<PAGE>
Registration No.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF
SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2
INITIAL REGISTRATION STATEMENT
ALLMERICA SELECT SEPARATE ACCOUNT III OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Exact Name of Registrant)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
440 Lincoln Street
Worcester, MA 01653
(Address of Principal Executive Office)
Abigail M. Armstrong, Secretary and Counsel
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
It is proposed that this filing will become effective:
_____immediately upon filing pursuant to paragraph (b)
_____On (________)pursuant to paragraph (b)
_____60 days after filing pursuant to paragraph (a)(1)
_____On (date) pursuant to paragraph (a)(1)
_____On (date) pursuant to paragraph (a)(2) of Rule 485
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940,
Registrant hereby declares that an indefinite amount of its securities is
being registered under the Securities Act of 1933.
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until Registrant shall file a
further amendment which specifically states that this Registration Statement
shall become effective in accordance with Section 8(a) of the Securities Act
of 1933 or until this Registration Statement shall become effective on such
date or dates as the Commission, acting pursuant to said section 8(a), may
determine.
<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8b-2 AND THE PROSPECTUS
<TABLE>
<CAPTION>
Item No. of
Form N-8b-2 Caption in Prospectus
- ----------- ---------------------
<S> <C>
1 ........................... Cover Page
2 ........................... Cover Page
3 ........................... Not Applicable
4 ........................... Distribution
5 ........................... The Company, The Variable Account
6 ........................... The Variable Account
7 ........................... Not Applicable
8 ........................... Not Applicable
9 ........................... Legal Proceedings
10 ........................... Summary; Description of the Company, Variable
Account, and Underlying Funds; The Contract;
Contract Termination and Reinstatement; Other
Contract Provisions
11 ........................... Summary; The Trust; VIP; T. Rowe Price;
Investment Objectives and Policies
12 ........................... Summary; The Trust; VIP; T. Rowe Price;
13 ........................... Summary; The Trust; VIP; T. Rowe Price;
Investment Advisory Services to VIP;
Investment Advisory Services to the Trust;
Investment Advisory Services to T. Rowe
Price; Charges and Deductions
14 ........................... Summary; Application for a Contract
15 ........................... Summary; Application for a Contract; Premium
Payments; Allocation of Net Premiums
16 ........................... The Variable Account; The Trust; VIP; T. Rowe
Price; Allocation of Net Premiums
17 ........................... Summary; Surrender; Partial Withdrawal;
Charges and Deductions; Contract Termination
and Reinstatement
18 ........................... The Variable Account; The Trust; VIP; T. Rowe
Price; Premium Payments
19 ........................... Reports; Voting Rights
20 ........................... Not Applicable
21 ........................... Summary; Contract Loans; Other Contract
Provisions
22 ........................... Other Contract Provisions
23 ........................... Not Required
24 ........................... Other Contract Provisions
25 ........................... Allmerica Financial
26 ........................... Not Applicable
27 ........................... The Company
28 ........................... Directors and Principal Officers
29 ........................... The Company
30 ........................... Not Applicable
31 ........................... Not Applicable
32 ........................... Not Applicable
33 ........................... Not Applicable
34 ........................... Not Applicable
35 ........................... Distribution
36 ........................... Not Applicable
37 ........................... Not Applicable
38 ........................... Summary; Distribution
39 ........................... Summary; Distribution
40 ........................... Not Applicable
41 ........................... The Company; Distribution
42 ........................... Not Applicable
</TABLE>
<PAGE>
<TABLE>
<S> <C>
43 ........................... Not Applicable
44 ........................... Premium Payments; Contract Value and Cash
Surrender Value
45 ........................... Not Applicable
46 ........................... Contract Value and Cash Surrender Value;
Federal Tax Considerations
47 ........................... The Company
48 ........................... Not Applicable
49 ........................... Not Applicable
50 ........................... The Variable Account
51 ........................... Cover Page; Summary; Charges and Deductions;
The Contract; Contract Termination and
Reinstatement; Other Contract Provisions
52 ........................... Addition, Deletion or Substitution of
Investments
53 ........................... Federal Tax Considerations
54 ........................... Not Applicable
55 ........................... Not Applicable
56 ........................... Not Applicable
57 ........................... Not Applicable
58 ........................... Not Applicable
59 ........................... Not Applicable
</TABLE>
<PAGE>
ALLMERICA SELECT SPL
ALLMERICA SELECT SEPARATE ACCOUNT III OF ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY
WORCESTER, MASSACHUSETTS 01653
This prospectus describes ALLMERICA SELECT SPL contracts ("the Contract"), a
modified single payment variable life insurance policy offered by Allmerica
Financial Life Insurance and Annuity Company ("Company"). The Contract provides
for life insurance coverage and for the accumulation of a Contract Value. The
Contract requires the Contract Owner to make an initial payment of at least
$25,000.
Contract Value may accumulate on a variable basis in the Allmerica Select
Separate Account III ("Variable Account."), a separate account of the Company.
The Contract permits you to allocate net premiums among the fourteen (14)
sub-accounts ("Sub-Accounts") of the Variable Account. Each Sub-Account invests
its assets exclusively in a corresponding investment portfolio ("Fund" or
"Underlying Fund"). Contract Values may also be allocated to the Fixed Account,
which is part of the Company's General Account, and earn interest at a
guaranteed rate from the date allocated to the Fixed Account to the next
Contract anniversary. The following Funds are available under the Contracts
(certain Funds may not be available in all states):
<TABLE>
<CAPTION>
FUND MANAGER
- -------------------------------------------------- --------------------------------------------------
<S> <C>
Select Emerging Markets Fund Schroder Capital Management International Inc.
Select International Equity Fund Bank of Ireland Asset Management (U.S.) Limited
T. Rowe Price International Stock Portfolio Rowe Price-Fleming International, Inc.
Select Aggressive Growth Fund Nicholas-Applegate Capital Management, L.P.
Select Capital Appreciation Fund T. Rowe Price Associates, Inc.
Select Value Opportunity Fund Cramer Rosenthal McGlynn, LLC
Select Growth Fund Putnam Investment Management, Inc.
Select Strategic Growth Fund Cambiar Investors, Inc.
Fidelity VIP Growth Portfolio Fidelity Management and Research Company
Select Growth and Income Fund John A. Levin & Co., Inc.
Fidelity VIP Equity-Income Portfolio Fidelity Management and Research Company
Fidelity VIP High Income Portfolio Fidelity Management and Research Company
Select Income Fund Standish, Ayer & Wood, Inc.
Money Market Fund Allmerica Asset Management, Inc.
</TABLE>
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF THE
ALLMERICA INVESTMENT TRUST, VARIABLE INSURANCE PRODUCTS FUND, AND T. ROWE PRICE
INTERNATIONAL SERIES, INC. THE FIDELITY VIP HIGH INCOME PORTFOLIO INVESTS IN
HIGHER-YIELDING, HIGHER RISK, LOWER-RATED DEBT SECURITIES (SEE "INVESTMENT
OBJECTIVES AND POLICIES"). INVESTORS SHOULD RETAIN A COPY OF THIS PROSPECTUS FOR
FUTURE REFERENCE. IT MAY NOT BE ADVANTAGEOUS TO REPLACE EXISTING INSURANCE WITH
THE CONTRACT.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES COMMISSIONS HAVE NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED ON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
CORRESPONDENCE MAY BE MAILED TO
ALLMERICA SELECT
P.O. BOX 8179
BOSTON, MASSACHUSETTS 02266-8179
OR
440 LINCOLN STREET
WORCESTER, MASSACHUSETTS 01653
(508) 855-1000
Dated 1998
<PAGE>
(CONTINUED FROM COVER PAGE)
Each Contract is a "modified endowment Contract" for federal income tax
purposes, except in certain circumstances described in "FEDERAL TAX
CONSIDERATIONS." A loan, distribution or other amounts received from a modified
endowment Contract during the life of the Insured will be taxed to the extent of
accumulated income in the Contract. Death Benefits under a modified endowment
contract, however, are generally not subject to federal income tax. See "FEDERAL
TAX CONSIDERATIONS."
THE CONTRACT IS AN OBLIGATION OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY, AND IS DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE CONTRACT IS NOT A
DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE CONTRACT IS NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE
POLICY ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND
POSSIBLE LOSS OF PRINCIPAL.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS........................................................................ 4
SUMMARY.............................................................................. 7
PERFORMANCE INFORMATION.............................................................. 13
DESCRIPTION OF THE COMPANY, VARIABLE ACCOUNT, AND UNDERLYING FUNDS................... 17
INVESTMENT OBJECTIVES AND POLICIES................................................... 18
INVESTMENT ADVISORY SERVICES......................................................... 20
THE CONTRACT......................................................................... 22
Applying for a Contract........................................................ 22
Free Look Period............................................................... 23
Conversion Privilege........................................................... 23
Payments....................................................................... 24
Allocation of Payments......................................................... 24
Transfer Privilege............................................................. 25
Death Benefit.................................................................. 26
Guaranteed Death Benefit Rider................................................. 26
Contract Value................................................................. 28
Payment Options................................................................ 29
Optional Insurance Benefits.................................................... 29
Surrender...................................................................... 29
Partial Withdrawal............................................................. 30
CHARGES AND DEDUCTIONS............................................................... 30
Monthly Deductions............................................................. 30
Daily Deductions...............................................................
Surrender Charge............................................................... 32
Partial Withdrawal Costs....................................................... 32
Transfer Charges............................................................... 32
CONTRACT LOANS....................................................................... 33
CONTRACT TERMINATION AND REINSTATEMENT............................................... 34
OTHER CONTRACT PROVISIONS............................................................ 35
FEDERAL TAX CONSIDERATIONS........................................................... 36
The Company and The Variable Account........................................... 36
Taxation of The Contracts...................................................... 36
VOTING RIGHTS........................................................................ 38
DIRECTORS AND PRINCIPAL OFFICERS..................................................... 39
DISTRIBUTION......................................................................... 40
REPORTS.............................................................................. 40
SERVICES............................................................................. 40
LEGAL PROCEEDINGS.................................................................... 41
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS.................................... 41
FURTHER INFORMATION.................................................................. 41
MORE INFORMATION ABOUT THE FIXED ACCOUNT............................................. 42
INDEPENDENT ACCOUNTANTS.............................................................. 42
FINANCIAL STATEMENTS................................................................. 43
UNAUDITED FINANCIAL STATEMENTS....................................................... UF-1
APPENDIX A -- GUIDELINE MINIMUM SUM INSURED TABLE.................................... A-1
APPENDIX B -- OPTIONAL INSURANCE BENEFITS............................................ B-1
APPENDIX C -- PAYMENT OPTIONS........................................................ C-1
APPENDIX D -- ILLUSTRATIONS.......................................................... D-1
</TABLE>
3
<PAGE>
SPECIAL TERMS
AGE: how old the Insured is on his/her last birthday measured on the Date of
Issue and each Contract anniversary.
ALLMERICA FINANCIAL: Allmerica Financial Life Insurance and Annuity Company.
"We," "our," "us" and "Company" refer to Allmerica Financial in this prospectus.
BENEFICIARY: the person or persons you name to receive the Net Death Benefit
when the Insured dies.
COMPANY: Allmerica Financial Life Insurance and Annuity Company. "We," "our,"
"us" and "Allmerica Financial" also refer to Allmerica Financial Life Insurance
and Annuity Company in this prospectus.
CONTRACT OWNER: the person who may exercise all rights under the Contract, with
the consent of any irrevocable Beneficiary. "You" and "your" refer to the
Contract Owner in this prospectus.
CONTRACT VALUE: the total value of your Contract. It is the SUM of the:
- Value of the units of the Sub-Accounts credited to your Contract; PLUS
- Accumulation in the Fixed Account credited to the Contract.
DATE OF ISSUE: the date the Contract was issued, used to measure the Monthly
Processing Date, Contract months, Contract years and Contract anniversaries.
DEATH BENEFIT: the Face Amount (the amount of insurance determined by your
payment) or the Guideline Minimum Sum Insured, whichever is greater. After the
Final Payment Date, if the Guaranteed Death Benefit Rider is in effect, the
Death Benefit will be the greater of the Face Amount as of the Final Payment
Date or the Contract Value as of the date due proof of death is received by the
Company.
EVIDENCE OF INSURABILITY: information, including medical information, used to
decide the Insured's Underwriting Class.
FACE AMOUNT: the amount of insurance coverage. The Face Amount is shown in your
Contract.
FINAL PAYMENT DATE: the Contract anniversary before the Insured's 100th
birthday. After this date, no payments may be made and the Net Death Benefit is
the Contract Value less any Outstanding Loan.
FIXED ACCOUNT: a guaranteed account of the General Account that guarantees
principal and a fixed minimum interest rate.
GENERAL ACCOUNT: all our assets other than those held in separate investment
accounts.
GUIDELINE MINIMUM SUM INSURED: the minimum death benefit required to qualify the
Contract as "life insurance" under federal tax laws. The guideline minimum sum
insured is the PRODUCT of
- The Contract Value TIMES
- A percentage based on the Insured's age
GUIDELINE SINGLE PREMIUM: used to determine the Face Amount under the Contract.
4
<PAGE>
INSURED: the person or persons covered under the Contract. If more than one
person is named, all provisions of the Contract that are based on the death of
the Insured will be based on the date of death of the last surviving Insured.
LOAN VALUE: the maximum amount you may borrow under the Contract.
MONTHLY DEDUCTIONS: the amount of money that we deduct from the Contract Value
each month to pay for the Monthly Maintenance Fee, Administration Charge,
Monthly Insurance Protection Charge, Distribution Charge and the Federal & State
Payment Tax Charge.
MONTHLY INSURANCE PROTECTION CHARGE: the amount of money that we deduct from the
Contract Value each month to pay for the insurance.
MONTHLY PROCESSING DATE: the date, shown in your Contract, when Monthly
Deductions are deducted.
NET DEATH BENEFIT: Before the Final Payment Date the Net Death Benefit is:
- The Death Benefit; MINUS
- Any Outstanding Loan on the Insured's death, rider charges and Monthly
Deductions due and unpaid through the Contract month in which the Insured
dies, as well as any partial withdrawal costs and surrender charges.
After the Final Payment Date, if the Guaranteed Death Benefit Rider is NOT in
effect, the Net Death Benefit is:
- The Contract Value; MINUS
- Any Outstanding Loan on the Insured's death.
If the Guaranteed Death Benefit Rider is in effect after the Final Payment Date,
the Death Benefit will be either the Face Amount as of the Final Payment Date or
the Contract Value as of the date due proof of death is received by the Company,
whichever is greater, reduced by an Outstanding Loan through the contract month
in which the Insured dies.
OUTSTANDING LOAN: all unpaid Contract loans plus loan interest due or accrued.
PRINCIPAL OFFICE: our office at 440 Lincoln Street, Worcester, Massachusetts
01653.
PRO-RATA ALLOCATION: an allocation among the Fixed Account and the Sub-Accounts
of the Variable Account in the same proportion that, on the date of allocation,
the Contract Value in the Fixed Account (other than value subject to Outstanding
Loan) and the Contract Value in each Sub-Account bear to the total Contract
Value.
SECOND-TO-DIE: the Contract may be issued as a joint survivorship
("Second-to-Die") Contract. Life insurance coverage is provided for two
Insureds, with death benefits payable at the death of the last surviving
Insured.
SUB-ACCOUNT: a subdivision of the Variable Account investing exclusively in the
shares of a Fund.
SURRENDER VALUE: the amount payable on a full surrender. It is the Contract
Value less any Outstanding Loan and surrender charges.
5
<PAGE>
UNDERLYING FUNDS (FUNDS): the investment Funds of Allmerica Investment Trust
("Trust"), the Portfolios of Fidelity Variable Insurance Products Fund
("Fidelity VIP") and T. Rowe Price International Series, Inc. ("T. Rowe Price")
which are available under the Contract.
UNDERWRITING CLASS: the insurance risk classification that we assign the Insured
based on the information in the application and other Evidence of Insurability
we consider. The Insured's underwriting class will affect the Monthly Insurance
Protection Charge.
UNIT: a measure of your interest in a Sub-Account.
VALUATION DATE: any day on which the net asset value of the shares of any Funds
and Unit values of any Sub-Accounts are computed. Valuation dates currently
occur on:
- Each day the New York Stock Exchange is open for trading; and
- Other days (other than a day during which no payment, partial withdrawal
or surrender of a Contract was received) when there is a sufficient degree
of trading in a Fund's portfolio securities so that the current net asset
value of the Sub-Accounts may be materially affected.
VALUATION PERIOD: the interval between two consecutive Valuation Dates.
VARIABLE ACCOUNT: Allmerica Select Separate Account III, one of the Company's
separate investment accounts.
WRITTEN REQUEST: your request in writing, satisfactory to us, received at our
Principal Office.
6
<PAGE>
SUMMARY
WHAT IS THE CONTRACT'S OBJECTIVE?
The objective of the Contract is to give permanent life insurance protection and
to help you build assets tax-deferred. Benefits available through the Contract
include:
- A life insurance benefit that can protect your family;
- Payment options that can guarantee an income for life, if you want to use
your Contract for retirement income;
- A personalized investment portfolio you may tailor to meet your needs,
time frame and risk tolerance level;
- Experienced professional investment advisers; and
- Tax deferral on earnings while your money is accumulating.
The Contract combines features and benefits of traditional life insurance with
the advantages of professional money management. However, unlike the fixed
benefits of ordinary life insurance, the Contract Value will increase or
decrease depending on investment results. Unlike traditional insurance policies,
the Contract has no fixed schedule for payments.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is a contract between you and us. Each Contract has a Contract
Owner ("you"), the Insured and a Beneficiary. As Contract Owner, you make the
payment, choose investment allocations and select the Insured and Beneficiary.
The Insured is the person covered under the Contract. The Beneficiary is the
person who receives the Net Death Benefit when the Insured dies.
WHAT HAPPENS WHEN THE INSURED DIES?
We will pay the Net Death Benefit to the Beneficiary when the Insured dies while
the Contract is in effect. If the Contract was issued as a Second-to-Die
Contract, the Net Death Benefit will be paid on the death of the last surviving
Insured.
Before the Final Payment Date, the Death Benefit is either the Face Amount (the
amount of insurance determined by your payment) or the minimum death benefit
provided by the Guideline Minimum Sum Insured, whichever is greater. The Net
Death Benefit is the Death Benefit less any Outstanding Loan, rider charges and
Monthly Deductions due and unpaid through the Contract month in which the
Insured dies, as well as any partial withdrawals and surrender charges.
After the Final Payment Date, if the Guaranteed Death Benefit is NOT in effect,
the Net Death Benefit is the Contract Value less any Outstanding Loan. The
Beneficiary may receive the Net Death Benefit in a lump sum or under one of the
Company's payment options. If the Guaranteed Death Benefit Rider is in effect on
the Final Payment Date, a Guaranteed Death Benefit will be provided unless the
Rider is subsequently terminated. The Guaranteed Death Benefit will be either
the Face Amount as of the Final Payment Date or the Contract Value as of the
date due proof of death is received by the Company, which is greater, reduced by
any Outstanding Loan through the Contract month in which the insured dies. For
more information, see "Guaranteed Death Benefit Rider"
7
<PAGE>
CAN I EXAMINE THE CONTRACT?
Yes. You have the right to examine and cancel your Contract by returning it to
us or to one of our representatives within 10 days (or such later date as
required in your state) after you receive the Contract.
If your Contract provides for a full refund under its "Right to Cancel"
provision as required in your state, your refund will be your entire payment.
If your Contract does not provide for a full refund, you will receive:
- Amounts allocated to the Fixed Account; PLUS
- The value of the Units in the Variable Account; PLUS
- All fees, charges and taxes which have been imposed.
Your refund will be determined as of the Valuation Date that the Contract is
received at our Principal Office.
WHAT ARE MY INVESTMENT CHOICES?
Each Sub-Account invests its assets in a corresponding investment portfolio
("Fund") of Allmerica Investment Trust ("Trust"), Variable Insurance Products
Fund ("Fidelity VIP") and T. Rowe Price International Series, Inc. ("T. Rowe
Price").
This range of investment choices allows you to allocate your money among the
various Funds to meet your investment needs. If your Contract provides for a
full refund under its "Right to Cancel" provision as required in your state, we
will allocate all Sub-Account investments to the Money Market Fund during the
Right to Cancel period. Reallocation will then be made to the Sub-Account
investments you selected on the application no later than the expiration of the
Right to Cancel period. For more information about your investment choices, see
WHO ARE THE INVESTMENT ADVISERS AND HOW ARE THEY SELECTED?, below.
The Contract also offers a Fixed Account. The Fixed Account is a guaranteed
account offering a minimum interest rate. It is part of the General Account of
the Company.
WHO ARE THE INVESTMENT ADVISERS AND HOW ARE THEY SELECTED?
BARRA RogersCasey, Inc. ("BARRA RogersCasey"), a pension consulting firm,
assists the Company in the selection of the Contract's Funds. In addition, BARRA
RogersCasey assists the Trust in the selection of investment advisers for the
Funds of the Trust. BARRA RogersCasey provides consulting services to pension
plans representing hundreds of billions of dollars in total assets and, in its
consulting capacity, monitors the investment performance of over 1000 investment
advisers. BARRA RogersCasey also develops asset allocation strategies that
broker-dealers may elect to provide to their registered representatives in
assisting clients in developing diversified portfolios. BARRA RogersCasey is
wholly-controlled by BARRA, Inc. As a consultant, BARRA RogersCasey has no
decision-making authority with respect to the Funds, and is not responsible for
any investment advice provided to the Funds by Allmerica Financial Investment
Management Services, Inc. ("AFIMS") or the investment advisers.
AFIMS, an affiliate of the Company, is the investment manager of the Trust.
AFIMS has entered into agreements with investment advisers ("Sub-Advisers")
selected by AFIMS and the Trustees in consultation with BARRA RogersCasey. Each
investment adviser is selected by using strict objective, quantitative, and
qualitative criteria, with special emphasis on the investment adviser's record
in managing similar portfolios. In consultation with BARRA RogersCasey, a
committee monitors and evaluates the ongoing performance of all of the Funds.
The committee may recommend the replacement of an investment adviser of one of
the Funds of the Trust, or the addition or deletion of Funds. The committee
includes members who may be affiliated or
8
<PAGE>
unaffiliated with the Company and the Trust. The Sub-Advisers (other than
Allmerica Asset Management, Inc.) are not affiliated with the Company or the
Trust.
Fidelity Management & Research Company ("FMR") is the investment adviser of
Fidelity VIP. FMR is one of America's largest investment management
organizations and has its principal business address at 82 Devonshire Street,
Boston, Massachusetts. It is composed of a number of different companies, which
provide a variety of financial services and products. FMR is the original
Fidelity company, founded in 1946. It provides a number of mutual funds and
other clients with investment research and portfolio management services.
Rowe Price-Fleming International, Inc. ("Price-Fleming") is the investment
adviser of T. Rowe Price. Price-Fleming, founded in 1979 as a joint venture
between T. Rowe Price Associates, Inc. and Robert Fleming Holdings, Limited, is
one of America's largest international mutual fund asset managers with
approximately $30 billion under management in its offices in Baltimore, London,
Tokyo, Hong Kong, Singapore and Buenos Aires. T. Rowe Price Associates, Inc., an
affiliate of Price-Fleming, serves as Sub-Adviser of the Select Capital
Appreciation Fund of the Trust.
The following are the investment advisers of the Funds:
<TABLE>
<CAPTION>
FUND INVESTMENT ADVISER
- -------------------------------------------------- --------------------------------------------------
<S> <C>
Select Emerging Markets Fund Schroder Capital Management International Inc.
Select International Equity Fund Bank of Ireland Asset Management (U.S.) Limited
T. Rowe Price International Stock Portfolio Rowe Price-Fleming International, Inc.
Select Aggressive Growth Fund Nicholas-Applegate Capital Management, L.P.
Select Capital Appreciation Fund T. Rowe Price Associates, Inc.
Select Value Opportunity Fund Cramer Rosenthal McGlynn, LLC
Select Growth Fund Putnam Investment Management, Inc.
Select Strategic Growth Fund Cambiar Investors, Inc.
Fidelity VIP Growth Portfolio Fidelity Management and Research Company
Select Growth and Income Fund John A. Levin & Co., Inc.
Fidelity VIP Equity-Income Portfolio Fidelity Management and Research Company
Fidelity VIP High Income Portfolio Fidelity Management and Research Company
Select Income Fund Standish, Ayer & Wood, Inc.
Money Market Fund Allmerica Asset Management, Inc.
</TABLE>
CAN I MAKE TRANSFERS AMONG THE FUNDS AND THE FIXED ACCOUNT?
Yes. You may transfer among the Funds and the Fixed Account, subject to our
consent and then current rules. You will incur no current taxes on transfers
while your money is in the Contract. You also may elect automatic account
rebalancing so that assets remain allocated according to a desired mix or choose
automatic dollar cost averaging to gradually move funds into one or more
Sub-Accounts. See TRANSFER PRIVILEGE.
The first 12 transfers of Contract Value in a Contract year are free. A transfer
charge not to exceed $25 may apply for each additional transfer in the same
Contract year. This charge is for the costs of processing the transfer.
HOW MUCH CAN I INVEST AND HOW OFTEN?
The Contract requires a single payment on or before the Date of Issue.
Additional payment(s) of at least $10,000 may be made as long as the total
payments do not exceed the maximum payment amount specified in the Contract.
9
<PAGE>
WHAT IF I NEED MY MONEY?
You may borrow up to the Loan Value of your Contract. The Loan Value is 90% of
the Surrender Value. You may also make partial withdrawals and surrender the
Contract for its Surrender Value.
The guaranteed annual interest rate credited to the Contract Value securing a
loan will be at least 4.0%. However, any portion of the Outstanding Loan that is
a preferred loan will be credited with not less than 5.50%.
We will allocate Contract loans among the Sub-Accounts and the Fixed Account
according to your instructions. If you do not make an allocation, we will make a
Pro-rata Allocation. We will transfer the Contract Value in each Sub-Account
equal to the Contract loan to the Fixed Account.
You may surrender your Contract and receive its Surrender Value. You may make
partial withdrawals of $1,000 or more from the Contract Value, subject to
partial withdrawal costs and any applicable surrender charges. The Face Amount
is proportionately reduced by each partial withdrawal. We will not allow a
partial withdrawal if it would reduce the Contract Value below $25,000. A
surrender or partial withdrawal may have tax consequences. See TAXATION OF
CONTRACTS.
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
Yes. There are several changes you can make after receiving your Contract,
within limits. You may
- Cancel your Contract under its "Right to Cancel" provision;
- Transfer your ownership to someone else;
- Change the Beneficiary;
- Change the allocation for any additional payment, with no tax consequences
under current law;
- Make transfers of the Contract Value among the Funds, with no taxes
incurred under current law; and
- Add or remove the optional insurance benefits provided by rider.
CAN I CONVERT MY CONTRACT INTO A NON-VARIABLE CONTRACT?
Yes. You can convert your Contract without charge during the first 24 months
after the Date of Issue. On conversion, we will transfer the Contract Value in
the Variable Account to the Fixed Account. We will allocate any future
payment(s) to the Fixed Account, unless you instruct us otherwise.
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
The following charges will apply to your Contract under the circumstances
described. Some of these charges apply throughout the Contract's duration.
We deduct the following monthly charges from the Contract Value:
- A $2.50 Maintenance Fee from Contracts with a Contract Value of less than
$100 (See "Maintenance Fee.");
- 0.20% on an annual basis for the administrative expenses (See
"Administration Charge.");
10
<PAGE>
- A deduction for the cost of insurance, which varies depending on the type
of Contract and Underwriting Class (See "Monthly Insurance Protection
Charge."); and
- For the first ten Contract years only, 0.90% on an annual basis for
distribution expenses (See "Distribution Fee."); and
- For the first Contract year only, 1.50% on an annual basis for federal,
state and local taxes (See "Federal & State Payment Tax Charge.").
The following daily charge is deducted from the Variable Account:
- 0.90% on an annual basis for the mortality and expense risks (See
"Mortality and Expense Risk Charge.").
There are deductions from and expenses paid out of the assets of the Funds that
are described in the accompanying prospectuses.
WHAT ARE THE EXPENSES AND FEES OF THE FUNDS?
The following table shows the expenses of the Funds for 1997. For more
information concerning fees and expenses, see the prospectuses of the Funds.
CHARGES OF THE UNDERLYING FUNDS
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Underlying Funds. The following table shows the expenses
of the Underlying Funds for 1997. For more information concerning fees and
expenses, see the prospectuses of the Underlying Funds.
<TABLE>
<CAPTION>
MANAGEMENT FEE TOTAL FUND EXPENSES
(AFTER ANY OTHER FUND (AFTER ANY APPLICABLE
UNDERLYING FUND VOLUNTARY WAIVER) EXPENSES REIMBURSEMENTS)
- ---------------------------------------- --------------------- --------------- ------------------------
<S> <C> <C> <C>
Select Emerging Markets Fund @ 1.35% 0.65% 2.00%(1)
Select International Equity Fund 0.92%* 0.20% 1.12%(1)(3)
T. Rowe Price International Stock
Portfolio 1.05% 0.00% 1.05%
Select Aggressive Growth Fund 0.89%* 0.09% 0.98%(1)(3)
Select Capital Appreciation Fund 0.95%* 0.15% 1.10%(1)
Select Value Opportunity Fund 0.90%** 0.14% 1.04%(1)(3)
Select Growth Fund 0.85% 0.08% 0.93%(1)(3)
Select Strategic Growth Fund @ 0.85% 0.13% 0.98%(1)
Fidelity VIP Growth Portfolio 0.60% 0.09% 0.69%(2)
Select Growth and Income Fund 0.70%* 0.07% 0.77%(1)(3)
Fidelity VIP Equity-Income Portfolio 0.50% 0.08% 0.58%(2)
Fidelity VIP High Income Portfolio 0.59% 0.12% 0.71%
Select Income Fund 0.58%* 0.13% 0.71%(1)
Money Market Fund 0.27% 0.08% 0.35%(1)
</TABLE>
* Effective September 1, 1997, the management fee rates for these Funds were
revised. The management fee ratios shown in the table above have been adjusted
to assume that the revised rates took effect on January 1, 1997.
11
<PAGE>
@ Select Emerging Markets Fund and Select Strategic Growth Fund commenced
operations in February, 1998. Expenses shown are annualized and are based on
estimated amounts for the current fiscal year. Actual expense may be greater or
less than shown.
** The Select Value Opportunity Fund was formerly known as the "Small-Mid Cap
Value Fund." Effective April 1, 1997, the management fee rate of the former
Small-Mid Cap Value Fund was revised. In addition, effective April 1, 1997 and
until further notice, the management fee rate has been voluntarily limited to an
annual rate of 0.90% of average daily net assets, and total expenses are limited
to 1.25% of average daily net assets. The management fee ratio shown above for
the Select Value Opportunity Fund has been adjusted to assume that the revised
rate and the voluntary limitations took effect on January 1, 1997. Without these
adjustments, the management fee ratio and the total Fund expense ratio would
have been 0.95% and 1.09%, respectively. The management fee limitation may be
terminated at any time.
