<PAGE> 1
Registration No. 333-15045
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post 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 FOUR
-----------------------------------------------------------
(Exact Name of Trust)
THE TRAVELERS INSURANCE COMPANY
-------------------------------
(Name of Depositor)
One Tower Square, Hartford, Connecticut 06183
----------------------------------------------
(Complete Address of Depositor's Principal Executive Offices)
Ernest J. Wright
Secretary
The Travelers Insurance 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)
- -----
X on May 1, 1998 pursuant to paragraph (b)
- -----
60 days after filing pursuant to paragraph (a)(1)
- -----
on __________ pursuant to paragraph (a)(1) of Rule 485.
- -----
this post-effective amendment designates a new effective date for a
- ----- previously filed post-effective amendment.
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
TRAVELERS INSURANCE
A Member of Travelers Group [LOGO]
[UMBRELLA LOGO]
TRAVELERS
PORTFOLIO
ARCHITECT LIFE
THE TRAVELERS INSURANCE COMPANY
CONTRACT PROSPECTUS
TRAVELERS SERIES TRUST
MONEY MARKET PORTFOLIO MAY 1, 1998
CAPITAL APPRECIATION FUND
<PAGE> 5
THE TRAVELERS VARIABLE LIFE INSURANCE
SEPARATE ACCOUNT FOUR
PROSPECTUS
This Prospectus describes a modified single premium individual variable life
insurance policy (the "Policy") offered by The Travelers Insurance Company (the
"Company") and funded by a segment of The Travelers Variable Life Insurance
Separate Account Four ("Separate Account Four"). Separate Account Four 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 life insurance policies. 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, 1998.
<PAGE> 6
From the Issue Date through the end of the Right to Cancel Period, the Initial
Premium will be allocated to the Money Market Portfolio, 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, Travelers Quality Bond, MFS Emerging Growth, Disciplined
Mid Cap Stock, and three Zero Coupon Bond Fund Portfolios (Series 1998, 2000,
and 2005) of The Travelers Series Trust; Money Market Portfolio; 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:
(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.
2
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<S> <C>
GLOSSARY OF SPECIAL TERMS................................... 5
PROSPECTUS SUMMARY.......................................... 6
THE INSURANCE COMPANY....................................... 11
THE SEPARATE ACCOUNT........................................ 12
Separate Account Four..................................... 12
THE INVESTMENT OPTIONS...................................... 12
Substitutions and Additions............................... 14
Mixed and Shared Funding.................................. 14
THE POLICY.................................................. 14
The Policy Application.................................... 15
Eligible Purchasers....................................... 15
Payments Made Under the Policy............................ 15
Allocation of Premium Payments............................ 16
Right to Cancel Period.................................... 17
CHARGES AND DEDUCTIONS...................................... 17
Monthly Deduction Amount.................................. 17
Cost of Insurance Charge............................... 17
State Premium Tax Charges and DAC Charges.............. 18
Charges Against the Investment Options of Separate Account
Four................................................... 18
Mortality and Expense Risk Charge...................... 18
Administrative Expense Charges......................... 18
Income Taxes........................................... 19
INVESTMENT OPTION EXPENSES.................................. 19
SURRENDER CHARGES........................................... 19
TRANSFER CHARGE............................................. 20
REDUCTION OR ELIMINATION OF CHARGES......................... 20
VALUATION OF THE SEPARATE ACCOUNT........................... 20
How the Cash Value Varies................................. 20
How the Investment Experience is Determined............... 21
Accumulation Unit Value................................... 21
Net Investment Factor..................................... 21
Valuation Periods and Valuation Dates..................... 21
TRANSFERS OF CASH VALUE..................................... 21
Telephone Transfers....................................... 22
Automated Transfers....................................... 22
DEATH BENEFIT............................................... 22
Changes in Death Benefit Option........................... 23
Changes in Stated Amount.................................. 23
Maturity and Maturity Extension Benefits.................. 24
Policy Lapse and Reinstatement............................ 25
Lapse Protection Guarantee Rider.......................... 25
Exchange Rights........................................... 25
</TABLE>
3
<PAGE> 8
<TABLE>
<S> <C>
POLICY SURRENDERS AND CASH SURRENDER VALUE.................. 25
Right to Surrender........................................ 25
Full Surrenders........................................... 26
Partial Surrenders........................................ 26
POLICY LOANS................................................ 26
Risks Associated with Loans Taken Against a Variable Life
Insurance Policy....................................... 27
PAYMENT OPTIONS............................................. 27
OTHER MATTERS............................................... 28
Voting Rights............................................. 28
Reports to Policy Owners.................................. 28
Limit on Right to Contest and Suicide Exclusion........... 29
Misstatement as to Sex and Age............................ 29
Suspension of Valuation................................... 29
Beneficiary............................................... 29
Assignment................................................ 29
Dividends................................................. 29
FEDERAL TAX CONSIDERATIONS.................................. 30
General................................................... 30
TAX STATUS OF THE POLICY.................................... 30
Definition of Life Insurance.............................. 30
Diversification........................................... 30
Investor Control.......................................... 31
TAX TREATMENT OF POLICY BENEFITS............................ 31
In General................................................ 31
Modified Endowment Contracts.............................. 32
Exchanges................................................. 32
Aggregation of Modified Endowment Contracts............... 32
Policies Which Are Not Modified Endowment Contracts....... 32
Treatment of Loan Interest................................ 33
THE COMPANY'S INCOME TAXES.................................. 33
YEAR 2000 COMPLIANCE........................................ 33
MANAGEMENT.................................................. 33
Directors of the Travelers Insurance Company.............. 33
SENIOR OFFICERS OF THE TRAVELERS INSURANCE COMPANY.......... 34
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS................ 35
DISTRIBUTION OF THE POLICY.................................. 35
LEGAL PROCEEDINGS AND OPINION............................... 36
REGISTRATION STATEMENT...................................... 36
INDEPENDENT ACCOUNTANTS..................................... 36
FINANCIAL STATEMENTS........................................ 36
ILLUSTRATIONS............................................... 36
APPENDIX A: PERFORMANCE INFORMATION......................... 42
APPENDIX B: DEATH BENEFIT EXAMPLES.......................... 44
APPENDIX C: REPRESENTATIVE STATED AMOUNTS................... 46
</TABLE>
4
<PAGE> 9
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 offices of The Travelers Insurance
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 Four.
ISSUE DATE -- the date on which the Company issues the Policy 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) to whom the Policy is issued
who has rights under the Policy during the lifetime of the Insured; the Policy
Owner may or may not be the Insured.
POLICY YEARS -- annual periods computed from the Policy Date.
SEPARATE ACCOUNT FOUR -- The Travelers Variable Life Insurance Separate Account
Four, a separate account established by The Travelers Insurance 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. 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 Four ("Separate Account
Four"), a registered unit investment trust separate account was established by
The Travelers Insurance 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"):
Capital Appreciation Fund
Money Market Portfolio
TRAVELERS SERIES FUND, INC.
Alliance Growth Portfolio
MFS Total Return Portfolio
Putnam Diversified Income Portfolio
TRAVELERS SERIES TRUST
Equity Income Portfolio
Federated High Yield Portfolio
Federated Stock Portfolio
Large Cap Portfolio
Lazard International Stock Portfolio
MFS Emerging Growth Portfolio
Disciplined Mid Cap Stock Portfolio
Travelers Quality Bond Portfolio
Zero Coupon Bond Portfolio 1998
Zero Coupon Bond Portfolio 2000
Zero Coupon Bond Portfolio 2005
Additional Investment Options 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 of this Prospectus. 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.") 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).
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
6
<PAGE> 11
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 Money Market Portfolio. After the expiration of the Right to
Cancel Period, the values in the Money Market Portfolio 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 appropriate
number of 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 FOUR. 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.
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
7
<PAGE> 12
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 Four.")
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
YEARS TAX CHARGES RISK CHARGE ADMINISTRATIVE CHARGE* TOTAL
1-10 .35% .90% .40% 1.65%*
11+ N/A .90% .40% 1.30%*
</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
YEARS TAX CHARGES RISK CHARGE ADMINISTRATIVE CHARGE* TOTAL
2-10 .35% .75% .40% 1.50%*
11+ N/A .75% .40% 1.15%*
</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 the
Company receives a Premium Payment. 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 service.
INVESTMENT OPTION EXPENSES
Separate Account Four 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
INVESTMENT OPTION EXPENSES
(as a percentage of average daily net assets of the Investment Option as of
December 31, 1997, unless noted otherwise.)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
MANAGEMENT OTHER TOTAL
FUND NAME FEE EXPENSES EXPENSE
- ------------------------------------------------------------ ---- ---- -----
Alliance Growth Portfolio .80% .02% .82%
- ---------------------------------------------------------------------------------------------
Lazard International Stock .83% .42% 1.25%
- ---------------------------------------------------------------------------------------------
Capital Appreciation Fund .75% .09% .84%
- ---------------------------------------------------------------------------------------------
Disciplined Mid Cap Stock Portfolio .70% .25% .95%
- ---------------------------------------------------------------------------------------------
Large Cap Portfolio (sub-adviser Fidelity) .75% .20% .95%
- ---------------------------------------------------------------------------------------------
Federated Stock Portfolio .63% .32% .95%
- ---------------------------------------------------------------------------------------------
Equity Income Portfolio (sub-adviser Fidelity) .75% .20% .95%
- ---------------------------------------------------------------------------------------------
MFS Emerging Growth .75% .20% .95%
- ---------------------------------------------------------------------------------------------
MFS Total Return Portfolio .80% .06% .86%
- ---------------------------------------------------------------------------------------------
Federated High Yield Portfolio .65% .30% .95%
- ---------------------------------------------------------------------------------------------
Putnam Diversified Income Portfolio .75% .13% .88%
- ---------------------------------------------------------------------------------------------
Travelers Quality Bond Portfolio .32% .43% .75%
- ---------------------------------------------------------------------------------------------
Zero Coupon Bond Portfolio 1998 .10% .05% .15%
- ---------------------------------------------------------------------------------------------
Zero Coupon Bond Portfolio 2000 .10% .05% .15%
- ---------------------------------------------------------------------------------------------
Zero Coupon Bond Portfolio 2005 .10% .05% .15%
- ---------------------------------------------------------------------------------------------
Money Market Portfolio .32% .08% .40%
</TABLE>
NOTES:
1. The other expenses reflected in Alliance Growth Portfolio and MFS Total
Return, Putnam Diversified Income Portfolio are as of October 31, 1997 (the
Fund's fiscal year end). Travelers Capital Appreciation reflects other
expenses as of December 31, 1997. There were no fees waived or expenses
reimbursed for these funds in 1997.
2. There were no fees waived or expenses reimbursed for these funds in 1997.
3. Other Expenses are as of December 31, 1997 and take into account the current
expense limitations agreed to by the Portfolio's investment manager (the
"Manager"). The Manager waived all of its fees for the period and reimbursed
the Portfolios for their expenses. Without such arrangements, the Total
Expenses for the Portfolios would have been as follows: 1.05% for MFS
Emerging Growth Portfolio; 1.14% for Federated Stock Portfolio; 1.90% for
Equity Income Portfolio; 2.65% for Large Cap Portfolio; and 1.82% for
Traveler Disciplined Mid-Cap Stock Portfolio.
4. For Travelers Money Market Portfolio, other expenses have been restated to
reflect the current expense reimbursement arrangement with The Travelers
Insurance Company. Travelers 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 0.40%. Without
such arrangement, Total Expenses would have been 1.39% for the Travelers
Money Market Portfolio.
5. Other expenses are as of December 31, 1997 and take into account the current
expense reimbursement arrangement with Travelers. Travelers has agreed to
reimburse the Portfolio for the amount by which the aggregate expenses
(including management, but excluding brokerage commissions, interest charges
and taxes) exceeds 1.25%. Without such arrangement, the Total Expenses for
the Lazard International Stock Portfolio would have been 1.76%.
6. Other expenses are as of December 31, 1997 and take into account the current
expense reimbursement arrangement with Travelers. Travelers has agreed to
reimburse the Portfolio for the amount by which the aggregate expenses
(including management, but excluding brokerage commissions, interest charges
and taxes) exceeds .75%. Without such arrangement, the Total Expenses for the
Quality Bond Portfolio would have been 1.76%.
7. Other Expenses are as of December 31, 1997 and take into account the current
expense reimbursement arrangement with Travelers. Travelers has agreed to
reimburse the Portfolio for the amount by which the aggregate expenses
(including management, but excluding brokerage commissions, interest charges
and taxes) exceeds .15%. Without such arrangement, the Total Expenses for the
Portfolio would have been as follows: 2.21% for Zero Coupon Bond Fund Series
1998; 1.80% for Zero Coupon Bond Fund Series 2000; 1.52% for Zero Coupon Bond
Fund Series 2005.
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 Death Benefit options. 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. 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 Loan" 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
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.
THE INSURANCE COMPANY
- --------------------------------------------------------------------------------
The Travelers Insurance Company (the "Company") an indirect wholly owned
subsidiary of Travelers Group Inc., is a stock insurance company which has been
continuously engaged in the insurance business since its incorporation in the
state of Connecticut in 1864. The Company writes individual life insurance and
individual and group annuity contracts on a nonparticipating basis, and acts as
the depositor for Separate Account Four. The Company is licensed to conduct life
insurance business in all states of the United States, the District of Columbia,
Puerto Rico, Guam, the British and U.S. Virgin Islands and the Bahamas. The
Company's obligations as depositor for Separate Account Four may not be
transferred without notice to and consent of Policy Owners. 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 Company is a member of the Insurance Marketplace Standards Association
("IMSA"), and as such may use the IMSA logo and IMSA membership in its
advertisements. Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and service for individually
sold life insurance and annuities. IMSA members have adopted policies and
procedures that demonstrate a commitment to honesty, fairness and integrity in
all customer contacts involving the sale and service of individual life
insurance and annuity products.
11
<PAGE> 16
THE SEPARATE ACCOUNT
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT FOUR
The Company established the Separate Account Four on October 16, 1996, pursuant
to the insurance laws of the state of Connecticut. Separate Account Four 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 Four meets the definition of a separate account under
the federal securities laws. Registration of Separate Account Four with the SEC
does not involve supervision by the SEC of the management or investment policies
of Separate Account Four. 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 Four's registration under
the 1940 Act.
Additionally, the operations of Separate Account Four 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 Four 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 Four. The
Policies provide that the assets of Separate Account Four 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.
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
INVESTMENT
INVESTMENT OPTION OBJECTIVE ADVISER/SUB-ADVISER
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Capital Appreciation Fund Seeks growth of capital through the use of Travelers Asset Management
common stocks. Income is not an objective. International Corporation
The Fund invests principally in common ("TAMIC")
stocks of small to large companies which are Subadviser: Janus Capital Corp.
expected to experience wide fluctuations in
price in both rising and declining markets.
Money Market Portfolio Seeks high current income from short-term TAMIC
(formerly "Cash Income Trust") money market instruments while preserving
capital and maintaining a high degree of
liquidity
TRAVELERS SERIES FUND, INC.
