________________________________________________________________
18. Except as indicated below, I hereby declare that no person other than myself has any interest whatsoever
either directly or indirectly in this application and that I will not pay or allow any commission or compensation
directly or indirectly in connection with this application to any person.
Signed _____________________________________________________ Date _______________________________________________
(TO BE SIGNED PERSONALLY BY AGENT OR BROKER WHO COMPLETED THE APPLICATION)
</TABLE>
<PAGE> 10
AGENT LICENSING INFORMATION
1. Are you properly licensed to write business for The Travelers Life and
Annuity Company in the state where the application was secured?
[ ] Agent's License [ ] Solicitor's License [ ] Broker's License
2. Did anyone except you assist in securing the application? [ ] Yes [ ] No
If YES, who ___________________________________________________________
AGENT'S COMMENTS
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
THE TRAVELERS
The Travelers Life and Annuity Company
Hartford, CT 06183
TL-11855
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary of financial information extracted from the
financial statements of The Travelers Life and Annuity Company and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 694,535
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 9,554
<MORTGAGE> 90,542
<REAL-ESTATE> 10,111
<TOTAL-INVEST> 947,001
<CASH> 0
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 40,027
<TOTAL-ASSETS> 2,254,283
<POLICY-LOSSES> 654,534
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 1,210,702
<NOTES-PAYABLE> 0
0
0
<COMMON> 3,000
<OTHER-SE> 368,868
<TOTAL-LIABILITY-AND-EQUITY> 2,254,483
9,357
<INVESTMENT-INCOME> 89,040
<INVESTMENT-GAINS> (9,613)
<OTHER-INCOME> 16,223
<BENEFITS> 56,448
<UNDERWRITING-AMORTIZATION> 3,286
<UNDERWRITING-OTHER> 5,691
<INCOME-PRETAX> 39,582
<INCOME-TAX> 13,791
<INCOME-CONTINUING> 25,791
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,791
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