(1) Until further notice, AFIMS has declared a voluntary expense limitation of
1.35% of average net assets for the Select Aggressive Growth Fund and Select
Capital Appreciation Fund, 1.50% for the Select International Equity Fund, 1.25%
for the Select Value Opportunity Fund, 1.20% for the Select Growth Fund, 1.10%
for the Select Growth and Income, 1.00% for the Select Income Fund, and 0.60%
for the Money Market Fund. The total operating expenses of these Funds of the
Trust were less than their respective expense limitations throughout 1997.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee to the extent that
expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's average
daily net assets, except that such waiver shall not exceed the net amount of
management fees earned by AFIMS from the Fund after subtracting fees paid by
AFIMS to a sub-adviser.
The declaration of a voluntary expense limitation in any year does not bind
AFIMS to declare future expense limitations with respect to these Funds. These
limitations may be terminated at any time.
(2) A portion of the brokerage commissions that certain Funds pay was used to
reduce Fund expenses. In addition, certain Funds have entered into arrangements
with their custodian and transfer agent whereby interest earned on uninvested
cash balances was used to reduce custodian and transfer agent expenses.
Including these reductions, the total operating expenses presented in the table
would have been 0.57% for Fidelity VIP Equity-Income Portfolio, and 0.67% for
Fidelity VIP Growth Portfolio.
(3) These Funds have entered into agreements with brokers whereby brokers rebate
a portion of commissions. Had these amounts been treated as reductions of
expenses, the total operating expense ratios would have been 0.93% for the
Select Aggressive Growth Fund, 0.98% for the Select Value Opportunity Fund,
1.10% for the Select International Equity Fund, 0.91% for the Select Growth
Fund, 0.98% for the Select Value Opportunity Fund, and 0.74% for the Select
Growth and Income Fund.
WHAT CHARGES DO I INCUR IF I SURRENDER MY CONTRACT OR MAKE A PARTIAL WITHDRAWAL?
The charges below apply only if you surrender your Contract or make partial
withdrawals:
- Surrender Charge -- This charge applies on full surrenders within ten
Contract years. The surrender charge begins at 10.00% of the payment(s)
and decreases to 0% by the tenth Contract year.
- Partial Withdrawal Costs -- We deduct from the Contract Value the
following for partial withdrawals:
- A transaction fee of 2.0% of the amount withdrawn, not to exceed $25,
for each partial withdrawal for processing costs; and
- A surrender charge on a withdrawal exceeding the "Free 10% Withdrawal,"
described below.
12
<PAGE>
WHAT ARE THE LAPSE AND REINSTATEMENT PROVISIONS OF MY CONTRACT?
The Contract will not lapse unless the Surrender Value on a Monthly Processing
Date is less than zero. There is a 62-day grace period in this situation. You
may reinstate your Contract within three years after the grace period, within
limits. If the Guaranteed Death Benefit Rider is in effect, the Contract will
not lapse. However, if the Guaranteed Death Benefit Rider terminates, the
Contract may then lapse. See THE CONTRACT -- "Guaranteed Death Benefit Rider."
HOW IS MY CONTRACT TAXED?
The Contract has been designed to be a "modified endowment contract." However,
under Section 1035 of the Internal Revenue Code of 1986, as amended ("Code"), an
exchange of (1) a life insurance contract entered into before June 21, 1988 or
(2) a life insurance contract that is not itself a modified endowment contract,
will not cause the Contract to be treated as a modified endowment contract if no
additional payments are made and there is no increase in the death benefit as a
result of the exchange.
If the Contract is considered a modified endowment contract, all distributions
(including Contract loans, partial withdrawals, surrenders and assignments) will
be taxed on an "income-first" basis. Also, a 10% penalty tax may be imposed on
that part of a distribution that is includible in income. However, the Net Death
Benefit under the Contract is excludable from the gross income of the
Beneficiary. In some circumstances, federal estate tax may apply to the Net
Death Benefit or the Contract Value. See TAXATION OF THE CONTRACT.
THIS SUMMARY IS INTENDED TO PROVIDE ONLY A VERY BRIEF OVERVIEW OF THE MORE
SIGNIFICANT ASPECTS OF THE CONTRACT. THIS PROSPECTUS AND THE CONTRACT PROVIDE
FURTHER DETAIL. THE CONTRACT PROVIDES INSURANCE PROTECTION FOR THE NAMED
BENEFICIARY. THE CONTRACT AND ITS ATTACHED APPLICATION ARE THE ENTIRE AGREEMENT
BETWEEN YOU AND THE COMPANY.
PERFORMANCE INFORMATION
The Contracts were first offered to the public in 1998. However, the Company may
advertise "Total Return" and "Average Annual Total Return" performance
information based on the periods that the Funds have been in existence. The
results for any period prior to the Contracts being offered will be calculated
as if the Contracts had been offered during that period of time, with all
charges assumed to be those applicable to the Sub-Accounts and the Funds.
Total return and average annual total return are based on the hypothetical
profile of a representative Contract Owner and historical earnings and are not
intended to indicate future performance. "Total return" is the total income
generated net of certain expenses and charges. "Average annual total return" is
net of the same expenses and charges, but reflects the hypothetical return
compounded annually. This hypothetical return is equal to cumulative return had
performance been constant over the entire period. Average annual total returns
are not the same as yearly results and tend to smooth out variations in the
Fund's return.
Performance information under the Contracts is net of Fund expenses, Monthly
Deductions and surrender charges. We take a representative Contract Owner and
assume that:
- The Insured is a male Age 55, standard (non-tobacco user) Underwriting
Class;
- The Contract Owner had allocations in each of the Sub-Accounts for the
Fund durations shown; and
- There was a full surrender at the end of the applicable period.
13
<PAGE>
Performance information for any Sub-Account reflects only the performance of a
hypothetical investment in the Sub-Account during a period. It is not
representative of what may be achieved in the future. However, performance
information may be helpful in reviewing market conditions during a period and in
considering a Fund's success in meeting its investment objectives.
We may compare performance information for a Sub-Account in reports and
promotional literature to:
- Standard & Poor's 500 Stock Index ("S&P 500");
- Dow Jones Industrial Average ("DJIA");
- Shearson Lehman Aggregate Bond Index;
- Other unmanaged indices of unmanaged securities widely regarded by
investors as representative of the securities markets;
- Other groups of variable life separate accounts or other investment
products tracked by Lipper Analytical Services;
- Other services, companies, publications, or persons such as Morningstar,
Inc., who rank the investment products on performance or other criteria;
and
- The Consumer Price Index.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for insurance and administrative charges, separate account
charges and Fund management costs and expenses.
In advertising, sales literature, publications or other materials, we may give
information on various topics of interest to Contract Owners and prospective
Contract Owners. These topics may include:
- The relationship between sectors of the economy and the economy as a whole
and its effect on various securities markets, investment strategies and
techniques (such as value investing, market timing, dollar cost averaging,
asset allocation and automatic account rebalancing);
- The advantages and disadvantages of investing in tax-deferred and taxable
investments;
- Customer profiles and hypothetical payment and investment scenarios;
- Financial management and tax and retirement planning; and
- Investment alternatives to certificates of deposit and other financial
instruments, including comparisons between the Contracts and the
characteristics of and market for the financial instruments.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues but
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Funds.
14
<PAGE>
TABLE I
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE UNDERLYING FUNDS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE CONTRACT
The following performance information is based on the periods that the Funds
have been in existence. The data is net of expenses of the Funds, all
Sub-Account charges, and all Contract charges (including surrender charges) for
a representative Contract. It is assumed that the Insured is Male, Age 55,
standard (non-tobacco user) underwriting class, that a single payment of $25,000
was made, that the entire payment was allocated to each Sub-Account
individually, and that there was a full surrender of the Contract at the end of
the applicable period.
<TABLE>
<CAPTION>
10 Years
One-Year or Life
Total 5 of Fund
Underlying Fund Return Years (if less)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select International Equity Fund -3.37% N/A 6.82%
T. Rowe Price International Stock Portfolio -4.95% N/A 3.75%
Select Aggressive Growth Fund 10.81% 13.08% 15.92%
Select Capital Appreciation Fund 6.35% N/A 17.91%
Select Value Opportunity Fund 16.96% N/A 13.09%
Select Growth Fund 26.16% 11.49% 12.74%
Select Strategic Growth Fund N/A N/A N/A
Fidelity VIP Growth Portfolio 15.60% 14.28% 14.44%
Select Growth and Income Fund 14.62% 12.85% 11.74%
Fidelity VIP Equity Income Portfolio 20.22% 16.41% 14.10%
Fidelity VIP High Income Portfolio 9.76% 10.22% 9.96%
Select Income Fund 1.20% 3.08% 2.86%
Money Market Fund -2.54% 0.89% 3.15%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Money Market;
8/21/92 for Select Aggressive Growth, Select Growth, Select Income, and Select
Growth and Income; 4/30/93 for Select Value Opportunity; 5/02/94 for Select
International Equity; 4/28/95 for the Select Capital Appreciation Fund; 10/09/86
for Fidelity VIP Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP
High Income; and 3/31/94 for T. Rowe Price International Stock. The Select
Emerging Markets Fund and Select Strategic Growth Fund commenced operations in
February, 1998.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
15
<PAGE>
TABLE II
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE UNDERLYING FUNDS
EXCLUDING MONTHLY CONTRACT CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the Funds
have been in existence. The performance information is net of total Fund
expenses, all Sub-Account charges, and premium tax and expense charges. THE DATA
DOES NOT REFLECT MONTHLY CHARGES UNDER THE CONTRACTS OR SURRENDER CHARGES. It is
assumed that a single premium payment of $25,000 has been made and that the
entire payment was allocated to each Sub-Account individually.
<TABLE>
<CAPTION>
10 Years
One-Year or Life
Total 5 of Fund
Underlying Fund Return Years (if less)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select International Equity Fund 3.71% N/A 10.14%
T. Rowe Price International Stock Portfolio 2.17% N/A 7.09%
Select Aggressive Growth Fund 17.64% 15.76% 18.49%
Select Capital Appreciation Fund 13.25% N/A 21.78%
Select Value Opportunity Fund 23.73% N/A 15.88%
Select Growth Fund 32.86% 14.18% 15.32%
Select Strategic Growth Fund N/A N/A N/A
Fidelity VIP Growth Fund 22.38% 16.95% 16.31%
Select Growth and Income Fund 21.41% 15.53% 14.32%
Fidelity VIP Equity Income Fund 26.96% 19.07% 15.97%
Fidelity VIP High Income Fund 16.61% 12.92% 11.77%
Select Income Fund 8.19% 5.90% 5.55%
Money Market Fund 4.52% 3.77% 4.85%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Money Market;
8/21/92 for Select Aggressive Growth, Select Growth, Select Income, and Select
Growth and Income; 4/30/93 for Select Value Opportunity; 5/02/94 for Select
International Equity; 4/28/95 for the Select Capital Appreciation Fund; 10/09/86
for Fidelity VIP Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP
High Income; and 3/31/94 for T. Rowe Price International Stock. The Select
Emerging Markets Fund and Select Strategic Growth Fund commenced operations in
February, 1998.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING THE GIVEN
TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT MAY BE
ACHIEVED IN THE FUTURE.
16
<PAGE>
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
AND THE UNDERLYING FUNDS
THE COMPANY
Allmerica Financial Life Insurance and Annuity Company ("Company" or "Allmerica
Financial") is a life insurance company organized under the laws of Delaware in
1974. The Company is an indirect, wholly-owned subsidiary of First Allmerica
Financial Life Insurance Company, ("First Allmerica), which in turn is a wholly-
owned subsidiary of Allmerica Financial Corporation. First Allmerica was
formerly named State Mutual Life Assurance Company of America. First Allmerica
was organized under the laws of Massachusetts in 1844 and is the fifth oldest
life insurance company in America. Our principal office is 440 Lincoln Street,
Worcester, Massachusetts 01653, telephone 1-508-855-1000. We are subject to the
laws of the state of Delaware, to regulation by the Commissioner of Insurance of
Delaware, and to other laws and regulations where we are licensed to operate.
The Company is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE VARIABLE ACCOUNT
The Variable Account is a separate investment account with fourteen (14)
Sub-Accounts. Each Sub-Account invests in a Fund of the Trust, Fidelity VIP or
T. Rowe Price. The assets used to fund the variable part of the Contracts are
set aside in Sub-Accounts and are separate from our general assets. We
administer and account for each Sub-Account as part of our general business.
However, income, capital gains and capital losses are allocated to each
Sub-Account without regard to any of our other income, capital gains or capital
losses. Under Delaware law, the assets of the Variable Account may not be
charged with any liabilities arising out of any other business of ours.
Our Board of Directors authorized the Variable Account by vote on June 13, 1996.
The Variable Account meets the definition of "separate account" under federal
securities laws. It is registered with the Securities and Exchange Commission
("SEC") as a unit investment trust under the Investment Company Act of 1940
("1940 Act"). This registration does not involve SEC supervision of the
management or investment practices or policies of the Variable Account or of the
Company. We reserve the right, subject to law, to change the names of the
Variable Account and the Sub-Accounts.
THE TRUST
The Trust is an open-end, diversified management investment company registered
with the SEC under the 1940 Act. This registration does not involve SEC
supervision of the investments or investment policy of the Trust or its separate
investment portfolios.
First Allmerica established the Trust as a Massachusetts business trust on
October 11, 1984. The Trust is a vehicle for the investment of assets of various
separate accounts established by the Company and affiliated insurance companies.
Shares of the Trust are not offered to the public but solely to the separate
accounts. Ten different investment portfolios of the Trust are available under
the Contracts, each issuing a series of shares: Select Emerging Markets Fund,
Select International Equity Fund, Select Aggressive Growth Fund, Select Capital
Appreciation Fund, Select Value Opportunity Fund, Select Growth Fund, Select
Strategic Growth Fund, Select Growth and Income Fund, Select Income Fund, and
Money Market Fund. The assets of each Fund are held separate from the assets of
the other Funds. Each Fund operates as a separate investment vehicle. The income
or losses of one Fund have no effect on the investment performance of another
Fund. The
17
<PAGE>
Sub-Accounts reinvest dividends and/or capital gains distributions received from
a Fund in more shares of that Fund as retained assets. Allmerica Financial
Investment Management Services, Inc. ("AFIMS") serves as investment manager of
the Trust. AFIMS has entered into agreements with other investment managers
("Sub-Advisers"), who manage the investments of the Funds. See INVESTMENT
ADVISORY SERVICES TO THE TRUST.
FIDELITY VIP
Fidelity VIP, managed by Fidelity Management & Research Company ("Fidelity
Management"), is an open-end, diversified, management investment company
organized as a Massachusetts business trust on November 13, 1981, and registered
with the SEC under the 1940 Act. Three of its investment portfolios are
available under the Contract: Fidelity VIP High Income Portfolio, Fidelity VIP
Equity-Income Portfolio, and Fidelity VIP Growth Portfolio.
Various Fidelity companies perform certain activities required to operate
Fidelity VIP. Fidelity Management is one of America's largest investment
management organizations, and has its principal business address at 82
Devonshire Street, Boston, Massachusetts. It is composed of a number of
different companies which provide a variety of financial services and products.
Fidelity Management is the original Fidelity company, founded in 1946. It
provides a number of mutual funds and other clients with investment research and
portfolio management services.
T. ROWE PRICE
T. Rowe Price, managed by Rowe Price-Fleming International, Inc.
("Price-Fleming"), is an open-end, diversified, management investment company
organized as a Maryland corporation in 1994 and registered with the SEC under
the 1940 Act. One of its investment portfolios is available under the Contracts:
the T. Rowe Price International Stock Portfolio.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Funds is set forth below. MORE
DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES, RESTRICTIONS AND
RISKS, EXPENSES PAID BY THE FUNDS AND OTHER RELEVANT INFORMATION REGARDING THE
FUNDS MAY BE FOUND IN THEIR RESPECTIVE PROSPECTUSES, WHICH ACCOMPANY THIS
PROSPECTUS AND SHOULD BE READ CAREFULLY BEFORE INVESTING. The Statements of
Additional Information of the Funds are available upon request. There can be no
assurance that the investment objectives of the Funds can be achieved.
SELECT EMERGING MARKETS FUND -- seeks long-term growth of capital by investing
in the world's emerging markets. The Sub-Adviser for the Select Emerging Markets
Fund is Schroder Capital Management International Inc.
SELECT INTERNATIONAL EQUITY FUND -- seeks maximum long-term total return
(capital appreciation and income) primarily by investing in common stocks of
established non-U.S. companies. The Sub-Adviser for the Select International
Equity Fund is Bank of Ireland Asset Management (U.S.) Limited.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- seeks long-term growth of capital
through investments primarily in common stocks of established, non-U.S.
companies. The Manager of the Portfolio is Rowe Price-Fleming International,
Inc.
SELECT AGGRESSIVE GROWTH FUND -- seeks above-average capital appreciation by
investing primarily in common stocks of companies that are believed to have
significant potential for capital appreciation. The Sub-Adviser for the Select
Aggressive Growth Fund is Nicholas-Applegate Capital Management, L.P.
18
<PAGE>
SELECT CAPITAL APPRECIATION FUND -- seeks long-term growth of capital in a
manner consistent with the preservation of capital. Realization of income is not
a significant investment consideration and any income realized on the Fund's
investments will be incidental to its primary objective. The Fund will invest
primarily in common stock of industries and companies which are experiencing
favorable demand for their products and services, and which operate in a
favorable competitive environment and regulatory climate. The Sub-Adviser for
the Select Capital Appreciation Fund is T. Rowe Price Associates, Inc.
SELECT VALUE OPPORTUNITY FUND -- seeks long-term growth of capital by investing
primarily in a diversified portfolio of common stocks of small and mid-size
companies, whose securities at the time of purchase are considered by the
Sub-Adviser to be undervalued. The Sub-Adviser for the Select Value Opportunity
Fund is Cramer Rosenthal McGlynn, LLC.
SELECT GROWTH FUND -- seeks to achieve growth of capital by investing in a
diversified portfolio consisting primarily of common stocks selected for their
long-term growth potential. The Sub-Adviser for the Select Growth Fund is Putnam
Investment Management, Inc.
SELECT STRATEGIC GROWTH FUND -- seeks long-term growth of capital by investing
primarily in common stocks of established companies. The Sub-Adviser for the
Select Strategic Growth Fund is Cambiar Investors, Inc.
FIDELITY VIP GROWTH PORTFOLIO -- seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation may also be found
in other types of securities, including bonds and preferred stocks.
SELECT GROWTH AND INCOME FUND -- seeks a combination of long-term growth of
capital and current income. The Fund will invest primarily in dividend-paying
common stocks and securities convertible into common stocks. The Sub-Adviser for
the Select Growth and Income Fund is John A. Levin & Co., Inc.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the Portfolio will also consider the potential for capital appreciation. The
Portfolio's goal is to achieve a yield which exceeds the composite yield on the
securities comprising S&P 500.
FIDELITY VIP HIGH INCOME PORTFOLIO -- seeks to obtain a high level of current
income by investing primarily in high-yielding, lower-rated fixed-income
securities (commonly referred to as "junk bonds"), while also considering growth
of capital. These securities are often considered to be speculative and involve
greater risk of default or price changes than securities assigned a high quality
rating. For more information about these lower-rated securities, see the VIP
prospectus.
SELECT INCOME FUND -- seeks a high level of current income. The Fund will invest
primarily in investment grade, fixed-income securities. The Sub-Adviser for the
Select Income Fund is Standish, Ayer & Wood, Inc.
MONEY MARKET FUND -- seeks to obtain maximum current income consistent with the
preservation of capital and liquidity. Allmerica Asset Management, Inc. is the
Sub-Adviser of the Money Market Fund.
CERTAIN UNDERLYING FUNDS HAVE SIMILAR INVESTMENT OBJECTIVES AND/OR POLICIES.
THEREFORE, TO CHOOSE THE SUB-ACCOUNTS WHICH BEST MEET YOUR NEEDS AND OBJECTIVES,
CAREFULLY READ THE PROSPECTUSES OF THE TRUST, FIDELITY VIP AND T. ROWE PRICE,
ALONG WITH THIS PROSPECTUS. IN SOME STATES, INSURANCE REGULATIONS MAY RESTRICT
THE AVAILABILITY OF PARTICULAR SUB-ACCOUNTS.
If required in your state, in the event of a material change in the investment
policy of a Sub-Account or the Underlying Fund in which it invests, you will be
notified of the change. If you have Contract Value in that Sub-Account, the
Company will transfer it without charge on written request within sixty (60)
days of the later of (1) the effective date of such change in the investment
policy, or (2) your receipt of the notice of the right to transfer. You may then
change the percentages of your premium and deduction allocations.
19
<PAGE>
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY SERVICES TO THE TRUST
The Trustees have responsibility for the supervision of the affairs of the
Trust. The Trustees have entered into a management agreement with Allmerica
Investment Management Services, Inc. ("AFIMS"), an indirectly wholly-owned
subsidiary of First Allmerica. AFIMS, subject to Trustee review, is responsible
for the daily affairs of the Trust and the general management of the Funds.
AFIMS performs administrative and management services for the Trust, furnishes
to the Trust all necessary office space, facilities and equipment, and pays the
compensation, if any, of officers and Trustees who are affiliated with AFIMS.
The Trust bears all expenses incurred in its operation, other than the expenses
AFIMS assumes under the management agreement. Trust expenses include:
- Costs to register and qualify the Trust's shares under the Securities Act
of 1933 ("1933 Act")
- Other fees payable to the SEC
- Independent public accountant, legal and custodian fees
- Association membership dues, taxes, interest, insurance payments and
brokerage commissions
- Fees and expenses of the Trustees who are not affiliated with AFIMS
- Expenses for proxies, prospectuses, reports to shareholders and other
expenses
Under the management agreement with the Trust, AFIMS has entered into agreements
with investment advisers ("Sub-Advisers") selected by AFIMS and the Trustees in
consultation with BARRA RogersCasey, Inc. ("BARRA RogersCasey"), a pension
consulting firm. The cost of such consulting services is borne by AFIMS. As a
consultant, BARRA RogersCasey has no decision-making authority with respect to
the Funds, and is not responsible for any advice provided to the Funds by AFIMS
or the Sub-Advisers.
Under each Sub-Adviser agreement, the Sub-Adviser is authorized to engage in
portfolio transactions on behalf of the Fund, subject to the Trustees'
instructions. The terms of a Sub-Adviser agreement cannot be materially changed
without the approval of a majority in interest of the shareholders of the Fund.
The Sub-Advisers (other than Allmerica Asset Management, Inc.) are not
affiliated with the Company or the Trust.
20
<PAGE>
For providing its services under the management agreement, AFIMS will receive a
fee, computed daily at an annual rate based on the average daily net asset value
of each Fund as follows:
<TABLE>
<S> <C> <C>
Select Emerging Markets Fund * 1.35%
Select International Equity Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Aggressive Growth Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Capital Appreciation Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Value Opportunity Fund First $100 million 1.00%
Next $150 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Select Growth Fund First $250 million 0.85%
Next $250 million 0.80%
Next $250 million 0.70%
Over $750 million 0.70%
Select Strategic Growth Fund * 0.85%
Select Growth and Income Fund First $100 million 0.75%
Next $150 million 0.70%
Over $250 million 0.65%
Select Income Fund First $50 million 0.60%
Next $50 million 0.55%
Over $100 million 0.45%
Money Market Fund First $50 million 0.35%
Next $200 million 0.25%
Over $250 million 0.20%
</TABLE>
* For the Select Emerging Markets Fund, and the Select Strategic Growth Fund,
the investment management fee does not vary according to the level of assets in
the Fund. AFIMS' fee computed for each Fund will be paid from the assets of such
Fund.
The prospectus of the Trust contains additional information concerning the
Funds, including information about additional expenses paid by the Funds and
fees paid to the Sub-Advisers by AFIMS, and should be read in conjunction with
this Prospectus.
21
<PAGE>
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP
For managing investments and business affairs, each Portfolio pays a monthly fee
to FMR. The prospectus of VIP contains additional information concerning the
Portfolios, including information concerning additional expenses paid by the
Portfolios, and should be read in conjunction with this Prospectus.
The Fidelity VIP High Income Portfolio pays a monthly fee to FMR at an annual
fee rate made up of the sum of two components:
1. A group fee rate based on the monthly average net assets of all the mutual
funds advised by FMR. On an annual basis this rate cannot rise above 0.37%,
and drops as total assets in all these funds rise.
2. An individual fund fee rate of 0.45% of the Fidelity VIP High Income
Portfolio's average net assets throughout the month.
One-twelfth of the annual management fee rate is applied to net assets averaged
over the most recent month, resulting in a dollar amount which is the management
fee for that month.
The Fidelity VIP Growth and the Fidelity VIP Equity-Income Portfolios' fee rates
are each made of two components:
1. A group fee rate based on the monthly average net assets of all of the
mutual funds advised by FMR. On an annual basis, this rate cannot rise above
0.52%, and drops as total assets in all these mutual funds rise.
2. An individual Portfolio fee rate of 0.30% for the Fidelity VIP Growth
Portfolio and 0.20% for the Fidelity VIP Equity-Income Portfolio.
One-twelfth of the sum of these two rates is applied to the respective
Portfolio's net assets averaged over the most recent month, giving a dollar
amount which is the fee for that month.
Thus, the Fidelity VIP High Income Portfolio may have a fee as high as 0.82%.
The Fidelity VIP Growth Portfolio may have a fee as high as 0.82% of its average
net assets. The Fidelity VIP Equity-Income Portfolio may have a fee as high as
0.72% of its average net assets.
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE
The Investment Adviser for the T. Rowe Price International Stock Portfolio is
Rowe Price-Fleming International, Inc. ("Price-Fleming"). Price-Fleming, founded
in 1979 as a joint venture between T. Rowe Price Associates, Inc. and Robert
Fleming Holdings, Limited, is one of America's largest international mutual fund
asset managers, with approximately $30 billion under management in its offices
in Baltimore, London, Tokyo, Hong Kong, Singapore and Buenos Aires.
To cover investment management and operating expenses, the T. Rowe Price
International Stock Portfolio pays Price-Fleming a single, all-inclusive fee of
1.05% of its average daily net assets.
THE CONTRACT
APPLYING FOR A CONTRACT
Individuals wishing to purchase a Contract must complete an application and
submit it to an authorized representative or to the Company at its Principal
Office. We offer Contracts to applicants 89 years old and under. After receiving
a completed application from a prospective Contract Owner, we will begin
underwriting to decide the insurability of the proposed Insured. We may require
medical examinations and other
22
<PAGE>
information before deciding insurability. We issue a Contract only after
underwriting has been completed. We may reject an application that does not meet
our underwriting guidelines.
If a prospective Contract Owner makes the initial payment with the application,
we will provide fixed conditional insurance during underwriting. The conditional
insurance will be based upon Death Benefit Factors shown in the Conditional
Insurance Agreement, up to a maximum of $500,000, depending on Age and
Underwriting Class. This coverage will continue for a maximum of 90 days from
the date of the application or, if required, the completed medical exam. If
death is by suicide, we will return only the payment made. If the initial
payment is not made with the application, on Contract delivery we will require
the initial payment to place the insurance in force.
If you made the initial payment before the date of Issuance and Acceptance, we
will allocate the payment to our Fixed Account within two business days of
receipt of the payment at our Principal Office. IF WE ARE UNABLE TO ISSUE THE
CONTRACT, THE PAYMENT WILL BE RETURNED TO THE CONTRACT OWNER WITHOUT INTEREST.
If your application is approved and the Contract is issued and accepted, we will
allocate your Contract Value on Issuance and Acceptance according to your
instructions. However, if your Contract provides for a full refund of payments
under its "Right to Cancel" provision as required in your state (see THE
CONTRACT -- "Free Look Period," below), we will initially allocate your
Sub-Account investments to the Money Market Fund. We will reallocate all amounts
according to your investment choices no later than the expiration of the right
to cancel period.
If your initial payment is equal to the amount of the Guideline Single Premium,
the contract will be issued with the Guaranteed Death Benefit Rider at no
additional cost. If the Guaranteed Death Benefit Rider is in effect on the Final
Payment Date, a guaranteed Net Death Benefit will be provided thereafter unless
the Guaranteed Death Benefit Rider is terminated. (See THE CONTRACT -- "Death
Benefit" -- "Guaranteed Death Benefit Rider," below)
FREE LOOK PERIOD
The Contract provides for a free look period under the Right to Cancel
provision. You have the right to examine and cancel your Contract by returning
it to us or to one of our representatives on or before the tenth day (or such
later date as required in your state) after you receive the Contract.
If your Contract provides for a full refund under its "Right to Cancel"
provision as required in your state, your refund will be your entire payment. If
your Contract does not provide for a full refund, you will receive:
- Amounts allocated to the Fixed Account; PLUS
- The Contract Value in the Variable Account; PLUS
- All fees, charges and taxes which have been imposed.
We may delay a refund of any payment made by check until the check has cleared
your bank. Your refund will be determined as of the Valuation Date that the
Contract is received at our Principal Office.
CONVERSION PRIVILEGE
Within 24 months of the Date of Issue, you can convert your Contract into a
non-variable Contract by transferring all Contract Value in the Sub-Accounts to
the Fixed Account. The conversion will take effect at the end of the Valuation
Period in which we receive, at our Principal Office, notice of the conversion
23
<PAGE>
satisfactory to us. There is no charge for this conversion. We will allocate any
future payment(s) to the Fixed Account, unless you instruct us otherwise.
PAYMENTS
The Contracts are designed for a large single payment to be paid by the Contract
Owner on or before the Date of Issue. The minimum initial payment is $25,000.
The initial payment is used to determine the Face Amount. The Face Amount will
be determined by treating the payment as equal to 100% of the Guideline Single
Premium. You may indicate the desired Face Amount on the application. If the
Face Amount specified exceeds 100% of the Guideline Single Premium for the
payment amount, the application will be amended and a Contract with a higher
Face Amount will be issued.
If the Face Amount specified is less than 80% of the Guideline Single Premium
for the payment amount, the application will be amended and a Contract with a
lower Face Amount will be issued. The Contract Owner must agree to any amendment
to the application.
Under our underwriting rules, the Face Amount must be based on 100% of the
Guideline Single Premium to be eligible for simplified underwriting.
Payments are payable to the Company. Payments may be made by mail to our
Principal Office or through our authorized representative. Any additional
payment, after the initial payment, is credited to the Variable Account or Fixed
Account on the date of receipt at the Principal Office.
The Contract limits the ability to make additional payments. However, no
additional payment may be less than $10,000 without our consent. Any additional
payment(s) may not cause total payments to exceed the maximum payment on the
specifications page of your Contract.
Total payments may not exceed the current maximum payment limits under federal
tax law. Where total payments would exceed the current maximum payment limits,
we will only accept that part of a payment that will make total payments equal
the maximum. We will return any part of a payment that is greater than that
amount. However, we will accept a payment needed to prevent Contract lapse
during a Contract year. See CONTRACT TERMINATION AND REINSTATEMENT.
ALLOCATION OF PAYMENTS
In the application for your Contract, you decide the initial allocation of the
payment among the Sub-Accounts and the Fixed Account. You may allocate the
payment to one or more of the Sub-Accounts and/or the Fixed Account. The minimum
amount that you may allocate to a Sub-Account is 1.0% of the payment. Allocation
percentages must be in whole numbers (for example, 33 1/3% may not be chosen)
and must total 100%.