Alliance Growth Portfolio Seeks long-term growth of capital by Travelers Investment Adviser
investing predominantly in equity securities ("TIA")
of companies with a favorable outlook for Subadviser: Alliance Capital
earnings and whose rate of growth is Management L.P.
expected to exceed that of the U.S. economy
over time. Current income is only an
incidental consideration.
</TABLE>
12
<PAGE> 17
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
INVESTMENT
INVESTMENT OPTION OBJECTIVE ADVISER/SUB-ADVISER
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MFS Total Return Portfolio Seeks to obtain above-average income TIA
(compared to a portfolio entirely invested Subadviser: MFS
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.
Putnam Diversified Income Seeks high current income consistent with TIA
Portfolio preservation of capital. The Portfolio will Subadviser: Putnam Investment
allocate its investments among the U.S. Management, Inc.
Government Sector, the High Yield Sector,
and the International Sector of the fixed
income securities markets.
Smith Barney High Income Seeks high current income. Capital Mutual Management Corp. ("MMC")
Portfolio appreciation is a secondary objective. The
Portfolio will invest at least 65% of its
assets in high-yielding corporate debt
obligations and preferred stock.
TRAVELERS SERIES TRUST
Equity Income Portfolio Seeks reasonable income by investing at TAMIC
least 65% in income-producing equity Subadviser: Fidelity Management
securities. The balance may be invested in & Research Company
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 Subadviser also considers the potential
for capital appreciation.
Federated High Yield Seeks high current income by investing TAMIC
Portfolio primarily in a professionally managed, Subadviser: Federated
diversified portfolio of fixed income Investment Counseling, Inc.
securities.
Federated Stock Portfolio Seeks growth of income and capital by TAMIC
investing principally in a professionally Subadviser: Federated
managed and diversified portfolio of common Investment Counseling, Inc.
stock of high-quality companies (i.e.,
leaders in their industries and
characterized by sound management and the
ability to finance expected growth).
Large Cap Portfolio Seeks long-term growth of capital by TAMIC
investing primarily in equity securities of Subadviser: Fidelity Management
companies with large market capitalizations. & Research Company
Lazard International Stock Seeks capital appreciation by investing TAMIC
Portfolio primarily in the equity securities of Subadviser: Lazard Asset
non-United States companies (i.e., Management
incorporated or organized outside the United
States).
MFS Emerging Growth Portfolio Seeks long-term growth of capital. Dividend TAMIC
and interest income from portfolio Subadviser: MFS
securities, if any, is incidental.
Disciplined Mid Cap Stock Seeks growth of capital by investing TAMIC
Fund primarily in a broadly diversified portfolio Subadviser: TIMCO
of common stocks
Travelers Quality Bond Seeks current income, moderate capital TAMIC
Portfolio volatility and total return.
</TABLE>
13
<PAGE> 18
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
INVESTMENT
INVESTMENT OPTION OBJECTIVE ADVISER/SUB-ADVISER
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Zero Coupon Bond Fund Portfolio Seeks to provide as high an investment TAMIC
(Series 1998) return as 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.
Zero Coupon Bond Fund Portfolio Seeks to provide as high an investment TAMIC
(Series 2000) return as 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.
Zero Coupon Bond Fund Portfolio Seeks to provide as high an investment TAMIC
(Series 2005) return as 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.
</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.
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
14
<PAGE> 19
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 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
15
<PAGE> 20
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 Date 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. You may allocate premium to one or more Investment
Options, provided that such allocation is made in whole percentages of at least
5%.
Regardless of the allocation made in the application, during the period between
premium receipt and policy issuance (the "Underwriting Period"), the Company
will hold the Initial Premium 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 Money Market Portfolio (e.g., as if the
Policy had been issued and the premium allocated to the Money Market Portfolio
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 Money Market Portfolio until the expiration of the Right to
Cancel Period. At the end of the Right to Cancel Period, the Cash Value in the
Money Market Portfolio 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.
You may change the allocation of Cash Value among any of the available
Investment Options. (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.
16
<PAGE> 21
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
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
17
<PAGE> 22
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 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 0.20% 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.
A monthly 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). 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 FOUR
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%.
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.
18
<PAGE> 23
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 Four 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 appear in the
Prospectus Summary and are fully 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>
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
19
<PAGE> 24
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 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 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 Four 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 Four 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 Four at their net asset value to the extent necessary to make
payments under the Policy.
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.
20
<PAGE> 25
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
Four (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 Four 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.
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.
21
<PAGE> 26
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.
AUTOMATIC REBALANCING
You may elect to have the Company periodically reallocate values in your
contract to match your original (or your latest) investment option allocation
request.
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
22
<PAGE> 27
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
ATTAINED AGE PORTION FOR EACH FULL 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.
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
23
<PAGE> 28
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 her own personal tax adviser prior to the exercise
of the Maturity Extension Benefit to assess any potential tax liability.
24
<PAGE> 29
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. Thirty 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.
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
25
<PAGE> 30
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
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 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
26
<PAGE> 31
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 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
27
<PAGE> 32
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 Four. 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.
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 Four 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 Four and the
Investment Options. At least once in each Policy Year, the Company will send to
each Policy Owner 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
28
<PAGE> 33
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).
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.
29
<PAGE> 34
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.
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 Four, 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.
30
<PAGE> 35
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 the owners of separate account assets. For example, a Policy 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 Four. 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 Four.
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 advisor prior to the purchase of a policy.
31
<PAGE> 36
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 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
32
<PAGE> 37
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 Four for any federal,
state or local taxes that it incurs that may be attributable to Separate Account
Four 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
Four or to the Policies.
YEAR 2000 COMPLIANCE
- --------------------------------------------------------------------------------
Generally, computer programs were designed without considering the impact of the
upcoming change in the century. As a result, software and computer systems may
need to be upgraded or replaced in order to comply with "Year 2000"
requirements. If not corrected, these computer applications could fail or create
erroneous results by or at the Year 2000. The business, financial condition, and
result of operations of a company could be materially and adversely affected by
the failure of its systems and applications (or those either provided or
operated by third-parties) to properly operate or manage dates beyond the year
1999.
The Company has investigated the nature and extent of the work required for our
computer systems to process beyond the turn of the century, and has made
progress toward achieving this goal, including upgrading and/or replacing
existing systems. We are confirming with our service providers that they are
also in the process of replacing or modifying their systems with the same goal.
We expect that our principal systems will be Year 2000 compliant by early 1999.
While these efforts involve substantial costs, we closely monitor associated
costs and continue to evaluate associated risks based on actual expenses. While
it is likely that these efforts will be successful, if necessary modifications
and conversions are not completed in a timely manner, the Year 2000 requirements
could have a material adverse effect on certain operations of the Company.
MANAGEMENT
- --------------------------------------------------------------------------------
DIRECTORS OF THE TRAVELERS INSURANCE COMPANY
The following are the Directors and Executive Officers of The Travelers
Insurance 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.
</TABLE>
33
<PAGE> 38
<TABLE>
<CAPTION>
DIRECTOR
NAME AND POSITION SINCE PRINCIPAL BUSINESS
----------------- -------- ------------------
<S> <C> <C>
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 Insurance 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; Vice Chairman since February 1998;
Executive Vice President (1995-1998) 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 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.
SENIOR OFFICERS OF THE TRAVELERS INSURANCE COMPANY
- --------------------------------------------------------------------------------
The following are the Senior Officers of The Travelers Insurance 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
Barry Jacobson.............................................. Senior Vice President
Russell H. Johnson.......................................... Senior Vice President
Warren H. May............................................... Senior Vice President
Jay S. Fishman.............................................. Senior Vice President
David A. Tyson.............................................. Senior Vice President
F. Denney Voss.............................................. Senior Vice President
Christine M. Modie.......................................... Senior Vice President
Elizabeth C. Georgakopoulos................................. Senior Vice President
</TABLE>
Information relating to the management of the Investment Options is contained in
the Investment Option prospectuses.
34
<PAGE> 39
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS
- --------------------------------------------------------------------------------
The assets of Separate Account Four 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 Four. The Company maintains
records of all of Separate Account Four'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 or its successor. 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 Four, 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 Travelers Distribution
Company an affiliated broker-dealer, may become the principal underwriter during
1998.
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.
35
<PAGE> 40
LEGAL PROCEEDINGS AND OPINION
- --------------------------------------------------------------------------------
There are no pending material legal proceedings affecting the Separate Account.
There is one material pending legal proceeding, other than ordinary routine
litigation incidental to the business, to which the Company is a party. In March
1997, a purported class action entitled Patterman v. The Travelers, Inc. was
commenced in the Superior Court of Richmond County, Georgia, alleging, among
other things, violations of the Georgia RICO statute and other state laws by an
affiliate of the Company, Primerica Financial Services, Inc. and certain of its
affiliates. Plaintiffs seek unspecified compensatory and punitive damages and
other relief. In April 1997, the lawsuit was removed to the U.S. District Court
for the Southern District of Georgia, and in October, 1997, the lawsuit was
remanded to the Superior Court of Richmond County. Later in October 1997, the
defendants, including the Company, answered the complaint, denied liability and
asserted numerous affirmative defenses. In February 1998, the Superior Court of
Richmond County transferred the lawsuit to the Superior Court of Gwinnett
County, Georgia, and certified the transfer order for immediate appellate
review. Also in February 1998, plaintiffs served an application for appellate
review of the transfer order; defendants subsequently opposed that application;
and later in February 1998, the Court of Appeals of the State of Georgia granted
plaintiffs' application for appellate review. Pending appeal proceedings in the
trial court have been stayed. The Company intends to vigorously contest the
litigation.
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 Four, the Company and the Policy. You may access the
SEC's website (http://www.sec.gov) to view the entire Registration Statement.
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
Coopers & Lybrand L.L.P., independent accountants, 100 Pearl Street, Hartford,
Connecticut, are the independent auditors for Separate Account Four. The
services provided to Separate Account Four will primarily include the audit of
Separate Account Four's financial statements in 1998.
The consolidated financial statements of The Travelers Insurance Company and
Subsidiaries as of December 31, 1997 and 1996, and for each of the years in the
three-year period ended December 31, 1997, have been included herein and in the
registration statement in reliance upon the report 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 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 Four or its Investment Options.
36
<PAGE> 41
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 (.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 .75% for
Investment Option expenses. The 12% illustration will assume that the mortality
and expense risk charge has been reduced to 0.75% 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 1997 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 -2.05% and 3.95%, respectively. The illustrated gross annual
investment rate of return of 12% corresponds to an approximate net annual rate
of return of 9.95% in the first Policy Year, and 10.10% 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 Four, since the Company is not currently deducting such charges
from Separate Account Four. 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 illustration will
show average fund expenses or, if requested, actual fund expenses. The
hypothetical gross annual investment return assumed in such an illustration will
not exceed 12%.
37
<PAGE> 42
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>
DEATH BENEFIT* CASH VALUE* CASH SURRENDER VALUE*
----------------------------- ----------------------------- -----------------------------
TOTAL PREMIUMS 0% 6% 12% 0% 6% 12% 0% 6% 12%
YEAR WITH 5% INTEREST (-2.05%) (3.95%) (9.95%)# (-2.05%) (3.95%) (9.95%)# (-2.05%) (3.95%) (9.95%)#
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 38,791 38,791 38,791 9,619 10,213 10,807 8,869 9,463 10,057
2 11,025 38,791 38,791 38,791 9,239 10,428 11,704 8,489 9,678 10,954
3 11,576 38,791 38,791 38,791 8,860 10,644 12,683 8,160 9,944 11,983
4 12,155 38,791 38,791 38,791 8,481 10,860 13,754 7,781 10,160 13,054
5 12,763 38,791 38,791 38,791 8,100 11,077 14,926 7,450 10,427 14,276
6 13,401 38,791 38,791 38,791 7,717 11,292 16,208 7,117 10,692 15,608
7 14,071 38,791 38,791 38,791 7,329 11,506 17,612 6,829 11,006 17,112
8 14,775 38,791 38,791 38,791 6,936 11,717 19,151 6,536 11,317 18,751
9 15,513 38,791 38,791 38,791 6,537 11,925 20,839 6,237 11,625 20,539
10 16,289 38,791 38,791 38,791 6,129 12,128 22,692 6,129 12,128 22,692
15 20,789 38,791 38,791 47,877 4,046 13,325 35,729 4,046 13,325 35,729
20 26,533 38,791 38,791 69,051 1,421 14,297 56,599 1,421 14,297 56,599
</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>
# 9.95% is increased to 10.10% in years 2 and thereafter due
to a reduction in the mortality and expense risk charge.
* Net Interest Rates are shown in parenthesis
</TABLE>
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>
DEATH BENEFIT* CASH VALUE* CASH SURRENDER VALUE*
----------------------------- ----------------------------- -----------------------------
TOTAL PREMIUMS 0% 6% 12% 0% 6% 12% 0% 6% 12%
YEAR WITH 5% INTEREST (-2.05%) (3.95%) (9.95%)# (-2.05%) (3.95%) (9.95%)# (-2.05%) (3.95%) (9.95%)#
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 38,791 38,791 38,791 9,566 10,159 10,752 8,816 9,409 10,002
2 11,025 38,791 38,791 38,791 9,130 10,313 11,585 8,380 9,563 10,835
3 11,576 38,791 38,791 38,791 8,689 10,462 12,491 7,989 9,762 11,791
4 12,155 38,791 38,791 38,791 8,243 10,604 13,479 7,543 9,904 12,779
5 12,763 38,791 38,791 38,791 7,791 10,738 14,557 7,141 10,088 13,907
6 13,401 38,791 38,791 38,791 7,329 10,862 15,734 6,729 10,262 15,134
7 14,071 38,791 38,791 38,791 6,856 10,974 17,019 6,356 10,474 16,519
8 14,775 38,791 38,791 38,791 6,368 11,070 18,424 5,968 10,670 18,024
9 15,513 38,791 38,791 38,791 5,862 11,148 19,962 5,562 10,848 19,662
10 16,289 38,791 38,791 38,791 5,334 11,205 21,648 5,334 11,205 21,648
15 20,789 38,791 38,791 44,971 2,331 11,284 33,561 2,331 11,284 33,561
20 26,533 0 38,791 64,081 0 10,229 52,525 0 10,229 52,525
</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>
# 9.95% is increased to 10.10% in years 2 and thereafter due
to a reduction in the mortality and expense risk charge.
* Net Interest Rates are shown in parenthesis
</TABLE>
39
<PAGE> 44
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>
DEATH BENEFIT* CASH VALUE* CASH SURRENDER VALUE*
----------------------------- ----------------------------- -----------------------------
TOTAL PREMIUMS 0% 6% 12% 0% 6% 12% 0% 6% 12%
YEAR WITH 5% INTEREST (-2.05%) (3.95%) (9.95%)# (-2.05%) (3.95%) (9.95%)# (-2.05%) (3.95%) (9.95%)#
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 48,382 48,974 49,567 9,591 10,183 10,776 8,841 9,433 10,026
2 11,025 47,974 49,155 50,423 9,183 10,364 11,632 8,433 9,614 10,882
3 11,576 47,566 49,332 51,353 8,775 10,541 12,562 8,075 9,841 11,862
4 12,155 47,157 49,505 52,361 8,366 10,714 13,570 7,666 10,014 12,870
5 12,763 46,747 49,672 53,456 7,956 10,881 14,665 7,306 10,231 14,015
6 13,401 46,334 49,833 54,643 7,543 11,042 15,852 6,943 10,442 15,252
7 14,071 45,916 49,983 55,930 7,125 11,192 17,139 6,625 10,692 16,639
8 14,775 45,491 50,122 57,324 6,700 11,331 18,533 6,300 10,931 18,133
9 15,513 45,062 50,251 58,838 6,271 11,460 20,047 5,971 11,160 19,747
10 16,289 44,622 50,362 60,476 5,831 11,571 21,685 5,831 11,571 21,685
15 20,789 42,390 50,919 71,655 3,599 12,128 32,864 3,599 12,128 32,864
20 26,533 39,665 50,776 88,798 874 11,985 50,007 874 11,985 50,007
</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>
# 9.95% is increased to 10.10% in years 2 and thereafter due
to a reduction in the mortality and expense risk charge.