You may change the allocation of any future payment by Written Request or
telephone request. You have the privilege to make telephone requests, unless you
elected not to have the privilege on the application. The policy of the Company
and its representatives and affiliates is that they will not be responsible for
losses resulting from acting on telephone requests reasonably believed to be
genuine. We will use reasonable methods to confirm that instructions
communicated by telephone are genuine; otherwise, the Company may be liable for
any losses from unauthorized or fraudulent instructions. We require that callers
on behalf of a Contract Owner identify themselves by name and identify the
Contract Owner by name, date of birth and Social Security number. All telephone
requests are tape recorded. An allocation change will take effect on the date of
receipt of the notice at the Principal Office. No charge is currently imposed
for changing payment allocation instructions. We reserve the right to impose a
charge in the future, but guarantee that the charge will not exceed $25.
24
<PAGE>
The Contract Value in the Sub-Accounts will vary with investment experience. You
bear this investment risk. Investment performance may also affect the Death
Benefit. Review your allocations of Contract Value as market conditions and your
financial planning needs change.
TRANSFER PRIVILEGE
At any time prior to the election of a Payment Option, subject to our then
current rules, you may transfer amounts among the Sub-Accounts or between a
Sub-Account and the Fixed Account. (You may not transfer that portion of the
Contract Value held in the Fixed Account that secures a Contract loan.)
We will make transfers at your Written Request or telephone request, as
described in THE CONTRACT -- ALLOCATION OF PAYMENTS. Transfers are effected at
the value next computed after receipt of the transfer order.
The first 12 transfers in a Contract year are free. After that, we will deduct a
transfer charge not to exceed $25 from amounts transferred in that Contract
year.
Transfers involving the Fixed Account are currently permitted only if:
- - There has been at least a ninety (90) day period since the last transfer from
the Fixed Account; and
- - The amount transferred from the Fixed Account in each transfer does not exceed
the lesser of $100,000 or 25% of the Contract Value
DOLLAR-COST AVERAGING OPTION AND AUTOMATIC REBALANCING OPTION
You may have automatic transfers of at least $100 made on a periodic basis:
- - from the Fixed Account or the Sub-Accounts which invests in the Money Market
Fund or the Select Income Fund of the Trust to one or more of the other
Sub-Accounts ("Dollar-Cost Averaging Option"), or
- - to reallocate Contract Value among the Sub-Accounts ("Automatic Rebalancing
Option").
Automatic transfers may be made every one, three, six or twelve months.
Generally, all transfers will be processed on the 15th of each scheduled month.
If the 15th is not a business day, however, or is the Monthly Processing Date,
the automatic transfer will be processed on the next business day. The
Dollar-Cost Averaging Option and the Automatic Account Rebalancing Option may
not be in effect at the same time. The Fixed Account is not included in
Automatic Account Rebalancing.
If the Contract Value in the Sub-Account from which the automatic transfer is to
be made is reduced to zero, the automatic transfer option will terminate. The
Contract Owner must reapply for any future automatic transfers.
The first automatic transfer counts as one transfer toward the 12 free transfers
allowed in each Contract year. Each subsequent automatic transfer is free and
does not reduce the remaining number of transfers that are free in a Contract
year. Any transfers made for a conversion privilege, Contract loan or material
change in investment policy will not count toward the 12 free transfers.
ASSET ALLOCATION MODEL REALLOCATIONS
If a Contract Owner elects to follow an asset allocation strategy, the Contract
Owner may preauthorize transfers in accordance with the chosen strategy. The
Company may provide administrative or other support services to independent
third parties who provide recommendations as to such allocation strategies.
However, the Company does not engage any third parties to offer investment
allocation services of any type under this
25
<PAGE>
Contract, does not endorse or review any investment allocations recommendations
made by such third parties, and is not responsible for the investment
allocations and transfers transacted on the Contract Owner's behalf. The Company
does not charge for providing additional asset allocation support services.
Additional information concerning asset allocation programs for which the
Company is currently providing support services may be obtained from a
registered representative or the Company.
TRANSFER PRIVILEGES SUBJECT TO POSSIBLE LIMITS
All of the transfer privileges described above are subject to our consent. We
reserve the right to impose limits on transfers including, but not limited to,
the:
- Minimum amount that may be transferred;
- Minimum amount that may remain in a Sub-Account following a transfer from
that Sub-Account;
- Minimum period between transfers involving the Fixed Account; and
- Maximum amounts that may be transferred from the Fixed Account.
These rules are subject to change by the Company.
DEATH BENEFIT (WITHOUT GUARANTEED DEATH BENEFIT RIDER)
If the Contract is in force on the Insured's death, we will, with due proof of
death, pay the Net Death Benefit to the named Beneficiary. For Second-to-Die
Contracts, the Net Death Benefit is payable on the death of the last surviving
Insured. There is no Death Benefit payable on the death of the first Insured to
die. We will normally pay the Net Death Benefit within seven days of receiving
due proof of the Insured's death, but we may delay payment of Net Death
Benefits. See OTHER CONTRACT PROVISIONS -- "Delay of Benefit Payments." The
Beneficiary may receive the Net Death Benefit in a lump sum or under a payment
option, unless the payment option has been restricted by the Contract Owner. See
APPENDIX C -- PAYMENT OPTIONS.
The Death Benefit is the GREATER of the:
- Face Amount OR
- Guideline Minimum Sum Insured.
Before the Final Payment Date the Net Death Benefit is:
- The Death Benefit; MINUS
- Any Outstanding Loan, rider charges and Monthly Deductions due and unpaid
through the Contract month in which the Insured dies, as well as any
partial withdrawals and surrender charges.
After the Final Payment Date, the Net Death benefit is:
- The Contract Value; MINUS
- Any Outstanding Loan.
In most states, we will compute the Net Death Benefit on the date we receive due
proof of the Insured's death.
GUARANTEED DEATH BENEFIT RIDER (NOT AVAILABLE IN ALL STATES) -- If at the time
of issue the Contract Owner has made payments equal to 100% of the Guideline
Single Premium, a Guaranteed Death Benefit Rider will
26
<PAGE>
be added to the Contract at no additional charge. The Contract will not lapse
while the Guaranteed Death Benefit Rider is in force. The Death Benefit before
the Final Payment Date will be the GREATER of the:
- Face Amount OR
- Guideline Minimum Sum Insured.
If the Guaranteed Death Benefit Rider is in effect on the Final Payment Date, a
guaranteed Net Death Benefit will be provided thereafter unless the Guaranteed
Death Benefit Rider is terminated, as described below. The guaranteed Net Death
Benefit will be:
- the GREATER of (a) the Face Amount as of the Final Payment Date or (b) the
Contract Value as of the date due proof of death is received by the
Company,
- REDUCED by the Outstanding Loan, if any, through the Contract month in
which the Insured dies.
The Guaranteed Death Benefit Rider will terminate (AND MAY NOT BE REINSTATED) on
the first to occur of the following:
- Foreclosure of the Outstanding Loan, if any; or
- Any Contract change that results in a negative guideline level premium; or
- A request for a partial withdrawal or preferred loan after the Final
Payment Date; or
- Upon your written request.
GUIDELINE MINIMUM SUM INSURED -- The guideline minimum sum insured is a
percentage of the Contract Value as set forth in APPENDIX A -- GUIDELINE MINIMUM
SUM INSURED TABLE. The guideline minimum sum insured is computed based on
federal tax regulations to ensure that the Contract qualifies as a life
insurance Contract and that the insurance proceeds will be excluded from the
gross income of the Beneficiary.
ILLUSTRATION -- In this illustration, assume that the Insured is under the age
of 40, and that there is no Outstanding Loan.
A Contract with a $100,000 Face Amount will have a Death Benefit of $100,000.
However, because the Death Benefit must be equal to or greater than 265% of
Contract Value, if the Contract Value exceeds $37,740 the Death Benefit will
exceed the $100,000 Face Amount. In this example, each dollar of Contract Value
above $37,740 will increase the Death Benefit by $2.65. For example, a Contract
with a Contract Value of $50,000 will have a guideline minimum sum insured of
$132,500 ($50,000 X 2.65); Contract Value of $60,000 will produce a guideline
minimum sum insured of $159,000 ($60,000 X 2.65); and Contract Value of $75,000
will produce a guideline minimum sum insured of $198,750 ($75,000 X 2.65).
Similarly, if Contract Value exceeds $37,740, each dollar taken out of Contract
Value will reduce the Death Benefit by $2.65. If, for example, the Contract
Value is reduced from $60,000 to $50,000 because of partial withdrawals, charges
or negative investment performance, the Death Benefit will be reduced from
$159,000 to $132,500. If, however, the Contract Value multiplied by the
applicable percentage from the table in Appendix A is less than the Face Amount,
the Death Benefit will equal the Face Amount.
The applicable percentage becomes lower as the Insured's age increases. If the
Insured's age in the above example were, for example, 50 (rather than between
zero and 40), the applicable percentage would be 200%. The Death Benefit would
not exceed the $100,000 Face Amount unless the Contract Value exceeded $50,000
(rather than $37,740), and each dollar then added to or taken from Contract
Value would change the Death Benefit by $2.00.
27
<PAGE>
CONTRACT VALUE
The Contract Value is the total value of your Contract. It is the SUM of:
- Your accumulation in the Fixed Account; PLUS
- The value of your Units in the Sub-Accounts.
There is no guaranteed minimum Contract Value. The Contract Value on any date
depends on variables that cannot be predetermined.
Your Contract Value is affected by the:
- Amount of your payment(s);
- Interest credited in the Fixed Account;
- Investment performance of the Funds you select;
- Partial withdrawals;
- Loans, loan repayments and loan interest paid or credited; and
- Charges and deductions under the Contract.
COMPUTING CONTRACT VALUE -- We compute the Contract Value on the Date of Issue
and on each Valuation Date. On the Date of Issue, the Contract Value is:
- Your payment plus any interest earned during the period it was allocated
to the Fixed Account (see "The Contract -- Application for a Contract");
MINUS
- The Monthly Deductions due.
On each Valuation Date after the Date of Issue, the Contract Value is the SUM
of:
- Accumulations in the Fixed Account; PLUS
- The SUM of the PRODUCTS of:
- The number of Units in each Sub-Account; TIMES
- The value of a Unit in each Sub-Account on the Valuation Date.
THE UNIT -- We allocate each payment to the Sub-Accounts you selected. We credit
allocations to the Sub-Accounts as Units. Units are credited separately for each
Sub-Account.
The number of Units of each Sub-Account credited to the Contract is the QUOTIENT
of:
- That part of the payment allocated to the Sub-Account; DIVIDED BY
- The dollar value of a Unit on the Valuation Date the payment is received
at our Principal Office.
28
<PAGE>
The number of Units will remain fixed unless changed by a split of Unit value,
transfer, loan, partial withdrawal or surrender. Also, Monthly Deductions taken
from a Sub-Account will result in cancellation of Units equal in value to the
amount deducted.
The dollar value of a Unit of a Sub-Account varies from Valuation Date to
Valuation Date based on the investment experience of that Sub-Account. This
investment experience reflects the investment performance, expenses and charges
of the Fund in which the Sub-Account invests. The value of each Unit was set at
$1.00 on the first Valuation Date of each Sub-Account.
The value of a Unit on any Valuation Date is the PRODUCT of:
- The dollar value of the Unit on the preceding Valuation Date; TIMES
- The Net Investment Factor.
NET INVESTMENT FACTOR -- The net investment factor measures the investment
performance of a Sub-Account during the Valuation Period just ended. The net
investment factor for each Sub-Account is the result of:
- The net asset value per share of a Fund held in the Sub-Account determined
at the end of the current Valuation Period; PLUS
- The per share amount of any dividend or capital gain distributions made by
the Fund on shares in the Sub-Account if the "ex-dividend" date occurs
during the current Valuation Period; DIVIDED BY
- The net asset value per share of a Fund share held in the Sub-Account
determined as of the end of the immediately preceding Valuation Period;
MINUS
- The mortality and expense risk charge for each day in the Valuation
Period, currently at an annual rate of 0.90% of the daily net asset value
of that Sub-Account.
The net investment factor may be greater or less than one.
PAYMENT OPTIONS
The Net Death Benefit payable may be paid in a single sum or under one or more
of the payment options then offered by the Company. See "APPENDIX C -- PAYMENT
OPTIONS." These payment options also are available at the Final Payment Date or
if the Contract is surrendered. If no election is made, we will pay the Net
Death Benefit in a single sum.
OPTIONAL INSURANCE BENEFITS
You may add an optional insurance benefit to the Contract by rider, as described
in APPENDIX B -- OPTIONAL INSURANCE BENEFITS.
SURRENDER
You may surrender the Contract and receive its Surrender Value. The Surrender
Value is:
- The Contract Value; MINUS
- Any Outstanding Loan and surrender charges.
29
<PAGE>
We will compute the Surrender Value on the Valuation Date on which we receive
the Contract with a Written Request for surrender. We will deduct a surrender
charge if you surrender the Contract within 10 full Contract years of the Date
of Issue. See CHARGES AND DEDUCTIONS -- "Surrender Charge."
The Surrender Value may be paid in a lump sum or under a payment option then
offered by us. See APPENDIX C -- PAYMENT OPTIONS. We will normally pay the
Surrender Value within seven days following our receipt of Written Request. We
may delay benefit payments under the circumstances described in OTHER CONTRACT
PROVISIONS -- "Delay of Benefit Payments."
For important tax consequences of a surrender, see "FEDERAL TAX CONSIDERATIONS."
PARTIAL WITHDRAWAL
You may withdraw part of the Contract Value of your Contract on Written Request.
Your Written Request must state the dollar amount you wish to receive. You may
allocate the amount withdrawn among the Sub-Accounts and the Fixed Account. If
you do not provide allocation instructions, we will make a Pro-rata Allocation.
Each partial withdrawal must be at least $1,000. We will not allow a partial
withdrawal if it would reduce the Contract Value below $25,000. The Face Amount
is reduced proportionately based on the ratio of the amount of the partial
withdrawal and charges to the Contract Value on the date of withdrawal.
On a partial withdrawal from a Sub-Account, we will cancel the number of Units
equal in value to the amount withdrawn. The amount withdrawn will be the amount
you requested plus the partial withdrawal costs and any applicable surrender
fee. See CHARGES AND DEDUCTIONS -- "Surrender Charges" and CHARGES AND
DEDUCTIONS -- "Partial Withdrawal Costs." We will normally pay the partial
withdrawal within seven days following our receipt of the written request. We
may delay payment as described in OTHER CONTRACT PROVISIONS -- "Delay of Benefit
Payments."
For important tax consequences of partial withdrawals, see FEDERAL TAX
CONSIDERATIONS.
CHARGES AND DEDUCTIONS
The following charges will apply to your Contract under the circumstances
described. Some of these charges apply throughout the Contract's duration.
No surrender charges or partial withdrawal charges are imposed, and no
commissions are paid where the Insured as of the date of application is within
the following class of individuals:
- - All employees of First Allmerica and its affiliates and subsidiaries located
at First Allmerica's home office (or at off-site locations if such employees
are on First Allmerica's home office payroll); all Directors of First
Allmerica and its affiliates and subsidiaries, all employees and registered
representatives of any broker-dealer that has entered into a sales agreement
with us or Allmerica Investments, Inc. to sell the Contracts and any spouses
or children of the above persons.
MONTHLY DEDUCTIONS
On the Monthly Processing Date, the Company will deduct an amount to cover
charges and expenses incurred in connection with the Contract. This Monthly
Deduction will be deducted by subtracting values from the Fixed Account
accumulation and/or canceling Units from each applicable Sub-Account in the
ratio that the Contract Value in the Sub-Account bears to the Contract Value.
The amount of the Monthly Deduction will vary from month to month. If the
Contract Value is not sufficient to cover the Monthly Deduction which is due,
the Contract may lapse. (See CONTRACT TERMINATION AND REINSTATEMENT.) The
Monthly Deduction is comprised of the following charges:
- - MAINTENANCE FEE: The Company will make a deduction of $2.50 from any Contract
with less than $100 in Contract Value to cover charges and expenses incurred
in connection with the Contract. This charge is to
30
<PAGE>
reimburse the Company for expenses related to issuance and maintenance of the
Contract. The Company does not intend to profit from this charge.
- - ADMINISTRATION CHARGE: The Company imposes a monthly charge at an annual rate
of 0.20% of the Contract Value. This charge is to reimburse us for
administrative expenses incurred in the administration of the Contract. It is
not expected to be a source of profit.
- - MONTHLY INSURANCE PROTECTION CHARGE: Immediately after the Contract is issued,
the Death Benefit will be greater than the payment. While the Contract is in
force, prior to the Final Payment Date, the Death Benefit will generally be
greater than the Contract Value. To enable us to pay this excess of the Death
Benefit over the Contract Value, a monthly cost of insurance charge is
deducted. This charge varies depending on the type of Contract and the
Underwriting Class. In no event will the current deduction for the cost of
insurance exceed the guaranteed maximum insurance protection rates set forth
in the Contract. These guaranteed rates are based on the Commissioners 1980
Standard Ordinary Mortality Tables, Tobacco User or Non-Tobacco User
(Mortality Table B for unisex Contracts and Mortality Table D for Second-to-
Die Contracts) and the Insured's sex and Age. The Tables used for this purpose
set forth different mortality estimates for males and females and for tobacco
user and non-tobacco user. Any change in the insurance protection rates will
apply to all Insureds of the same Age, sex and Underwriting Class whose
Contracts have been in force for the same period.
The Underwriting Class of an Insured will affect the insurance protection
rate. We currently place Insureds into standard Underwriting Classes and
non-standard Underwriting Classes. The Underwriting Classes are also divided
into two categories: tobacco user and non-tobacco user. We will place Insureds
under the age of 18 at the Date of Issue in a standard or non-standard
Underwriting Class. We will then classify the Insured as a non-tobacco user.
- - DISTRIBUTION EXPENSE: During the first ten Contract years, we make a monthly
deduction to compensate for a portion of the sales expenses which are incurred
by us with respect to the Contracts. This charge is equal to an annual rate of
0.90% of the Contract Value.
- - FEDERAL & STATE PAYMENT TAX CHARGE: During the first Contract year, we make a
monthly deduction to partially compensate the Company for the increase in
federal tax liability from the application of Section 848 of the Internal
Revenue Code and to offset a portion of the average premium tax the Company is
expected to pay to various state and local jurisdictions. This charge is equal
to an annual rate of 1.50% of the Contract Value. The Company does not intend
to profit from the premium tax portion of this charge.
- - DAILY DEDUCTIONS: We assess each Sub-Account with a charge for mortality and
expense risks we assume. Fund expenses are also reflected in the Variable
Account.
- - MORTALITY AND EXPENSE RISK CHARGE: We impose a daily charge at a current
annual rate of 0.90% of the average daily net asset value of each Sub-Account.
This charge compensates us for assuming mortality and expense risks for
variable interests in the Contracts.
The mortality risk we assume is that Insureds may live for a shorter time than
anticipated. If this happens, we will pay more Net Death Benefits than
anticipated. The expense risk we assume is that the expenses incurred in
issuing and administering the Contracts will exceed those compensated by the
maintenance fee and administration charges in the Contracts. If the charge for
mortality and expense risks is not sufficient to cover mortality experience
and expenses, we will absorb the losses. If the charge turns out to be higher
than mortality and expense risk expenses, the difference will be a profit to
us. If the charge provides us with a profit, the profit will be available for
our use to pay distribution, sales and other expenses.
- - FUND EXPENSES: The value of the Units of the Sub-Accounts will reflect the
investment advisory fee and other expenses of the Funds whose shares the
Sub-Accounts purchase. The prospectuses and statements of additional
information of the Funds contain more information concerning the fees and
expenses.
No charges are currently made against the Sub-Accounts for federal or state
income taxes. Should income taxes be imposed, we may make deductions from the
Sub-Accounts to pay the taxes. See FEDERAL TAX CONSIDERATIONS.
31
<PAGE>
SURRENDER CHARGE
The Contract's contingent surrender charge is a deferred sales charge and an
unrecovered payment tax charge. The deferred sales charge compensates us for
distribution expenses, including commissions to our representatives, advertising
and the printing of prospectuses and sales literature.
<TABLE>
<CAPTION>
Contract Year* 1 2 3 4 5 6 7 8 9 10+
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Surrender Charge 10.00% 9.25% 8.50% 7.75% 7.00% 6.25% 4.75% 3.25% 1.50% 0%
</TABLE>
The surrender charge applies for ten Contract years. We impose the surrender
charge only if, during its duration, you request a full surrender or a partial
withdrawal in excess of the free withdrawal amount.
* For a Contract that lapses and reinstates, see REINSTATEMENT.
PARTIAL WITHDRAWAL COSTS
For each partial withdrawal, we deduct a transaction fee of 2.0% of the amount
withdrawn, not to exceed $25. This fee is intended to reimburse us for the cost
of processing the withdrawal.
A partial withdrawal charge may also be deducted from Contract Value. However,
in any Contract year, you may withdraw, without a partial withdrawal charge, up
to:
- 10% of the Contract Value; MINUS
- The total of any prior free withdrawals in the same Contract year ("Free
10% Withdrawal.")
The right to make the Free 10% Withdrawal is not cumulative from Contract year
to Contract year. For example, if only 8% of Contract Value were withdrawn in
the second Contract year, the amount you could withdraw in future Contract years
would not be increased by the amount you did not withdraw in the second Contract
year.
We impose any applicable surrender charge on any withdrawal greater than the
Free 10% Withdrawal.
TRANSFER CHARGES
The first 12 transfers in a Contract year are free. After that, we may deduct a
transfer charge not to exceed $25 from amounts transferred in that Contract
year. This charge reimburses us for the administrative costs of processing the
transfer.
If you apply for automatic transfers, the first automatic transfer counts as one
transfer. Each future automatic transfer is without charge and does not reduce
the remaining number of transfers that may be made without charge.
Each of the following transfers of Contract Value from the Sub-Accounts to the
Fixed Account is free and does not count as one of the 12 free transfers in a
Contract year:
- A conversion within the first 24 months from Date of Issue;
- A transfer to the Fixed Account to secure a loan; and
- A transfer from the Fixed Account as a result of a loan repayment.
32
<PAGE>
CONTRACT LOANS
You may borrow money secured by your Contract Value, both during and after the
first Contract year. The total amount you may borrow is the Loan Value. The Loan
Value is 90% of the Surrender Value. Contract Value equal to the Outstanding
Loan will earn monthly interest in the Fixed Account at an annual rate of at
least 4.0%.
The minimum loan amount is $1,000. The maximum loan is the Loan Value minus any
Outstanding Loan. We will usually pay the loan within seven days after we
receive the Written Request. We may delay the payment of loans as stated in
OTHER CONTRACT PROVISIONS -- "Delay of Payments."
We will allocate the loan among the Sub-Accounts and the Fixed Account according
to your instructions. If you do not make an allocation, we will make a Pro-rata
Allocation. We will transfer Contract Value in each Sub-Account equal to the
Contract loan to the Fixed Account. We will not count this transfer as a
transfer subject to the transfer charge.
PREFERRED LOAN OPTION
Any portion of the Outstanding Loan that represents earnings in this Contract, a
loan from an exchanged life insurance policy that was as carried over to this
Contract or the gain in the exchanged life insurance policy that was carried
over to this Contract may be treated as a preferred loan. The available
percentage of the gain carried over from an exchanged policy less any policy
loan carried over which will be eligible for preferred loan treatment is as
follows:
<TABLE>
<CAPTION>
Beginning of 1 2 3 4 5 6 7 8 9 10 11
Contract Year ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unloaned Gain 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Available
</TABLE>
The guaranteed annual interest rate credited to the Contract Value securing a
preferred loan will be at least 5.5%.
LOAN INTEREST CHARGED
Interest accrues daily at the annual rate of 6.0%. Interest is due and payable
in arrears at the end of each Contract year or for as short a period as the loan
may exist. Interest not paid when due will be added to the Outstanding Loan by
transferring Contract Value equal to the interest due to the Fixed Account. The
interest due will bear interest at the same rate.
REPAYMENT OF OUTSTANDING LOAN
You may pay any loans before Contract lapse. We will allocate that part of the
Contract Value in the Fixed Account that secured a repaid loan to the
Sub-Accounts and Fixed Account according to your instructions. If you do not
make a repayment allocation, we will allocate Contract Value according to your
most recent payment allocation instructions. However, loan repayments allocated
to the Variable Account cannot exceed Contract Value previously transferred from
the Variable Account to secure the outstanding loan.
If the Outstanding Loan exceeds the Contract Value less the surrender charge,
the Contract will terminate. We will mail a notice of termination to the last
known address of you and any assignee. If you do not make sufficient payment
within 62 days after this notice is mailed, the Contract will terminate with no
value. See CONTRACT TERMINATION AND REINSTATEMENT.
33
<PAGE>
EFFECT OF CONTRACT LOANS
Contract loans will permanently affect the Contract Value and Surrender Value,
and may permanently affect the Death Benefit. The effect could be favorable or
unfavorable, depending on whether the investment performance of the Sub-Accounts
is less than or greater than the interest credited to the Contract Value in the
Fixed Account that secures the loan. We will deduct any Outstanding Loan from
the proceeds payable when the Insured dies or from a surrender.
CONTRACT TERMINATION AND REINSTATEMENT
TERMINATION
Unless the Guaranteed Death Benefit Rider is in effect, the Contract will
terminate if on a Monthly Processing Date the Surrender Value is less than $0
(zero.) If this situation occurs, the Contract will be in default. You will then
have a grace period of 62 days, measured from the date of default, to make a
payment sufficient to prevent termination. On the date of default, we will send
a notice to you and to any assignee of record. The notice will state the payment
due and the date by which it must be paid. Failure to make a sufficient payment
within the grace period will result in the Contract terminating without value.
If the Insured dies during the grace period, we will deduct from the Net Death
Benefit any overdue charges. See THE CONTRACT -- "Guaranteed Death Benefit
Rider."
REINSTATEMENT
A terminated Contract may be reinstated within three years of the date of
default and before the Final Payment Date. The reinstatement takes effect on the
Monthly Processing Date following the date you submit to us:
- Written application for reinstatement;
- Evidence of Insurability showing that the Insured is insurable according
to our current underwriting rules;
- A payment that is large enough to cover the cost of all Contract charges
that were due and unpaid during the grace period;
- A payment that is large enough to keep the Contract in force for three
months; and
- A payment or reinstatement of any loan against the Contract that existed
at the end of the grace period.
Contracts which have been surrendered may not be reinstated. The Guaranteed
Death Benefit Rider may not be reinstated.
SURRENDER CHARGE -- For the purpose of measuring the surrender charge period,
the Contract will be reinstated as of the date of default. The surrender charge
on the date of reinstatement is the surrender charge that would have been in
effect on the date of default.
CONTRACT VALUE ON REINSTATEMENT -- The Contract Value on the date of
reinstatement is:
- The payment made to reinstate the Contract and interest earned from the
date the payment was received at our Principal Office; PLUS
- The Contract Value less any Outstanding Loan on the date of default; MINUS
- The Monthly Deductions due on the date of reinstatement.
You may reinstate any Outstanding Loan.
34
<PAGE>
OTHER CONTRACT PROVISIONS
CONTRACT OWNER
The Contract Owner named on the specifications page of the Contract is the
Insured unless another Contract Owner has been named in the application. As
Contract Owner, you are entitled to exercise all rights under your Contract
while the Insured is alive, with the consent of any irrevocable Beneficiary.
BENEFICIARY
The Beneficiary is the person or persons to whom the Net Death Benefit is
payable on the Insured's death. Unless otherwise stated in the Contract, the
Beneficiary has no rights in the Contract before the Insured dies. While the
Insured is alive, you may change the Beneficiary, unless you have declared the
Beneficiary to be irrevocable. If no Beneficiary is alive when the Insured dies,
the Contract Owner (or the Contract Owner's estate) will be the Beneficiary. If
more than one Beneficiary is alive when the Insured dies, we will pay each
Beneficiary in equal shares, unless you have chosen otherwise. Where there is
more than one Beneficiary, the interest of a Beneficiary who dies before the
Insured will pass to surviving Beneficiaries proportionally, unless the Contract
Owner has requested otherwise.
ASSIGNMENT
You may assign a Contract as collateral or make an absolute assignment. All
Contract rights will be transferred as to the assignee's interest. The consent
of the assignee may be required to make changes in payment allocations, make
transfers or to exercise other rights under the Contract. We are not bound by an
assignment or release thereof, unless it is in writing and recorded at our
Principal Office. When recorded, the assignment will take effect on the date the
Written Request was signed. Any rights the assignment creates will be subject to
any payments we made or actions we took before the assignment is recorded. We
are not responsible for determining the validity of any assignment or release.
THE FOLLOWING CONTRACT PROVISIONS MAY VARY BY STATE.
LIMIT ON RIGHT TO CHALLENGE THE CONTRACT
We cannot challenge the validity of your Contract if the Insured was alive after
the Contract had been in force for two years from the Date of Issue.
SUICIDE
The Net Death Benefit will not be paid if the Insured commits suicide within two
years from the Date of Issue. Instead, we will pay the Beneficiary all payments
made for the Contract, without interest, less any Outstanding Loan and partial
withdrawals.
MISSTATEMENT OF AGE OR SEX
If the Insured's Age or sex is not correctly stated in the Contract application,
we will adjust the Death Benefit and the Face Amount under the Contract to
reflect the correct Age and sex. The adjustment will be based upon the ratio of
the maximum payment for the Contract to the maximum payment for the Contract
issued for the correct Age or sex. We will not reduce the Death Benefit to less
than the Guideline Minimum Sum Insured. For a unisex Contract, there is no
adjusted benefit for misstatement of sex.
35
<PAGE>
DELAY OF PAYMENTS
We may delay paying any amounts derived from a payment you made by check until
the check has cleared your bank. Amounts payable from the Variable Account for
surrender, partial withdrawals, Net Death Benefit, Contract loans and transfers
may be postponed whenever:
- The New York Stock Exchange is closed other than customary weekend and
holiday closings;
- The SEC restricts trading on the New York Stock Exchange; or
- The SEC determines an emergency exists, so that disposal of securities is
not reasonably practicable or it is not reasonably practicable to compute
the value of the Variable Account's net assets.
We reserve the right to defer amounts payable from the Fixed Account. This delay
may not exceed six months. However, if payment is delayed for 30 days or more,
we will pay interest at least equal to an effective annual yield of 3.0% per
year for the deferment. Amounts from the Fixed Account used to make payments on
Contracts that we or our affiliates issue will not be delayed.
FEDERAL TAX CONSIDERATIONS
The following summary of federal tax considerations is based on our
understanding of the present federal income tax laws as they are currently
interpreted. Legislation may be proposed which, if passed, could adversely and
possibly retroactively affect the taxation of the Contracts. This summary is not
exhaustive, does not purport to cover all situations, and is not intended as tax
advice. We do not address tax provisions that may apply if the Contract Owner is
a corporation or the Trustee of an employee benefit plan. You should consult a
qualified tax adviser to apply the law to your circumstances.
THE COMPANY AND THE VARIABLE ACCOUNT
The Company is taxed as a life insurance company under Subchapter L of the
Internal Revenue Code. We file a consolidated tax return with our parent and
affiliates. We do not currently charge for any income tax on the earnings or
realized capital gains in the Variable Account. We do not currently charge for
federal income taxes with respect to the Variable Account. A charge may apply in
the future for any federal income taxes we incur. The charge may become
necessary, for example, if there is a change in our tax status. Any charge would
be designed to cover the federal income taxes on the investment results of the
Variable Account.
Under current laws, the Company may incur state and local taxes besides premium
taxes. These taxes are not currently significant. If there is a material change
in these taxes affecting the Variable Account, we may charge for taxes paid or
for tax reserves.
TAXATION OF THE CONTRACTS
We believe that the Contracts described in this prospectus are life insurance
contracts under Section 7702 of the Code. Section 7702 affects the taxation of
life insurance contracts and places limits on the total amount of premiums and
on the relationship of the Contract Value to the Death Benefit. As a life
insurance contract, the Net Death Benefit of the contract is excludable from the
gross income of the Beneficiary. Also, any increase in Contract Value is not
taxable until received by you or your designee. Although the Company believes
the Contracts are in compliance with Section 7702 of the Code, the manner in
which Section 7702 should be applied to a last survivorship life insurance
contract is not directly addressed by Section 7702. In absence of final
regulations or other guidance issued under Section 7702, there is necessarily
some uncertainty whether a Contract will meet the Section 7702 definition of a
life insurance Contract. This is true particularly if the Contract Owner pays
the full amount of payments permitted under the Contract. A Contract Owner
contemplating the payment of such amounts should do so only after consulting a
tax advisor. If a Contract were
36
<PAGE>
determined not to be a life insurance contract under Section 7702, it would not
have most of the tax advantages normally provided by a life insurance contract.
MODIFIED ENDOWMENT CONTRACTS
A life insurance contract is treated as a "modified endowment contract" under
Section 7702A of the Code if it meets the definition of life insurance in
Section 7702 but fails the "seven-pay test" of Section 7702A. The seven-pay test
provides that payments can not be paid at a rate more rapidly than allowed by
the payment of seven annual payments using specified computational rules
provided in Section 7702A.
If the Contract is considered a modified endowment contract, distributions
(including Contract loans, partial withdrawals, surrenders and assignments) will
be taxed on an "income-first" basis and includible in gross income to the extent
that the Surrender Value exceeds the Contract Owner's investment in the
Contract. Any other amounts will be treated as a return of capital up to the
Contract Owner's basis in the Contract. A 10% tax is imposed on that part of any
distribution that is includible in income, unless the distribution is:
- Made after the taxpayer becomes disabled;
- Made after the taxpayer attains age 59 1/2; OR
- Part of a series of substantially equal periodic payments for the
taxpayer's life or life expectancy or joint life expectancies of the
taxpayer and beneficiary.
The Company has designed this Contract to meet the definition of a modified
endowment contract.
Any contract received in exchange for a modified endowment contract will also be
a modified endowment contract. However, an exchange under Section 1035 of the
Code of (1) a life insurance contract entered into before June 21, 1988 or (2) a
life insurance contract that is not itself a modified endowment contract, will
not cause the new Contract to be treated as a modified endowment contract if no
additional payments are paid and there is no increase in the death benefit as a
result of the exchange.
All modified endowment contracts issued by the same insurance company to the
same Contract Owner during any 12-month period will be treated as a single
modified endowment contract in computing taxable distributions.
CONTRACT LOANS
Consumer interest paid on Contract loans under an individually owned Contract is
not tax deductible. A business may deduct interest on loans up to $50,000
subject to a prescribed maximum amount, provided that the Insured is a "key
person" of that business. The Code defines "key person" to mean an officer or a
20% owner.
Federal tax law requires that the investment of each Sub-Account funding the
Contracts is adequately diversified according to Treasury regulations. Although
we do not have control over the investments of the Funds, we believe that the
Funds currently meet the Treasury's diversification requirements. We will
monitor continued compliance with these requirements.
The Treasury Department has announced that previous regulations on
diversification do not provide guidance concerning the extent to which Contract
Owners may direct their investments to divisions of a separate investment
account. Regulations may provide guidance in the future. The Contracts or our
administrative rules may be modified as necessary to prevent a Contract Owner
from being considered the owner of the assets of the Variable Account.
37
<PAGE>
VOTING RIGHTS
Where the law requires, we will vote Fund shares that each Sub-Account holds
according to instructions received from Contract Owners with Contract Value in
the Sub-Account. If, under the 1940 Act or its rules, we may vote shares in our
own right, whether or not the shares relate to the Contracts, we reserve the
right to do so.
We will provide each person having a voting interest in a Fund with proxy
materials and voting instructions. We will vote shares held in each Sub-Account
for which no timely instructions are received in proportion to all instructions
received for the Sub-Account. We will also vote in the same proportion our
shares held in the Variable Account that do not relate to the Contracts.
We will compute the number of votes that a Contract Owner has the right to
instruct on the record date established for the Fund. This number is the
quotient of:
- Each Contract Owner's Contract Value in the Sub-Account; divided by
- The net asset value of one share in the Fund in which the assets of the
Sub-Account are invested.
We may disregard voting instructions Contract Owners initiate in favor of any
change in the investment policies or in any investment adviser or principal
underwriter. Our disapproval of any change must be reasonable. A change in
investment policies or investment adviser must be based on a good faith
determination that the change would be contrary to state law or otherwise is
improper under the objectives and purposes of the Funds. If we do disregard
voting instructions, we will include a summary of and reasons for that action in
the next report to Contract Owners.
38
<PAGE>
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ------------------------------------ --------------------------------------------------
<S> <C>
Bruce C. Anderson Director of First Allmerica since 1996; Vice
Director President, First Allmerica since 1984
Abigail M. Armstrong Secretary of First Allmerica since 1996; Counsel,
Secretary and Counsel First Allmerica since 1991
Robert E. Bruce Director and Chief Information Officer of First
Director and Chief Information Allmerica since 1997; Vice President of First
Officer Allmerica since 1995; Corporate Manager, Digital
Equipment Corporation 1979 to 1995
John P. Kavanaugh Director and Chief Investment Officer of First
Director, Vice President and Chief Allmerica since 1996; Vice President, First
Investment Officer Allmerica since 1991
John F. Kelly Director of First Allmerica since 1996; General
Director, Vice President and Counsel since 1981; Senior Vice President
General Counsel since1986, and Assistant Secretary, First
Allmerica since 1991
J. Barry May Director of First Allmerica since 1996; Director
Director and President, The Hanover Insurance Company
since 1996; Vice President, The Hanover
Insurance Company, 1993 to 1996; General
Manager, The Hanover Insurance Company 1989 to
1993
James R. McAuliffe Director of First Allmerica since 1996; Director
Director of Citizens Insurance Company of America since
1992; President since 1994 and CEO since 1996;
Vice President, First Allmerica 1982 to 1994 and
Chief Investment Officer, First Allmerica 1986
to 1994.
John F. O'Brien Director, Chairman of the Board, President and
Director and Chairman of the Board Chief Executive Officer, First Allmerica since
1989
Edward J. Parry, III Director and Chief Financial Officer of First
Director, Vice President, Chief Allmerica since 1996; Vice President and
Financial Officer, and Treasurer Treasurer, First Allmerica since 1993
Richard M. Reilly Director of First Allmerica since 1996; Vice
Director, President and Chief President, First Allmerica since 1990; Director,
Executive Officer Allmerica Investments, Inc. since 1990; Director
and President, Allmerica Financial Investment
Management Services, Inc. since 1990
Robert P. Restrepo, Jr. Director and Vice President of First Allmerica
Director since May, 1998; Chief Executive Officer,
Travelers Property & Casualty Group, 1996 to
1998; Senior Vice President, Aetna Life &
Casualty Company, 1993 to 1996.
Eric A. Simonsen Director of First Allmerica since 1996; Vice
Director and Vice President President, First Allmerica since 1990; Chief
Financial Officer, First Allmerica 1990 to 1996
Phillip E. Soule Director of First Allmerica since 1996; Vice
Director President, First Allmerica since 1987
</TABLE>
39
<PAGE>
DISTRIBUTION
Allmerica Investments, Inc., an indirect wholly-owned subsidiary of First
Allmerica, acts as the principal underwriter and general distributor of the
Contracts. Allmerica Investments, Inc. is registered with the SEC as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc. ("NASD"). Broker-dealers sell the Contracts through their registered
representatives who are appointed by us.
The Company pays commissions not to exceed 7.5% of the payment to broker-dealers
which sell the Contracts. Alternative commission schedules are available with
lower initial commission amounts, plus ongoing annual compensation of up to
1.00% of Contract Value. To the extent permitted by NASD rules, promotional
incentives or payments may also be provided to broker-dealers based on sales
volumes, the assumption of wholesaling functions or other sales-related
criteria. Other payments may be made for other services that do not directly
involve the sale of the Contracts. These services may include the recruitment
and training of personnel, production of promotional literature, and similar
services.
We intend to recoup commissions and other sales expenses through a combination
of the contingent surrender charge and investment earnings on amounts allocated
under the Contracts to the Fixed Account. Commissions paid on the Contracts,
including other incentives or payments, are not charged to Contract Owners or to
the Separate Account.
REPORTS
We will maintain the records for the Variable Account. We will promptly send you
statements of transactions under your Contract, including:
- Payments;
- Transfers among Sub-Accounts and the Fixed Account;
- Partial withdrawals;
- Increases in loan amount or loan repayments;
- Lapse or termination for any reason; and
- Reinstatement.
We will send an annual statement to you that will summarize all of the above
transactions and deductions of charges during the Contract year. It will also
set forth the status of the Death Benefit, Contract Value, Surrender Value,
amounts in the Sub-Accounts and Fixed Account, and any Contract loans. We will
send you reports containing financial statements and other information for the
Variable Account and the Funds as the 1940 Act requires.
SERVICES
The Company receives fees from the investment advisers or other service
providers of certain Underlying Funds in return for providing certain services
to Contract Owners. Currently, the Company receives service fees with respect to
the Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio, and
Fidelity VIP High Income Portfolio, at an annual rate of 0.10% of the aggregate
net asset value, respectively, of the shares held by the Variable Account. With
respect to the T. Rowe Price International Stock Portfolio, the Company receives
service fees at an annual rate of 0.15% per annum of the aggregate net asset
value of shares held by the Variable Account. The Company may in the future
render services for which it will receive compensation from the investment
advisers or other service providers of other Underlying Funds.
40
<PAGE>
LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Variable Account is a party,
or to which the assets of the Variable Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Variable Account.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We reserve the right, subject to law, to make additions to, deletions from, or
substitutions for the shares that are held in the Sub-Accounts. We may redeem
the shares of a Fund and substitute shares of another registered open-end
management company, if:
- The shares of the Fund are no longer available for investment; or
- In our judgment further investment in the Fund would be improper based on
the purposes of the Variable Account or the affected Sub-Account.
Where the 1940 Act or other law requires, we will not substitute any shares
respecting a Contract interest in a Sub-Account without notice to Contract
Owners and prior approval of the SEC and state insurance authorities. The
Variable Account may, as the law allows, purchase other securities for other
contracts or allow a conversion between contracts on a Contract Owner's request.
We reserve the right to establish additional Sub-Accounts funded by a new fund
or by another investment company. Subject to law, we may, in our sole
discretion, establish new Sub-Accounts or eliminate one or more Sub-Accounts.
Shares of the Funds are issued to other separate accounts of the Company and its
affiliates that fund variable annuity contracts ("mixed funding.") Shares of the
Portfolios of Fidelity VIP and T. Rowe are also issued to other unaffiliated
insurance companies ("shared funding.") It is conceivable that in the future
such mixed funding or shared funding may be disadvantageous for variable life
contract owners or variable annuity contract owners. The Company and the Funds
do not believe that mixed funding is currently disadvantageous to either
variable life insurance contract owners or variable annuity contract owners. The
Company will monitor events to identify any material conflicts among contract
owners because of mixed funding. If the Company concludes that separate funds
should be established for variable life and variable annuity separate accounts,
we will bear the expenses.
We may change the Contract to reflect a substitution or other change and will
notify Contract Owners of the change. Subject to any approvals the law may
require, the Variable Account or any Sub-Accounts may be:
- Operated as a management company under the 1940 Act;
- Deregistered under the 1940 Act if registration is no longer required; or
- Combined with other Sub-Accounts or our other separate accounts.
FURTHER INFORMATION
We have filed a registration statement under the Securities Act of 1933 ("1933
Act") for this offering with the SEC. Under SEC rules and regulations, we have
omitted from this prospectus parts of the registration statement and amendments.
Statements contained in this prospectus are summaries of the Contract and other
legal documents. The complete documents and omitted information may be obtained
from the SEC's principal office in Washington, D.C., on payment of the SEC's
prescribed fees.
41
<PAGE>
MORE INFORMATION ABOUT THE FIXED ACCOUNT
This prospectus serves as a disclosure document only for the aspects of the
Contract relating to the Variable Account. For complete details on the Fixed
Account, read the Contract itself. The Fixed Account and other interests in the
General Account are not regulated under the 1933 Act or the 1940 Act because of
exemption and exclusionary provisions. 1933 Act provisions on the accuracy and
completeness of statements made in prospectuses may apply to information on the
fixed part of the Contract and the Fixed Account. The SEC has not reviewed the
disclosures in this section of the prospectus.
GENERAL DESCRIPTION
You may allocate part or all of your payment to accumulate at a fixed rate of
interest in the Fixed Account. The Fixed Account is a part of our General
Account. The General Account is made up of all of our general assets other than
those allocated to any separate account. Allocations to the Fixed Account become
part of our General Account assets and are used to support insurance and annuity
obligations.
FIXED ACCOUNT INTEREST
We guarantee amounts allocated to the Fixed Account as to principal and a
minimum rate of interest. The minimum interest we will credit on amounts
allocated to the Fixed Account is 4.0% compounded annually. "Excess interest"
may or may not be credited at our sole discretion. We will guarantee initial
rates on amounts allocated to the Fixed Account, either as a payment or a
transfer, to the next Contract anniversary.
TRANSFERS, SURRENDERS, PARTIAL WITHDRAWALS AND CONTRACT LOANS
If a Contract is surrendered or if a partial withdrawal is made, a surrender
charge and/or partial withdrawal charge may be imposed. We deduct partial
withdrawals from Contract Value allocated to the Fixed Account on a
last-in/first out basis.
The first 12 transfers in a Contract year are free. After that, we may deduct a
transfer charge not to exceed $25 for each transfer in that Contract year. The
transfer privilege is subject to our consent and to our then current rules.
Contract loans may also be made from the Contract Value in the Fixed Account. We
will credit that part of the Contract Value that is equal to any Outstanding
Loan with interest at an effective annual yield of at least 4.0% (5.5% for
preferred loans).
We may delay transfers, surrenders, partial withdrawals, Net Death Benefits and
Contract loans up to six months. However, if payment is delayed for 30 days or
more, we will pay interest at least equal to an effective annual yield of 3.0%
per year for the deferment. Amounts from the Fixed Account used to make payments
on Contracts that we or our affiliates issue will not be delayed.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1997 and 1996 and for
each of the two years in the period ended December 31, 1997, included in this
prospectus constituting part of the Registration Statement, have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Contracts.
42
<PAGE>
FINANCIAL STATEMENTS
Financial Statements for the Company are included in this Prospectus, starting
on the next page. The financial statements of the Company should be considered
only as bearing on our ability to meet our obligations under the Contract. They
should not be considered as bearing on the investment performance of the assets
held in the Variable Account.
43
<PAGE>
FINANCIAL STATEMENTS
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
(IN MILLIONS) 1998 1997
-------------------------------------------------- ------ -------
<S> <C> <C>
REVENUES
Premiums........................................ $ 0.4 $ 8.0
Universal life and investment product policy
fees........................................ 61.9 49.9
Net investment income......................... 38.7 42.3
Net realized investment gains (losses)........ 17.1 (1.7)
Other income.................................. 0.9 0.1
------ -------
Total revenues............................ 119.0 98.6
------ -------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses......................... 40.0 49.2
Policy acquisition expenses................... 16.8 13.8
Loss from cession of disability income
business.................................... -- 53.9
Other operating expenses...................... 25.4 23.4
------ -------
Total benefits, losses and expenses....... 82.2 140.3
------ -------
Income (loss) before federal income taxes......... 36.8 (41.7)
------ -------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current....................................... 14.2 (16.2)
Deferred...................................... (1.1) 1.8
------ -------
Total federal income tax expense
(benefit)............................... 13.1 (14.4)
------ -------
Net income (loss)................................. 23.7 (27.3)
OTHER COMPREHENSIVE (LOSS)
Net (depreciation) on available for sale
securities.................................... (5.9) (16.4)
Benefit for deferred federal income taxes....... 2.1 5.8
------ -------
Other comprehensive (loss)................ (3.8) (10.6)
------ -------
Comprehensive income (loss)....................... $ 19.9 $ (37.9)
------ -------
------ -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
UF-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
(IN MILLIONS) 1998 1997
-------------------------------------------------- ------- -------
<S> <C> <C>
COMMON STOCK
Balance at beginning and end of period........ $ 2.5 $ 2.5
------- -------
ADDITIONAL PAID IN CAPITAL
Balance at beginning and end of period........ 386.9 346.3
------- -------
RETAINED EARNINGS
Balance at beginning of period................ 213.1 176.4
Net income (loss)............................. 23.7 (27.3)
------- -------
Balance at end of period...................... 236.8 149.1
------- -------
ACCUMULATED OTHER COMPREHENSIVE INCOME
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period................ 38.5 20.5
Net (depreciation) on available for sale
securities.................................. (5.9) (16.4)
Benefit for deferred federal income taxes..... 2.1 5.8
------- -------
Other comprehensive (loss)................ (3.8) (10.6)
------- -------
Balance at end of period...................... 34.7 9.9
------- -------
Total shareholder's equity................ $ 660.9 $ 507.8
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
UF-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED) MARCH 31, DECEMBER 31,
(IN MILLIONS) 1998 1997
-------------------------------------------------- ------------ ----------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost
of $1,358.4 and $1,340.5)................... $ 1,422.5 $ 1,402.5
Equity securities at fair value (cost of $33.9
and $34.4).................................. 47.5 54.0
Mortgage loans................................ 223.1 228.2
Real estate................................... 12.0 12.0
Policy loans.................................. 142.6 140.1
Other long term investments................... 20.7 20.3
------------ ----------------
Total investments......................... 1,868.4 1,857.1
------------ ----------------
Cash and cash equivalents....................... 9.6 31.1
Accrued investment income....................... 33.3 34.2
Deferred policy acquisition costs............... 800.3 765.3
Reinsurance receivables:
Future policy benefits........................ 265.9 242.5
Outstanding claims, losses and loss adjustment
expenses.................................... 7.6 5.5
Unearned premiums............................. 2.9 1.7
Other......................................... 11.3 1.4
------------ ----------------
Total reinsurance receivables............. 287.7 251.1
------------ ----------------
Premiums, accounts and notes receivable......... 0.2 --
Other assets.................................... 10.1 10.7
Separate account assets......................... 8,935.2 7,567.3
------------ ----------------
Total assets.............................. $ 11,944.8 $ 10,516.8
------------ ----------------
------------ ----------------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits........................ $ 2,101.1 $ 2,097.3
Outstanding claims, losses and loss adjustment
expenses.................................... 22.5 18.5
Unearned premiums............................. 2.9 1.8
Contractholder deposit funds and other policy
liabilities................................. 34.6 32.5
------------ ----------------
Total policy liabilities and accruals..... 2,161.1 2,150.1
------------ ----------------
Expenses and taxes payable...................... 90.3 77.6
Reinsurance premiums payable.................... 16.2 4.9
Short term debt................................. 6.9 --
Deferred federal income taxes................... 72.8 75.9
Separate account liabilities.................... 8,936.6 7,567.3
------------ ----------------
Total liabilities......................... 11,283.9 9,875.8
------------ ----------------
Commitments and contingencies (Note 5)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,521 shares issued &
outstanding................................... 2.5 2.5
Additional paid in capital...................... 386.9 386.9
Accumulated other comprehensive income.......... 34.7 38.5
Retained earnings............................... 236.8 213.1
------------ ----------------
Total shareholder's equity................ 660.9 641.0
------------ ----------------
Total liabilities and shareholder's
equity.................................. $ 11,944.8 $ 10,516.8
------------ ----------------
------------ ----------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
UF-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31,
(IN MILLIONS) 1998 1997
-------------------------------------------------- ------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................. $ 23.7 $ (27.3)
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Net realized (gains) losses............... (17.1) 1.7
Net amortization and depreciation......... (0.2) 0.1
Deferred federal income taxes............. (1.1) 1.8
Change in deferred acquisition costs...... (35.7) 10.8
Change in premiums and notes receivable,
net of reinsurance...................... 11.1 --
Change in accrued investment income....... 0.9 (2.9)
Change in policy liabilities and accruals,
net..................................... 11.2 1.0
Change in reinsurance receivable.......... (36.6) (1.0)
Change in expenses and taxes payable...... 10.8 10.4
Separate account activity, net............ 1.3 0.2
Other, net................................ 1.2 (0.8)
------- -------
Net cash used in operating
activities.......................... (30.5) (6.0)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of
available-for-sale fixed maturities......... 52.1 255.1
Proceeds from disposals of equity
securities.................................. 37.6 1.2
Proceeds from disposals of other
investments................................. -- 0.1
Proceeds from mortgages matured or
collected................................... 29.1 10.9
Purchase of available-for-sale fixed
maturities.................................. (69.6) (263.4)
Purchase of equity securities................. (25.5) (0.7)
Purchase of other investments................. (21.6) (16.5)
------- -------
Net cash provided by (used in)
investing activities................ 2.1 (13.3)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in short term debt..................... 6.9 19.9
------- -------
Net cash provided by financing
activities.......................... 6.9 19.9
------- -------
Net change in cash and cash equivalents........... (21.5) 0.6
Cash and cash equivalents, beginning of period.... 31.1 18.8
------- -------
Cash and cash equivalents, end of period.......... $ 9.6 $ 19.4
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
UF-4
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a wholly
owned subsidiary of Allmerica Financial Corporation ("AFC"). The accompanying
unaudited consolidated financial statements of AFLIAC have been prepared in
accordance with generally accepted accounting principles for stock life
insurance companies for interim financial information.
The interim consolidated financial statements of AFLIAC include the accounts of
Somerset Square, Inc., a wholly owned non-insurance company. Somerset Square,
Inc. was transferred from SMAFCO effective November 30, 1997.
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
The accompanying interim consolidated financial statements reflect, in the
opinion of the Company's management, all adjustments, consisting of only normal
and recurring adjustments, necessary for a fair presentation of the financial
position and results of operations. Certain reclassifications have been made to
the 1997 consolidated statements of income in order to conform to the 1998
presentation. The results of operations for the three months ended March 31,
1998 are not necessarily indicative of the results to be expected for the full
year. These financial statements should be read in conjunction with the
Company's 1997 Annual Audited Financial Statements.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(Statement No. 130). Statement No. 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. This statement stipulates that comprehensive income
reflect the change in equity of an enterprise during a period from transactions
and other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company has
adopted Statement No. 130 for the first quarter of 1998, resulting primarily in
reporting unrealized gains and losses on investments in debt and equity
securities in comprehensive income.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of
Position 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" ("SOP No. 97-3"). SOP No. 97-3 provides guidance
on when a liability should be recognized for guaranty fund and other assessments
and how to measure the liability. This statement allows for the discounting of
the liability if the amount and timing of the cash payments are fixed and
determinable. In addition, it provides criteria for when an asset may be
recognized for a portion or all of the assessment liability or paid assessment
that can be recovered through premium tax offsets or policy surcharges. This
statement is effective for fiscal years beginning after December 15, 1998. The
Company believes that the adoption of this statement will not have a material
effect on the results of operations or financial position.
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use" ("SOP No.
98-1"). SOP No. 98-1 requires that certain costs incurred in developing
internal-use computer software be capitalized and provides guidance for
determining
UF-5
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
whether computer software is to be considered for internal use. This statement
is effective for fiscal years beginning after December 15, 1998. The Company is
currently determining the impact of adoption of SOP No. 98-1.
3. SIGNIFICANT TRANSACTIONS
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. This agreement did not have a
material effect on the Company's results of operations or financial position.
4. FEDERAL INCOME TAXES
Federal income tax expense for the periods ended March 31, 1998 and 1997, has
been computed using estimated effective tax rates. These rates are revised, if
necessary, at the end of each successive interim period to reflect the current
estimates of the annual effective tax rates.
5. COMMITMENTS AND CONTINGENCIES
LITIGATION
In July 1997, a lawsuit was instituted in Louisiana against AFC and certain of
its subsidiaries by individual plaintiffs alleging fraud, unfair or deceptive
acts, breach of contract, misrepresentation and related claims in the sale of
life insurance policies. In October 1997, plaintiffs voluntarily dismissed the
Louisiana suit and refiled the action in Federal District Court in Worcester,
Massachusetts. The plaintiffs seek to be certified as a class. The case is in
early stages of discovery and the Company is evaluating the claims. Although the
Company believes it has meritorious defenses to plaintiffs' claims, there can be
no assurance that the claims will be resolved on a basis which is satisfactory
to the Company.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Although the Company does not believe that there is a material contingency
associated with the Year 2000 project, there can be no assurance that exposure
for material contingencies will not arise.
UF-6
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN JUNE 1997, THE FASB ALSO ISSUED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
NO. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION"
(STATEMENT NO. 131). THIS STATEMENT ESTABLISHES STANDARDS FOR THE WAY THAT
PUBLIC ENTERPRISES REPORT INFORMATION ABOUT OPERATING SEGMENTS IN ANNUAL
FINANCIAL STATEMENTS AND REQUIRES THAT SELECTED INFORMATION ABOUT THOSE
OPERATING SEGMENTS BE REPORTED IN INTERIM FINANCIAL STATEMENTS. THIS STATEMENT
SUPERSEDES STATEMENT NO. 14, "FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS
ENTERPRISE". STATEMENT NO. 131 REQUIRES THAT ALL PUBLIC ENTERPRISES REPORT
FINANCIAL AND DESCRIPTIVE INFORMATION ABOUT THEIR REPORTABLE OPERATING SEGMENTS.
OPERATING SEGMENTS ARE DEFINED AS COMPONENTS OF AN ENTERPRISE ABOUT WHICH
SEPARATE FINANCIAL INFORMATION IS AVAILABLE THAT IS EVALUATED REGULARLY BY THE
CHIEF OPERATING DECISION MAKER IN DECIDING HOW TO ALLOCATE RESOURCES AND IN
ASSESSING PERFORMANCE. THIS STATEMENT IS EFFECTIVE FOR FISCAL YEARS BEGINNING
AFTER DECEMBER 15, 1997. THE COMPANY HAS ADOPTED STATEMENT NO. 131 FOR THE FIRST
QUARTER OF 1998, RESULTING IN CERTAIN SEGMENT RE-DEFINITIONS WHICH HAVE NO
IMPACT ON THE CONSOLIDATED RESULTS OF OPERATIONS. (SEE NOTE 7.)
UF-7
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholder's equity, and of cash flows
present fairly, in all material respects, the financial position of Allmerica
Financial Life Insurance and Annuity Company at December 31, 1997 and 1996, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 3, 1998
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
----------------------------------------------- ------- -------
<S> <C> <C>
REVENUES
Premiums..................................... $ 22.8 $ 32.7
Universal life and investment product
policy fees.............................. 212.2 176.2
Net investment income...................... 164.2 171.7
Net realized investment gains (losses)..... 2.9 (3.6)
Other income............................... 1.4 0.9
------- -------
Total revenues......................... 403.5 377.9
------- -------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 187.8 192.6
Policy acquisition expenses................ 2.8 49.9
Loss from cession of disability income
business................................. 53.9 --
Other operating expenses................... 101.3 86.6
------- -------
Total benefits, losses and expenses.... 345.8 329.1
------- -------
Income before federal income taxes............. 57.7 48.8
------- -------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 13.9 26.9
Deferred................................... 7.1 (9.8)
------- -------
Total federal income tax expense....... 21.0 17.1
------- -------
Net income..................................... $ 36.7 $ 31.7
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,340.5 and $1,660.2)............................ $ 1,402.5 $ 1,698.0
Equity securities at fair value (cost of $34.4 and
$33.0)............................................ 54.0 41.5
Mortgage loans...................................... 228.2 221.6
Real estate......................................... 12.0 26.1
Policy loans........................................ 140.1 131.7
Other long term investments......................... 20.3 7.9
---------- ----------
Total investments............................... 1,857.1 2,126.8
---------- ----------
Cash and cash equivalents............................. 31.1 18.8
Accrued investment income............................. 34.2 37.7
Deferred policy acquisition costs..................... 765.3 632.7
Reinsurance receivables on paid and unpaid losses,
benefits and unearned premiums...................... 251.1 81.5
Other assets.......................................... 10.7 8.2
Separate account assets............................... 7,567.3 4,524.0
---------- ----------
Total assets.................................... $ 10,516.8 $ 7,429.7
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,097.3 $ 2,171.3
Outstanding claims, losses and loss adjustment
expenses.......................................... 18.5 16.1
Unearned premiums................................... 1.8 2.7
Contractholder deposit funds and other policy
liabilities....................................... 32.5 32.8
---------- ----------
Total policy liabilities and accruals........... 2,150.1 2,222.9
---------- ----------
Expenses and taxes payable............................ 77.6 77.3
Reinsurance premiums payable.......................... 4.9 --
Deferred federal income taxes......................... 75.9 60.2
Separate account liabilities.......................... 7,567.3 4,523.6
---------- ----------
Total liabilities............................... 9,875.8 6,884.0
---------- ----------
Commitments and contingencies (Note 13)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,521 and 2,518 shares issued and
outstanding......................................... 2.5 2.5
Additional paid in capital............................ 386.9 346.3
Unrealized appreciation on investments, net........... 38.5 20.5
Retained earnings..................................... 213.1 176.4
---------- ----------
Total shareholder's equity...................... 641.0 545.7
---------- ----------
Total liabilities and shareholder's equity...... $ 10,516.8 $ 7,429.7
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
- ----------------------------------------------- ------- -------
<S> <C> <C>
COMMON STOCK
Balance at beginning of period............. $ 2.5 $ 2.5
Issued during year......................... -- --
------- -------
Balance at end of period................... 2.5 2.5
------- -------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period............. 346.3 324.3
Contribution from Parent................... 40.6 22.0
------- -------
Balance at end of period................... 386.9 346.3
------- -------
RETAINED EARNINGS
Balance at beginning of period............. 176.4 144.7
Net income................................. 36.7 31.7
------- -------
Balance at end of period................... 213.1 176.4
------- -------
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 20.5 23.8
Net appreciation (depreciation) on
available for sale securities............ 27.0 (5.1)
(Provision) benefit for deferred federal
income taxes............................. (9.0) 1.8
------- -------
Balance at end of period................... 38.5 20.5
------- -------
Total shareholder's equity............. $ 641.0 $ 545.7
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
- -------------------------------------------------- -------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................... $ 36.7 $ 31.7
Adjustments to reconcile net income to net
cash used in operating activities:
Net realized gains........................ (2.9) 3.6
Net amortization and depreciation......... -- 3.5
Loss from cession of disability income
business................................ 53.9 --
Deferred federal income taxes............. 7.1 (9.8)
Payment related to cession of disability
income business......................... (207.0) --
Change in deferred acquisition costs...... (181.3) (66.8)
Change in premiums and notes receivable,
net of reinsurance payable.............. 3.9 (0.2)
Change in accrued investment income....... 3.5 1.2
Change in policy liabilities and accruals,
net..................................... (72.4) (39.9)
Change in reinsurance receivable.......... 22.1 (1.5)
Change in expenses and taxes payable...... 0.2 32.3
Separate account activity, net............ 0.4 10.5
Other, net................................ (7.5) (0.2)
-------- --------
Net used in operating activities...... (343.3) (35.6)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of
available-for-sale fixed maturities......... 909.7 809.4
Proceeds from disposals of equity
securities.................................. 2.4 1.5
Proceeds from disposals of other
investments................................. 23.7 17.4
Proceeds from mortgages matured or
collected................................... 62.9 34.0
Purchase of available-for-sale fixed
maturities.................................. (579.7) (795.8)
Purchase of equity securities................. (3.2) (13.2)
Purchase of other investments................. (79.4) (36.2)
Other investing activities, net............... -- (2.0)
-------- --------
Net cash provided by investing
activities.............................. 336.4 15.1
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and capital
paid in..................................... 19.2 22.0
-------- --------
Net cash provided by financing
activities.............................. 19.2 22.0
-------- --------
Net change in cash and cash equivalents........... 12.3 1.5
Cash and cash equivalents, beginning of period.... 18.8 17.3
-------- --------
Cash and cash equivalents, end of period.......... $ 31.1 $ 18.8
-------- --------
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid................................. $ -- $ 3.4
Income taxes paid............................. $ 5.4 $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly-owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a
wholly-owned subsidiary of Allmerica Financial Corporation ("AFC").