* Net Interest Rates are shown in parenthesis
</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>
DEATH BENEFIT* CASH VALUE* CASH SURRENDER VALUE*
----------------------------- ----------------------------- -----------------------------
TOTAL PREMIUMS 0% 6% 12% 0% 6% 12% 0% 6% 12%
YEAR WITH 5% INTEREST (-2.05%) (3.95%) (9.95%)# (-2.05%) (3.95%) (9.95%)# (-2.05%) (3.95%) (9.95%)#
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 48,311 48,901 49,492 9,520 10,110 10,701 8,770 9,360 9,951
2 11,025 47,829 49,001 50,259 9,038 10,210 11,468 8,288 9,460 10,718
3 11,576 47,342 49,087 51,085 8,551 10,296 12,294 7,851 9,596 11,594
4 12,155 46,849 49,159 51,972 8,058 10,368 13,181 7,358 9,668 12,481
5 12,763 46,350 49,214 52,926 7,559 10,423 14,135 6,909 9,773 13,485
6 13,401 45,841 49,250 53,951 7,050 10,459 15,160 6,450 9,859 14,560
7 14,071 45,321 49,262 55,049 6,530 10,471 16,258 6,030 9,971 15,758
8 14,775 44,787 49,247 56,225 5,996 10,456 17,434 5,596 10,056 17,034
9 15,513 44,234 49,199 57,482 5,443 10,408 18,691 5,143 10,108 18,391
10 16,289 43,660 49,115 58,826 4,869 10,324 20,035 4,869 10,324 20,035
15 20,789 40,467 48,189 67,582 1,676 9,398 28,791 1,676 9,398 28,791
20 26,533 0 45,513 79,959 0 6,722 41,168 0 6,722 41,168
</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>
# 9.95% is increased to 10.10% in years 2 and thereafter due
to a reduction in the mortality and expense risk charge.
* Net Interest Rates are shown in parenthesis
</TABLE>
41
<PAGE> 46
APPENDIX A
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, Separate Account Four's 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 Four invests in Investment Options
that were in existence prior to the date on which they became available under
the Policy. Average annual rates of return for periods prior to the availability
of the Separate Account are calculated by adjusting the actual returns of the
Investment Options to reflect the contract charges shown below.
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 and
how these charges affect Cash Values and Death Benefits, see the Illustrations.
RATES OF RETURN FOR
PERIODS ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1 YEAR
INVESTMENT OPTION RATE OF RETURN
- ----------------------------------------------------------------------------
<S> <C>
Federated High Yield Bond Portfolio......................... 13.95%
Money Market Portfolio...................................... 3.70%
Travelers Quality Bond Portfolio............................ 5.75%
Large Cap Portfolio......................................... 21.84%
Equity Income Portfolio..................................... 30.58%
Lazard International Stock Portfolio........................ 6.73%
MFS Emerging Growth Portfolio............................... 19.44%
Capital Appreciation Fund................................... 24.48%
Federated Stock Portfolio................................... 31.77%
Alliance Growth Portfolio................................... 27.34%
Putnam Diversified Income Portfolio......................... 6.36%
MFS Total Return Portfolio.................................. 19.66%
Zero Coupon Bond Fund Portfolio 1998........................ 4.61%
Zero Coupon Bond Fund Portfolio 1999........................ 5.66%
Zero Coupon Bond Fund Portfolio 2000........................ 10.03%
Disciplined Mid Cap Stock Portfolio......................... 33.10%
</TABLE>
* The average rate of return reflects the cumulative performance since inception
(4/97)
42
<PAGE> 47
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.
43
<PAGE> 48
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 23 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
44
<PAGE> 49
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.
45
<PAGE> 50
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
The Travelers Insurance Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets of The Travelers
Insurance Company and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income and retained earnings and cash flows
for each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Travelers
Insurance Company and Subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
January 26, 1998
F-1
<PAGE> 51
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
($ IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
REVENUES
Premiums $1,583 $1,387 $1,504
Net investment income 2,037 1,950 1,884
Realized investment gains 199 65 106
Other revenues 354 284 204
- -------------------------------------------------------------------------------------------
Total Revenues $4,173 $3,686 $3,698
- -------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 1,341 1,187 1,206
Interest credited to contractholders 829 863 997
Amortization of deferred acquisition costs and value of
insurance in force 293 281 290
General and administrative expenses 427 380 368
- -------------------------------------------------------------------------------------------
Total Benefits and Expenses 2,890 2,711 2,861
- -------------------------------------------------------------------------------------------
Income from continuing operations before federal income taxes 1,283 975 837
- -------------------------------------------------------------------------------------------
Federal income taxes:
Current expense 434 284 233
Deferred 10 58 57
- -------------------------------------------------------------------------------------------
Total Federal Income Taxes 444 342 290
- -------------------------------------------------------------------------------------------
Income from continuing operations 839 633 547
- -------------------------------------------------------------------------------------------
Discontinued operations, net of income taxes
Income from operations (net of taxes of $0, $0 and $18) -- -- 72
Gain on disposition (net of taxes of $0, $14 and $68) -- 26 131
- -------------------------------------------------------------------------------------------
Income from Discontinued Operations -- 26 203
- -------------------------------------------------------------------------------------------
Net income 839 659 750
Retained earnings beginning of year 2,471 2,312 1,562
Dividends to parent 500 500 --
- -------------------------------------------------------------------------------------------
Retained Earnings End of Year $2,810 $2,471 $2,312
===========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE> 52
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN MILLIONS)
<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost,
$20,682; $19,284) $21,511 $19,637
Equity securities, at fair value (cost, $480; $330) 512 338
Mortgage loans 2,869 2,920
Real estate held for sale 134 297
Trading securities, at market value 800 --
Policy loans 1,872 1,910
Short-term securities 1,102 902
Other invested assets 1,702 1,253
- ----------------------------------------------------------------------------------
Total Investments $30,502 $27,257
- ----------------------------------------------------------------------------------
Cash 58 74
Investment income accrued 338 355
Premium balances receivable 106 105
Reinsurance recoverables 4,339 3,858
Deferred acquisition costs and value of insurance in force 2,312 2,133
Separate and variable accounts 11,319 8,127
Other assets 1,052 1,064
- ----------------------------------------------------------------------------------
Total Assets $50,026 $42,973
- ----------------------------------------------------------------------------------
LIABILITIES
Contractholder funds 14,913 14,189
Future policy benefits 12,569 11,762
Policy and contract claims 378 536
Trading securities sold not yet purchased, at market value 462 --
Separate and variable accounts 11,309 8,115
Commercial paper -- 50
Deferred federal income taxes 409 57
Other liabilities 2,661 1,936
- ----------------------------------------------------------------------------------
Total Liabilities $42,701 $36,645
- ----------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million shares authorized,
issued and outstanding 100 100
Additional paid-in capital 3,187 3,170
Retained earnings 2,810 2,471
Unrealized investment gains, net of taxes 1,228 587
- ----------------------------------------------------------------------------------
Total Shareholder's Equity $ 7,325 $ 6,328
- ----------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $50,026 $42,973
==================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 53
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
($ IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 1,519 $ 1,387 $ 1,346
Net investment income received 2,059 1,910 1,855
Other revenues received 180 131 90
Benefits and claims paid (1,230) (1,060) (846)
Interest credited to contractholders (853) (820) (960)
Operating expenses paid (445) (343) (615)
Income taxes paid (368) (328) (63)
Trading account investments, (purchases) sales, net (54) -- --
Other 18 (70) (137)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 826 807 670
Net cash used in discontinued operations -- (350) (596)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operations $ 826 $ 457 $ 74
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 2,259 1,928 1,974
Mortgage loans 663 917 680
Proceeds from sales of investments
Fixed maturities 7,592 9,101 6,773
Equity securities 341 479 379
Mortgage loans 207 178 704
Real estate held for sale 169 210 253
Purchases of investments
Fixed maturities (11,143) (11,556) (10,748)
Equity securities (483) (594) (305)
Mortgage loans (771) (470) (144)
Policy loans, net 38 (23) (325)
Short-term securities, (purchases) sales, net (2) 498 291
Other investments, (purchases) sales, net (260) (137) (267)
Securities transactions in course of settlement 311 (52) 258
Net cash provided by investing activities of discontinued operations -- 348 1,425
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (used in) Investing Activities $ (1,079) $ 827 $ 948
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of commercial paper, net (50) (23) (1)
Contractholder fund deposits 3,544 2,493 2,705
Contractholder fund withdrawals (2,757) (3,262) (3,755)
Dividends to parent company (500) (500) --
Other -- 9 --
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (used in) Financing Activities $ 237 $ (1,283) $ (1,051)
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash $ (16) $ 1 $ (29)
- ----------------------------------------------------------------------------------------------------------------------
Cash at December 31, $ 58 $ 74 $ 73
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 54
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the accompanying
financial statements follow.
Basis of Presentation
The Travelers Insurance Company and Subsidiaries (the Company) is a wholly
owned subsidiary of The Travelers Insurance Group Inc. (TIGI), an indirect
wholly owned subsidiary of Travelers Group Inc. (Travelers Group). The
consolidated financial statements include the accounts of the Company and its
insurance and non-insurance subsidiaries on a fully consolidated basis. The
primary insurance subsidiaries of the Company are The Travelers Life and
Annuity Company (TLAC) and Primerica Life Insurance Company (Primerica Life)
and its subsidiary National Benefit Life Insurance Company (NBL).
- TRAVELERS LIFE AND ANNUITY offers fixed and variable deferred annuities,
payout annuities and term, universal and variable life and long-term care
insurance to individuals and small businesses. It also provides group
pension products, including guaranteed investment contracts and group
annuities for employer-sponsored retirement and savings plans. These
products are primarily marketed through The Copeland Companies (Copeland),
an indirect, wholly owned subsidiary of the Company, the Financial
Consultants of Salomon Smith Barney, an affiliate of the Company, and a
nationwide network of independent agents. The Company's Corporate and
Other Segment was absorbed into Travelers Life and Annuity during the
second quarter of 1996.
- PRIMERICA LIFE INSURANCE offers individual life products, primarily term
insurance, to consumers through a nationwide sales force of approximately
80,000 full and part-time independent agents.
As discussed in Note 2 of Notes to Consolidated Financial Statements, in
January 1995 the group life insurance and related businesses of the Company
were sold to Metropolitan Life Insurance Company (MetLife). Also in January
1995, the group medical component was exchanged for a 42% interest in The
MetraHealth Companies, Inc. (MetraHealth). The Company's interest in
MetraHealth was sold on October 2, 1995 and through that date was accounted
for on the equity method. The Company's discontinued operations reflect the
results of the medical insurance business not transferred, the equity
interest in the earnings of MetraHealth through October 2, 1995 (date of
sale) and the gains from the sales of these businesses.
In September 1995, Travelers Group made a pro rata distribution to its
stockholders of shares of Class A Common Stock of Transport Holdings Inc.,
which at the time was a wholly owned subsidiary of Travelers Group and was
the indirect owner of the business of Transport Life Insurance Company
(Transport Life). Immediately prior to this distribution, the Company
distributed Transport Life, an indirect wholly owned subsidiary of the
Company, to TIGI, as a return of capital.
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 1997
presentation.
F-5
<PAGE> 55
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Accounting Changes
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In February, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (FAS 132). FAS 132
supersedes the disclosure requirements in FASB Statements No. 87, "Employers'
Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefits Pension Plans and Termination of Benefits,"
and No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." FAS 132 addresses disclosure only and does not address measurement
or recognition. In addition to other disclosure changes, FAS 132 allows
employers to disclose total contributions to multi-employer plans without
disaggregating the amounts attributable to pensions and other postretirement
benefits. This statement is effective for fiscal years beginning after
December 15, 1997. Earlier application is encouraged. Effective December 31,
1997, the Company adopted FAS 132. The adoption of this standard did not have
any impact on results of operations, financial condition or liquidity.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (FAS 125). FAS 125
establishes accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. These standards are
based on an approach that focuses on control. Under this 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 standards for
distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. The requirements of FAS 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 Statement of
Financial Accounting Standards 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. Application of FAS 125 prior
to the effective date or retroactively is not permitted. The adoption of the
provisions of FAS 125 effective January 1, 1997 did not have a material
impact on results of operations, financial condition or liquidity. The
adoption of the provisions of FAS 127 effective January, 1998 are
not expected to have a material impact on the results of operations,
financial condition or liquidity.
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.
F-6
<PAGE> 56
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). This statement
establishes financial accounting and reporting standards for stock-based
employee compensation plans as well as transactions in which an entity issues
its equity instruments to acquire goods or services from non-employees. This
statement defines a fair value-based method of accounting for employee stock
options or similar equity instruments, and encourages all entities to adopt
this method of accounting for all employee stock compensation plans. However,
it also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). Entities electing to remain with the accounting method
prescribed in APB 25 must make pro-forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined
by FAS 123 had been applied. FAS 123 is applicable to fiscal years beginning
after December 15, 1995. The Company has elected to continue to account for
its stock-based employee compensation plans using the accounting method
prescribed by APB 25 and has included in the notes to consolidated financial
statements the pro-forma disclosures required by FAS 123. See Note 9. The
Company has adopted FAS 123 for its stock-based non-employee compensation
plans.
Accounting Policies
INVESTMENTS
Fixed maturities include bonds, notes and redeemable preferred stocks. Fair
values of investments in fixed maturities are based on quoted market prices
or dealer quotes or, if these are not available, discounted expected cash
flows using market rates commensurate with the credit quality and maturity of
the investment. Also included in fixed maturities are loan-backed and
structured securities, which are amortized using the retrospective method.
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 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.
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, 1997 and 1996.
Real estate held for sale is carried at the lower of cost or fair value less
estimated cost 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 accepted 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, 1997 and 1996.
F-7
<PAGE> 57
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Trading securities are carried at market value. Realized and unrealized gains
and losses on trading securities are included in investment income.
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.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including financial
futures contracts, equity options, forward contracts and interest rate swaps
and caps, as a means of hedging exposure to interest rate, equity price and
foreign currency risk. Hedge accounting is used to account for derivatives.
To qualify for hedge accounting the changes in value of the derivative must
be expected to substantially offset the changes in value of the hedged item.
Hedges are monitored to ensure that there is a high correlation between the
derivative instruments and the hedged investment.
Gains and losses arising from financial futures contracts are used to adjust
the basis of hedged investments and are recognized in net investment income
over the life of the investment.