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company and its results of operations
for the month of December, 1997. Somerset Square, Inc. was transferred from
SMAFCO effective November 30, 1997. (See Significant Transactions.)
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Certain reclassifications have been
made to the 1996 financial statements in order to conform to the 1997
presentation.
B. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by management to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which management believes may not be collectible in
full. In establishing reserves, management considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result of this decision real estate held by the
Company and real estate joint ventures were written down to the estimated fair
value less cost to sell. Depreciation is not recorded on these assets while they
are held for disposal.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
or a group of investments is determined, a realized investment loss is recorded.
Changes in the valuation allowance for mortgage loans and real estate are
included in realized investment gains or losses.
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities, and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuation. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Acquisition costs related to universal life products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized from this group of
products, including realized and unrealized gains and losses from investments.
Acquisition costs related to fixed annuities and other life insurance products
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. Although realization of deferred policy acquisition costs is not
assured, management believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains, and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policies are computed using interest rates ranging from 2 1/2% to 6% for
life insurance and 2% to 9 1/2% for
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
annuities. Mortality, morbidity and withdrawal assumptions for all policies are
based on the Company's own experience and industry standards. Liabilities for
universal life include deposits received from customers and investment earnings
on their fund balances, less administrative charges. Universal life fund
balances are also assessed mortality and surrender charges. Individual health
benefit liabilities for active lives are estimated using the net level premium
method, and assumptions as to future morbidity, withdrawals and interest which
provide a margin for adverse deviation. Benefit liabilities for disabled lives
are estimated using the present value of benefits method and experience
assumptions as to claim terminations, expenses and interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported. These liabilities are determined using case basis
evaluations and statistical analyses and represent estimates of the ultimate
cost of all claims incurred but not paid. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
Premiums for individual accident and health insurance are reported as earned on
a pro-rata basis over the contract period.
The unexpired portion of these premiums is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual accident and health insurance premiums
are recognized as revenue over the related contract periods. Benefits, losses
and related expenses are matched with premiums, resulting in their recognition
over the lives of the contracts. This matching is accomplished through the
provision for future benefits, estimated and unpaid losses and amortization of
deferred policy acquisition costs. Revenues for investment-related products
consist of net investment income and contract charges assessed against the fund
values. Related benefit expenses primarily consist of net investment income
credited to the fund values after deduction for investment and risk charges.
Revenues for universal life and group variable universal life products consist
of net investment income, and mortality, administration and surrender charges
assessed against the fund values. Related benefit expenses include universal
life benefits in excess of fund values and net investment income credited to
universal life fund values. Certain policy charges that represent compensation
for services to be provided in future periods are deferred and amortized over
the period benefited using the same assumptions used to amortize capitalized
acquisition costs.
I. FEDERAL INCOME TAXES
AFC, its life insurance subsidiaries, FAFLIC and AFLIAC, and its non-life
insurance domestic subsidiaries file a life-nonlife consolidated United States
Federal income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life insurance company taxable
operating losses that can be applied to offset life insurance company taxable
income. Allmerica P&C and its subsidiaries will be included in the AFC
consolidated return as part of the
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
non-life insurance company subgroup for the period July 17, 1997 through
December 31, 1997. For the period January 1, 1997 through July 16, 1997,
Allmerica P&C and its subsidiaries will file a separate consolidated United
States Federal income tax return.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate Federal Income Tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No.
109). These differences result primarily from loss reserves, policy acquisition
expenses, and unrealized appreciation/depreciation on investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. This statement establishes standards for
the way that public enterprises report information about operating segments in
annual financial statements and requires that selected information about those
operating segments be reported in interim financial statements. This statement
supersedes Statement No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS
ENTERPRISE. Statement No. 131 requires that all public enterprises report
financial and descriptive information about their reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for fiscal years beginning
after December 15, 1997. The Company anticipates no impact from the adoption of
Statement No. 131.
In June 1997, the FASB also issued Statement No. 130, REPORTING COMPREHENSIVE
INCOME, which established standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement stipulates that comprehensive income
reflect the change in equity of an enterprise during a period from transactions
and other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
anticipates that the adoption of Statement No. 130 will result primarily in
reporting the changes in unrealized gains and losses on investments in debt and
equity securities in comprehensive income.
2. SIGNIFICANT TRANSACTIONS
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income under a 100% coinsurance
agreement to Metropolitan Life Insurance Company. The coinsurance agreement
became effective October 1, 1997. The transaction has resulted in the
recognition of a $53.9 million pre-tax loss in the first quarter of 1997.
During the 4th quarter of 1997, SMAFCO contributed $40.6 million of additional
paid in capital to the Company. The nature of the contribution was $19.2 million
in cash and $21.4 million in other assets including Somerset Square, Inc.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Effective January 1, 1998, the Company entered into an agreement with
Reinsurance Group of America, Inc. to reinsure the mortality risk on the
universal life and variable universal life blocks of business. Management
believes that this agreement will not have a material effect on the results of
operations or financial position of the Company.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of SFAS No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 6.3 $ .5 $-- $ 6.8
States and political subdivisions....... 2.8 .2 -- 3.0
Foreign governments..................... 50.1 2.0 -- 52.1
Corporate fixed maturities.............. 1,147.5 58.7 3.3 1,202.9
Mortgage-backed securities.............. 133.8 5.2 1.3 137.7
------------- ----- ----- -------------
Total fixed maturities
available-for-sale..................... $ 1,340.5 $ 66.6 $ 4.6 $ 1,402.5
------------- ----- ----- -------------
Equity securities....................... $ 34.4 $ 19.9 $ 0.3 $ 54.0
------------- ----- ----- -------------
------------- ----- ----- -------------
1996
---------------------------------------------------------
U.S. Treasury securities and U.S.
government and agency securities....... $ 15.7 $ 0.5 $ 0.2 $ 16.0
States and political subdivisions....... 8.9 1.6 -- 10.5
Foreign governments..................... 53.2 2.9 -- 56.1
Corporate fixed maturities.............. 1,437.2 38.6 6.1 1,469.7
Mortgage-backed securities.............. 145.2 2.2 1.7 145.7
------------- ----- ----- -------------
Total fixed maturities
available-for-sale..................... $ 1,660.2 $ 45.8 $ 8.0 $ 1,698.0
------------- ----- ----- -------------
Equity securities....................... $ 33.0 $ 10.2 $ 1.7 $ 41.5
------------- ----- ----- -------------
------------- ----- ----- -------------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1997, the amortized
cost and market value of these assets on deposit were $276.8 million and $291.7
million, respectively. At December 31, 1996, the amortized cost and market value
of these assets on deposit were $284.9 million and $292.2 million, respectively.
In addition, fixed maturities, excluding those securities on deposit in New
York, with an amortized cost of $4.2 million were on deposit with various state
and governmental authorities at December 31, 1997 and 1996.
There were no contractual fixed maturity investment commitments at December 31,
1997 and 1996, respectively.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1997
-----------------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ ------------- -------------
<S> <C> <C>
Due in one year or less..................................... $ 63.0 $ 63.5
Due after one year through five years....................... 328.8 343.9
Due after five years through ten years...................... 649.5 679.9
Due after ten years......................................... 299.2 315.2
------------- -------------
Total....................................................... $ 1,340.5 $ 1,402.5
------------- -------------
------------- -------------
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
PROCEEDS FROM
FOR THE YEARS ENDED DECEMBER 31, VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
- ------------------------------------------------------------ ------------- ----------- -----------
<S> <C> <C> <C>
1997
Fixed maturities............................................ $702.9 $ 11.4 $ 5.0
Equity securities........................................... $ 1.3 $ 0.5 $--
1996
Fixed maturities............................................ $496.6 $ 4.3 $ 8.3
Equity securities........................................... $ 1.5 $ 0.4 $ 0.1
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
SECURITIES
FOR THE YEAR ENDED DECEMBER 31, FIXED AND OTHER
(IN MILLIONS) MATURITIES (1) TOTAL
- ------------------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
1997
Net appreciation, beginning of year......................... $ 12.7 $ 7.8 $ 20.5
Net appreciation on available-for-sale securities........... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (9.8) -- (9.8)
Provision for deferred federal income taxes................. (5.1) (3.9) (9.0)
----- ----- -----
9.4 8.6 18.0
----- ----- -----
Net appreciation, end of year............................... $ 22.1 $ 16.4 $ 38.5
----- ----- -----
----- ----- -----
</TABLE>
(1) Includes net appreciation on other investments of $11.1 million in 1997, and
$2.2 million in 1996.
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
SECURITIES
FOR THE YEAR ENDED DECEMBER 31, 1996 FIXED AND OTHER
(IN MILLIONS) MATURITIES (1) TOTAL
- ------------------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Net appreciation, beginning of year......................... $ 20.4 $ 3.4 $ 23.8
Net (depreciation) appreciation on available-for-sale
securities................................................. (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 9.0 -- 9.0
Benefit (provision) for deferred federal income taxes....... 4.1 (2.3) 1.8
----------- ----- -----------
(7.7) 4.4 (3.3)
----------- ----- -----------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
----------- ----- -----------
----------- ----- -----------
</TABLE>
(1) Includes net appreciation on other investments of $11.1 million in 1997, and
$2.2 million in 1996.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Mortgage loans.............................................. $ 228.2 $ 221.6
Real estate:
Held for sale............................................. 12.0 26.1
Held for production of income............................. -- --
----------- -----------
Total real estate....................................... $ 12.0 $ 26.1
----------- -----------
Total mortgage loans and real estate........................ $ 240.2 $ 247.7
----------- -----------
----------- -----------
</TABLE>
Reserves for mortgage loans were $9.4 million and $9.5 million at December 31,
1997 and 1996, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result, real estate assets with a carrying
amount of $15.7 million were written down to the estimated fair value less cost
to sell of $12.0 million, and a net realized investment loss of $3.7 million was
recognized. Depreciation is not recorded on these assets while they are held for
disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1997. During 1996, non-cash investing
activities included real estate acquired through foreclosure of mortgage loans,
which had a fair value of $0.9 million.
At December 31, 1997, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $18.7 million. These
commitments generally expire within one year.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Property type:
Office building........................................... $ 101.7 $ 86.1
Residential............................................... 19.3 39.0
Retail.................................................... 42.2 55.9
Industrial/warehouse...................................... 61.9 52.6
Other..................................................... 24.5 25.3
Valuation allowances...................................... (9.4) (11.2)
----------- -----------
Total....................................................... $ 240.2 $ 247.7
----------- -----------
----------- -----------
Geographic region:
South Atlantic............................................ $ 68.7 $ 72.9
Pacific................................................... 56.6 37.0
East North Central........................................ 61.4 58.3
Middle Atlantic........................................... 29.8 35.0
West South Central........................................ 6.9 5.7
New England............................................... 12.4 21.9
Other..................................................... 13.8 28.1
Valuation allowances...................................... (9.4) (11.2)
----------- -----------
Total....................................................... $ 240.2 $ 247.7
----------- -----------
----------- -----------
</TABLE>
At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $52.0 million; 1999 -- $17.1 million; 2000 -- $46.3 million; 2001 -- $7.0
million; 2002 -- $11.7 million; and $94.1 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1997, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS DECEMBER 31
- ------------------------------------------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1997
Mortgage loans.............................................. $ 9.5 $ 1.1 $ 1.2 $ 9.4
Real estate................................................. 1.7 3.7 5.4 --
----- --- --- -----
Total................................................... $11.2 $ 4.8 $ 6.6 $ 9.4
----- --- --- -----
----- --- --- -----
1996
Mortgage loans.............................................. $12.5 $ 4.5 $ 7.5 $ 9.5
Real estate................................................. 2.1 -- 0.4 1.7
----- --- --- -----
Total................................................... $14.6 $ 4.5 $ 7.9 $11.2
----- --- --- -----
----- --- --- -----
</TABLE>
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Deductions of $5.4 million to the investment valuation allowance related to real
estate in 1997 primarily reflect writedowns to the estimated fair value less
cost to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $20.6 million and $21.5 million, with
related reserves of $7.1 million and $7.3 million as of December 31, 1997 and
1996, respectively. All impaired loans were reserved as of December 31, 1997 and
1996.
The average carrying value of impaired loans was $19.8 million and $26.3
million, with related interest income while such loans were impaired of $2.2
million and $3.4 million as of December 31, 1997 and 1996, respectively.
D. OTHER
At December 31, 1997, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Fixed maturities............................................ $ 130.0 $ 137.2
Mortgage loans.............................................. 20.4 22.0
Equity securities........................................... 1.3 0.7
Policy loans................................................ 10.8 10.2
Real estate................................................. 3.9 6.2
Other long-term investments................................. 1.0 0.8
Short-term investments...................................... 1.4 1.4
----------- -----------
Gross investment income..................................... 168.8 178.5
Less investment expenses.................................... (4.6) (6.8)
----------- -----------
Net investment income....................................... $ 164.2 $ 171.7
----------- -----------
----------- -----------
</TABLE>
At December 31, 1997, mortgage loans on non-accrual status were $2.8 million,
which were all restructured loans. There were no fixed maturities on non-accrual
status at December 31, 1997. The effect of non-accruals, compared with amounts
that would have been recognized in accordance with the original terms of the
investment, had no impact in 1997, and reduced net income by $0.1 million in
1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $21.1 million and $25.4 million at December 31, 1997 and 1996,
respectively. Interest income on restructured mortgage loans that would have
been recorded in accordance with the original terms of such loans amounted to
$1.9 million and $3.6 million in 1997 and 1996, respectively. Actual interest
income on these loans included in net investment income aggregated $2.1 million
and $2.2 million in 1997 and 1996, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1997.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Fixed maturities............................................ $ 3.0 $ (3.3)
Mortgage loans.............................................. (1.1) (3.2)
Equity securities........................................... 0.5 0.3
Real estate................................................. (1.5) 2.5
Other....................................................... 2.0 0.1
----- -----
Net realized investment losses.............................. $ 2.9 $ (3.6)
----- -----
----- -----
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about certain financial instruments
(insurance contracts, real estate, goodwill and taxes are excluded) for which it
is practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain financial
instruments are estimates which, in many cases, may differ significantly from
the amounts which could be realized upon immediate liquidation. In cases where
market prices are not available, estimates of fair value are based on discounted
cash flow analyses which utilize current interest rates for similar financial
instruments which have comparable terms and credit quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
REINSURANCE RECEIVABLES
The carrying amount of the reinsurance receivable for outstanding claims, losses
and loss adjustment expenses reported in the balance sheet approximates fair
value.
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------------------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 31.1 $ 31.1 $ 18.8 $ 18.8
Fixed maturities.......................................... 1,402.5 1,402.5 1,698.0 1,698.0
Equity securities......................................... 54.0 54.0 41.5 41.5
Mortgage loans............................................ 228.2 239.8 221.6 229.3
Policy loans.............................................. 140.1 140.1 131.7 131.7
Reinsurance receivables................................... 251.1 251.1 72.5 72.5
----------- ----------- ----------- -----------
$ 2,107.0 $ 2,118.6 $ 2,184.1 $ 2,191.8
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
FINANCIAL LIABILITIES
Individual annuity contracts.............................. 876.0 850.6 910.2 885.9
Supplemental contracts without life contingencies......... 15.3 15.3 15.9 15.9
Other individual contract deposit funds................... 0.3 0.3 0.3 0.3
----------- ----------- ----------- -----------
$ 891.6 $ 866.2 $ 926.4 $ 902.1
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
6. DEBT
In 1997 the Company incurred no debt. During 1996, the Company utilized
repurchase agreements to finance certain investments.
Interest expense was $3.4 million in 1996, relating to the repurchase
agreements, and is recorded in other operating expenses.
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Federal income tax expense (benefit)
Current................................................... $ 13.9 $ 26.9
Deferred.................................................. 7.1 (9.8)
----- -----
Total....................................................... $ 21.0 $ 17.1
----- -----
----- -----
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes. The deferred
tax (assets) liabilities are comprised of the following at December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Deferred tax (assets) liabilitie
Loss reserves............................................. $(175.8) $(137.0)
Deferred acquisition costs................................ 226.4 186.9
Investments, net.......................................... 27.0 14.2
Bad debt reserve.......................................... (2.0) (1.1)
Other, net................................................ 0.3 (2.8)
----------- -----------
Deferred tax liability, net............................... $ 75.9 $ 60.2
----------- -----------
----------- -----------
</TABLE>
Gross deferred income tax liabilities totaled $253.7 million and $201.1 million
at December 31, 1997 and 1996. Gross deferred income tax assets totaled $177.8
million and $140.9 at December 31, 1997 and 1996.
Management believes, based on the Company's recent earnings history and its
future expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the life-nonlife consolidated
group's federal income tax returns through 1991. The Company is currently
considering its response to certain adjustments proposed by the IRS with respect
to the life-nonlife consolidated group's federal income tax returns for 1989,
1990, and 1991. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
8. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $124.1 million and $112.4 million in 1997 and 1996. The
net amounts payable to FAFLIC and affiliates for accrued expenses and various
other liabilities and receivables were $15.0 million and $13.3 million at
December 31, 1997 and 1996.
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance.
At January 1, 1998, AFLIAC could pay dividends of $33.9 million to FAFLIC
without prior approval.
10. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Insurance premiums:
Direct.................................................... $ 48.8 $ 53.3
Assumed................................................... 2.6 3.1
Ceded..................................................... (28.6) (23.7)
----------- -----------
Net premiums................................................ $ 22.8 $ 32.7
----------- -----------
----------- -----------
Insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................... $ 226.0 $ 206.4
Assumed................................................... 4.2 4.5
Ceded..................................................... (42.4) (18.3)
----------- -----------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $ 187.8 $ 192.6
----------- -----------
----------- -----------
</TABLE>
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Balance at beginning of year................................ $ 632.7 $ 555.7
Acquisition expenses deferred............................. 184.1 116.6
Amortized to expense during the year...................... (53.0) (49.9)
Adjustment to equity during the year...................... (10.2) 10.3
Adjustment for cession of disability income insurance..... (38.6) --
Adjustment for revision of universal life and variable
universal life insurance mortality assumptions.......... 50.3 --
----------- -----------
Balance at end of year...................................... $ 765.3 $ 632.7
----------- -----------
----------- -----------
</TABLE>
On October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.3 million recapitalization of deferred policy acquisition costs.
12. LIABILITIES FOR INDIVIDUAL ACCIDENT AND HEALTH BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior estimates are reflected in
results of operations in the year such changes are determined to be needed and
recorded.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$219.9 million and $226.2 million at December 31, 1997 and 1996. Accident and
health claim liabilities have been re-estimated for all prior years and were
increased by $-0- million in 1997 and $3.2 million in 1996. Due to the
reinsurance agreement whereby the Company has ceded substantially all of its
accident and health business to the Metropolitan, management believes that no
material adverse development of losses will occur. However, the amount of the
liabilities could be revised in the near term if the estimates are revised.
13. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit was instituted in Louisiana against Allmerica Financial
Corp. and certain of its subsidiaries by individual plaintiffs alleging fraud,
unfair or deceptive acts, breach of contract, misrepresentation and related
claims in the sale of life insurance policies. In October 1997, plaintiffs
voluntarily dismissed the Louisiana suit and refiled the action in Federal
District Court in Worcester, Massachusetts. The plaintiffs seek to be certified
as a class. The case is in the early stages of discovery and the Company is
evaluating the
F-18
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
claims. Although the Company believes it has meritorious defenses to plaintiffs'
claims, there can be no assurance that the claims will be resolved on a basis
which is satisfactory to the Company.
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the opinion of management, based on the advice
of legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's financial statements. However, liabilities
related to these proceedings could be established in the near term if estimates
of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. Although the Company does not
believe that there is a material contingency associated with the Year 2000
project, there can be no assurance that exposure for material contingencies will
not arise.
14. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles for
stock life insurance companies primarily because policy acquisition costs are
expensed when incurred, investment reserves are based on different assumptions,
life insurance reserves are based on different assumptions and income tax
expense reflects only taxes paid or currently payable. Statutory net income and
surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Statutory net income........................................ $ 31.5 $ 5.4
Statutory Surplus........................................... $ 307.1 $ 234.0
----------- -----------
----------- -----------
</TABLE>
F-19
<PAGE>
APPENDIX A -- GUIDELINE MINIMUM SUM INSURED TABLE
The guideline minimum sum insured is a percentage of the Contract Value as set
forth below, according to federal tax regulations:
GUIDELINE MINIMUM SUM INSURED
<TABLE>
<CAPTION>
Age of Insured Percentage of
on Date of Death Contract Value
- -------------------------------------------------------------- ---------------
<S> <C>
40 (and under).............................................. 265%
45.......................................................... 230%
50.......................................................... 200%
55.......................................................... 165%
60.......................................................... 145%
65.......................................................... 135%
70.......................................................... 130%
75.......................................................... 120%
80.......................................................... 120%
85.......................................................... 120%
90.......................................................... 110%
91.......................................................... 108%
92.......................................................... 106%
93.......................................................... 105%
94.......................................................... 105%
95.......................................................... 105%
96.......................................................... 104%
97.......................................................... 103%
98.......................................................... 102%
99 and above................................................ 100%
</TABLE>
For the ages not listed, the progression between the listed ages is linear.
A-1
<PAGE>
APPENDIX B -- OPTIONAL INSURANCE BENEFITS
This Appendix provides only a summary of other insurance benefits available by
rider. For more information, contact your representative. Certain riders may not
be available in all states.
OPTION TO ACCELERATE BENEFITS (LIVING BENEFITS) RIDER
This rider allows part of the Contract proceeds to be available before death
if the Insured becomes terminally ill or is permanently confined to a
nursing home.
LIFE INSURANCE 1035 EXCHANGE RIDER
This rider provides preferred loan rates to: (a) any outstanding loan
carried over from an exchanged policy, the proceeds of which are applied to
purchase the Contract; and (b) a percentage of the gain under the exchanged
policy, less the outstanding policy loans carried over to the Contract, as
of the date of exchange.
GUARANTEED DEATH BENEFIT RIDER
This rider provides a guaranteed Net Death Benefit which is the GREATER of
(a) the Face Amount as of the Final Payment Date or (b) the Contract Value
as of the date due proof of death is received by the Company, REDUCED by the
Outstanding Loan, if any, through the Contract month in which the Insured
dies. If the Contract Owner pays an initial payment equal to the Guideline
Single Premium, the Contract will be issued with the Guaranteed Death
Benefit Rider at no additional charge. The rider may terminate under certain
circumstances.
B-1
<PAGE>
APPENDIX C -- PAYMENT OPTIONS
PAYMENT OPTIONS -- On Written Request, the Surrender Value or all or part of any
payable Net Death Benefit may be paid under one or more payment options then
offered by the Company. If you do not make an election, we will pay the benefits
in a single sum. If a payment option is selected, the beneficiary may pay to us
any amount that would otherwise be deducted from the Death Benefit. A
certificate will be provided to the payee describing the payment option
selected.
The amounts payable under a payment option are paid from the Fixed Account.
These amounts are not based on the investment experience of the Variable
Account. The amounts payable under these options, for each $1,000 applied, will
be:
(a) the rate per $1,000 of benefit based on our non-guaranteed current benefit
option rates for this class of Contracts, or
(b) the rate in your Contract for the applicable benefit option, whichever is
greater.
If you choose a benefit option, the Beneficiary may, when filing a proof of
claim, pay us any amount that otherwise would be deducted from the proceeds.
OPTION A: BENEFITS FOR A SPECIFIED NUMBER OF YEARS -- We will make equal
payments for any selected number of years up to 30 years. These payments may be
made annually, semi-annually, quarterly or monthly, whichever you choose.
OPTION B: LIFETIME MONTHLY BENEFIT -- Benefits are based on the age of the
person who receives the money (called the payee) on the date the first payment
will be made. You may choose one of the three following options to specify when
benefits will cease:
- when the payee dies with no further benefits due (Life Annuity);
- when the payee dies but not before the total benefit payments made by us
equals the amount applied under this option (Life Annuity with Installment
Refund); or
- when the payee dies but not before 10 years have elapsed from the date of
the first payment (Life Annuity with payments Guaranteed for 10 years).
OPTION C: INTEREST BENEFITS -- We will pay interest at a rate we determine each
year. It will not be less than 3% per year. We will make payments annually,
semi-annually, quarterly, or monthly, whichever is preferred. These benefits
will stop when the amount left has been withdrawn. If the payee dies, any unpaid
balance plus accrued interest will be paid in a lump sum.
OPTION D: BENEFITS FOR A SPECIFIED AMOUNT -- Interest will be credited to the
unpaid balance and we will make payments until the unpaid balance is gone. We
will credit interest at a rate we determine each year, but not less than 3%. We
will make payments annually, semi-annually, quarterly, or monthly, whichever is
preferred. The benefit level chosen must provide for an annual benefit of at
least 8% of the amount applied.
OPTION E: LIFETIME MONTHLY BENEFITS FOR TWO PAYEES -- We will pay a benefit
jointly to two payees during their joint lifetime. After one payee dies, the
benefits to the survivor will be:
- the same as the original amount, or
- in an amount equal to 2/3 of the original amount.
C-1
<PAGE>
Benefits are based on the payees' ages on the date the first payment is due.
Benefits will end when the second payee dies.
- - SELECTION OF PAYMENT OPTIONS -- The amount applied under any one option for
any one payee must be at least $5,000. The periodic payment for any one payee
must be at least $50. Subject to the Contract Owner and Beneficiary
provisions, any option selection may be changed before the Net Death Benefit
become payable. If you make no selection, the Beneficiary may select an option
when the Net Death Benefit becomes payable.
- - If the amount of the monthly benefit under Option B for the age of the payee
is the same for different periods certain, the payee will be entitled to the
longest period certain for the payee's age.
- - You may give the Beneficiary the right to change from Option C or D to any
other option at any time. If Option C or D is chosen by the payee when this
Contract becomes a claim, the payee may reserve the right to change to any
other option. The payee who elects to change options must be the payee under
the option selected.
ADDITIONAL DEPOSITS -- An additional deposit may be added to any proceeds when
they are applied under Option B and E. We reserve the right to limit the amount
of any additional deposit. We may levy a charge of no more than 3% on any
additional deposits.
RIGHTS AND LIMITATIONS -- A payee has no right to assign any amount payable
under any option, nor to demand a lump sum benefit in place of any amount
payable under Options B or E. A payee will have the right to receive a lump sum
in place of installments under Option A. The payee must provide us with a
Written Request to reserve this right. If the right to receive a lump sum is
exercised, we will determine the lump sum benefit at the same interest rates
used to calculate the installments. The amount left under Option C and any
unpaid balance under Option D, may be withdrawn only as noted in the Written
Request selecting the option.
A corporate or fiduciary payee may select only Option A, C or D, subject to our
approval.
PAYMENT DATES -- The first payment under any option, except Option C, will be
due on the date this Contract matures, by death or otherwise, unless another
date is designated. Benefits under Option C begin at the end of the first
benefit period.
The last payment under any option will be made as stated in the option's
description. However, if a payee under Options B or E dies before the due date
of the second monthly payment, the amount applied, minus the first monthly
payment, will be paid in a lump sum or under any option other than Option E.
This payment will be made to the surviving payee under Option E or the
succeeding payee under Option B.
BENEFIT RATES -- The Benefit Option Tables in your Contract show benefit amounts
for Option A, B and E. If you choose one of these options, either within five
years of the date of surrender or the date the proceeds are otherwise payable,
we will apply either the benefit rates listed in the Tables, or the rates we use
on the date the proceeds are paid, whichever is more favorable. Benefits that
begin more than five years after that date, or as a result of additional
deposits, will be based on the rates we use on the date the first benefit is
due.
C-2
<PAGE>
APPENDIX D -- ILLUSTRATIONS OF DEATH BENEFIT, CONTRACT VALUES
AND ACCUMULATED PAYMENTS
The following tables illustrate the way in which a Contract's Death Benefit and
Contract Value could vary over an extended period.
ASSUMPTIONS
The tables illustrate the following Contracts: a Contract issued to a male, age
55, under a standard underwriting class and qualifying for the non-tobacco user
discount; a Contract issued on a unisex basis to an Insured, age 55, under a
standard underwriting class and qualifying for the non-tobacco user discount;
Second-to-Die Contract issued to a male, age 65, under a standard Underwriting
Class and qualifying for the non-tobacco user discount and a female, age 65,
under a standard Underwriting Class and qualifying for the non-tobacco user
discount; and a Second-to-Die Contract issued on a unisex basis to two Insureds
both age 65, under a standard Underwriting Class and qualifying for the
non-tobacco user discount. The tables illustrate the guaranteed insurance
protection rates and the current insurance protection rates as presently in
effect.
The tables illustrate Contract Values based on the assumptions that no Contract
loans have been made, that no partial withdrawals have been made, and that no
more than 12 transfers have been made in any Contract year (so that no
transaction or transfer charges have been incurred). On request, we will provide
a comparable illustration based on the proposed Insured's age, sex, and
Underwriting Class, and a specified payment.
The tables assume that the initial payment is allocated to and remains in the
Variable Account for the entire period shown. They are based on hypothetical
gross investment rates of return for the Fund (i.e., investment income and
capital gains and losses, realized or unrealized) equal to constant gross annual
rates of 0%, 6%, and 12%. The second column of the tables shows the amount that
would accumulate if the initial payment was invested to earn interest (after
taxes) at 5% compounded annually.
The Contract Values and Death Benefit would be different from those shown if the
gross annual investment rates of return averaged 0%, 6%, and 12% over a period
of years, but fluctuated above or below the averages for individual Contract
years. The values would also be different depending on the allocation of the
Contract's total Contract Value among the Sub-Accounts, if the rates of return
averaged 0%, 6% or 12, but the rates of each Fund varied above and below the
averages.
The hypothetical returns shown in the table do not reflect any charges for
income taxes against the Variable Account since no charges are currently made.
However, if in the future the charges are made, to produce illustrated Death
Benefits and Contract Value, the gross annual investment rate of return would
have to exceed 0%, 6% or 12% by a sufficient amount to cover the tax charges.
DEDUCTIONS FOR CHARGES
The amounts shown for the Death Proceeds and Contract Values take into account
the deduction from payment for the tax expense charge, the Monthly Deductions
from Contract Value (including the administrative charge (equivalent to 0.20% on
an annual basis), and the distribution charge (equivalent to 0.90% on an annual
basis, for the first ten Contract years only), and the daily charge against the
Variable Account for mortality and expense risks (0.90% on an annual basis). In
both the Current Cost of Insurance Charges illustrations and Guaranteed Cost of
Insurance Charges illustrations, the Variable Account charges currently are
equivalent to an effective annual rate of 0.90% of the average daily value of
the assets in the Variable Account.
D-1
<PAGE>
EXPENSES OF THE UNDERLYING FUNDS
The amounts shown in the tables also take into account the Underlying Fund
advisory fees and operating expenses, which are assumed to be at an annual rate
of 0.95% of the average daily net assets of the Underlying Fund. The actual fees
and expenses of each Underlying Fund vary, and, in 1997, ranged from an annual
rate of 0.35% to an annual rate of 2.00% of average daily net assets. The fees
and expenses associated with the Contract may be more or less than 0.95% in the
aggregate, depending upon how you make allocations of the Contract Value among
the Sub-Accounts.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.35%
of average net assets for the Select Aggressive Growth Fund and Select Capital
Appreciation Fund, 1.50% for the Select International Equity Fund, 1.25% for the
Select Value Opportunity Fund, 1.20% for the Select Growth Fund, 1.10% for the
Select Growth and Income, 1.00% for the Select Income Fund, and 0.60% for the
Money Market Fund. The total operating expenses of these Funds of the Trust were
less than their respective expense limitations in 1997. These limitations may be
terminated at any time.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee to the extent that
expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's average
daily net assets, except that such waiver shall not exceed the net amount of
management fees earned by AFIMS from the Fund after subtracting fees paid by
AFIMS to a sub-adviser. These limitations may be terminated at any time.
NET ANNUAL RATES OF INVESTMENT
Taking into account the Separate Account mortality and expense risk charge of
0.90%, and the assumed 0.95% charge for Underlying Fund advisory fees and
operating expenses, the gross annual rates of investment return of 0%, 6% and
12% correspond to net annual rates of -1.85%, 4.15% and 10.150%, respectively.
The hypothetical returns shown in the table do not reflect any charges for
income taxes against the Separate Account since no charges are currently made.
However, if in the future such charges are made, in order to produce illustrated
death benefits and Contract Values, the gross annual investment rate of return
would have to exceed 0%, 6% or 12% by a sufficient amount to cover the tax
charges.
UPON REQUEST, THE COMPANY WILL PROVIDE A COMPARABLE ILLUSTRATION BASED UPON THE
PROPOSED INSURED'S AGE AND UNDERWRITING CLASSIFICATION, AND THE REQUESTED FACE
AMOUNT, SUM INSURED OPTION, AND RIDERS.
D-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ALLMERICA SELECT SPL
MALE NONSMOKER AGE 55
SPECIFIED FACE AMOUNT = $74,596
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- -------------------------------- ------------------------------------
CONTRACT AT 5% SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ---------- --------- -------- -------- --------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,288 23,788 74,596 22,741 25,241 74,596 24,194 26,694 74,596
2 27,563 20,665 22,978 74,596 23,557 25,870 74,596 26,621 28,934 74,596
3 28,941 20,070 22,195 74,596 24,390 26,515 74,596 29,236 31,361 74,596
4 30,388 19,501 21,439 74,596 25,238 27,175 74,596 32,055 33,993 74,596
5 31,907 18,959 20,709 74,596 26,103 27,853 74,596 35,095 36,845 74,596
6 33,502 18,441 20,003 74,596 26,984 28,547 74,596 38,374 39,937 74,596
7 35,178 18,134 19,322 74,596 28,071 29,258 74,596 42,100 43,288 74,596
8 36,936 17,851 18,663 74,596 29,175 29,987 74,596 46,107 46,920 74,596
9 38,783 17,653 18,028 74,596 30,360 30,735 74,596 50,482 50,857 74,596
10 40,722 17,413 17,413 74,596 31,501 31,501 74,596 55,124 55,124 80,481
11 42,758 17,006 17,006 74,596 32,643 32,643 74,596 60,411 60,411 88,200
12 44,896 16,609 16,609 74,596 33,827 33,827 74,596 66,205 66,205 96,659
13 47,141 16,220 16,220 74,596 35,053 35,053 74,596 72,554 72,554 105,929
14 49,498 15,841 15,841 74,596 36,324 36,324 74,596 79,512 79,512 116,088
15 51,973 15,471 15,471 74,596 37,642 37,642 74,596 87,138 87,138 127,221
16 54,572 15,109 15,109 74,596 39,007 39,007 74,596 95,494 95,494 139,422
17 57,300 14,756 14,756 74,596 40,421 40,421 74,596 104,653 104,653 152,793
18 60,165 14,411 14,411 74,596 41,887 41,887 74,596 114,689 114,689 167,446
19 63,174 14,074 14,074 74,596 43,406 43,406 74,596 125,688 125,688 183,505
20 66,332 13,745 13,745 74,596 44,980 44,980 74,596 137,742 137,742 201,104
Age 60 31,907 18,959 20,709 74,596 26,103 27,853 74,596 35,095 36,845 74,596
Age 65 40,722 17,413 17,413 74,596 31,501 31,501 74,596 55,124 55,124 80,481
Age 70 51,973 15,471 15,471 74,596 37,642 37,642 74,596 87,138 87,138 127,221
Age 75 66,332 13,745 13,745 74,596 44,980 44,980 74,596 137,742 137,742 201,104
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
D-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ALLMERICA SELECT SPL
MALE NONSMOKER AGE 55
SPECIFIED FACE AMOUNT = $74,596
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST --------------------------------- ------------------------------- ------------------------------------
CONTRACT AT 5% SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ---------- --------- --------- --------- --------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,029 23,529 74,596 22,483 24,983 74,596 23,938 26,438 74,596
2 27,563 20,094 22,407 74,596 22,994 25,307 74,596 26,069 28,382 74,596
3 28,941 19,131 21,256 74,596 23,470 25,595 74,596 28,350 30,475 74,596
4 30,388 18,138 20,075 74,596 23,910 25,847 74,596 30,799 32,736 74,596
5 31,907 17,100 18,850 74,596 24,300 26,050 74,596 33,428 35,178 74,596
6 33,502 16,015 17,578 74,596 24,640 26,203 74,596 36,261 37,824 74,596
7 35,178 15,055 16,242 74,596 25,103 26,291 74,596 39,507 40,694 74,596
8 36,936 14,022 14,834 74,596 25,493 26,306 74,596 43,004 43,817 74,596
9 38,783 12,960 13,335 74,596 25,857 26,232 74,596 46,847 47,222 74,596
10 40,722 11,719 11,719 74,596 26,047 26,047 74,596 50,944 50,944 74,596
11 42,758 10,078 10,078 74,596 25,986 25,986 74,596 55,477 55,477 80,996
12 44,896 8,275 8,275 74,596 25,800 25,800 74,596 60,347 60,347 88,107
13 47,141 6,286 6,286 74,596 25,468 25,468 74,596 65,565 65,565 95,725
14 49,498 4,081 4,081 74,596 24,966 24,966 74,596 71,140 71,140 103,865
15 51,973 1,628 1,628 74,596 24,266 24,266 74,596 77,078 77,078 112,534
16 54,572 0 0 74,596 23,324 23,324 74,596 83,374 83,374 121,726
17 57,300 0 0 74,596 22,080 22,080 74,596 90,009 90,009 131,413
18 60,165 0 0 74,596 20,471 20,471 74,596 96,963 96,963 141,566
19 63,174 0 0 74,596 18,402 18,402 74,596 104,189 104,189 152,116
20 66,332 0 0 74,596 15,776 15,776 74,596 111,644 111,644 163,000
Age 60 31,907 17,100 18,850 74,596 24,300 26,050 74,596 33,428 35,178 74,596
Age 65 40,722 11,719 11,719 74,596 26,047 26,047 74,596 50,944 50,944 74,596
Age 70 51,973 1,628 1,628 74,596 24,266 24,266 74,596 77,078 77,078 112,534
Age 75 66,332 0 0 74,596 15,776 15,776 74,596 111,644 111,644 163,000
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
D-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ALLMERICA SELECT SPL
UNISEX NONSMOKER AGE 55
SPECIFIED FACE AMOUNT = $76,948
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- -------------------------------- ------------------------------------
CONTRACT AT 5% SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ---------- --------- -------- -------- --------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,288 23,788 76,948 22,741 25,241 76,948 24,194 26,694 76,948
2 27,563 20,665 22,978 76,948 23,557 25,870 76,948 26,621 28,934 76,948
3 28,941 20,070 22,195 76,948 24,390 26,515 76,948 29,236 31,361 76,948
4 30,388 19,501 21,439 76,948 25,238 27,175 76,948 32,055 33,993 76,948
5 31,907 18,959 20,709 76,948 26,103 27,853 76,948 35,095 36,845 76,948
6 33,502 18,441 20,003 76,948 26,984 28,547 76,948 38,374 39,937 76,948
7 35,178 18,134 19,322 76,948 28,071 29,258 76,948 42,100 43,288 76,948
8 36,936 17,851 18,663 76,948 29,175 29,987 76,948 46,107 46,920 76,948
9 38,783 17,653 18,028 76,948 30,360 30,735 76,948 50,482 50,857 76,948
10 40,722 17,413 17,413 76,948 31,501 31,501 76,948 55,124 55,124 80,481
11 42,758 17,006 17,006 76,948 32,643 32,643 76,948 60,411 60,411 88,200
12 44,896 16,609 16,609 76,948 33,827 33,827 76,948 66,205 66,205 96,659
13 47,141 16,220 16,220 76,948 35,053 35,053 76,948 72,554 72,554 105,929
14 49,498 15,841 15,841 76,948 36,324 36,324 76,948 79,512 79,512 116,088
15 51,973 15,471 15,471 76,948 37,642 37,642 76,948 87,138 87,138 127,221
16 54,572 15,109 15,109 76,948 39,007 39,007 76,948 95,494 95,494 139,422
17 57,300 14,756 14,756 76,948 40,421 40,421 76,948 104,653 104,653 152,793
18 60,165 14,411 14,411 76,948 41,887 41,887 76,948 114,689 114,689 167,446
19 63,174 14,074 14,074 76,948 43,406 43,406 76,948 125,688 125,688 183,505
20 66,332 13,745 13,745 76,948 44,980 44,980 76,948 137,742 137,742 201,104
Age 60 31,907 18,959 20,709 76,948 26,103 27,853 76,948 35,095 36,845 76,948
Age 65 40,722 17,413 17,413 76,948 31,501 31,501 76,948 55,124 55,124 80,481
Age 70 51,973 15,471 15,471 76,948 37,642 37,642 76,948 87,138 87,138 127,221
Age 75 66,332 13,745 13,745 76,948 44,980 44,980 76,948 137,742 137,742 201,104
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
D-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ALLMERICA SELECT SPL
UNISEX NONSMOKER AGE 55
SPECIFIED FACE AMOUNT = $76,948
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- ------------------------------- --------------------------------
CONTRACT AT 5% SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ---------- --------- -------- -------- --------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,029 23,529 76,948 22,483 24,983 76,948 23,937 26,437 76,948
2 27,563 20,092 22,405 76,948 22,991 25,304 76,948 26,065 28,377 76,948
3 28,941 19,139 21,264 76,948 23,475 25,600 76,948 28,350 30,475 76,948
4 30,388 18,153 20,091 76,948 23,920 25,857 76,948 30,801 32,739 76,948
5 31,907 17,135 18,885 76,948 24,325 26,075 76,948 33,439 35,189 76,948
6 33,502 16,074 17,637 76,948 24,684 26,247 76,948 36,282 37,844 76,948
7 35,178 15,143 16,331 76,948 25,170 26,357 76,948 39,535 40,723 76,948
8 36,936 14,144 14,956 76,948 25,586 26,398 76,948 43,040 43,852 76,948
9 38,783 13,121 13,496 76,948 25,979 26,354 76,948 46,885 47,260 76,948
10 40,722 11,930 11,930 76,948 26,208 26,208 76,948 50,983 50,983 76,948
11 42,758 10,347 10,347 76,948 26,190 26,190 76,948 55,549 55,549 81,102
12 44,896 8,617 8,617 76,948 26,058 26,058 76,948 60,479 60,479 88,300
13 47,141 6,716 6,716 76,948 25,792 25,792 76,948 65,774 65,774 96,030
14 49,498 4,624 4,624 76,948 25,373 25,373 76,948 71,450 71,450 104,317
15 51,973 2,302 2,302 76,948 24,771 24,771 76,948 77,512 77,512 113,168
16 54,572 0 0 76,948 23,935 23,935 76,948 83,954 83,954 122,573
17 57,300 0 0 76,948 22,829 22,829 76,948 90,776 90,776 132,533
18 60,165 0 0 76,948 21,401 21,401 76,948 97,968 97,968 143,033
19 63,174 0 0 76,948 19,563 19,563 76,948 105,490 105,490 154,016
20 66,332 0 0 76,948 17,222 17,222 76,948 113,302 113,302 165,420
Age 60 31,907 17,135 18,885 76,948 24,325 26,075 76,948 33,439 35,189 76,948
Age 65 40,722 11,930 11,930 76,948 26,208 26,208 76,948 50,983 50,983 76,948
Age 70 51,973 2,302 2,302 76,948 24,771 24,771 76,948 77,512 77,512 113,168
Age 75 66,332 0 0 76,948 17,222 17,222 76,948 113,302 113,302 165,420
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
D-6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ALLMERICA SELECT SPL
MALE NONSMOKER AGE 65
FEMALE NONSMOKER AGE 65
SPECIFIED FACE AMOUNT = $73,207
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- -------------------------------- ------------------------------------
CONTRACT AT 5% SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ---------- --------- -------- -------- --------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,416 23,916 73,207 22,877 25,377 73,207 24,339 26,839 73,207
2 27,563 20,876 23,189 73,207 23,803 26,115 73,207 26,903 29,215 73,207
3 28,941 20,341 22,466 73,207 24,721 26,846 73,207 29,644 31,769 73,207
4 30,388 19,828 21,766 73,207 25,661 27,598 73,207 32,600 34,538 73,207
5 31,907 19,338 21,088 73,207 26,621 28,371 73,207 35,798 37,548 73,207
6 33,502 18,868 20,430 73,207 27,603 29,165 73,207 39,259 40,821 73,207
7 35,178 18,606 19,794 73,207 28,795 29,982 73,207 43,192 44,379 73,207
8 36,936 18,364 19,177 73,207 30,009 30,822 73,207 47,435 48,248 73,207
9 38,783 18,204 18,579 73,207 31,310 31,685 73,207 52,078 52,453 76,582
10 40,722 18,000 18,000 73,207 32,572 32,572 73,207 57,026 57,026 83,257
11 42,758 17,615 17,615 73,207 33,821 33,821 73,207 62,620 62,620 91,425
12 44,896 17,237 17,237 73,207 35,117 35,117 73,207 68,763 68,763 100,393
13 47,141 16,868 16,868 73,207 36,463 36,463 73,207 75,508 75,508 110,242
14 49,498 16,507 16,507 73,207 37,861 37,861 73,207 82,915 82,915 121,056
15 51,973 16,153 16,153 73,207 39,313 39,313 73,207 91,049 91,049 132,932
16 54,572 15,807 15,807 73,207 40,820 40,820 73,207 99,981 99,981 145,972
17 57,300 15,468 15,468 73,207 42,385 42,385 73,207 109,789 109,789 160,292
18 60,165 15,137 15,137 73,207 44,010 44,010 73,207 120,559 120,559 176,016
19 63,174 14,813 14,813 73,207 45,697 45,697 73,207 132,386 132,386 193,283
20 66,332 14,495 14,495 73,207 47,449 47,449 73,207 145,373 145,373 212,244
Age 70 31,907 19,338 21,088 73,207 26,621 28,371 73,207 35,798 37,548 73,207
Age 75 40,722 18,000 18,000 73,207 32,572 32,572 73,207 57,026 57,026 83,257
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
D-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ALLMERICA SELECT SPL
MALE NONSMOKER AGE 65
FEMALE NONSMOKER AGE 65
SPECIFIED FACE AMOUNT = $73,207
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- -------------------------------- ------------------------------------
CONTRACT AT 5% SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ---------- --------- -------- -------- --------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,416 23,916 73,207 22,877 25,377 73,207 24,339 26,839 73,207
2 27,563 20,876 23,189 73,207 23,803 26,115 73,207 26,903 29,215 73,207
3 28,941 20,310 22,435 73,207 24,708 26,833 73,207 29,644 31,769 73,207
4 30,388 19,709 21,646 73,207 25,585 27,523 73,207 32,574 34,511 73,207
5 31,907 19,059 20,809 73,207 26,425 28,175 73,207 35,709 37,459 73,207
6 33,502 18,346 19,908 73,207 27,214 28,777 73,207 39,068 40,630 73,207
7 35,178 17,735 18,922 73,207 28,125 29,312 73,207 42,856 44,044 73,207
8 36,936 17,011 17,824 73,207 28,947 29,759 73,207 46,912 47,725 73,207
9 38,783 16,203 16,578 73,207 29,716 30,091 73,207 51,326 51,701 75,483
10 40,722 15,142 15,142 73,207 30,275 30,275 73,207 55,933 55,933 81,663
11 42,758 13,598 13,598 73,207 30,560 30,560 73,207 60,938 60,938 88,970
12 44,896 11,747 11,747 73,207 30,640 30,640 73,207 66,237 66,237 96,706
13 47,141 9,525 9,525 73,207 30,473 30,473 73,207 71,807 71,807 104,838
14 49,498 6,853 6,853 73,207 30,006 30,006 73,207 77,613 77,613 113,315
15 51,973 3,625 3,625 73,207 29,165 29,165 73,207 83,604 83,604 122,062
16 54,572 0 0 73,207 27,854 27,854 73,207 89,706 89,706 130,970
17 57,300 0 0 73,207 25,936 25,936 73,207 95,816 95,816 139,891
18 60,165 0 0 73,207 23,221 23,221 73,207 101,802 101,802 148,630
19 63,174 0 0 73,207 19,454 19,454 73,207 107,505 107,505 156,957
20 66,332 0 0 73,207 14,286 14,286 73,207 112,753 112,753 164,619
Age 70 31,907 19,059 20,809 73,207 26,425 28,175 73,207 35,709 37,459 73,207
Age 75 40,722 15,142 15,142 73,207 30,275 30,275 73,207 55,933 55,933 81,663
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
D-8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ALLMERICA SELECT SPL
UNISEX NONSMOKER AGE 65
UNISEX NONSMOKER AGE 65
SPECIFIED FACE AMOUNT = $72,969
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- -------------------------------- ------------------------------------
CONTRACT AT 5% SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ---------- --------- -------- -------- --------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,416 23,916 72,969 22,877 25,377 72,969 24,338 26,838 72,969
2 27,563 20,874 23,186 72,969 23,800 26,113 72,969 26,901 29,213 72,969
3 28,941 20,339 22,464 72,969 24,719 26,844 72,969 29,639 31,764 72,969
4 30,388 19,826 21,764 72,969 25,658 27,596 72,969 32,595 34,532 72,969
5 31,907 19,336 21,086 72,969 26,619 28,369 72,969 35,792 37,542 72,969
6 33,502 18,866 20,428 72,969 27,600 29,163 72,969 39,252 40,815 72,969
7 35,178 18,604 19,792 72,969 28,792 29,979 72,969 43,185 44,372 72,969
8 36,936 18,362 19,175 72,969 30,006 30,819 72,969 47,428 48,240 72,969
9 38,783 18,202 18,577 72,969 31,307 31,682 72,969 52,070 52,445 76,570
10 40,722 17,998 17,998 72,969 32,569 32,569 72,969 57,017 57,017 83,244
11 42,758 17,613 17,613 72,969 33,818 33,818 72,969 62,610 62,610 91,410
12 44,896 17,236 17,236 72,969 35,114 35,114 72,969 68,752 68,752 100,378
13 47,141 16,866 16,866 72,969 36,460 36,460 72,969 75,496 75,496 110,224
14 49,498 16,505 16,505 72,969 37,858 37,858 72,969 82,902 82,902 121,037
15 51,973 16,151 16,151 72,969 39,310 39,310 72,969 91,035 91,035 132,911
16 54,572 15,805 15,805 72,969 40,817 40,817 72,969 99,965 99,965 145,949
17 57,300 15,467 15,467 72,969 42,381 42,381 72,969 109,772 109,772 160,267
18 60,165 15,136 15,136 72,969 44,006 44,006 72,969 120,540 120,540 175,989
19 63,174 14,811 14,811 72,969 45,693 45,693 72,969 132,365 132,365 193,253
20 66,332 14,494 14,494 72,969 47,445 47,445 72,969 145,350 145,350 212,211
Age 70 31,907 19,336 21,086 72,969 26,619 28,369 72,969 35,792 37,542 72,969
Age 75 40,722 17,998 17,998 72,969 32,569 32,569 72,969 57,017 57,017 83,244
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
D-9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ALLMERICA SELECT SPL
UNISEX NONSMOKER AGE 65
UNISEX NONSMOKER AGE 65
SPECIFIED FACE AMOUNT = $72,969
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- -------------------------------- ------------------------------------
CONTRACT AT 5% SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH SURRENDER CONTRACT DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ---------- --------- -------- -------- --------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 21,416 23,916 72,969 22,877 25,377 72,969 24,338 26,838 72,969
2 27,563 20,874 23,186 72,969 23,800 26,113 72,969 26,901 29,213 72,969
3 28,941 20,305 22,430 72,969 24,703 26,828 72,969 29,638 31,763 72,969
4 30,388 19,698 21,636 72,969 25,575 27,512 72,969 32,564 34,501 72,969
5 31,907 19,041 20,791 72,969 26,407 28,157 72,969 35,693 37,443 72,969
6 33,502 18,316 19,878 72,969 27,185 28,748 72,969 39,041 40,604 72,969
7 35,178 17,689 18,876 72,969 28,081 29,268 72,969 42,818 44,005 72,969
8 36,936 16,948 17,761 72,969 28,887 29,699 72,969 46,862 47,674 72,969
9 38,783 16,119 16,494 72,969 29,637 30,012 72,969 51,261 51,636 75,389
10 40,722 15,035 15,035 72,969 30,175 30,175 72,969 55,851 55,851 81,543
11 42,758 13,465 13,465 72,969 30,435 30,435 72,969 60,834 60,834 88,817
12 44,896 11,586 11,586 72,969 30,489 30,489 72,969 66,107 66,107 96,516
13 47,141 9,336 9,336 72,969 30,295 30,295 72,969 71,648 71,648 104,606
14 49,498 6,636 6,636 72,969 29,800 29,800 72,969 77,423 77,423 113,038
15 51,973 3,384 3,384 72,969 28,933 28,933 72,969 83,383 83,383 121,739
16 54,572 0 0 72,969 27,597 27,597 72,969 89,454 89,454 130,603
17 57,300 0 0 72,969 25,657 25,657 72,969 95,539 95,539 139,487
18 60,165 0 0 72,969 22,927 22,927 72,969 101,507 101,507 148,200
19 63,174 0 0 72,969 19,152 19,152 72,969 107,202 107,202 156,515
20 66,332 0 0 72,969 13,989 13,989 72,969 112,457 112,457 164,188
Age 70 31,907 19,041 20,791 72,969 26,407 28,157 72,969 35,693 37,443 72,969
Age 75 40,722 15,035 15,035 72,969 30,175 30,175 72,969 55,851 55,851 81,543
</TABLE>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY. THEY ARE NOT
A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. INVESTMENT
RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. INVESTMENT RESULTS WILL DEPEND ON
INVESTMENT ALLOCATIONS AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE
FUNDS. THESE HYPOTHETICAL INVESTMENT RATES OF RETURN MAY NOT BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD.
D-10
<PAGE>
PART II
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
- --------------------
Article VIII of Registrant's Bylaws provides: Each Director and each Officer
of the Corporation, whether or not in office, (and his executors or
administrators), shall be indemnified or reimbursed by the Corporation
against all expenses actually and necessarily incurred by him in the defense
or reasonable settlement of any action, suit, or proceeding in which he is
made a party by reason of his being or having been a Director or Officer of
the Corporation, including any sums paid in settlement or to discharge
judgment, except in relation to matters as to which he shall be finally
adjudged in such action, suit, or proceeding to be liable for negligence or
misconduct in the performance of his duties as such Director or Officer; and
the foregoing right of indemnification or reimbursement shall not affect any
other rights to which he may be entitled under the Articles of Incorporation,
any statute, bylaw, agreement, vote of stockholders, or otherwise.
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.
REPRESENTATIONS PURSUANT TO SECTION 26(e) OF THE INVESTMENT COMPANY ACT OF 1940
- -------------------------------------------------------------------------------
The Company hereby represents that the aggregate fees and charges under the
Policy are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the Company.
<PAGE>
CONTENTS OF THE REGISTRATION STATEMENT
--------------------------------------
This registration statement comprises the following papers and documents:
The facing sheet.
Cross-reference to items required by Form N-8B-2.
The prospectus consisting of ____ pages.
The undertaking to file reports.
The undertaking pursuant to Rule 484 under the Securities Act of 1933.
Representations Pursuant to Section 26(e) of the Investment Company Act of 1940
The Company hereby represents that the aggregate fees and charges under the
Policy are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the Company.
The signatures.
Written consents of the following persons:
1. PricewaterhouseCoopers LLP
2. Opinion of Counsel
3. Actuarial Consent
The following exhibits:
<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C> <C>
1. Exhibit 1 (Exhibits required by paragraph A of the instructions to
Form N-8B-2)
(1) Certified copy of Resolutions of the Board of Directors of the
Company of June 13, 1996 authorizing the establishment of the
Allmerica Select Separate Account III was previously filed in the
initial Registration Statement on Form S-6 of the Fulcrum
Variable Life Separate Account II (File No 333-15569) and is
incorporated by reference herein.
(2) Not Applicable.
(3) (a) Underwriting and Administrative Services Agreement between
the Company and Allmerica Investments, Inc. was previously
filed on April 15, 1998 in Post-Effective Amendment No. 5 of
the registration statement on Form S-6 of Allmerica Select
Separate Account II (File No 33-83604) and is incorporated
by reference herein.
(b) Registered Representatives/Agents Agreement was previously
filed on April 15, 1998 in Post-Effective Amendment No. 5 of
the registration statement on Form S-6 of Allmerica Select
Separate Account II (File No 33-83604) and is incorporated
by reference herein.
(c) Compensation Schedule for the Allmerica Select SPL contract
is filed herewith
(4) Not Applicable.
(5) (a) Allmerica Select SPL Contract is filed herewith.
(b) Option To Accelerate Death Benefits Rider (Living Benefits
Rider) is filed herewith.
(c) Section 1035 Rider is filed herewith.
(d) Guaranteed Death Benefit Rider is filed herewith.
(6) Articles of Incorporation and Bylaws, as amended, of the Company
were previously filed on October 1, 1995 in Post-Effective
Amendment No. 1 of the registration statement on Form S-6 of
Allmerica Select Separate Account II (File No 33-83604)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
and are incorporated by reference herein.
(7) Not Applicable.
(8) (a) Participation Agreement with Allmerica Investment Trust was
previously filed on April 15, 1998 in Post-Effective
Amendment No. 5 of the registration statement on Form S-6 of
Allmerica Select Separate Account II (File No 33-83604) and
is incorporated by reference herein.
(b) Participation Agreement with T. Rowe Price International
Series, Inc. was previously filed on April 15, 1998 in
Post-Effective Amendment No. 5 of the registration statement
on Form S-6 of Allmerica Select Separate Account II (File
No 33-83604) and is incorporated by reference herein.
(c) Participation Agreement with Variable Insurance Products
Fund, as amended, was previously filed on April 15, 1998 in
Post-Effective Amendment No. 5 of the registration statement
on Form S-6 of Allmerica Select Separate Account II (File
No 33-83604) and is incorporated by reference herein.
(d) Fidelity Service Agreement, effective as of November 1,
1995, was previously filed on April 30, 1996 in
Post-Effective Amendment No. 2 of the registration statement
on Form S-6 of Allmerica Select Separate Account II (File
No 33-83604) and is incorporated by reference herein.
(e) An Amendment to the Fidelity Service Agreement, effective as
of January 1, 1997, was previously filed on May 1, 1997 in
Post-Effective Amendment No. 3 of the registration statement
on Form S-6 of Allmerica Select Separate Account II (File
No 33-83604) and is incorporated by reference herein.
(f) Fidelity Service Contract, effective as of January 1, 1997,
was previously filed on May 1, 1997 in Post-Effective
Amendment No. 3 of the registration statement on Form S-6 of
Allmerica Select Separate Account II (File No 33-83604) and
is incorporated by reference herein.
(g) Service Agreement with Rowe-Price Fleming International,
Inc. was previously filed on April 15, 1998 in
Post-Effective Amendment No. 5 of the registration statement
on Form S-6 of Allmerica Select Separate Account II (File
No 33-83604) and is incorporated by reference herein.
(h) BFDS Agreements for lockbox and mailroom services was
previously filed on April 15, 1998 in Post-Effective
Amendment No. 5 of the registration statement on Form S-6 of
Allmerica Select Separate Account II (File No 33-83604) and
is incorporated by reference herein.
(9) Not Applicable.
(10) Application is filed herewith.
2. Policy and Policy riders are included in Exhibit 1(5) above.
3. Opinion of Counsel is filed herewith.
4. Not Applicable.
5. Not Applicable.
6. Actuarial Consent is filed herewith.
7. Procedures Memorandum pursuant to Rule 6e-3(T)(b)(12)(iii) under the
1940 Act which includes conversion procedures pursuant to
Rule 6e-3(T)(b)(13)(v)(B) is filed herewith.
8. Consent of Independent Accountants is filed herewith.
</TABLE>
<PAGE>
FORM S-6 EXHIBIT TABLE
<TABLE>
<S> <C>
Exhibit 1(3)(c) Commission Schedule
Exhibit 1(5)(a) Allmerica Select SPL Cntract
Exhibit 1(5)(b) Option To Accelerate Death Benefits Rider (Living Benefits Rider)
Exhibit 1(5)(c) Section 1035 Rider
Exhibit 1(5)(d) Guaranteed Death Benefit Rider
Exhibit 1(10) Application
Exhibit 3 Opinion of Counsel
Exhibit 6 Actuarial Consent
Exhibit 7 Procedures Memorandum
Exhibit 8 Consent of Independent Accountants
</TABLE>
<PAGE>
EXHIBIT 1(3)(c)
COMMISSION (ALLMERICA SELECT SPL)
Compensation
Frequency: Premium-based Compensation - Weekly
Trail - Quarterly beginning in Contract year 2
Compensation as
Percentage of
Payment: Ages up to Issue Age 79*
------------------------
The following commission Codes are available:
Commission Code A 7.50% upfront commission; no trail
Commission Code B 6.00% upfront commission; 0.25% trail
Commission Code C 3.50% upfront commission; 1.00% trail
Issue Ages 80 to 89* (No Choice)
--------------------------------
Commission Code C 3.50% upfront commission; 1.00% trail
*For Second-to-Die Contracts, the Issue Age of the Older
Insured
For Commission Codes B and C, in addition to the initial
commission paid on all payments, a trail commission will
be paid on the first quarterly payment date following the
first anniversary of the date of issue, based on the
Contract Value not including the Loan Account as of the
last day of the quarter.
No trail commissions will be paid during the first Contract year.
<PAGE>
PLEASE READ THIS CONTRACT CAREFULLY
THE DEATH BENEFIT AND CONTRACT VALUE, WHEN BASED ON THE INVESTMENT PERFORMANCE
OF THE VARIABLE ACCOUNT, MAY INCREASE OR DECREASE AND ARE NOT GUARANTEED AS TO A
FIXED DOLLAR AMOUNT. PLEASE REFER TO THE VARIABLE ACCOUNT AND DEATH BENEFIT
SECTIONS FOR ADDITIONAL INFORMATION. WE AGREE TO PAY THE BENEFITS OF THIS
CONTRACT IN ACCORDANCE WITH ITS TERMS.