Forward contracts, equity options, and interest rate swaps and caps were not
significant at December 31, 1997 and 1996. Information concerning derivative
financial instruments is included in Note 6.
INVESTMENT GAINS AND LOSSES
Realized investment gains and losses are included as a component of pretax
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. The foreign exchange effects of Canadian
operations are included in unrealized gains and losses.
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.
DEFERRED ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE
Costs of acquiring individual life insurance, annuities and long-term care
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, including term
insurance and long-term care insurance, are amortized in relation to
anticipated premiums; universal life in relation to estimated gross profits;
and annuity contracts employing a level yield method. For life insurance, a
10- to 25-year amortization period is used; for long-term care business, a
10- to 20-year period is used, 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.
F-8
<PAGE> 58
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The value of insurance in force is an asset recorded at the time of
acquisition of an insurance company. It represents the actuarially determined
present value of anticipated profits to be realized from life insurance,
annuities and health 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 interest rates
ranging from 14% to 18%. Traditional life insurance and guaranteed renewable
health policies are amortized in relation to anticipated premiums; universal
life is amortized in relation to estimated gross profits; and annuity
contracts are amortized employing a level yield method. The value of
insurance in force is reviewed periodically for recoverability to determine
if any adjustment is required.
SEPARATE AND VARIABLE ACCOUNTS
Separate and variable accounts primarily represent funds for which investment
income and investment gains and losses accrue directly to, and investment
risk is borne by, the contractholders. Each account has specific investment
objectives. The assets of each account are legally segregated and are not
subject to claims that arise out of any other business of the Company. The
assets of these accounts are carried at market value. Certain other separate
accounts provide guaranteed levels of return or benefits and the assets of
these accounts are primarily carried at market value. 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.
GOODWILL
Goodwill represents the cost of acquired businesses in excess of net assets
and is being amortized on a straight-line basis principally over a 40-year
period. The carrying amount is regularly reviewed for indication of
impairment in value that in the view of management would be other than
temporary. Impairments would be recognized in operating results if a
permanent diminution in value is deemed to have occurred.
CONTRACTHOLDER FUNDS
Contractholder funds represent receipts from the issuance of universal life,
pension investment and certain deferred 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 3.5% to 9.45%.
FUTURE POLICY BENEFITS
Benefit reserves represent liabilities for future insurance policy benefits.
Benefit reserves for life insurance and annuities have been computed based
upon mortality, morbidity, persistency and interest assumptions applicable to
these coverages, which range from 2.5% to 10.0%, including adverse deviation.
These assumptions consider Company experience and industry standards. The
assumptions vary by plan, age at issue, year of issue and duration.
Appropriate recognition has been given to experience rating and reinsurance.
F-9
<PAGE> 59
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company, whose insurance subsidiaries are domiciled principally in
Connecticut and Massachusetts, prepares statutory financial statements in
accordance with the accounting practices prescribed or permitted by the
insurance departments of those states. 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 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 and for
deferred profits on limited-payment policies that are being recognized in
income over the policy term.
OTHER REVENUES
Other revenues include surrender, mortality and administrative charges and
fees as earned on investment, universal life and other insurance contracts.
Other revenues also include gains and losses on dispositions of assets and
operations other than realized investment gains and losses and revenues of
non-insurance subsidiaries.
INTEREST CREDITED TO CONTRACTHOLDERS
Interest credited to contractholders represents amounts earned by universal
life, pension investment and certain deferred annuity contracts in accordance
with contract provisions.
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.
Future Application of Accounting Standards
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" (SOP 97-3). SOP 97-3 provides guidance for
determining when an entity should recognize a liability for guaranty-fund and
other insurance-related assessments, how to measure that liability, and when
an asset may be recognized for the recovery of such assessments through
premium tax offsets or policy surcharges. This SOP is effective for financial
statements for fiscal years beginning after December 15, 1998, and the effect
of initial adoption is to be reported as a cumulative catch-up adjustment.
Restatement of previously issued financial statements is not allowed. The
Company has not yet determined when it will implement this SOP and does not
anticipate any material impact on the Company's financial condition, results
of operations or liquidity.
F-10
<PAGE> 60
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. All items
that are required to be recognized under accounting standards as components
of comprehensive income are to be reported in a financial statement that is
displayed with the same prominence as other financial statements. FAS 130
stipulates that comprehensive income reflect the change in equity of an
enterprise during a period from transactions and other events and
circumstances from non-owner sources. Comprehensive income will thus
represent the sum of net income and other comprehensive income, although FAS
130 does not require the use of the terms comprehensive income or other
comprehensive income. The accumulated balance of other comprehensive income
shall be displayed separately from retained earnings and additional paid-in
capital in the statement of financial position. FAS 130 is effective for
fiscal years beginning after December 15, 1997. The Company anticipates that
the adoption of FAS 130 will result primarily in reporting unrealized gains
and losses on investments in debt and equity securities in comprehensive
income.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" (FAS 131). FAS 131 establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires that selected information about those operating
segments be reported in interim financial statements. FAS 131 supersedes
Statement of Financial Accounting Standards No. 14, "Financial Reporting for
Segments of a Business Enterprise" (FAS 14). FAS 131 requires that all
public enterprises report financial and descriptive information about its
reportable operating segments. Operating segments are defined as components
of an enterprise about which separate financial information is available that
is evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. FAS 131 is effective for
fiscal years beginning after December 15, 1997. The Company is currently
determining the impact of the adoption of FAS 131.
2. DISPOSITIONS AND DISCONTINUED OPERATIONS
On January 3, 1995, the Company and its affiliates completed the sale of
their group life and related non-medical group insurance businesses to
MetLife for $350 million and recognized in the first quarter of 1995 a gain
of $20 million net of taxes. In connection with the sale, the Company ceded
100% of its risks in the group life and related businesses to MetLife on an
indemnity reinsurance basis, effective January 1, 1995. In connection with
the reinsurance transaction, the Company transferred assets with a fair
market value of approximately $1.5 billion to MetLife, equal to the statutory
reserves and other liabilities transferred.
On January 3, 1995, the Company and MetLife and certain of their affiliates,
formed the MetraHealth joint venture by contributing their group medical
businesses to MetraHealth, in exchange for shares of common stock of
MetraHealth. No gain was recognized as a result of this transaction . Upon
formation of the joint venture, the Company owned 42% of the outstanding
capital stock of MetraHealth, TIGI owned 8% and the other 50% was owned by
MetLife and its affiliates. In March 1995, MetraHealth acquired HealthSpring,
Inc. for common stock of MetraHealth resulting in a reduction in the
participation of the Company and TIGI, and MetLife in the MetraHealth venture
to 48.25% each. As the medical insurance business of the Company came due for
renewal, the risks were transferred to MetraHealth and the related operating
results for this medical insurance business were reported by the Company in
1995 as part of discontinued operations.
F-11
<PAGE> 61
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
On October 2, 1995, the Company and its affiliates completed the sale of
their ownership in MetraHealth to United HealthCare Corporation and through
that date had accounted for its interest in MetraHealth on the equity method.
Gross proceeds to the Company in 1995 were $708 million in cash, an after-tax
gain of $111 million was recognized. During 1996 the Company received a
contingency payment based on MetraHealth's 1995 results. In conjunction with
this payment, certain reserves associated with the group medical business and
exit costs related to the discontinued operations were reevaluated resulting
in a final after-tax gain of $26 million.
All of the businesses sold to MetLife or contributed to MetraHealth were
included in the Company's Managed Care and Employee Benefit Operations
(MCEBO) segment prior to 1995. The Company's discontinued operations in 1996
and 1995 reflect the results of the medical insurance business not
transferred, the equity interest in the earnings of MetraHealth through
October 2, 1995 (date of sale) and the gains from sales of these businesses.
Revenues from discontinued operations were insignificant for the year ended
December 31, 1996 and $1.2 billion for the year ended December 31, 1995.
In September 1995, Travelers Group made a pro rata distribution to its
stockholders of shares of Class A Common Stock of Transport Holdings Inc.,
which at the time was a wholly owned subsidiary of Travelers Group and was
the indirect owner of the business of Transport Life. Immediately prior to
this distribution, the Company distributed Transport, an indirect wholly
owned subsidiary of the Company, to TIGI as a return of capital, resulting in
a reduction in additional paid-in capital of $334 million. The results of
Transport through September 1995 are included in income from continuing
operations.
3. COMMERCIAL PAPER AND LINES OF CREDIT
The Company issues commercial paper directly to investors. No commercial
paper was outstanding at December 31, 1997 and $50 million was outstanding at
December 31, 1996. The Company maintains unused credit availability under
bank lines of credit at least equal to the amount of the outstanding
commercial paper. Interest expense related to the commercial paper was not
significant in 1997 or 1996.
Travelers Group, Commercial Credit Company (CCC) (an indirect wholly owned
subsidiary of Travelers Group) and the Company have an agreement with a
syndicate of banks to provide $1.0 billion of revolving credit, to be
allocated to any of Travelers Group, CCC or the Company. The Company's
participation in this agreement is limited to $250 million. The revolving
credit facility consists of a five-year revolving credit facility that
expires in 2001. At December 31, 1997, $50 million was allocated to the
Company. Under this facility the Company is required to maintain certain
minimum equity and risk-based capital levels. At December 31, 1997, the
Company was in compliance with these provisions. There were no amounts
outstanding under this agreement at December 31, 1997 and 1996. If the
Company had borrowings on this facility, the interest rate would be based
upon LIBOR plus a negotiated margin.
F-12
<PAGE> 62
\ THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. REINSURANCE
The Company participates in reinsurance in order to limit losses, minimize
exposure to large risks, provide additional capacity for future growth and to
effect business-sharing arrangements. Reinsurance is accomplished through
various plans of reinsurance, primarily yearly renewable term coinsurance and
modified coinsurance. The Company remains primarily liable as the direct
insurer on all risks reinsured. During 1997, new universal life business was
reinsured under an 80%/20% quota share reinsurance program and new term life
business was reinsured under a 90%/10% quota share reinsurance program.
Maximum retention of $1.5 million is generally reached on policies in excess
of $7.5 million. For other plans of insurance, it is the policy of the
Company to obtain reinsurance for amounts above certain retention limits on
individual life policies, which limits vary with age and underwriting
classification. Generally, the maximum retention on an ordinary life risk is
$1.5 million.
The Company writes workers' compensation business through its Accident
Department. This business is ceded 100% to an affiliate, The Travelers
Indemnity Company.
A summary of reinsurance financial data reflected within the consolidated
statement of operations and retained earnings is presented below ($ in
millions):
<TABLE>
<CAPTION>
---------------------------------------------------------------------
WRITTEN PREMIUMS 1997 1996 1995
---------------------------------------------------------------------
<S> <C> <C> <C>
Direct $2,148 $1,982 $2,166
Assumed from:
Non-affiliated companies 1 5 --
Ceded to:
Affiliated companies (280) (284) (374)
Non-affiliated companies (273) (309) (302)
---------------------------------------------------------------------
Total Net Written Premiums $1,596 $1,394 $1,490
=====================================================================
<CAPTION>
---------------------------------------------------------------------
EARNED PREMIUMS 1997 1996 1995
---------------------------------------------------------------------
<S> <C> <C> <C>
Direct $2,170 $1,897 $2,067
Assumed from:
Non-affiliated companies 1 5 --
Ceded to:
Affiliated companies (321) (219) (283)
Non-affiliated companies (291) (315) (298)
---------------------------------------------------------------------
Total Net Earned Premiums $1,559 $1,368 $1,486
=====================================================================
</TABLE>
F-13
<PAGE> 63
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Reinsurance recoverables at December 31, 1997 and 1996 include amounts
recoverable on unpaid and paid losses and were as follows ($ in millions):
<TABLE>
<CAPTION>
----------------------------------------------------------
REINSURANCE RECOVERABLES 1997 1996
----------------------------------------------------------
<S> <C> <C>
Life and Accident and Health
Business:
Non-affiliated companies $1,362 $1,497
Property-Casualty Business:
Affiliated companies 2,977 2,361
----------------------------------------------------------
Total Reinsurance Recoverables $4,339 $3,858
==========================================================
</TABLE>
Total reinsurance recoverables at December 31, 1997 and 1996 include $697
million and $720 million, respectively, from MetLife in connection with the
sale of the Company's group life and related businesses. See Note 2.
5. SHAREHOLDER'S EQUITY
Additional Paid-In Capital
The increase of $17 million in additional paid-in capital during 1997 is due
to tax benefits related to exercising Travelers Group stock options by the
Company's employees.
Unrealized Investment Gains (Losses)
An analysis of the change in unrealized gains and losses on investments is
shown in Note 13.
Shareholder's Equity and Dividend Availability
The Company's statutory net income, which includes all insurance
subsidiaries, was $754 million, $656 million, and $235 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
The Company's statutory capital and surplus was $4.12 billion and $3.44
billion at December 31, 1997 and 1996, 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 $551 million is available in 1998 for dividend payments by the Company
without prior approval of the Connecticut Insurance Department. In addition,
under a revolving credit facility, the Company is required to maintain
certain minimum equity and risk based capital levels. The Company is in
compliance with these covenants at December 31, 1997 and 1996.
F-14
<PAGE> 64
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company uses derivative financial instruments, including financial
futures, equity options, forward contracts and interest rate swaps as a means
of hedging exposure to foreign currency, equity price changes and/or interest
rate risk on anticipated transactions or existing assets and liabilities. The
Company does not hold or issue derivative instruments for trading purposes.
These derivative financial instruments have off-balance sheet risk. Financial
instruments with off-balance sheet risk involve, to varying degrees, elements
of credit and market risk in excess of the amount recognized in the balance
sheet. The contract or notional amounts of these instruments reflect the
extent of involvement the Company has in a particular class of financial
instrument. However, the maximum loss of cash flow associated with these
instruments can be less than these amounts. For forward contracts and
interest rate swaps, credit risk is limited to the amounts calculated to be
due the Company on such contracts. Financial futures contracts and purchased
listed option contracts have little credit risk since organized exchanges are
the counterparties.
The Company monitors creditworthiness of counterparties to these financial
instruments by using criteria of acceptable risk that are consistent with
on-balance sheet financial instruments. The controls include credit
approvals, limits and other monitoring procedures.
The Company uses exchange traded financial futures contracts to manage its
exposure to changes in interest rates which arise from the sale of certain
insurance and investment products, or the need to reinvest proceeds from the
sale or maturity of investments. To hedge against adverse changes in interest
rates, the Company enters long or short positions in financial futures
contracts to offset asset price changes resulting from changes in market
interest rates until an investment is purchased or a product is sold.
Margin payments are required to enter a futures contract and contract gains
or losses are settled daily in cash. The contract amount of futures contracts
represents the extent of the Company's involvement, but not future cash
requirements, as open positions are typically closed out prior to the
delivery date of the contract.
At December 31, 1997 and 1996, the Company held financial futures contracts
with notional amounts of $625 million and $169 million, respectively, and a
deferred gain of $.7 million and a deferred loss of $4.1 million and a
deferred gain of $1.2 million, and a deferred loss of $.1 million,
respectively. Total losses of $5.8 million and gains of $2.0 million from
financial futures were deferred at December 31, 1997 and 1996, respectively,
relating to anticipated investment purchases and investment product sales,
and are reported as other liabilities. At December 31, 1997 and 1996, the
Company's futures contracts had no fair value because these contracts were
marked to market and settled in cash daily.
The off-balance sheet risks of equity options, forward contracts, and
interest rate swaps were not significant at December 31, 1997 and 1996.
F-15
<PAGE> 65
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company purchased a 5-year interest rate cap, with a notional amount of
$200 million, from Travelers Group in 1995 to hedge against losses that could
result from increasing interest rates. This instrument, which does not have
off-balance sheet risk, gives the Company the right to receive payments if
interest rates exceed specific levels at specific dates. The premium of $2
million paid for this instrument is being amortized over its life. The
interest rate cap asset is reported at fair value which is $0 and $1 million
at December 31, 1997 and 1996, respectively.
Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Company issues fixed and variable rate
loan commitments and has unfunded commitments to partnerships. The
off-balance sheet risk of these financial instruments was not significant at
December 31, 1997 and 1996.
Fair Value of Certain Financial Instruments
The Company uses various financial instruments in the normal course of its
business. Fair values of financial instruments that are considered insurance
contracts are not required to be disclosed and are not included in the
amounts discussed.
At December 31, 1997 and 1996, investments in fixed maturities had a carrying
value and a fair value of $21.5 billion and $19.6 billion, respectively. See
Notes 1 and 13.
At December 31, 1997 and 1996, mortgage loans had a carrying value of $2.9
billion, which approximated 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 $143 million and $174 million of financial instruments
classified as other assets approximated their fair values at December 31,
1997 and 1996, respectively. The carrying values of $2.0 billion and $850
million of financial instruments classified as other liabilities also
approximated their fair values at December 31, 1997 and 1996, respectively.
Fair value is determined using various methods, including discounted cash
flows, as appropriate for the various financial instruments.
At December 31, 1997, contractholder funds with defined maturities had a
carrying value of $2.3 billion and a fair value of $2.3 billion, compared
with a carrying value of $1.4 billion and a fair value of $1.5 billion at
December 31, 1996. The fair value of these contracts is determined by
discounting expected cash flows at an interest rate commensurate with the
Company's credit risk and the expected timing of cash flows. Contractholder
funds without defined maturities had a carrying value of $9.7 billion and a
fair value of $9.5 billion at December 31, 1997, compared with a carrying
value of $9.1 billion and a fair value of $8.8 billion at December 31, 1996.
These contracts generally are valued at surrender value.
The assets of separate accounts providing a guaranteed return had a carrying
value and a fair value of $260 million and $260 million, respectively, at
December 31, 1997, compared with a carrying value and a fair value of $217
million and $217 million, respectively, at December 31, 1996. The liabilities
of separate accounts providing a guaranteed return had a carrying value and a
fair value of $209 million and $206 million, respectively, at December 31,
1997, compared with a carrying value and a fair value of $208 million and
$204 million, respectively, at December 31, 1996.
F-16
<PAGE> 66
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The carrying values of cash, short-term securities, trading securities,
investment income accrued, trading securities sold not purchased, and
commercial paper approximated their fair values.
The carrying value of policy loans, which have no defined maturities, is
considered to be fair value.
7. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
See Note 6 for a discussion of financial instruments with off-balance sheet
risk.
Litigation
In March 1997, a purported class action entitled Patterman v. The Travelers,
Inc. was commenced in the Superior Court of Richmond County, Georgia,
alleging, among other things, violations of the Georgia RICO statute and
other state laws by an affiliate of the Company, Primerica Financial
Services, Inc. and certain of its affiliates. Plaintiffs seek unspecified
compensatory and punitive damages and other relief. In April 1997, the
lawsuit was removed to the U.S. District Court for the Southern District of
Georgia, and in October 1997, the lawsuit was remanded to the Superior Court
of Richmond County. Later in October 1997, the defendants answered the
complaint, denied liability and asserted numerous affirmative defenses. In
February 1998, the Superior Court of Richmond County transferred the lawsuit
to the Superior Court of Gwinnett County, Georgia, and certified the transfer
order for immediate appellate review. Also in February 1998, plaintiffs
served an application for appellate review of the transfer order; defendants
subsequently opposed that application; and later in February 1998, the Court
of Appeals of the State of Georgia granted plaintiffs' application for
appellate review. Pending appeal proceedings in the trial court have been
stayed. The Company intends to vigorously contest the litigation.
The Company is also a defendant or co-defendant in various other litigation
matters in the normal course of business. Although there can be no
assurances, as of December 31, 1997, 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 and Other Postretirement Benefits
The Company participates in a qualified, noncontributory defined benefit
pension plan sponsored by an affiliate. In addition, the Company provides
certain other postretirement benefits to retired employees through a plan
sponsored by an affiliate. The Company's share of net expense for the
qualified pension and other postretirement benefit plans was not significant
for 1997, 1996 and 1995. Beginning January 1, 1996, the Company's other
postretirement benefit plans were amended to restrict benefit eligibility to
retirees and certain retiree-eligible employees. Previously, covered
employees could become eligible for postretirement benefits if they reached
retirement age while working for the Company.
F-17
<PAGE> 67
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Through plans sponsored by TIGI, the Company also provides defined
contribution pension plans for certain agents. Company contributions are
primarily a function of production. The expense for these plans was not
significant in 1997, 1996 and 1995.
401(k) Savings Plan
Substantially all of the Company's employees are eligible to participate in a
401(k) savings plan sponsored by Travelers Group. Prior to January 1, 1996,
the Company made matching contributions to the 401(k) savings plan on behalf
of participants in the amount of 50% of the first 5% of pre-tax contributions
made by the employee, plus an additional variable matching contribution based
on the profitability of TIGI and its subsidiaries. During 1996, the Company
made matching contributions in an amount equal to the lesser of 100% of the
pre-tax contributions made by the employee or $1,000. Effective January 1,
1997, the Company discontinued matching contributions for the majority of its
employees. The Company's expenses in connection with the 401(k) savings plan
were not significant in 1997, 1996 and 1995.
9. RELATED PARTY TRANSACTIONS
The principal banking functions, including payment of salaries and expenses,
for certain subsidiaries and affiliates of TIGI are handled by two companies.
The Travelers Insurance Company (Life Department) handles banking functions
for the life and annuity operations of Travelers Life and Annuity and some of
its non-insurance affiliates. The Travelers Indemnity Company handles banking
functions for the property-casualty operations, including most of its
property-casualty insurance and non-insurance affiliates. Settlements between
companies are made at least monthly. The Company provides various employee
benefits coverages to employees of 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 shared with affiliated companies. Charges for these services are
shared by the companies on cost allocation methods based generally on
estimated usage by department.
The Company maintains a short-term investment pool in which its insurance
affiliates participate. The position of each company participating in the
pool is calculated and adjusted daily. At December 31, 1997 and 1996, the
pool totaled approximately $2.6 billion and $2.9 billion, respectively. The
Company's share of the pool amounted to $725 million and $196 million at
December 31, 1997 and 1996, respectively, and is included in short-term
securities in the consolidated balance sheet.
The Company sells structured settlement annuities to The Travelers Indemnity
Company in connection with the settlement of certain policyholder
obligations. Such deposits were $88 million, $40 million, and $38 million for
1997, 1996 and 1995, respectively.
The Company markets deferred annuity products and life and health insurance
through its affiliate, Salomon Smith Barney. Premiums and deposits related to
these products were $1.0 billion, $820 million, and $583 million in 1997,
1996 and 1995, respectively.
At December 31, 1996, the Company had an investment of $22 million in bonds
of its affiliate, CCC. This was included in fixed maturities in the
consolidated balance sheet.
F-18
<PAGE> 68
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company had an investment of $1.15 billion and $648 million in common
stock of Travelers Group at December 31, 1997 and 1996, respectively. This
investment is carried at fair value.
The Company participates in a stock option plan sponsored by Travelers Group
that provides for the granting of stock options in Travelers Group common
stock to officers and key employees. To further encourage employee stock
ownership, during 1997 Travelers Group introduced the WealthBuilder stock
option program. Under this program all employees meeting certain requirements
have been granted Travelers Group stock options.
The Company applies APB 25 and related interpretations in accounting for
stock options. Since stock options under the Travelers Group plans are issued
at fair market value on the date of award, no compensation cost has been
recognized for these awards. FAS 123 provides an alternative to APB 25
whereby fair values may be ascribed to options using a valuation model and
amortized to compensation cost over the vesting period of the options.
Had the Company applied FAS 123 in accounting for Travelers Group stock
options, net income would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
YEAR ENDING DECEMBER 31, 1997 1996 1995
($ IN MILLIONS)
-----------------------------------------------------------------------
<S> <C> <C> <C>
Net income, as reported $839 $659 $750
-----------------------------------------------------------------------
FAS 123 pro forma adjustments, (9) (3) (1)
after tax
-----------------------------------------------------------------------
Net income, pro forma $830 $656 $749
</TABLE>
The Company has an interest rate cap agreement with Travelers Group. See Note
6.
10. LEASES
Most leasing functions for TIGI and its subsidiaries are administered by TAP.
In 1996, TAP assumed the obligations for several leases. Rent expense related
to all leases are shared by the companies on a cost allocation method based
generally on estimated usage by department. Rent expense was $15 million, $24
million, and $22 million in 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
--------------------------------------------------
YEAR ENDING DECEMBER 31, MINIMUM OPERATING
($ in millions) RENTAL PAYMENTS
--------------------------------------------------
<S> <C>
1998 $ 49
1999 44
2000 43
2001 45
2002 43
Thereafter 337
--------------------------------------------------
Total Rental Payments $561
==================================================
</TABLE>
F-19
<PAGE> 69
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Future sublease rental income of approximately $73 million will partially
offset these commitments. Also, the Company will be reimbursed for 50% of the
rental expense for a particular lease totaling $218 million, by an affiliate.
Minimum future capital lease payments are not significant.
The Company is reimbursed for use of furniture and equipment through cost
sharing agreements by its affiliates.
11. FEDERAL INCOME TAXES
<TABLE>
<CAPTION>
EFFECTIVE TAX RATE
---------------------------------------------------------------------
For The Year Ended December 31, 1997 1996 1995
($ in millions)
---------------------------------------------------------------------
<S> <C> <C> <C>
Income Before Federal Income Taxes $1,283 $ 975 $ 837
Statutory Tax Rate 35% 35% 35%
---------------------------------------------------------------------
Expected Federal Income Taxes 449 341 293
Tax Effect of:
Non-taxable investment income (4) (3) (4)
Other, net (1) 4 1
=====================================================================
Federal Income Taxes $ 444 $ 342 $ 290
=====================================================================
Effective Tax Rate 35% 35% 35%
---------------------------------------------------------------------
COMPOSITION OF FEDERAL INCOME TAXES
Current:
United States $ 410 $ 263 $ 220
Foreign 24 21 13
---------------------------------------------------------------------
Total 434 284 233
---------------------------------------------------------------------
Deferred:
United States 10 57 52
Foreign -- 1 5
---------------------------------------------------------------------
Total 10 58 57
---------------------------------------------------------------------
Federal Income Taxes $ 444 $ 342 $ 290
=====================================================================
</TABLE>
Tax benefits allocated directly to shareholder's equity for the years ended
December 31, 1997, 1996 and 1995 were $17 million, $8 million and $7 million,
respectively.
F-20
<PAGE> 70
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The net deferred tax liabilities at December 31, 1997 and 1996 were comprised
of the tax effects of temporary differences related to the following assets
and liabilities:
<TABLE>
<CAPTION>
($ in millions) 1997 1996
------- -------
<S> <C> <C>
Deferred Tax Assets:
Benefit, reinsurance and other reserves $ 550 $ 510
Contractholder funds 11 32
Operating lease reserves 68 71
Other employee benefits 102 104
Other 139 121
- -----------------------------------------------------------------------------------
Total 870 838
- -----------------------------------------------------------------------------------
Deferred Tax Liabilities:
Deferred acquisition costs and value of 608 571
insurance in force
Investments, net 484 131
Other 87 93
- -----------------------------------------------------------------------------------
Total 1,179 795
- -----------------------------------------------------------------------------------
Net Deferred Tax (Liability) Asset Before Valuation Allowance (309) 43
Valuation Allowance for Deferred Tax Assets (100) (100)
- -----------------------------------------------------------------------------------
Net Deferred Tax Liability After Valuation Allowance $ (409) $ (57)
- -----------------------------------------------------------------------------------
</TABLE>
Starting in 1994 and continuing for at least five years, the Company and its
life insurance subsidiaries will file a consolidated federal income tax
return. Federal income taxes are allocated to each member of the consolidated
group on a separate return basis adjusted for credits and other amounts
required by the consolidation process. Any resulting liability will be paid
currently to the Company. Any credits for losses will be paid by the Company
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 $100 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 if
life/non-life consolidation is elected in 1999, 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 1997.
The initial recognition of any benefit produced by the reversal of the
valuation allowance will be recognized by reducing goodwill.
At December 31, 1997, the Company had 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 $932 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
$326 million.
F-21
<PAGE> 71
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. NET INVESTMENT INCOME
<TABLE>
<CAPTION>
---------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
---------------------------------------------------------------------
<S> <C> <C> <C>
GROSS INVESTMENT INCOME
Fixed maturities $1,460 $1,387 $1,248
Mortgage loans 291 334 419
Policy loans 137 156 166
Real estate held for sale 88 94 111
Other, including trading 150 77 97
securities
---------------------------------------------------------------------
2,126 2,048 2,041
---------------------------------------------------------------------
Investment expenses 89 98 157
---------------------------------------------------------------------
Net investment income $2,037 $1,950 $1,884
---------------------------------------------------------------------
</TABLE>
13. INVESTMENTS AND INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) for the periods were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
---------------------------------------------------------------------
<S> <C> <C> <C>
REALIZED INVESTMENT GAINS
Fixed maturities $71 $(63) $(43)
Equity securities (9) 47 36
Mortgage loans 59 49 47
Real estate held for sale 67 33 18
Other 11 (1) 48
---------------------------------------------------------------------
Total Realized Investment Gains $199 $65 $106
---------------------------------------------------------------------
</TABLE>
F-22
<PAGE> 72
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Changes in net unrealized investment gains (losses) that are included as a
separate component of shareholder's equity were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
-------------------------------------------------------------------------
<S> <C> <C> <C>
UNREALIZED INVESTMENT GAINS
Fixed maturities $ 446 $ (323) $1,974
Equity securities 25 (35) 46
Other 520 220 200
-------------------------------------------------------------------------
Total Realized Investment Gains 991 (138) 2,220
-------------------------------------------------------------------------
Related taxes 350 (43) 778
-------------------------------------------------------------------------
Change in unrealized investment gains
(losses) 641 (95) 1,442
Balance beginning of year 587 682 (760)
-------------------------------------------------------------------------
Balance End of Year $1,228 $ 587 $ 682
-------------------------------------------------------------------------
</TABLE>
Included in Other are gains of $506 million, $203 million and $214 million
for 1997, 1996 and 1995, respectively, related to appreciation of Travelers
Group stock.