RIGHT TO CANCEL
We want you to be satisfied with the contract you have purchased and we urge
you to examine it closely. If for any reason you are not satisfied, you may
return the contract to us or an authorized representative within 10 days
after receipt of the contract.
If you return the contract, it will be void from the Date of Issue, and you
will receive a refund equal to the total of:
1. the difference between any payments made, including fees or any other
charges, and the amounts allocated to the Variable Account;
2. the value of the amounts in the Variable Account on the date the
returned contract is received at our Principal Office; and
3. any fees or other charges imposed on amounts in the Variable Account.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
Home Office: Dover, Delaware
Principal Office: 440 Lincoln Street, Worcester, Massachusetts 01653
This is a legal contract between Allmerica Financial Life Insurance and Annuity
Company and the owner. It is issued in consideration of the payment shown on
the Specifications Page.
/s/ Richard M. Reilly /s/ Abigail M. Armstrong
President Secretary
MODIFIED SINGLE PAYMENT VARIABLE LIFE INSURANCE CONTRACT
NON-PARTICIPATING
FORM 1030-96
<PAGE>
TABLE OF CONTENTS
SPECIFICATIONS......................................................... 3
DEFINITIONS............................................................ 7
GENERAL TERMS.......................................................... 9
INFORMATION ABOUT YOU AND THE BENEFICIARY.............................. 11
WHAT YOU SHOULD KNOW ABOUT:
THE PAYMENTS...................................................... 12
YOUR CONTRACT VALUE............................................... 14
THE VARIABLE ACCOUNT.............................................. 16
THE FIXED ACCOUNT................................................. 19
TRANSFERS......................................................... 21
BORROWING FROM YOUR CONTRACT...................................... 22
SURRENDERS AND PARTIAL WITHDRAWALS................................ 23
THE DEATH BENEFIT................................................. 25
THE BENEFIT OPTIONS............................................... 26
FORM 1030-96 2
<PAGE>
DEFINITIONS
AGE means how old the Insured is on his/her last
birthday measured on the Date of Issue and each
contract anniversary.
APPLICATION is the form you complete to apply for this
contract. It contains your payment, payment
allocation and other information that enable us
to prepare this contract. If a medical
questionnaire or other forms are required, they
become a part of the application. It is signed
by you and the Insured and becomes a part of this
contract.
ASSIGNEE is the person to whom you have transferred your
ownership of this contract.
COMPANY means Allmerica Financial Life Insurance and
Annuity Company, also referred to as we, our, and
us.
CONTRACT CHANGE means any change in the Underwriting Risk Class or
the addition or deletion of a Rider.
CONTRACT VALUE is the sum of your values in the Variable Account
and the Fixed Account.
DATE OF ISSUE is stated on the Specifications Page. Contract
months, years and anniversaries are measured from
this date.
EARNINGS means the amount by which the Contract Value
exceeds the sum of the payments made less any
payments that were previously considered
withdrawn. Earnings are calculated on each
Monthly Processing Date.
EVIDENCE OF INSURABILITY is the information, including medical information,
that we use to decide the Underwriting Risk Class
of the Insured.
FACE AMOUNT is the amount of insurance coverage. The Face
Amount is shown on the Specifications Page of the
contract. The death benefit is based on the Face
Amount; see the Death Benefit section.
FINAL PAYMENT DATE is the contract anniversary before the Insured's
(younger Insured's) 100th birthday. This date is
shown on the Specifications Page. The net death
benefit after this date will equal the Contract
Value minus any Outstanding Loan.
FIXED ACCOUNT is the part of the Company's General Account to
which all or a portion of a payment or transfer
may be allocated.
FUND is a separate investment series for investment by
a Sub-Account of the Variable Account.
GENERAL ACCOUNT is the assets of the Company that are not
allocated to a Separate Account.
INSURANCE PROTECTION AMOUNT is the death benefit minus the Contract Value.
INSURED is the person or persons covered as indicated on
the Specifications Page. If more than one person
is named, all provisions of the Contract that are
based on the death of the Insured will be based on
the date of death of the last survivor of the
persons named.
FORM 1030-96 7
<PAGE>
MONTHLY INSURANCE is the amount of money that we deduct from the
PROTECTION CHARGE Contract Value each month to pay for the
insurance.
MONTHLY PROCESSING DATE is the date the monthly charges are deducted from
the Contract Value. This date is shown on the
Specifications Page. If the Company is not open
on this date, the Monthly Processing Date will be
the next business date.
OUTSTANDING LOAN means all unpaid contract loans plus interest due
or accrued on such loans.
PRINCIPAL OFFICE is the Company's office at 440 Lincoln Street,
Worcester, Massachusetts, 01653.
PRO RATA refers to an allocation among the Sub-Accounts of
the Variable Account and the Fixed Account. A Pro
Rata allocation will be in the same proportion
that the Contract Value in each Sub-Account of the
Variable Account and the Contract Value in the
Fixed Account (other than value that is subject to
Outstanding Loan) have to the total Contract
Value.
RIDER is an optional benefit that may be added to your
contract.
SEPARATE ACCOUNT is a segregated account established by the
Company. The assets are not commingled with the
Company's general assets.
SPECIFICATIONS PAGES contain information specific to your contract and
are located after the Table of Contents.
SUB-ACCOUNTS are subdivisions of the Variable Account investing
exclusively in the shares of one or more Funds.
UNDERWRITING RISK CLASS means the insurance risk classification that we
assign to the Insured based on the information in
the Application and any other Evidence of
Insurability we obtain. The Underwriting Risk
Class affects the Monthly Insurance Protection
Charge.
VARIABLE ACCOUNT is the Company's Separate Account, consisting of
Sub-Accounts that invest in the underlying Funds.
WRITTEN REQUEST is a request you make in written form that is
satisfactory to us and filed at our Principal
Office.
YOU OR YOUR means the owner of this contract as shown in the
Application or in the latest change filed with us.
FORM 1030-96 8
<PAGE>
GENERAL TERMS
ENTIRE CONTRACT This contract, with a copy of the Application, and
any attached Riders, is the entire contract
between you and us. The entire contract also
includes: a copy of any Application to change to
a better Underwriting Risk Class, any new
Specifications Pages, and any supplemental pages
issued.
We assume that the information you and the Insured
provide in any Application is accurate and
complete to the best of your knowledge. If we
contest this contract or deny a claim, we may use
only the information you and the Insured provided
in an Application. Our representatives are not
permitted to change this contract or extend the
time for making payments. Only our President, a
Vice President or Secretary may change the
provisions of this contract, and then only in
writing.
RIGHT TO CONTEST THE A contest is any action taken by us to cancel your
CONTRACT IS LIMITED insurance or deny a claim based on untrue or
incomplete answers in your Application. We cannot
contest the Face Amount of the contract if it has
been in force for two years from the Date of Issue
and the Insured is alive at the end of this
two-year period.
If the Underwriting Risk Class is changed at your
request, we cannot contest the change after it has
been in force for two years from its effective
date and the Insured is alive.
NON-PARTICIPATING No insurance dividends will be paid on this
contract.
ADJUSTMENT OF INTEREST RATES We determine the Fixed Account interest rates used
to calculate the Contract Value, subject to the
guarantees on the Specifications Page. Any
changes in these rates will be based on changes in
our future expectations for our investment
earnings.
SUICIDE EXCLUSION If an Insured, while sane or insane, commits
suicide within two years of the Date of Issue of
this contract, we will not pay a death benefit.
The beneficiary will receive only the total amount
of payments made to us less any Outstanding Loan
and amounts withdrawn.
NOTICE OF FIRST TO DIE In the case of second-to-die insurance, upon the
death of the Insured who dies first, the owner
agrees to mail to the Principal Office, within 90
days of the date of death, or as soon thereafter
as is reasonably possible, proof of death.
MISSTATEMENT OF AGE OR SEX On the date of death of the insured, the death
benefit will be reduced or increased if the Age or
sex is misstated. The adjustment will be based
upon the ratio of the Maximum Payment for this
contract to the Maximum Payment for the contract
issued at the correct Age or sex.
PROTECTION OF BENEFITS To the extent allowed by law, the benefits
provided by this contract cannot be reached by the
beneficiary's creditors. No beneficiary may
assign, transfer, anticipate, or encumber the
Contract Value or benefit unless you give them
this right.
PERIODIC REPORT We will mail a report to you at your last known
address at least once a year. This report will
provide the following information:
- Contract Values in each Sub-Account and in
the Fixed Account;
- the value of the contract if surrendered;
FORM 1030-96 9
<PAGE>
- payments made by you and charges deducted by
us since the last report;
- the Outstanding Loan and any other
information required by law; and
- the death benefit.
FORM 1030-96 10
<PAGE>
INFORMATION ABOUT YOU AND THE BENEFICIARY
OWNER The owner of the contract is shown on the
Specifications Page. The owner may change the
ownership of this contract without the consent of
any beneficiary. However, an irrevocable
beneficiary must agree to the change in writing.
ASSIGNMENT You may change the ownership of this contract by
sending us a Written Request. An absolute
assignment will transfer ownership of the contract
from you to another person called the Assignee.
You may also assign this contract as collateral to
a collateral Assignee. The limitations on your
ownership rights while a collateral assignment is
in effect are specified in the assignment.
An assignment will take place only when the
Written Request is recorded at our Principal
Office. When recorded, it will take effect on the
date it was signed by you. Any rights created by
the assignment will be subject to any payments
made or actions taken by us before the change is
recorded. We are not responsible for assuring
that any assignment or any Assignee's interest is
valid.
BENEFICIARY You name the beneficiary to receive the net death
benefit. The beneficiary's interest will be
affected by any assignment you make. If you
assign this contract as collateral, all or a
portion of the net death benefit will first be
paid to the collateral Assignee; any money left
over from the amount due the Assignee will go to
those otherwise entitled.
Your choice of beneficiary may be revocable or
irrevocable. You may change a revocable
beneficiary at any time by Written Request; but an
irrevocable beneficiary must agree to any change
in writing. You will also need an irrevocable
beneficiary's permission to exercise other rights
and options granted by this contract. Unless you
have asked otherwise, the beneficiary will be
revocable.
Any change of the beneficiary must be made while
the Insured is living. This change will take
place on the date the request is signed, even if
the Insured is not living on the day we receive it
at the Principal Office. Any rights created by
the change will be subject to any payments made,
or actions taken, before we receive the Written
Request.
If a beneficiary dies before the Insured, his or
her interest in this contract will pass to any
surviving beneficiaries in proportion to their
share in the net death benefit, unless you have
requested otherwise. If all beneficiaries die
before the Insured, the net death benefit will
pass to you or your estate.
COMMON DISASTER OPTION The common disaster option may be elected by
Written Request. If the common disaster option is
in effect on the date of the Insured's death, the
beneficiary must be alive a certain number of days
following the Insured's date of death in order to
be entitled to receive a benefit. Otherwise, we
will pay the net death benefit as though the
beneficiary died before the Insured. The number
of days that the beneficiary must live after the
Insured's death is selected by you when you elect
the common disaster option.
FORM 1030-96 11
<PAGE>
WHAT YOU SHOULD KNOW ABOUT THE PAYMENTS
PAYMENTS This contract will not be in force until the
payment is made to us. The payment must be sent
to either our Principal Office or an authorized
representative. If you request it in writing, we
will send you a signed receipt after the payment
is received.
Additional payments under the contract will be
permitted prior to the Final Payment Date only
under the following circumstances:
1. An additional payment is required to keep the
contract in force subject to the Grace
Period provisions.
2. An additional payment is required for
reinstatement.
3. Additional payments may be made at any time
provided total payments do not exceed the
Maximum Payment shown on the Specifications
Page. The minimum amount of the additional
payment is indicated on the Specifications
Page. We may require Evidence of
Insurability if the additional payment would
increase the net death benefit. A payment
received while there is an Outstanding Loan
on the contract will be considered a loan
repayment rather than an additional payment.
GRACE PERIOD This contract will terminate 62 days after a
Monthly Processing Date on which the surrender
value is less than zero. The 62 day period is a
grace period. At least 61 days before the end of
the grace period, we will mail the owner and any
Assignee written notice of the amount of payment
that will be required to continue this contract in
force. The required payment will be no greater
than the amount required to pay the monthly
deductions for three months as of the day the
grace period began. If that payment is not paid
by the end of the grace period, the contract will
terminate without value.
The death benefit during the grace period will be
reduced by any overdue charges. The contract will
lapse if the amount shown in the notice remains
unpaid at the end of the grace period. The
contract terminates on the date of lapse.
REINSTATEMENT If this contract has lapsed or foreclosed for
failure to pay loan interest and has not been
surrendered, it may be restored (called
"reinstated" in this contract) within three years
after the date of default or foreclosure. We
will reinstate the contract on the Monthly
Processing Date following the day we receive
all of the following items:
- a written Application for reinstatement;
- Evidence of Insurability showing the Insured
is insurable according to our underwriting
rules at that time;
- a payment sufficient to cover the cost of all
contract charges that were due and unpaid
during the grace period;
- a payment large enough to keep the contract
in force for three months; and
- a payment or reinstatement of any loans
against the contract that existed at the end
of the grace period.
FORM 1030-96 12
<PAGE>
Your reinstatement payment will be allocated
to the Fixed Account until we approve your
Application. At that time, we will transfer
the reinstatement payment, plus accrued
interest, as you directed in your last
payment allocation request.
The Contract Value on the reinstatement date is:
- the payment to reinstate the contract,
including the interest earned from the date
we received your payment; plus
- an amount equal to the Contract Value less
any Outstanding Loan on the default date;
less
- the monthly deductions due on the
reinstatement date.
For the purpose of measuring the surrender charge
period, the contract will be reinstated as of the
date of default. The surrender charge on the
reinstatement date is the charge that was in
effect on the date of default.
FORM 1030-96 13
<PAGE>
WHAT YOU SHOULD KNOW ABOUT YOUR CONTRACT VALUE
Your Contract Value is the sum of the Variable
Account value and the Fixed Account value.
ALLOCATION OF If you make a payment with your Application or at
INITIAL PAYMENTS any time before your right to examine the contract
expires, we may put that payment into the Money
Market Fund Sub-Account on the date it is received
at our Principal Office or the Date of Issue, if
later. We will transfer the Contract Value as you
directed in your Application, or by later request,
no later than the expiration of the period during
which you may exercise your right to cancel the
contract.
MONTHLY DEDUCTION Beginning on the date this contract is issued and
on every Monthly Processing Date until the Final
Payment Date, we will deduct the following monthly
charges Pro Rata from the Contract Value:
- the Administration Charge;
- the Distribution Fee;
- the Federal & State Payment Tax Charge;
- the Insurance Protection Charge; and
- the Monthly Maintenance Fee.
These amounts are shown on the Specifications
Page.
Charges allocated to the Fixed Account will be
deducted on a last-in, first-out basis. This
means that we use the most recent payments to pay
the fees.
ADMINISTRATION CHARGE The Administration Charge compensates us for the
cost of providing administrative services
attributable to this Contract.
DISTRIBUTION FEE The Distribution Fee compensates us for
distribution expenses.
FEDERAL & STATE This charge compensates us for federal, state and
PAYMENT TAX CHARGE local taxes we must pay.
INSURANCE PROTECTION CHARGE The Insurance Protection Charge compensates us for
the cost of providing a death benefit in excess of
the Contract Value. This charge will not exceed
the guaranteed maximum Insurance Protection
Charge. The guaranteed maximum Insurance
Protection Charge for any contract month is equal
to (a) times (b), where;
(a) is the rate shown in the Guaranteed Maximum
Monthly Insurance Protection Table shown on
the Specifications Page, and
(b) is the Insurance Protection Amount.
The insurance protection rates actually charged
will usually be lower than, and never will be
higher than, the guaranteed rates. We may change
the monthly insurance protection rate from time to
time based on our expectations as to future
experience for mortality, expenses, taxes, or
persistency. Any change in insurance protection
rates will apply to all individuals in the same
Underwriting Risk Class as the Insured. We will
review the actual insurance protection rates for
this contract
FORM 1030-96 14
<PAGE>
whenever we change these rates for
new contracts. In any event, rates will be
reviewed no more often than once each year, but
not less than once in a five-year period.
MONTHLY MAINTENANCE FEE The Monthly Maintenance Fee shown on the
Specifications Page will be deducted on each
Monthly Processing Date.
FORM 1030-96 15
<PAGE>
WHAT YOU SHOULD KNOW ABOUT THE VARIABLE ACCOUNT
VARIABLE ACCOUNT The value of your contract will vary if it is
funded through investments in the Sub-Accounts of
the Variable Account. This account is separate
from our Fixed Account. We have exclusive and
absolute ownership and control of all assets,
including those in the Variable Account. However,
the portion of assets in the Variable Account
equal to the reserves and liabilities of the
contracts that are supported by this account will
not be charged with liabilities that arise out of
any other business we conduct.
This account, established to support variable life
insurance contracts, is registered with the
Securities and Exchange Commission (SEC) as a unit
investment trust under the Investment Company Act
of 1940. It is also governed by the laws of the
State of Delaware.
This account has several Sub-Accounts. Each
Sub-Account invests its assets in a separate
series of a registered investment company (called
a "Fund"). We reserve the right, when the law
allows, to change the name of the Variable Account
or any of its Sub-Accounts. A list of the
available Sub-Accounts in which you may choose to
invest is on the Application.
VARIABLE ACCOUNT The portion of the payment you make to us which is
CONTRACT VALUE not allocated to the Fixed Account will be
allocated to the Money Market Fund Sub-Account on
the date we receive the payment or the Date of
Issue, if it occurs after the date we receive the
payment. This value will be transferred to the
Sub-Accounts in accordance with your payment
allocation no later than the expiration of the
period during which you may exercise your right to
cancel the contract. Payments made thereafter
that are allocated to the Sub-Accounts will
purchase additional units of the Sub-Accounts.
The number of units purchased in each Sub-Account
is equal to the portion of the payment allocated
to the Sub-Account, divided by the value of the
applicable unit as of the valuation date the
payment is received at our Principal Office, or on
the valuation date that value is transferred to
the Sub-Account from another Sub-Account or the
Fixed Account.
The number of units will remain fixed unless (1)
changed by a subsequent split of unit value, or
(2) reduced because of a transfer, contract loan,
partial withdrawal, partial withdrawal transaction
charge, monthly deductions, surrender or surrender
charge allocated to the Sub-Account. Any
transaction described in (2) will result in the
cancellation of an appropriate number of units.
On each valuation date, we will value the assets
of each Sub-Account where activity has occurred.
The Contract Value in a Sub-Account at any time is
equal to the number of units this contract then
has in that Sub-Account multiplied by the
Sub-Account's unit value. The value of a unit for
any Sub-Account for any valuation period is
determined by multiplying that Sub-Account's unit
value for the immediately preceding valuation
period by the net investment factor for the
valuation period for which the unit value is being
calculated. The unit value will reflect the
investment advisory fee and other expenses
incurred by the registered investment companies.
NET INVESTMENT FACTOR This measures the investment performance of a
Sub-Account during the valuation period that has
just ended. The net investment factor is the
result of (a) plus (b), divided by (c), minus (d)
where:
(a) is the net asset value per share of a Fund
share held in the Sub-Account determined at
the end of the current valuation period, plus
FORM 1030-96 16
<PAGE>
(b) is the per share amount of any dividend or
capital gain distributions made by the Fund
on shares held in the Sub-Account if the
"ex-dividend" date occurs during the current
valuation period.
(c) is the net asset value per share of a Fund
share held in the Sub-Account determined as
of the end of the immediately preceding
valuation period.
(d) is a charge for mortality and expense risks
in the valuation period. The current
mortality and expense risk charge is shown on
the Specifications Page. This charge may be
increased or decreased, but will never exceed
the maximum mortality and expense risk charge
shown on the Specifications Page. Expense
and mortality results may not adversely
affect this maximum charge.
Since the net investment factor may be more or
less than one, the unit value may increase or
decrease. You bear the investment risk. We
reserve the right, subject to any required
regulatory approvals, to change the method we use
to determine the net investment factor.
VALUATION DATES AND PERIODS A valuation date is each day that the New York
Stock Exchange (NYSE) is open for business and any
other day that there is enough trading in the
Variable Account's underlying portfolio securities
to materially affect the value of the Variable
Account. A valuation period is the period between
valuation dates.
ADDITION, DELETION OR We may not change the investment policy of the
SUBSTITUTION OF Variable Account without the approval of the
INVESTMENTS Insurance Commissioner of Delaware. This
approval process is on file with the
Commissioner of your state.
We reserve the right, subject to compliance with
applicable law, to add, delete, or substitute the
shares of a Fund that are held by the Variable
Account or that the Variable Account may purchase.
We also reserve the right to eliminate the shares
of any Fund if they are no longer available for
investment, or if we believe investing more in any
Fund is no longer appropriate for the purposes of
the Variable Account.
We will notify you before we substitute any of
your shares in the Variable Account. This will
not, however, prevent the Variable Account from
buying other shares of underlying securities for
other series or classes of policies, or from
permitting a conversion between series or classes
of policies or contracts when requested by the
contract owner.
We reserve the right to establish other
Sub-Accounts, and to make them available to any
class or series of policies as we think
appropriate. Each new Sub-Account would invest in
a new investment company or in shares of another
open-end investment company. We also reserve the
right to eliminate or combine existing
Sub-Accounts of the Variable Account and to
transfer the assets between Sub-Accounts, when
allowed by law.
If we make any substitutions or changes that we
believe are necessary or appropriate, we may make
changes in this contract by written notice to
reflect the substitution or change. If we think
it is in the best interests of our contract
owners, we may operate the Variable Account as a
management company under the Investment Company
Act of 1940, or we may de-register it under that
Act if registration is no longer required. We may
also combine it with other Separate Accounts.
FORM 1030-96 17
<PAGE>
FEDERAL TAXES If we must pay taxes on the Variable Account, we
will charge you for that tax. Although the
Variable Account is currently not taxable, we
reserve the right to charge for taxes if it
becomes taxable.
SPLITTING OF UNITS We reserve the right to split the value of a unit,
to either increase or decrease the number of
units. Any splitting of units will have no
material effect on contract benefits.
FORM 1030-96 18
<PAGE>
WHAT YOU SHOULD KNOW ABOUT THE FIXED ACCOUNT
FIXED ACCOUNT The Fixed Account is a part of our General
Account. The General Account consists of all
assets owned by us, other than those in the
Variable Account and other Separate Accounts.
Except as limited by law, we have sole control
over the investment of these General Account
assets. You do not share directly in the
investment experience of the General Account, but
are allowed to allocate and transfer funds into
the Fixed Account.
FIXED ACCOUNT INTEREST The interest rate credited to Contract Value in
RATES the Fixed Account is set by us. We will review
this interest rate from time to time, at least
once a year. The following guarantees apply to
money in the Fixed Account:
- The interest rate in effect on the Date of
Issue is guaranteed until the next contract
anniversary, unless you borrow money from
that Contract Value.
- The interest rate in effect on the day funds
are transferred from a Sub-Account of the
Variable Account to the Fixed Account is
guaranteed until the next contract
anniversary, unless you borrow from that
Contract Value.
- The interest rate in effect on a contract
anniversary is guaranteed for one year for
those Contract Values in the Fixed Account
on the contract anniversary as long as those
values remain in the Fixed Account and are
not borrowed.
- The interest rate(s) we use for that portion
of the Contract Value that equals the
Outstanding Loan will be at least the
minimum rates shown on the Specifications
Page. One of the rates shown is the Preferred
Loan Rate which applies only to the portion
of the Outstanding Loan that is secured by
Earnings.
FIXED ACCOUNT CONTRACT VALUE On each Monthly Processing Date, the Contract
Value of the Fixed Account is equal to:
- the Contract Value in this account on the
preceding Monthly Processing Date increased
by one month's interest, plus
- payments received since the last Monthly
Processing Date that are allocated to the
Fixed Account plus the interest accrued from
the date the payments are received by us,
plus
- Variable Account Contract Value transferred
to the Fixed Account from any Sub-Accounts
since the preceding Monthly Processing Date,
increased by interest from the date the
Contract Value is transferred, minus
- Contract Value transferred from the Fixed
Account to a Sub-Account since the preceding
Monthly Processing Date and interest accrued
on these transfers from the transfer date to
the Monthly Processing Date, minus
- partial withdrawals from the Fixed Account,
partial withdrawal transaction charges and
surrender charges since the last Monthly
Processing Date, interest accrued on these
withdrawals, and charges from the withdrawal
date to the Monthly Processing Date, minus
- the portion of the Monthly Deductions
allocated to the Contract Value in the Fixed
Account.
FORM 1030-96 19
<PAGE>
During any contract month the Fixed Account
Contract Value will be calculated on a consistent
basis.
BASIS OF VALUE OF We base the minimum surrender value in the Fixed
THE FIXED ACCOUNT Account on the minimum Fixed Account interest
rates and mortality table shown on the
Specifications Page. Actual Contract Values are
based on interest and insurance protection rates
that we set. We have filed a detailed description
of the way we determine this value with the State
Insurance Department. All values equal or exceed
the minimums required by law in the state in which
this contract is delivered.
FORM 1030-96 20
<PAGE>
WHAT YOU SHOULD KNOW ABOUT TRANSFERS
While the contract is in force, you may transfer
amounts between the Fixed Account and the
Sub-Accounts or among Sub-Accounts on request.
You may transfer, without charge, all of the
Contract Value in the Variable Account to the
Fixed Account once during the first 24 months
after the contract is issued in order to convert
to a fixed-only product. If you do so, future
payments will be allocated to the Fixed Account
unless you specify otherwise. All other transfers
are subject to the following rules and will be
permitted with our approval.
We will determine the minimum and maximum amounts
that may be transferred according to the rules
that are in effect at the time of the transfer.
We also reserve the right to limit the number of
transfers that can be made in each contract year
and set other reasonable rules controlling
transfers.
If a transfer would reduce the Contract Value in a
Sub-Account to less than the current minimum
balance required for such accounts, we reserve the
right to include the remaining value in the amount
transferred.
You will not be charged for the first twelve
transfers in a contract year, but a transfer
charge of up to $25 may be made on each
additional transfer. Any transfer charge will be
deducted from the amount that is transferred.
There is no charge for transfers that result from
a contract loan or repayment of a loan.
FORM 1030-96 21
<PAGE>
WHAT YOU SHOULD KNOW ABOUT BORROWING FROM YOUR
CONTRACT
To borrow from this contract, the only collateral
you will need is the contract itself.
AMOUNT YOU MAY BORROW The maximum loan amount is 90% of the Contract
Value less the surrender charge. You may borrow
an amount subject to the minimum shown on the
Specifications Page, up to the maximum loan amount
minus any Outstanding Loan.
If you do not specify from which accounts you want
to borrow, we will allocate the loan Pro Rata. In
order to secure the Outstanding Loan, we will
transfer the Contract Value in each Sub-Account
equal to the contract loan allocated to each
Sub-Account to the Fixed Account.
LOAN INTEREST You will pay interest on your loan at an annual
rate indicated on the Specifications Page.
Interest accrues daily and is payable at the end
of each contract year. Any interest that is not
paid on time will be added to the loan principal
and bear interest at the same rate. If this makes
the principal higher than the Contract Value in
the Fixed Account, we will offset this shortfall
by transferring funds from the Sub-Accounts to the
Fixed Account. We will allocate the transferred
amount among the Sub-Accounts in the same
proportion that the value in each Sub-Account has
to the total value in all of them.
REPAYING THE OUTSTANDING You may repay the Outstanding Loan at any time
LOAN before this contract lapses. When you repay it,
we will transfer the Contract Value that is
securing the loan in the Fixed Account to the
various Sub-Accounts and increase the value in
them. You may tell us how to allocate repayments.
Otherwise, we may allocate them according to the
most recent payment allocation choices you have
made. Loan repayments made to the Variable
Account cannot be higher than the amounts you
transferred to secure the Outstanding Loan.
FORECLOSURE If at any time the amount of the Outstanding Loan
is higher than the Contract Value minus the
surrender charge, we will terminate the contract.
We will mail a notice of this termination to the
last known address of you and any Assignee. If
the excess Outstanding Loan is not paid within 62
days after this notice is mailed, the contract
will terminate with no value. You may reinstate
this contract according to the Reinstatement
provision.
FORM 1030-96 22
<PAGE>
WHAT YOU SHOULD KNOW ABOUT SURRENDERS AND PARTIAL
WITHDRAWALS
SURRENDER You may cancel this contract and receive its
surrender value as long as the Insured is living
on the date we receive your Written Request at our
Principal Office. The contract will be canceled
on that day. You may choose to receive the
surrender value in a lump sum or under a benefit
option.
SURRENDER VALUE The surrender value equals the Contract Value
minus the Outstanding Loan and surrender charge.
You will find the surrender charge on the
Specifications Page.
PARTIAL WITHDRAWALS You may withdraw part of the surrender value on
Written Request. Each withdrawal must be at least
$1,000. We will deduct a 2% withdrawal
transaction charge (maximum $25) from the Contract
Value each time you make a partial withdrawal.
We will not permit a partial withdrawal if it
reduces the Contract Value amount to less than the
minimum amount shown on the Specifications Page.
The Face Amount will be reduced proportionately
based on the ratio of the amount of the partial
withdrawal and charges to the Contract Value on
the date of withdrawal. The Contract Value will
be reduced by the amount of the partial
withdrawal, the partial withdrawal transaction
charge and any applicable surrender charges.
If you do not allocate a partial withdrawal and
its charges between the Fixed Account and each
Sub-Account, we will automatically allocate them
Pro Rata.
FREE WITHDRAWAL AMOUNT The free withdrawal amount will not be subject to
the surrender charge as described on the
Specifications Page. This amount equals (a) minus
(b), where:
(a) is the free withdrawal amount shown on the
Specifications Page, and
(b) is the total of the withdrawals (or portions
of them) made in the same contract year that
were exempt from the surrender charge.
The free withdrawal amount is first deducted from
Earnings. Withdrawals in excess of the free
withdrawal amount are deducted from payments not
previously considered withdrawn on a last-in,
first-out basis. Surrender charges applicable to
the excess withdrawal are described on the
Specifications Page.
POSTPONEMENT OF PAYMENT We may postpone any transfer from the Variable
Account, or payment of any amount payable on:
- surrender
- partial withdrawal
- transfer
- contract loan
- death of the Insured
The postponement will continue during any period
when:
- trading on the New York Stock Exchange is
restricted as determined by the Securities
and Exchange Commission, or the New York
Stock Exchange is closed for days other than
weekends and holidays, or
FORM 1030-96 23
<PAGE>
- the Securities and Exchange Commission by
order has permitted such suspension, or
- the Securities and Exchange Commission has
determined that such an emergency exists
that disposal of portfolio securities or
valuation of assets is not reasonably
practical.
We also may postpone any transfer from the Fixed
Account or payment of any portion of the amount
payable on a surrender, partial withdrawal or
contract loan from the Fixed Account for not more
than six months from the day we receive your
Written Request and your contract, if it is
required. If we postpone those payments for 30
days or more, the amount postponed will earn
interest during that period of not less than 3%
per year or such higher rate as required by law.
We will not postpone payments to make payments on
our policies.