Fixed Maturities
Proceeds from sales of fixed maturities classified as available for sale were
$7.6 billion, $10.2 billion and $6.8 billion in 1997, 1996 and 1995,
respectively. Gross gains of $170 million, $107 million and $80 million and
gross losses of $99 million, $175 million and $124 million in 1997, 1996 and
1995, respectively, were realized on those sales.
Fair values of investments in fixed maturities are based on quoted market
prices or dealer quotes or, if these are not available, discounted expected
cash flows using market rates commensurate with the credit quality and
maturity of the investment. The fair value of investments for which a quoted
market price or dealer quote are not available amounted to $5.1 billion and
$4.6 billion at December 31, 1997 and 1996, respectively.
F-23
<PAGE> 73
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The amortized cost and fair value of investments in fixed maturities were as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
DECEMBER 31, 1997 GROSS GROSS
($ in millions) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $ 3,842 $ 124 $ 2 $ 3,964
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 1,580 149 1 1,728
Obligations of states, municipalities
and political subdivisions 78 8 -- 86
Debt securities issued by
foreign governments 622 31 4 649
All other corporate bonds 14,548 547 24 15,071
Redeemable preferred stock 12 1 -- 13
- ---------------------------------------------------------------------------------------
Total Available For Sale $20,682 860 31 $21,511
- ---------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------
DECEMBER 31, 1996 GROSS GROSS
($ in millions) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $ 3,821 $ 71 $ 23 $ 3,869
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 1,329 56 4 1,381
Obligations of states, municipalities and
political subdivisions 89 1 1 89
Debt securities issued by foreign
governments 618 26 3 641
All other corporate bonds 13,421 273 43 13,651
Redeemable preferred stock 6 -- -- 6
- ----------------------------------------------------------------------------------------
Total Available For Sale $19,284 $ 427 $ 74 $19,637
- ----------------------------------------------------------------------------------------
</TABLE>
F-24
<PAGE> 74
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The amortized cost and fair value of fixed maturities at December 31, 1997,
by contractual maturity, are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
----------------------------------------------------------
($ in millions) AMORTIZED FAIR
COST VALUE
----------------------------------------------------------
<S> <C> <C>
MATURITY:
Due in one year or less $ 1,184 $ 1,191
Due after 1 year through 5 years 5,200 5,335
Due after 5 years through 10 years 5,332 5,515
Due after 10 years 5,124 5,506
---------------------------------------------------------
16,840 17,547
---------------------------------------------------------
Mortgage-backed securities 3,842 3,964
---------------------------------------------------------
Total Maturity $20,682 $21,511
---------------------------------------------------------
</TABLE>
The Company makes 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.
At December 31, 1997 and 1996, the Company held CMOs classified as available
for sale with a fair value of $2.1 billion and $2.0 billion, respectively.
Approximately 72% and 88%, respectively, of the Company's CMO holdings are
fully collateralized by GNMA, FNMA or FHLMC securities at December 31, 1997
and 1996. In addition, the Company held $1.9 billion and $1.9 billion of
GNMA, FNMA or FHLMC mortgage-backed pass-through securities at December 31,
1997 and 1996, respectively. Virtually all of these securities are rated AAA.
F-25
<PAGE> 75
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Equity Securities
The cost and fair values of investments in equity securities were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
EQUITY SECURITIES:
GROSS GROSS
($ in millions) UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Common stocks $179 $ 34 $ 11 $202
Non-redeemable preferred stocks 301 13 4 310
-----------------------------------------------------------------------------
Total Equity Securities $480 $ 47 $ 15 $512
-----------------------------------------------------------------------------
DECEMBER 31, 1996
Common stocks $212 $ 39 $ 30 $221
Non-redeemable preferred stocks 118 2 3 117
-----------------------------------------------------------------------------
Total Equity Securities $330 $ 41 $ 33 $338
-----------------------------------------------------------------------------
</TABLE>
Proceeds from sales of equity securities were $341 million, $487 million and
$379 million in 1997, 1996 and 1995, respectively. Gross gains of $53
million, $64 million and $27 million and gross losses of $62 million, $11
million and $2 million in 1997, 1996 and 1995, respectively, were realized on
those sales.
Mortgage Loans and Real Estate Held For Sale
Underperforming assets include delinquent mortgage loans, loans in the
process of foreclosure, foreclosed loans and loans modified at interest rates
below market.
At December 31, 1997 and 1996, the Company's mortgage loan and real estate
held for sale portfolios consisted of the following ($ in millions):
<TABLE>
<CAPTION>
----------------------------------------------------------
1997 1996
----------------------------------------------------------
<S> <C> <C>
Current Mortgage Loans $2,866 $2,869
Underperforming Mortgage Loans 3 51
----------------------------------------------------------
Total 2,869 2,920
----------------------------------------------------------
Real Estate Held For Sale 134 297
----------------------------------------------------------
Total $3,003 $3,217
----------------------------------------------------------
</TABLE>
F-26
<PAGE> 76
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Aggregate annual maturities on mortgage loans at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
------------------------------------------------
YEAR ENDING DECEMBER 31,
($ in millions)
------------------------------------------------
<S> <C>
Past Maturity $ 54
1998 243
1999 252
2000 321
2001 393
2002 121
Thereafter 1,485
------------------------------------------------
Total $2,869
================================================
</TABLE>
Joint Venture
In October 1997, the Company and Tishman Speyer Properties (Tishman), a
worldwide real estate owner, developer and manager, formed a joint real
estate venture with an initial equity commitment of $792 million. The Company
and certain of its affiliates committed $420 million in real estate equity
and $100 million in cash while Tishman committed $272 million in properties
and cash. Both companies are serving as asset managers for the venture and
Tishman is primarily responsible for the venture's real estate acquisition
and development efforts.
Trading Securities
Trading securities are held in a special purpose subsidiary, Tribeca
Investments LLC.
<TABLE>
<CAPTION>
-----------------------------------------------------
TRADING SECURITIES OWNED 1997
<S> <C>
Merger arbitrage $352
Convertible bond arbitrage 370
Other 78
-----------------------------------------------------
Total $800
-----------------------------------------------------
TRADING SECURITIES SOLD NOT YET PURCHASED
Merger arbitrage $213
Convertible bond arbitrage 249
-----------------------------------------------------
Total $462
-----------------------------------------------------
</TABLE>
The Company's trading portfolio investments and related liabilities are
normally held for periods less than six months. Therefore, expected future
cash flows for these assets and liabilities are expected to be realized in
less than one year.
F-27
<PAGE> 77
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Concentrations
At December 31, 1997 and 1996, the Company had no concentration of credit
risk in a single investee exceeding 10% of consolidated 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 $1.4
billion and $1.1 billion at December 31, 1997 and 1996, respectively. The
Company defines its below investment grade assets as those securities rated
"Ba1" or below by external rating agencies, or the equivalent by internal
analysts when a public rating does not exist. Such assets include publicly
traded below investment grade bonds and certain other privately issued bonds
that are classified as below investment grade loans.
The Company had concentrations of investments, primarily fixed maturities, in
the following industries:
<TABLE>
<CAPTION>
-------------------------------------------------
($ in millions) 1997 1996
-------------------------------------------------
<S> <C> <C>
Banking $2,215 $1,959
Finance 1,556 1,823
Electric Utilities 1,377 1,093
Asset-Backed Credit Cards 778 688
-------------------------------------------------
</TABLE>
Below investment grade assets included in the preceding table were not
significant.
At December 31, 1997 and 1996, concentrations of mortgage loans were for
properties located in highly populated areas in the states listed below:
<TABLE>
<CAPTION>
-------------------------------------------------
($ in millions) 1997 1996
-------------------------------------------------
<S> <C> <C>
California $794 $643
New York 310 297
-------------------------------------------------
</TABLE>
Other mortgage loan investments are relatively evenly dispersed throughout
the United States, with no holdings in any state exceeding $284 million and
$258 million at December 31, 1997 and 1996, respectively.
Concentrations of mortgage loans by property type at December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------
($ in millions) 1997 1996
-------------------------------------------------
<S> <C> <C>
Office $1,382 $1,208
Agricultural 771 693
Apartment 204 291
Hotel 201 217
-------------------------------------------------
</TABLE>
F-28
<PAGE> 78
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 consolidated balance sheets that were non-income
producing for the preceding 12 months were insignificant.
Restructured Investments
The Company had mortgage loans and debt securities that were restructured at
below market terms totaling approximately $7 million and $18 million at
December 31, 1997 and 1996, 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 loans amounted to $.9 million in 1997 and $5 million in 1996. Interest
on these assets, included in net investment income, aggregated $.2 million
and $2 million in 1997 and 1996, respectively.
14. DEPOSIT FUNDS AND RESERVES
At December 31, 1997, the Company had $24.0 billion of life and annuity
deposit funds and reserves. Of that total, $13.0 billion is not subject to
discretionary withdrawal based on contract terms. The remaining $11.0 billion
is for life and annuity products that are subject to discretionary withdrawal
by the contractholder. Included in the amount that is subject to
discretionary withdrawal is $2.0 billion of liabilities that are
surrenderable with market value adjustments. Also included are an additional
$5.2 billion of the life insurance and individual annuity liabilities which
are subject to discretionary withdrawals, and have an average surrender
charge of 4.8%. In the payout phase, these funds are credited at
significantly reduced interest rates. The remaining $3.8 billion of
liabilities are surrenderable without charge. More than 16.8% of these relate
to individual life products. These risks would have to be underwritten again
if transferred to another carrier, which is considered a significant
deterrent against withdrawal by long-term policyholders. Insurance
liabilities that are surrendered or withdrawn are reduced by outstanding
policy loans and related accrued interest prior to payout.
F-29
<PAGE> 79
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The following table reconciles net income to net cash provided by operating
activities:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income From Continuing Operations $ 839 $ 633 $ 547
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized gains (199) (65) (106)
Deferred federal income taxes 10 58 57
Amortization of deferred policy
acquisition costs and value of
insurance in force 293 281 290
Additions to deferred policy
acquisition costs (471) (350) (454)
Investment income accrued 14 2 (9)
Premium balances receivable 3 (6) (8)
Insurance reserves and accrued expenses 131 (1) 291
Other 206 255 62
- --------------------------------------------------------------------------------
Net cash provided by operating activities 826 807 670
Net cash used in discontinued operations -- (350) (596)
Net cash provided by operations $ 826 $ 457 $ 74
- --------------------------------------------------------------------------------
</TABLE>
16. NON-CASH INVESTING AND FINANCING ACTIVITIES
Significant noncash investing and financing activities include: a) the
conversion of $119 million of real estate held for sale to other invested
assets as a joint venture in 1997; b) the 1995 transfer of assets with a fair
market value of approximately $1.5 billion and statutory reserves and other
liabilities of approximately $1.5 billion to MetLife (see Note 2); c) the
1995 return of capital of Transport to TIGI (see Note 2); d) the acquisition
of real estate through foreclosures of mortgage loans amounting to $10
million, $117 million and $97 million in 1997, 1996 and 1995, respectively;
e) the acceptance of purchase money mortgages for sales of real estate
aggregating $4 million, $23 million and $27 million in 1997, 1996 and 1995,
respectively.
F-30
<PAGE> 80
TRAVELERS INSURANCE COMPANY
A Member of Travelers Group [LOGO]
L-20232 Individual Variable Life Insurance
TIC ED 5/98 Contracts Issued by
The Travelers Insurance Company
<PAGE> 81
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 33-770 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 33-770a 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 expected to be incurred, and the risks assumed by the
Company.
<PAGE> 82
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
- - The facing sheet.
- - The Prospectus.
- - The undertaking to file reports.
- - The signatures.
- - Written consents of the following persons
Attachments:
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.)
B. Consent and Actuarial Opinion of Mahir A. Dugentas, ASA,
pertaining to the illustrations contained in the Prospectus.
C. Consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.
Exhibits:
1. Resolution of the Board of Directors of The Travelers Insurance
Company authorizing the establishment of the Registrant.
(Incorporated herein by reference to Exhibit 1 to the Registration
Statement on Form S-6 filed October 29, 1996.)
2. Not applicable.
3(a). Form of Distribution Agreement among the Registrant, The Travelers
Insurance Company and Tower Square Securities, Inc. (Incorporated
herein by reference to Exhibit 3(a) to the Registration Statement
on Form S-6 filed October 29, 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 29, 1996.)
3(c). Agents Agreement, including schedule of sales commissions.
(Incorporated herein by reference to Exhibit 3(c) to Pre-Effective
No. 1 to the Registration Statement on Form S-6 filed April 16,
1997.)
4. None
5. Variable Life Insurance Policy. (Incorporated herein by reference
to Exhibit 5 to the Registration Statement on Form S-6 filed
October 29, 1996.)
6(a). Charter of The Travelers Insurance Company, as amended on October
19, 1994. (Incorporated herein by reference to Exhibit 6(a) to
the Registration Statement on Form S-6 filed October 29, 1996.)
6(b). By-Laws of The Travelers Insurance 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 29, 1996.)
<PAGE> 83
7. None
8. None
9. None
10. Application for Variable Life Insurance Policy.
11. Opinion of Katherine M. Sullivan, General Counsel, regarding the
legality of securities being registered.
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 13
to the Registration Statement on Form S-6 filed October 29, 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 29, 1996.)
<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant, The
Travelers Variable Life Insurance Separate Account Four, certifies that it
meets all of the requirements for effectiveness of this post-effective
amendment to this registration statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this post-effective amendment 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 24th day of April, 1998.
THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT FOUR
(Registrant)
THE TRAVELERS INSURANCE COMPANY
(Depositor)
By: *IAN R. STUART
Ian R. Stuart
Senior Vice President, Chief Financial Officer
Chief Accounting Officer and Controller
The Travelers Insurance Company
Pursuant to the requirements of the Securities Act of 1933, this post-effective
amendment to this registration statement has been signed by the following
persons in the capacities indicated on April 24, 1998.
<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
(Ian R. Stuart) Officer and Controller
*KATHERINE M. SULLIVAN Director
- -------------------------------------------
(Katherine M. Sullivan)
*MARC P. WEILL Director
- -------------------------------------------
(Marc P. Weill)
</TABLE>
*By: Ernest J. Wright, Attorney-in-Fact
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- ------- ----------- -----------------
<S> <C>
Attachments:
A. Consent of Katherine M. Sullivan, General Counsel, Electronically
to the filing of her opinion as an exhibit to this See Exhibit 11
Registration Statement and to the reference to her
opinion under the caption "Legal Proceedings and
Opinion" in the Prospectus.
B. Consent and Actuarial Opinion of Mahir A. Dugentas, Electronically
ASA, pertaining to the illustrations contained in the
Prospectus.
C. Consent of KPMG Peat Marwick LLP, Independent Electronically
Certified Public Accountants.
Exhibits:
1. Resolution of the Board of Directors of The Travelers
Insurance Company authorizing the establishment
of the Registrant. (Incorporated herein by reference to
Exhibit 1 to the Registration Statement on Form S-6
filed October 29, 1996.)
3(a). Form of Distribution Agreement among the Registrant,
The Travelers Insurance Company and Tower Square
Securities, Inc. (Incorporated herein by reference to
Exhibit 3(a) to the Registration Statement on Form S-6
filed October 29, 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 29, 1996.)
3(c). Agents Agreement, including schedule of sales commissions.
(Incorporated herein by reference to Exhibit 3(c) to Pre-
Effective No. 1 to the Registration Statement on Form S-6
filed April 16, 1997.)
5. Variable Life Insurance Policy. (Incorporated herein by
reference to Exhibit 5 to the Registration Statement on
Form S-6 filed October 29, 1996.)
6(a). Charter of The Travelers Insurance Company, as amended
on October 19, 1994. (Incorporated herein by reference to
Exhibit 6(a) to the Registration Statement on Form S-6
filed October 29, 1996.)
6(b). By-Laws of The Travelers Insurance 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 29, 1996.)
</TABLE>
<PAGE> 86
<TABLE>
<CAPTION>
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, Electronically
regarding the legality of securities being registered.
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 29, 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 29, 1996.)
</TABLE>
<PAGE> 1
ATTACHMENT B
April 20, 1998
ACTUARIAL OPINION
The illustrations included in the prospectus have been based on
assumptions and charges which are consistent with the provisions of the
Portfolio Architect Life contract. The rate structure of the contract has not
been designed to make the relationship between premiums and benefits, as shown
in the illustrations, appear more favorable for contract owners at the ages
illustrated than for contract owners at other ages.
/s/Mahir Dugentas, A.S.A., M.A.A.A.
Director of Life Pricing
<PAGE> 1
ATTACHMENT C
Consent of Independent Certified Public Accountants
The Board of Directors
The Travelers Insurance Company
We consent to the use of our report included herein and to the reference to our
firm as experts under the heading "Independent Accountants".
KPMG Peat Marwick LLP
Hartford, Connecticut
April 24, 1998
<PAGE> 1
PART ONE
LIFE INSURANCE APPLICATION [TRAVELERS LOGO]
GENERAL INSTRUCTIONS
- - Please PRINT legibly with black ink.
- - Answer all appropriate questions fully.
- - Please note instructions for each section provided in italicized print.
- - Please complete any necessary supplemental forms.
- - For spouse rider, submit a separate fully completed Part 1 application.
- - The Fair Credit Reporting Act/Medical Information Bureau notice and the
Description of Information Practices must be detached and given to the
Proposed Insured.
- - If additional space is needed for special instructions, please attach a
separate page.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING REQUIREMENTS ORDERED:
<S> <C> <C> <C>
[ ] Blood Profile [ ] Paramed Exam* [ ] ECG [ ] Inspection Report
[ ] Urine Specimen [ ] M.D. Exam [ ] Treadmill ECG [ ] APS
</TABLE>
*Be sure to inform the Paramed vendor of the application state for this sale so
they will use the correct Part Two form.
<TABLE>
<CAPTION>
ATTACHED FORMS ARE REQUIRED TO PROCESS THIS CASE:
(Use correct variation of forms for the state in which the application was signed.)
<S> <C> <C>
[ ] HIV Consent Form [ ] Juvenile Supplement [ ] Family Insurance Supplement
[ ] State-Required Replacement Form [ ] State-Required Supplement [ ] VUL Supplement
[ ] Life Financial Supplement [ ] Signed Illustration [ ] Other
--------------------------------------
CONTACT PERSON: Name
---------------------------------------------------------------------------------------------------
Phone ( ) Fax ( )
------------------------------------------------ ---------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AGENT(S) INFORMATION:
- -------------------------------------------------------------------------------------------------------------------------------
NAME AREA CODE & SOCIAL SECURITY # OR PRODUCER CODE COMMISSION
TELEPHONE NO. (IF APPLICABLE) SPLIT*
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -
- -------------------------- ----------------- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- %
- -
- -------------------------- ----------------- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- %
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*only if multiple agents
GENERAL AGENCY'S BRANCH/PRODUCER CODE (IF APPLICABLE): /
- - - - - - - - - - - -
OR BANK OR BROKER/DEALER NAME:
-------------------------------------------
SPECIAL INSTRUCTIONS:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[ ] Comments continued on attached separate page
THE TRAVELERS INSURANCE COMPANY
THE TRAVELERS LIFE AND ANNUITY COMPANY
ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
<PAGE> 2
<TABLE>
<S> <C> <C>
AGENT - INDICATE COMPANY: [ ] THE TRAVELERS INSURANCE COMPANY [ ] THE TRAVELERS LIFE AND ANNUITY COMPANY
</TABLE>
PART ONE
LIFE INSURANCE APPLICATION [TRAVELERS LOGO]
GENERAL INFORMATION - PROPOSED INSURED
Complete for all policies (please print). Use black ink. Questions must be
answered by the Proposed Insured.
If the Proposed Insured is under age 16, complete Juvenile Supplement.
<TABLE>
<S> <C> <C> <C>
1. Full Name (print as to appear in policy)
--------------------------------------------------------------------------------------
First Middle Last
2. Social Security No. Date of Birth Birthplace
------------- -------------- ------------------------------------------------------
State Country (if other than U.S.)
Sex: [ ] M [ ] F Marital Status: [ ] S [ ] M [ ] D [ ] W Current Citizen of
-------------------------
Country
3. Residence Address Apt. No.
----------------------------------------------------------------------------------- ----------------
Street and number
City State Zip Phone Number ( )
---------------------------------------- ---------- ------------- -----------------------------------
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 ( )
---------------------------------------- ---------- ------------- -----------------------------------
Check Calling Preference: [ ] Home [ ] Business Best Time To Call
----------------------------------------
7. Occupation (Position or Title) Annual Salary $ Other Income $
--------------------- ------------------ -------------------------
</TABLE>
<TABLE>
<CAPTION>
8. State all life insurance now in effect on Proposed Insured. If "None", so state.
- -------------------------------------------------------------------------------------------------
Company/Year of Issue Face Amount Amount of ADB Personal (P) or
Business (B) Coverage?
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
Will any life insurance, including annuities, in this or any other company be
replaced, discontinued, reduced or changed if insurance now applied for is
issued? (If "YES" provide details below, continue in "ADDITIONAL INFORMATION"
Section) .....[ ] YES [ ] N0
Insured
-----------------------------------------------
Company
-----------------------------------------------
Policy Number
-----------------------------------------
Amount $
----------------------------------------------
THE TRAVELERS INSURANCE COMPANY
THE TRAVELERS LIFE AND ANNUITY COMPANY
ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
<PAGE> 3
POLICY INFORMATION
Also complete the LIFE FINANCIAL SUPPLEMENT for face amounts of $1,000,000
and over, the FAMILY INSURANCE SUPPLEMENT for child coverage, and the
VARIABLE LIFE SUPPLEMENT for variable life policies.
<TABLE>
<CAPTION>
COVERAGE INFORMATION:
<S> <C> <C>
9. Life Insurance Product Stated Amount $
----------------------------- --------------------------------------------------------
Duration/Term Period Death Benefit (UL Only): [ ] Level [ ] Increasing
--------------------------------
</TABLE>
<TABLE>
<CAPTION>
10. Supplemental Benefits/Riders (WHERE APPLICABLE AND IF AVAILABLE):
<S> <C>
TERM-ONLY RIDERS: UL- AND VUL-ONLY RIDERS:
[ ] Annual Benefit Increase [ ] Annual Renewable Term $
----------------
[ ] Extension of Premium/Rate Guarantee [ ] COLA
[ ] Premium Waiver [ ] Estate Protector
[ ] Insured Term $ ; Reallocate on Anniversary
----------------- -------
TERM, UL AND VUL RIDERS: [ ] Monthly Deduction Waiver
[ ] Accelerated Benefits [ ] Policy Split Option [ ] Plus Option
[ ] Accidental Death [ ] Scheduled Increase Option %
[ ] Child Term units --------
------- [ ] Specified Amount Payment/Waiver $
-----------------
[ ] [ ] Spousal Term (complete a separate Part 1 on spouse) $
---------------------------------------- --------------
</TABLE>
<TABLE>
<S> <C> <C>
11. A) Premium Payment Plan (check one box): [ ] Annual [ ] Semi-Annual
[ ] Monthly Pre-Authorized Collection/Payor Soc. Sec. No. [ ] Single [ ] Other
---------------------------------
B) Check Billing Preference: [ ] Home [ ] Business [ ] Other
If "Other", list Premium Payor and Billing Address:
----------------------------------------------------------------------
12. A) Quoted Modal Premium $ B) Classic UL only: Selected Premium $
------------------------ ----------------------------------
13. Will this application increase an existing policy? [ ] YES [ ] NO If "YES", Policy #
-----------------------------
Current Stated Face Amount $ New Stated Face Amount $
------------------------------------ ----------------------------------
Current Modal Premium $ New Modal Premium $
----------------------------------------- ---------------------------------------
</TABLE>
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 ownership
interests pass to:
<TABLE>
<S> <C>
[ ] Surviving Owner(s) (Joint Tenants) or [ ] Deceased Owner's Estate (Tenants in Common)
</TABLE>
14. Policy Owner's Full Name and Social Security or Tax ID Number
--------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
If succeeding ownership is desired, indicate name, address and relationship to
Insured in "ADDITIONAL INFORMATION" section on following page. Succeeding owner
will become owner upon original owner's death.
BENEFICIARY
Payment due to 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.
15. Beneficiary Name (specify full name(s) and relationships)
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
<PAGE> 4
CONSUMER NOTICE
We may provide information about you or your policy or account, including
information from this application, for marketing and administrative purposes
and share such information with our corporate affiliates. You agree that any
such information may be used by us or an affiliate to determine whether you
qualify for or to offer other Travelers Group financial services.
[ ] If checked, you have indicated that you do not wish to have any
such information shared with our affiliate(s).
TOBACCO USE DECLARATION
16. My use of tobacco products, including (but not limited to) cigarettes,
cigars, pipes or any smoking materials, snuff, or chewing tobacco is as
indicated below:
<TABLE>
<S> <C> <C>
[ ] I have NEVER used tobacco products of any form.
[ ] I have not used tobacco products of any form in the past months/ years.
------- -------
[ ] I currently use tobacco.
</TABLE>
GENERAL RISK INFORMATION
Please give details to all "YES"answers in
the Additional Information section below.
<TABLE>
<CAPTION>
HAS THE PROPOSED INSURED:
<S> <C> <C> <C>
YES NO
17. 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.)
18. 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.).......................................................... [ ] [ ]
19. Engaged in automobile or motorcycle racing, sports parachuting, skydiving, hang gliding, skin or
scuba diving or any other hazardous sport? (If "YES", complete the AVOCATION SUPPLEMENT.).............. [ ] [ ]
20. A) In the past 5 years, been arrested for or convicted of driving while intoxicated or driving
under the influence? (If "YES", list driver's license number and details.)............................. [ ] [ ]
B) In the past 5 years, been arrested for or convicted of any other motor vehicle violation?........... [ ] [ ]
(If "YES", list driver's license number and details.)
21. Do you intend to reside or travel out of the United States or Canada?.................................. [ ] [ ]
(If "YES", complete the FOREIGN TRAVEL OR RESIDENCE SUPPLEMENT.)
</TABLE>
ADDITIONAL INFORMATION
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<PAGE> 5
MEDICAL HISTORY
1. Print Proposed Insured's name in full:
-------------------------------------
2. Name and address of personal physician:
-------------------------------------
3. Date and reason last consulted:
--------------------------------------------
4. What was the diagnosis and treatment:
-------------------------------------
ANSWER ALL QUESTIONS UNLESS PART TWO (MEDICAL EXAM) IS REQUIRED. For all "YES"
responses, provide in the "DETAILS" section the question number, names and
addresses of doctors, and when and why consulted. Include diagnoses, 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, seizure, asthma or drug or alcohol abuse.
<TABLE>
<S> <C>
5. Has the Proposed Insured ever had any indication of,
been treated or received medical consultation for: (circle all that apply)........................[ ] YES [ ] NO
Chest Pain Elevated Cholesterol Positive Test for Infection by the AIDS (HIV) virus
Heart Murmur Diabetes AIDS/ARC
Heart Attack Emphysema Arthritis
High Blood Pressure Pneumonia Sexually Transmitted Disease
Stroke Tuberculosis Depression
Paralysis Asthma Anxiety
Seizure Tumor Emotional Disorder
Deformity/Lameness Cancer Alcohol/Drug Abuse
6. Has the Proposed Insured ever had any disorder of: (circle all that apply)........................[ ] YES [ ] NO
Skin Ears Kidney
Neck Thyroid Genitourinary System
Back Heart Immune System
Spine Lungs Nervous System
Bones Breasts Blood
Joints Gastrointestinal System Lymph Nodes
Eyes Liver Blood Vessels
7. Other than above, within the past 5 years, has Proposed Insured had any illness, injury, surgery,
physical exam, consultation, EKG, X-Ray, or other medical test, or been a patient in a hospital
or other medical facility?........................................................................[ ] YES [ ] NO
8. Has the Proposed Insured ever used cocaine, marijuana, heroin or any other illicit drug or been
advised to restrict the use of alcohol or any other drug?.........................................[ ] YES [ ] NO
9. Does the Proposed Insured consume alcoholic beverages? (If "YES", list type,
amount and frequency of use.).....................................................................[ ] YES [ ] NO
10. Height: ft. in. Weight : lbs; weight loss in past 12 mos. lbs.
------- ------- ------- -------
11. Has a parent, brother or sister ever had heart disease, stroke, cancer, diabetes, high blood
pressure or kidney disease?........................................................................[ ] YES [ ] NO
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
12. FAMILY HISTORY Age Condition of Health Age Cause of Death
(if living) (at death)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Father
- ----------------------------------------------------------------------------------------------------
Mother
- ----------------------------------------------------------------------------------------------------
Brothers and Sisters
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 6
DETAILS OF "YES" ANSWERS AND ADDITIONAL INFORMATION
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AUTHORIZATION SECTION
AUTHORIZATION FOR THE RELEASE OF INFORMATION: THE PROPOSED INSURED(S)
authorizes The Travelers, its affiliates, its Reinsurers, insurance support
organizations, and their representatives to obtain 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 spouse and children to
furnish such information to The Travelers, its affiliates, 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.
The Proposed Insured(s) and Applicant, if different, have read this
authorization and understand they have a right to receive a copy.
The Proposed Insured(s) acknowledge receipt of the following notices: "Your
Privacy and the Fair Credit Reporting Act," "Medical Information Bureau
Disclosure Notice", and "Description of Information Practices".
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 WILL FORM THE BASIS FOR ANY
INSURANCE ISSUED; (B) EXCEPT AS STATED IN THE ATTACHED TEMPORARY INSURANCE
AGREEMENT, 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; AND (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.
NOTICE OF INSURANCE FRAUD: Any person who knowingly and with intent to defraud
any insurance company or other person files an application for insurance or
statement of claim containing any materially false information or conceals for
the purpose of misleading, information concerning any fact material thereto
commits a fraudulent insurance act, which is a crime and subjects such person
to criminal and civil penalties. By signing below, I acknowledge that I have
read the above information.
<TABLE>
<S> <C> <C> <C> <C> <C>
Proposed Insured's Name
----------------------------------------------------------------------------------------------------------
Proposed Insured's Signature X
-----------------------------------------------------------------------------------------------------
Applicant's Signature (if other than Proposed Insured)
--------------------------------------------------------------------------
Date / / Application taken at
- --------------------------------- --------------------------------------------------------------------------
City State
Witness' Signature Date / /
--------------------------------------------------------------- -----------------------------------------
Agent's Name
-------------------------------------------------------
</TABLE>
Note: If not personally witnessed by the agent, each
signature must be witnessed by someone present at the
time the application was signed.
<PAGE> 7
AGENT'S CERTIFICATE
To help avoid processing delays, answers to the following
questions MUST be furnished with the application.
<TABLE>
<S> <C> <C>
1. Are you properly "authorized" to write business for The Travelers Insurance Company or The Travelers Life
and Annuity Company in the state where the application was taken? ("Authorized" means that you possess
a current insurance license, with authority to solicit insurance products appropriate to this application;
and that The Travelers has authorized you to represent The Travelers.)..................................... [ ] YES [ ] NO
2. Did anyone assist you in taking or securing the application?............................................... [ ] YES [ ] NO
If "YES", who?
-----------------------------------------------------------------------------------------
3. Who initiated this application?
------------------------------------------------------------------------
4. Did you personally ask the questions and have the application signed in your presence? .................... [ ] YES [ ] NO
5. How long have you known the Proposed Insured?
----------------------------------------------------------
6. Has the Proposed Insured applied for insurance elsewhere in the past 6 months?
(Give details in #14) ................................................................................... [ ] YES [ ] NO
7. a. Will this replace any existing annuity or life insurance?............................................... [ ] YES [ ] NO
b. If "YES", have you given the applicant the appropriate forms regarding replacement?..................... [ ] YES [ ] NO
c. If "YES", have you completed and attached to the application all
applicable state replacement forms?..................................................................... [ ] YES [ ] NO
d. Is this an INTERNAL or EXTERNAL replacement? (Circle one)
8. Is this a 1035 exchange? (If "YES", provide original policy and appropriate forms.)........................ [ ] YES [ ] NO
9. Is the Proposed Insured applying for Long Term Care with The Travelers? ................................... [ ] YES [ ] NO
10. a. Purpose of Insurance:
[ ] Personal (check primary reason):
[ ] Income Protection [ ] Supplemental Savings
[ ] Estate Liquidity [ ] Other
[ ] Business: -----------------------------------------
[ ] Buy/Sell [ ] Key Person [ ] Deferred Compensation
[ ] Executive Bonus [ ] Mortgage/Loan Coverage [ ] Other
---------------------------------
b. If "Buy/Sell", is there like coverage in force or applied for on partner(s)?............................ [ ] YES [ ] NO
c. If there is a Buy/Sell Agreement in place, does the owner and beneficiary of this application
line up with that of the Buy/Sell Agreement?............................................ [ ] N/A [ ] YES [ ] NO
11. If available, is preferred rate being applied for?......................................................... [ ] YES [ ] NO
12. If preferred rate is not available, is standard rate acceptable?........................................... [ ] YES [ ] NO
13. If salary allotment or special plan, give: Mass Marketing Case/Company Name:
----------------------------------------------
Case/Plan Number: Accounting Location Number:
--------------------------------------------- --------------------------------
14. Additional Remarks:
--------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 8
AGENT REPRESENTATION
By signing below, I confirm that the agent representations set forth in the
Travelers Life Insurance Application to which this AGENT REPRESENTATION is
attached are true and accurate. Without limiting the foregoing, I expressly
verify the accuracy of all the information contained in the "AGENT'S
CERTIFICATE" section of this Travelers Life Insurance Application.
I further represent that the Proposed Insured(s) (and the Applicant, if
different), has signed the portions of the application where required, and, to
the best of my knowledge, has read and understands this application.
<TABLE>
<S> <C>
[ ] I did
personally witness the signatures Date
[ ] I did not ------------------------------------
Note: If not personally witnessed by --------------------------------------------------------------------------------
the agent, each signature must be Licensed Agent
witnessed by someone present at the
time the application was signed. --------------------------------------------------------------------------------
Licensed Agent #2 (if applicable)
</TABLE>
NOTES
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<PAGE> 9
PRE-AUTHORIZED COLLECTION
PLEASE ATTACH A VOIDED CHECK AND FIRST TWO MONTH'S PREMIUM. (We will NOT
accept a deposit ticket in place of a voided check.) Make sure your address
and the bank address appear correctly on the check.
<TABLE>
<S> <C> <C> <C>
Name: Phone Number: ( )
------------------------------------------------------ ---------------------------------------------------
Policy Number(s):
-----------------------------------------------------------------------------------------------------------
</TABLE>
I hereby authorize you, the bank, to charge my account in order to cover
monthly premium payments for my policy(ies) with The Travelers Insurance
Company or 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. My
signature below is exactly as I sign my personal checks.
<TABLE>
<S> <C>
--------------------------------------------
Bank Name: Please select date of monthly withdrawal
------------------------------------------------------------ (any date from 1 to 28):
-----------------
--------------------------------------------
Bank Address:
----------------------------------------------------------
Checking Account Number:
-----------------------------------------------
SIGNATURE OF DEPOSITOR: DATE SIGNED:
------------------------------------------------ ---------------------------------------
</TABLE>
TEMPORARY INSURANCE AGREEMENT - ACKNOWLEDGEMENT
IMPORTANT: THE TEMPORARY INSURANCE AGREEMENT ATTACHED BELOW PROVIDES A LIMITED
AMOUNT OF INSURANCE PROTECTION FOR A LIMITED PERIOD OF TIME, SUBJECT TO THE
TERMS OF THE AGREEMENT.
The Health Questions must be completed for the Proposed Insured(s) to be
eligible for Life Insurance protection under the terms of the Agreement.
TEMPORARY INSURANCE AGREEMENT - HEALTH QUESTIONS
IF EITHER OF THE QUESTIONS BELOW IS ANSWERED "YES" OR LEFT BLANK, no agent is
authorized to accept money and no insurance coverage will take effect under
this Agreement. No agent is authorized to accept money on a Proposed Insured
over age 65 (age last birthday) as of the date of this Agreement, nor will any
coverage take effect.
Has any person to be insured:
<TABLE>
<S> <C> <C>
1. Within the past 90 days, been admitted or advised to be admitted to a hospital or other
medical facility, or had surgery performed or recommended?................................................. [ ] YES [ ] NO
2. Within the past 2 years, been treated for heart trouble, chest pain, stroke, cancer or AIDS, or had such
treatment recommended by a physician or other medical practitioner?........................................ [ ] YES [ ] NO
</TABLE>
I (We) hereby acknowledge possession of the Temporary Insurance Agreement
bearing the same date and serial number as my (our) application. I (We) certify
that I (We) have read the Temporary Insurance Agreement, and understand and
acknowledge the terms of such Agreement. I (We) declare that the answers to the
Health Questions are true to the best of my (our) knowledge and belief.
<TABLE>
<S> <C> <C> <C>
An Advance Payment in the amount of $ has been made in connection with the application.
-------------------------------------
Signed at this day of , .
---------------------------------------- -------------------- -------------------------- --------------
City State Month Year
X
- ----------------------------------------------------- ---------------------------------------------------------------
Applicant (if other than Proposed Insured) Signature of Proposed Insured (parent/guardian if a minor)
---------------------------------------------------------------
Signature of Additional Proposed Insured
</TABLE>
<PAGE> 10
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 Insurance Company or The
Travelers Life and Annuity Company agrees that:
1. It will indemnify and hold you harmless from all 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 Insurance Company or 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, or any such
debit entry purporting to be initiated by The Travelers Insurance Company or
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 3 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 person(s) 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 INSURANCE COMPANY
THE TRAVELERS LIFE AND ANNUITY COMPANY /s/ A. MICHAEL MATAUA
Authorized in resolutions adopted by the Investment Committee of The Travelers
Insurance Company and The Travelers Life and Annuity Company.
<PAGE> 11
TEMPORARY INSURANCE AGREEMENT
IMPORTANT: THIS AGREEMENT PROVIDES A LIMITED AMOUNT OF INSURANCE PROTECTION FOR
A LIMITED PERIOD OF TIME, SUBJECT TO THE TERMS OF THIS AGREEMENT. No agent is
authorized to change or waive any of the terms of this Agreement. All premium
checks must be made payable to The Travelers. Do not make checks payable to the
agent or leave the payee blank. The payment received must be at least equal to
one modal premium or 10% of the annual premium.
<TABLE>
<S> <C>
Received from a premium of $ in connection with this application for
-------------------------- ----------------------------
life insurance, which bears the same date and serial number as this receipt, in which
--------------------------------------
is named as the Proposed Insured(s).
</TABLE>
TERMS AND CONDITIONS
AMOUNT OF COVERAGE: Subject to the limitations contained in this Agreement, if
money has been accepted by The Travelers as advance payment for the above
referenced Application for Life Insurance, and a Proposed Insured dies while
this temporary insurance is in effect, The Travelers will pay to the
beneficiary named in such application the lesser of: (a) the amount of all
death benefits, if applicable, or (b) $500,000. In no event shall the total
benefit payable under this Agreement and under any other Temporary Insurance
Agreement with The Travelers or its subsidiaries exceed $500,000 with respect
to ALL Proposed Insured(s).
DATE COVERAGE BEGINS: Temporary life insurance under this Agreement will begin
on the date that all of the following requirements have been met:
1. The date this Agreement has been completed; and
2. Part One and Part Two, if required, of the application for insurance has
been fully completed; and
3. All medical examinations or tests are completed if required by the Company's
underwriting rules for the Proposed Insured(s) age, plan or amount of
insurance; and
4. The initial premium has been paid and received by The Travelers' New
Business processing center.
DATE COVERAGE ENDS: Temporary life insurance under this Agreement will end on
the earliest of the following dates:
1. 60 days from the date of this Agreement; or
2. The date insurance begins under the policy applied for; or
3. The date a policy, other than applied for, is offered to the applicant; or
4. The date the Company mails notice to the applicant that the application is
declined, or the applicant is otherwise informed by a representative of the
Company that the application is declined; or
5. The date the applicant requests withdrawal of the application.
CREDIT OR REFUND OF PREMIUM: Any payment submitted to and accepted by The
Travelers will be:
1. Credited toward the first premium as of the policy date if a policy is
issued as applied for;
2. Credited toward the first premium as of the policy date if a policy is
issued other than as applied for and is accepted by the applicant;
3. Refunded if The Travelers declines to issue a policy or the applicant
declines to accept a policy as issued or issued other than as applied for;
or
4. Refunded by The Travelers at the request of the applicant.
DETACH THIS PAGE AND LEAVE WITH APPLICANT ONLY IF
PAYMENT IS MADE WHEN THE APPLICATION IS
DATED AND SIGNED AND PROPOSED INSURED(S) HAS
SIGNED THE ACKNOWLEDGEMENT ON THE FOLLOWING PAGE.
<PAGE> 12
SPECIAL LIMITATIONS
1. In the case of the death of a Proposed Insured by suicide, while this
agreement is in effect, The Travelers' liability shall be limited to the
return of the total premium paid under the application.
2. In no event will a death benefit be paid under both the Agreement and the
policy applied for in the application.
3. Fraud or misrepresentations in the application or in the Health Questions of
this Agreement invalidate this Agreement, and The Travelers' liability is to
refund any premium.
4. There is no coverage under this Agreement if the check or draft submitted
with the application is not honored by the bank.
5. No one is authorized to accept money on a Proposed Insured over age 65 (age
last birthday) on the date of this Agreement, nor will any coverage take
effect.
Acknowledgement:
I understand and agree to all of the terms of this Temporary Insurance
Agreement.
<TABLE>
<S> <C> <C> <C> <C> <C>
Signed at this day of , .
---------------------------------------- -------------------- -------------------------- --------------
City State Month Year
X
- ----------------------------------------------------- ---------------------------------------------------------------
Applicant (if other than Proposed Insured) Signature of Proposed Insured (parent/guardian if a minor)
- ----------------------------------------------------- ---------------------------------------------------------------
Signature of Agent Signature of Additional Proposed Insured
</TABLE>
Notice: The Proposed Insured(s) should retain a copy of this Agreement to
ensure coverage thereunder.
<PAGE> 13
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 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
underwriting 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 other investigative report which may be made, write to:
The Travelers, Life and Health Services, One Tower Square, Hartford,
Connecticut 06183.
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 by The Travelers and its affiliates. 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 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 on 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. 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 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.
DETACH THIS PAGE AND LEAVE WITH APPLICANT
<PAGE> 14
DESCRIPTION OF INFORMATION PRACTICES
This description of Information Practices is being provided in accordance with
the requirements of the Insurance Information and Privacy Protection Law.
NOTICE OF INSURANCE INFORMATION PRACTICES
We must collect a certain amount of necessary and helpful personal
information in order to properly underwrite and administer your
insurance coverage. The amount and type of information collected may
vary depending on the amount and type of insurance for which you have
applied. Our Information Practices provide:
1. Personal information may be collected from sources other than
yourself;
2. Such personal information as well as other personal or
privileged information subsequently collected by us or our
agent, may, in certain circumstances, be disclosed to third
parties without your authorization;
3. You may access and correct all personal information collected;
and
4. Upon request, we will provide you with additional information,
including:
a. The types of personal information collected;
b. The methods employed to collect personal information;
c. The instances when we may disclose personal
information without your authorization; and
d. Your rights to access, correct, amend and delete
recorded personal information.
If you need additional information, please write to us at this
address:
The Travelers Insurance Company
The Travelers Life and Annuity Company
Life and Health Services
One Tower Square
Hartford, CT 06183
<PAGE> 1
EXHIBIT 11
April 20, 1998
The Travelers Insurance Company
The Travelers Variable Life Insurance
Separate Account Four
One Tower Square
Hartford, Connecticut 06183
Gentlemen:
With reference to Post-Effective No. 1 to the Registration Statement on
Form S-6 filed by The Travelers Insurance Company and The Travelers Variable
Life Insurance Separate Account Four with the Securities and Exchange
Commission covering modified single premium individual variable life insurance
policies, I have examined such documents and such law as I have considered
necessary and appropriate, and on the basis of such examination, it is my
opinion that:
1. The Travelers Insurance Company is duly organized and existing
under the laws of the State of Connecticut and has been duly
authorized to do business and to issue variable life insurance
policies by the Insurance Commissioner of the State of
Connecticut.
2. The Travelers Variable Life Insurance Separate Account Four is a
duly authorized and existing separate account established pursuant
to Section 38a-433 of the Connecticut General Statutes.
3. The variable life insurance policies covered by the above
Registration Statement, and all post-effective amendments relating
thereto, have been approved and authorized by the Insurance
Commissioner of the State of Connecticut and when issued will be
valid, legal and binding obligations of The Travelers Insurance
Company and of The Travelers Variable Life Insurance Separate
Account Four.
4. Assets of The Travelers Variable Life Insurance Separate Account
Four are not chargeable with liabilities arising out of any other
business The Travelers Insurance Company may conduct.
I hereby consent to the filing of this opinion as an exhibit to the
above-referenced Registration Statement and to the reference to this opinion
under the caption "Legal Proceedings and Opinion" in the Prospectus
constituting a part of such Post-Effective Amendment.
Very truly yours,
/s/Katherine M. Sullivan
General Counsel
The Travelers Insurance Company