FORM 1030-96 24
<PAGE>
WHAT YOU SHOULD KNOW ABOUT THE DEATH BENEFIT
NET DEATH BENEFIT If the Insured dies before the Final Payment Date,
we will pay the net death benefit upon receipt at
the Principal Office of proof of the Insured's
death. The net death benefit is the Face Amount
at the time of death or the guideline minimum sum
insured, if greater, reduced by any Outstanding
Loan, rider charges and monthly deductions due and
unpaid through the contract month in which the
Insured dies, as well as any partial withdrawals
and surrender charges. We will pay interest from
the date of death to the date the net death
benefit is paid. If the Insured dies after the
Final Payment Date, we will pay the Contract Value
minus any Outstanding Loans. We will pay
interest from the date we receive the death
certificate. If you choose a lump sum payment,
the interest rate will be at least 3% a year, or
the minimum rate set by law, if greater.
REQUIRED MINIMUM In order to qualify as "life insurance" under the
AMOUNT OF DEATH federal tax law, this contract must provide a
BENEFIT minimum death benefit. This is called the
"guideline minimum sum insured" in the tax code.
This is calculated by multiplying the Contract
Value by the percentages shown on the
Specifications Page. The guideline minimum sum
insured varies by Age. The amounts shown in the
Table are determined according to federal tax law,
and will be adjusted according to any changes in
that law.
FORM 1030-96 25
<PAGE>
WHAT YOU SHOULD KNOW ABOUT THE BENEFIT OPTIONS
BENEFIT OPTIONS You may choose one of the following options for
receiving the surrender value or the net death
benefit. We will give the payee a certificate
describing the benefit option you selected. If
you make no choice, we will pay the benefits in a
single, lump sum.
We will pay all benefits from the Fixed Account.
Benefits may not be allocated to the Variable
Account. The amounts payable under these options,
for each $1,000 applied, will be:
(a) the rate per $1,000 of benefit based on our
non-guaranteed current benefit option rates
for this class of contracts, or
(b) the rate in this contract for the applicable
benefit option, whichever is greater.
If you choose a benefit option, the beneficiary
may, when filing a proof of claim, pay us any
amount that otherwise would be deducted from the
proceeds.
OPTION A: BENEFITS FOR A We will make equal payments for any selected
SPECIFIED NUMBER OF YEARS number of years up to 30 years. These payments
(TABLE A) may be made annually, semi-annually, quarterly or
monthly, whichever you choose.
OPTION B: LIFETIME MONTHLY Benefits are based on the age of the person who
BENEFIT (TABLE B) receives the money (called the payee) on the date
the first payment will be made. You may choose
one of the three following options to specify when
benefits will cease:
- when the payee dies with no further benefits
due (Life Annuity);
- when the payee dies but not before the total
benefit payments made by us equals the amount
applied under this option (Life Annuity with
Installment Refund); or
- when the payee dies but not before 10 years
have elapsed from the date of the first
payment (Life Annuity with Payments
Guaranteed for 10 years).
OPTION C: INTEREST We will pay interest at a rate we determine each
BENEFITS year. It will not be less than 3% per year. We
will make payments annually, semi-annually,
quarterly, or monthly, whichever is preferred.
These benefits will stop when the amount left has
been withdrawn. If the payee dies, any unpaid
balance plus accrued interest will be paid in a
lump sum.
OPTION D: BENEFITS FOR A Interest will be credited to the unpaid balance
SPECIFIED AMOUNT and we will make payments until the unpaid balance
is gone. We will credit interest at a rate we
determine each year, but not less than 3%. We
will make payments annually, semi-annually,
quarterly, or monthly, whichever is preferred.
The benefit level chosen must provide for an
annual benefit of at least 8% of the amount
applied.
OPTION E: LIFETIME MONTHLY We will pay a benefit jointly to two payees during
BENEFITS FOR TWO PAYEES their joint lifetime.
(TABLE E)
After one payee dies, the benefits to the
survivor will be:
- the same as the original amount, or
- in an amount equal to 2/3 of the original
amount.
FORM 1030-96 26
<PAGE>
Benefits are based on the payees' ages on the date
the first payment is due. Benefits will end when
the second payee dies.
SELECTING BENEFIT OPTIONS The amount we apply under any one option for any
one payee must be at least $5,000, and the
periodic payment for any one payee must be at
least $50.
You may change any option you select before the
net death benefit is paid, subject to the Owner
and Beneficiary provisions. If you make no
selection, the beneficiary may choose an option
when the benefits become payable.
If the amount of monthly income benefits under
Option B for the age of the payee is the same for
different periods certain, the payee will be
entitled to the longest period certain for the
payee's age.
You may give the beneficiary the right to change
from Option C or D to any other option at any
time. If Option C or D is chosen by the payee
when this contract becomes a claim, the payee may
reserve the right to change to any other option.
The payee who elects to change options must be the
payee under the option selected.
ADDITIONAL DEPOSITS An additional deposit may be added to any proceeds
when they are applied under Option B and E. We
reserve the right to limit the amount of any
additional deposit. We may levy a charge of no
more than 3% on any additional deposits.
RIGHTS AND LIMITATIONS A payee has no right to assign any amount payable
under any option, nor to demand a lump sum benefit
in place of any amount payable under Options B or
E. A payee will have the right to receive a lump
sum in place of installments under Option A. The
payee must provide us with a Written Request to
reserve this right. If the right to receive a
lump sum is exercised, we will determine the lump
sum benefit at the same interest rates used to
calculate the installments. The amount left under
Option C and any unpaid balance under Option D,
may be withdrawn only as noted in the Written
Request selecting the option.
A corporate or fiduciary payee may select only
Option A, C or D, subject to our approval.
BENEFIT DATES The first payment under any option, except Option
C, will be due on the date this contract matures,
by death or otherwise, unless another date is
designated. Benefits under Option C begin at the
end of the first benefit period.
The last payment under any option will be made as
stated in the option's description. However, if a
payee under Options B or E dies before the due
date of the second monthly payment, the amount
applied, minus the first monthly payment, will be
paid in a lump sum or under any option other than
Option E. This payment will be made to the
surviving payee under Option E or the succeeding
payee under Option B.
BENEFIT RATES The Benefit Option Tables show benefit amounts for
Option A, B and E. If you choose one of these
options, either within five years of the date of
surrender or the date the proceeds are otherwise
payable, we will apply either the benefit rates
listed in the Tables, or the rates we use on the
date the proceeds are paid, whichever is more
favorable. Benefits that begin more than five
years after that date, or as a result of
additional deposits, will be based on the rates we
use on the date the first benefit is due.
FORM 1030-96 27
<PAGE>
BENEFIT OPTIONS
TABLE A
BENEFITS FOR SPECIFIED NUMBER OF YEARS
PAYMENT FOR EACH $1,000 OF CONTRACT VALUE APPLIED
These tables are based on an annual interest rate of 3 1/2%.
<TABLE>
<CAPTION>
SEMI- QUAR-
YEARS ANNUAL ANNUAL TERLY MONTHLY
- ----- ------ ------ ----- -------
<S> <C> <C> <C> <C>
1 1000.00 504.30 253.23 84.65
2 508.60 256.49 128.79 43.05
3 344.86 173.91 87.33 29.19
4 263.04 132.65 66.61 22.27
5 213.99 107.92 54.19 18.12
6 181.32 91.44 43.92 15.35
7 158.01 79.69 40.01 13.38
8 140.56 70.88 35.59 11.90
9 127.00 64.05 32.16 10.75
10 116.18 58.59 29.42 9.83
11 107.34 54.13 27.18 9.09
12 99.98 50.42 25.32 8.46
13 93.78 47.29 23.75 7.94
14 88.47 44.62 22.40 7.49
15 83.89 42.31 21.24 7.10
16 79.89 40.29 20.23 6.76
17 76.37 38.51 19.34 6.47
18 73.25 36.94 18.55 6.20
19 70.47 35.54 17.85 5.97
20 67.98 34.28 17.22 5.75
21 65.74 33.15 16.65 5.56
22 63.70 32.13 16.13 5.39
23 61.85 31.19 15.66 5.24
24 60.17 30.34 15.24 5.09
25 58.62 29.56 14.85 4.96
26 57.20 28.85 14.49 4.84
27 55.90 28.19 14.15 4.73
28 54.69 27.58 13.85 4.63
29 53.57 27.02 13.57 4.53
30 52.53 26.49 13.3 4.45
</TABLE>
FORM 1030-96 28
<PAGE>
BENEFIT OPTIONS (CONTINUED)
LIFE INCOME OPTION TABLES
MONTHLY ANNUITY BENEFIT PAYMENT
FOR EACH $1,000 OF CONTRACT VALUE APPLIED
TABLE B
<TABLE>
<CAPTION>
Age Life Annuity with Life Life Annuity
Nearest Payments Guaranteed Annuity with Installment
Birthday for 10 Years Refund
- -------- -------------------- ------- ----------------
<S> <C> <C> <C>
50 4.22 4.24 4.14
51 4.28 4.31 4.19
52 4.34 4.37 4.25
53 4.41 4.44 4.31
54 4.48 4.52 4.37
55 4.55 4.59 4.43
56 4.63 4.68 4.50
57 4.71 4.76 4.57
58 4.80 4.86 4.65
59 4.89 4.96 4.73
60 4.98 5.06 4.82
61 5.08 5.18 4.90
62 5.19 5.30 5.00
63 5.30 5.43 5.10
64 5.42 5.56 5.20
65 5.55 5.71 5.31
66 5.68 5.87 5.43
67 5.81 6.04 5.55
68 5.96 6.22 5.68
69 6.11 6.41 5.81
70 6.26 6.62 5.96
71 6.43 6.84 6.11
72 6.60 7.08 6.27
73 6.77 7.34 6.44
74 6.95 7.62 6.62
75 7.13 7.91 6.81
</TABLE>
These tables are based on an annual interest rate of 3 1/2% and the 1983(a)
Individual Mortality Table using a blend reflecting 40% of the
male rate and 60% of the female rate.
FORM 1030-96 29
<PAGE>
BENEFIT OPTIONS (CONTINUED)
MONTHLY ANNUITY BENEFIT PAYMENT
FOR EACH $1,000 OF CONTRACT VALUE APPLIED
<TABLE>
<CAPTION>
TABLE E1 TABLE E2
Joint and Survivor Life Annuity Joint and Two-Thirds Survivor Life Annuity
Older Age Older Age
---------------------------------------------------- ----------------------------------------------------
50 55 60 65 70 75 80 50 55 60 65 70 75 80
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Y 50 3.91 3.97 4.02 4.05 4.07 4.09 4.10 4.25 4.40 4.57 4.76 4.96 5.18 5.39
O 55 4.18 4.26 4.32 4.36 4.39 4.41 4.60 4.80 5.02 5.26 5.50 5.75
U 60 4.54 4.65 4.73 4.78 4.81 5.08 5.35 5.63 5.92 6.21
N 65 5.04 5.19 5.29 5.35 5.74 6.10 6.46 6.82
G 70 5.75 5.95 6.08 6.67 7.15 7.62
E 75 6.77 7.06 8.04 8.69
R 80 8.29 10.05
A
G
E
</TABLE>
These tables are based on an annual interest rate of 3 1/2%
and the 1983(a) Individual Mortality Table using a proportional blend
of 50% male and 50% female.
MODIFIED SINGLE PAYMENT VARIABLE LIFE INSURANCE CONTRACT
NON-PARTICIPATING
FORM 1030-96 30
<PAGE>
EXHIBIT 1(5)(b)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
OPTION TO ACCELERATE DEATH BENEFITS
(LIVING BENEFITS RIDER)
This rider is a part of the contract to which it is attached. The Insured under
this rider is the Insured under the contract. This rider does not apply to
any benefits provided by rider.
BENEFIT - While this rider is in force, you may elect to receive a portion of
the net death benefit called the "Living Benefit," prior to the Insured's
death under either the Terminal Illness Option or the Nursing Home Option,
subject to the definitions, conditions and limitations in this rider. This
option may only be exercised once.
DEFINITIONS - "Option Amount" means that portion of the death benefit which you
elect to apply under this rider. The Option Amount must be at least
$25,000 and may not exceed the lesser of:
- - one-half of the death benefit on the date the option is elected; or
- - the amount that would reduce the face amount to our minimum issue limit for
this contract; or
- - $250,000.
"Option Percentage" is the Option Amount divided by the death benefit.
"Living Benefit" is the Option Amount which has been reduced for interest and
other factors. It is the lump sum benefit under this rider, and is the
amount used to determine the monthly benefit. The Living Benefit will
not be less than the surrender value of the contract multiplied by the
Option Percentage. The following factors will be used to calculate the
Living Benefit:
- - age;
- - sex, unless the contract is issued on a unisex basis;
- - life expectancy;
- - Contract Value;
- - Outstanding Loan;
- - rate of interest currently being credited to the Fixed Account including those
values which are subject to Outstanding Loan;
- - Face Amount;
- - current monthly deductions; and
- - an expense charge of $150.
An amount equal to the Outstanding Loan multiplied by the Option Percentage
will be deducted from the Living Benefit. The remaining Outstanding Loan
will continue in force.
The assumptions we use to calculate the Living Benefit may change from time to
time. The factors used to compute the Living Benefit will be set and
changed only prospectively; that is, based on changes in future
expectations. We will not change these factors to recoup any prior losses
or distribute past gains under the rider.
FORM 1030-96
<PAGE>
"Eligible Nursing Home" means an institution or special nursing unit of a
hospital which meets at least one of the following requirements:
1. it is Medicare - approved as a provider of skilled nursing care services;
or
2. it is licensed as a skilled nursing home or as an intermediate care
facility by the state in which it is located;
3. it meets all the requirements listed below;
- - it is licensed as a nursing home by the state in which it is located;
- - its main function is to provide skilled, intermediate or custodial nursing
care;
- - it is engaged in providing continuous room and board accommodations to 3 or
more persons;
- - it is under the supervision of a registered nurse (RN) or licensed practical
nurse (LPN);
- - it maintains a daily medical record of each patient; and
it maintains control and records for all medications dispensed.
Institutions which primarily provide residential facilities are not Eligible
Nursing Homes.
"Proof of claim satisfactory to us" includes:
- - a request signed by the Insured to disclose all facts concerning the
Insured's health;
- - records of the attending physician, including a prognosis of the Insured; and
- - if we request, a medical examination of the Insured at our expense conducted
by a physician we choose.
CONDITIONS - Upon Written Request you may elect to receive payment under one of
the accelerated death benefit options subject to the following conditions:
- - the contract is in force;
- - a written consent has been given by any collateral assignee, irrevocable
beneficiary and the Insured if you are not the Insured; and
- - the Insured qualifies for the option you elect.
TERMINAL ILLNESS OPTION - If you provide proof of claim satisfactory to us that
the Insured's life expectancy is 12 months or less, you may elect to
receive equal monthly payments for 12 months. For each $1,000 of Living
Benefit, each payment will be at least $85.21. This assumes an annual
interest rate of 5%.
If the Insured dies before all the payments have been made, we will pay in one
sum the present value of the remaining payments due under this rider
calculated at the interest rate we use to determine those payments as part
of the net death benefit.
If you do not wish to receive monthly payments, you may elect to receive the
Living Benefit in a lump sum.
NURSING HOME OPTION - If (1) the Insured is confined to an Eligible Nursing
Home and has been confined there continuously for the preceding six
months; and (2) you provide proof of claim satisfactory to us that the
Insured is expected to remain in the nursing home until death, you may
elect level monthly payments for the number of years shown in the table
that follows. For each $1,000 of living benefit, each payment will be at
least the minimum amount shown in that table. The table assumes an annual
interest rate of 5%.
FORM 6005-96
<PAGE>
If the Insured dies before all the payments have been made, we will pay in one
sum the present value of the remaining payments due under this rider
calculated at the interest rate we use to determine those payments as part
of the net benefit.
You may elect a longer payment period than that shown in the table. If you do,
monthly payments will be reduced so that the present value of the monthly
payments for the longer payment period is equal to the present value of
the payments for the period shown in the table, calculated at an interest
rate of at least 5%.
<TABLE>
<CAPTION>
PAYMENT PERIOD MINIMUM MONTHLY PAYMENT FOR PAYMENT PERIOD MINIMUM MONTHLY PAYMENT FOR
IN YEARS EACH $1,000 OF LIVING BENEFIT IN YEARS EACH $1,000 OF LIVING BENEFIT
<S> <C> <C> <C>
1 $85.21 16 $ 7.49
2 $43.64 17 $ 7.20
3 $29.80 18 $ 6.94
4 $22.89 19 $ 6.71
5 $18.74 20 $ 6.51
6 $15.99 21 $ 6.33
7 $14.02 22 $ 6.17
8 $12.56 23 $ 6.02
9 $11.42 24 $ 5.88
10 $10.51 25 $ 5.76
11 $ 9.77 26 $ 5.65
12 $ 9.16 27 $ 5.54
13 $ 8.64 28 $ 5.45
14 $ 8.20 29 $ 5.36
15 $ 7.82 30 $ 5.28
</TABLE>
We reserve the right to set a maximum monthly benefit, which will not be less
than $5,000.
If you do not wish to receive monthly payments, you may elect to receive a
single sum equal to the Living Benefit.
EFFECT ON CONTRACT - The death benefit of the contract will be decreased by
the Option Amount. Such decrease will be effective on the Monthly
Processing Date following the date of your Written Request.
New Specifications Pages will be issued. These pages will include the
following information:
- - the effective date of the decrease; and
- - the amount of the decrease and the reduced face amount.
The Contract Value will be reduced in the same proportion as the reduction in
the death benefit. There will be no surrender charge on the reduction in
Contract Value. The allocation of the Contract Value between Earnings and
Payments will remain the same.
EXCLUSION - No benefit will be paid under this rider if a claim results,
directly or indirectly, from a suicide attempt or a self-
FORM 6005-96
<PAGE>
inflicted injury (while sane or insane) for any period during which a suicide
exclusion is applicable.
TERMINATION - This rider will terminate on the first to occur of:
- - the end of the grace period of a premium in default; or
- - the termination or Final Payment Date of the contract while the Insured is
alive; or
- - at any time on your written request.
GENERAL - The contract Specifications Pages will show the date of issue of
this rider.
The Living Benefit will be made available to you on a voluntary basis only.
Accordingly:
(a) If you are required by law to exercise this option to satisfy the claim of
creditors, whether in bankruptcy or otherwise, you are not eligible
for this benefit.
(b) If you are required by a government agency to exercise this option in
order to apply for, obtain, or retain a government benefit or
entitlement, you are not eligible for this benefit.
Except as otherwise provided, all conditions and provisions of the contract
apply to this rider.
Signed for the Company at Dover, Delaware
FORM 6005-96
<PAGE>
EXHIBIT 1(5)(c)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SECTION 1035 RIDER
This Rider is a part of the contract to which it is attached. The insured
under this endorsement is the insured under the contract.
The contract is issued in consideration for your assignment to us of a life
insurance policy (called the "Exchanged Policy") on the life of the insured.
The "Exchanged Policy" is identified in your application for this contract.
As used in this endorsement, "gain" means the amount by which the cash value
of the Exchanged Policy (including any unpaid policy loan) exceeds your
investment in the Exchanged Policy as reported to us by the company which
issued the Exchanged Policy. We assume no responsibility for the calculation
of your investment in the Exchanged Policy.
The Fixed Account Interest Rates provisions are amended by the addition of
the following:
The Preferred Loan Rate will also be credited to the following amounts:
1. That portion of the Outstanding Loan which is carried over from the
Exchanged Policy and;
2. A percentage of the gain under the Exchanged Policy less the policy
loan carried over to this contract as of the date of exchange.
<TABLE>
<CAPTION>
Beginning of Exchanged Policy's Unloaned Gain
Contract Year Available For Preferred Loan Rate
------------- ---------------------------------
<S> <C>
1 0%
2 10%
3 20%
4 30%
5 40%
6 50%
7 60%
8 70%
9 80%
10 90%
11 100%
</TABLE>
Signed for the Company at Dover, Delaware.
<PAGE>
EXHIBIT 1(5)(d)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
Guaranteed Death Benefit Rider (SPVUL)
This rider is a part of the contract to which it is attached.
REQUIRED PAYMENT - This Rider will take effect upon receipt by the Company of
the Guaranteed Death Benefit Payment shown on Specifications Page 3.
GUARANTEED DEATH BENEFIT - The contract will not lapse while this Rider is in
force. The monthly deduction will be made from the Contract Value, if nay,
until the Final payment Date.
NET DEATH BENEFIT -- While this Rider is n force, the net death benefit
provisions of the contract is amended by the addition of the following:
If this Rider is in effect on the Final Payment Date, a death benefit will be
provided thereafter unless the Rider is terminated. The net death benefit
will be the Face Amount as of the Final Payment Date or the Contract Value as
of the date due poof of death is received by the Company, whichever is
greater, reduced by the Outstanding Loan through the contract month in which
the Insured dies. The monthly deduction will not be deducted after the Final
Payment Date.
Termination -- this Rider will terminate and may not be reinstated on the
fist to occur of the following:
- - Foreclosure of the Outstanding Loan; or
- - A request for a partial withdrawal or preferred loan is made after the
Final Payment Date; or
- - Upon your written request.
It is possible that the Contract Value will not be sufficient to keep the
contract in force on the first Monthly Processing Date following the date the
Rider terminated. The net amount payable to keep the contract in force will
never exceed the surrender charge plus the amount required to pay three
monthly deductions
Signed for the Company at Dover, Delaware
/s/ Richard M. Reilly /s/ Abigail M. Armstrong
--------------------- ---------------------------
Richard M. Reilly Abigail M. Armstrong
President Secretary
Form 10257-97
<PAGE>
EXHIBIT 1(10)
APPLICATION
<PAGE>
[ALLMERICA SELECT LOGO]
ALLMERICA FINANCIAL
LIFE INSURANCE AND 440 Lincoln Street
ANNUITY COMPANY Worcester, MA 01653 [SPL APPLICATION]
- -------------------------------------------------------------------------------
1 PAYMENT The monetary contribution to the policy.
CHECK ONE:
/ / I have enclosed a check for my initial payment of $____________
and have received a conditional receipt.
(Please make check payable to Allmerica Financial)
/ / My initial payment will be transferred from another insurance
company. Approximate amount $____________. The amount of insurance
purchased will be the minimum allowed by the IRS Guideline Single
Premium unless you designate a higher amount $_________________________.
(Please attach Transfer of Assets form)
2 ALLOCATION How I want my payment allocated.
ALLOCATE MY PAYMENT AS FOLLOWS: Please use whole percentages.
[You may allocate your payment to no more than [14] of the [14] variable
accounts listed below and the Fixed Account.]
YOUR TOTAL ALLOCATION MUST EQUAL 100%
________ % Select Emerging Markets
________ % Select International Equity
________ % T. Rowe Price International Stock
________ % Select Aggressive Growth
________ % Select Capital appreciation
________ % Select Value Opportunity
________ % Select Growth
________ % Select Strategic Growth
________ % Fidelity VIP Growth Portfolio
________ % Select Growth and Income
________ % Fidelity VIP Equity Income Portfolio
________ % Fidelity VIP High Income Portfolio
________ % Select Income
________ % Allmerica Money Market
________ % Fixed Account
________ %
________ %
________ %
________ %
100% % TOTAL
Any future payment will be allocated according to this selection
unless changed by me.
3 ACCOUNT REBALANCING
/ / I elect Automatic Account Rebalancing of the variable
accounts to the allocations specified in Section 2, above.
/ / Monthly / / Quarterly / / Semi-Annually / / Annually
(Automatic Account Rebalancing and Dollar Cost Averaging cannot be in
effect simultaneously.)
4 DOLLAR COST AVERAGING
Select ONE account from which to transfer money. Be sure you have
money allocated to this account in Section 2.
Transfer $____________ ($100 Minimum)
[FROM: / / Fixed Account or
/ / Select Income* or / / Money Market*
(*This account cannot be selected in the allocation below.)]
EVERY: / / Month / / Quarter / / 6 Mos. / / 12 Mos.
INTO: ________ % Select Emerging Markets
________ % Select International Equity
________ % T. Rowe Price International Stock
________ % Select Aggressive Growth
________ % Select Capital Appreciation
________ % Select Value Opportunity
________ % Select Growth
________ % Select Strategic Growth
________ % Fidelity VIP Growth Portfolio
________ % Select Growth and Income
________ % Fidelity VIP Equity Income Portfolio
________ % Fidelity VIP High Income Portfolio
________ % Select Income
________ % Allmerica Money Market
________ %
________ %
________ %
________ %
100% % TOTAL
5 INSURED The person upon whose life this insurance coverage is proposed.
For second insured, complete Form AS-426.
- -----------------------------------------------------------------------------
First Name Middle Last
- -----------------------------------------------------------------------------
Street Address
- -----------------------------------------------------------------------------
City State Zip
( )
- -----------------------------------------------------------------------------
Daytime Telephone Number Years at this Address
/ / / / M / / F
- ------------------- Sex ---------------
Date of Birth State of Birth
- ------------------------------------- --------------------------
Social Security/Tax I.D. Number Driver's License Number
6 OWNER The person or entity exercising the policy's contractual rights.
- -----------------------------------------------------------------------------
First Name Middle Last
- -----------------------------------------------------------------------------
Street Address
- -----------------------------------------------------------------------------
City State Zip
- ------------------------------------ -------------------------
Social Security/Tax I.D. Number Date of Trust
AS-401 Page 1 (12/97)
<PAGE>
7 BENEFICIARY
- ------------------------------------------------------------------------------
Name of Primary Beneficiary Relationship to Insured
- ------------------------------------------------------------------------------
Name of Contingent Beneficiary Relationship to Insured
8 REPLACEMENT OF OTHER CONTRACTS
WILL THE PROPOSED POLICY REPLACE ANY EXISTING ANNUITY OR LIFE INSURANCE POLICY?
/ / Yes / / No
If yes, list company name and policy number:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
9 TELEPHONE ACCESS
I WILL AUTOMATICALLY BE ABLE TO TRANSFER ACCOUNT VALUES AND CHANGE THE
ALLOCATION OF FUTURE INVESTMENTS BY TELEPHONE OR FAX UNLESS I CHECK THE BOX
BELOW.
/ / I DO NOT Accept the Telephone Access privilege.
(Please see additional information in the authorization and Signature Section)
10 INFORMATION ABOUT THE INSURED
10a CURRENT EMPLOYMENT.
Employer's Name:
-------------------------------------------------------
Occupation and Responsibilities:
---------------------------------------
-----------------------------------------------------------------------
10b INCOME
My annual earned income is $
--------------
My annual unearned income is $
--------------
My net worth is $
--------------
10c DURING THE PAST YEAR, I HAVE SMOKED ONE OR MORE CIGARETTES, CIGARS,
PIPES, OR USED CHEWING TOBACCO.
/ / Yes / / No
10c Height Weight
---------------- ----------------
11 MEDICAL HISTORY
11a DURING THE PAST 10 YEARS, I HAVE HAD, OR BEEN TREATED FOR HEART, LIVER,
LUNG, OR KIDNEY TROUBLE, HIGH BLOOD PRESSURE, STROKE, DIABETES, CANCER,
NERVOUS OR PSYCHOLOGICAL DISORDERS, OR ALCOHOL OR DRUG ABUSE.
/ / Yes / / No
11b DURING THE PAST 10 YEARS, I HAVE HAD, OR BEEN TREATED FOR IMMUNE
SYSTEM DISORDER INCLUDING ACQUIRED IMMUNE DEFICIENCY SYNDROME (AIDS),
AIDS-RELATED COMPLEX, OR ANOTHER IMMUNE DISORDER.
/ / Yes / / No
IF YOU ANSWERED "YES" TO 11a OR 11b, PLEASE COMPLETE ITEMS 11c THROUGH 11f:
11c I HAVE BEEN DIAGNOSED OR TREATED FOR:
-----------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
I AM CURRENTLY BEING TREATED: / / YES / / NO
----------------------------------------------------------------------------
Primary Physician's Name
----------------------------------------------------------------------------
Health Care Provider
----------------------------------------------------------------------------
Street Address
----------------------------------------------------------------------------
City State Zip
( ) / /
------------------------------------ ------------------------------------
Telephone Date of Last Visit
11d DURING THE PAST THREE YEARS, I HAVE PARTICIPATED IN, OR INTEND TO
PARTICIPATE IN:
/ / Scuba Diving / / Skydiving / / Land/Water Racing
/ / Hang Gliding or similar flying activity
11e DURING THE PAST TWO YEARS, I HAVE FLOWN, OR INTEND TO FLY, AS A
TRAINEE, PILOT, OR CREW MEMBER.
/ / Yes / / No
11f DURING THE PAST THREE YEARS, I HAVE HAD A MOTOR VEHICLE LICENSE
SUSPENDED OR REVOKED, OR BEEN CONVICTED OF DRIVING WHILE INTOXICATED OR
OF MORE THAN ONE MOVING VIOLATION.
/ / Yes / / No
Page 2
<PAGE>
AUTHORIZATIONS AND SIGNATURES
AUTHORIZATION TO OBTAIN INFORMATION
To all physicians, medical professionals, hospitals, clinics, other health
care providers, employers, Medical Information Bureau, Inc. (MIB), consumer
reporting agencies, other insurance support organizations, the United
States Internal Revenue Service, the Puerto Rico Bureau of Income Tax, and
other persons who have the types of information described about the
proposed insured:
I authorize you to give the Company, its reinsurers, or its agent (a) all
information you have as to illness, injury, medical history, diagnosis,
treatment, and prognosis (including any drug or alcohol abuse condition or
treatment) with respect to any physical or mental condition of the proposed
insured; and (b) any non-medical information, including but not limited to,
an investigative consumer report and copies of my tax returns filed with
the United States Internal Revenue Service and/or Puerto Rico Bureau of
Income Tax, which the Company believes it needs to perform the business
functions described below. I also authorize the Company to give the MIB
health or non-medical information it has about me and that of any minor
member of my family applying for insurance.
The information obtained will be used to determine if the proposed insured
is eligible for: (a) the insurance requested; or (b) benefits under a
policy which is in force. It will also be used for any other business
purpose which relates to the insurance requested or the policy which is in
force. This authorization will be valid for 30 months. I know that under
Federal Regulations I may revoke this authorization as it applies to drug
and alcohol abuse treatment at any time, but my revocation will not effect
any information that has been released prior thereto. I know that I may
request a copy of this form. I agree that a photocopy is as valid as the
original. I have received the Insurance Information Practices notice.
I understand that Allmerica Financial Life Insurance and Annuity Company is
authorized to honor telephone requests by me or by individuals authorized
by me, to transfer account values among sub-accounts and to change the
allocation of my future payments. I also understand that withdrawal of
funds from my policy cannot be transacted by telephone or fax instructions.
VARIABLE PRODUCT DISCLOSURE
I UNDERSTAND THAT ANY DEATH BENEFITS IN EXCESS OF THE FACE AMOUNT AND ANY
POLICY VALUE OF THE POLICY APPLIED FOR, MAY INCREASE OR DECREASE TO REFLECT
THE INVESTMENT EXPERIENCE OF THE SUB-ACCOUNTS OF THE VARIABLE ACCOUNT. THE
POLICY VALUE ALLOCATED TO THE FIXED ACCOUNT WILL ACCUMULATE INTEREST AT A
RATE SET BY THE COMPANY WHICH WILL NOT BE LESS THAN THE MINIMUM GUARANTEED
RATE OF 4% ANNUALLY. THERE IS NO GUARANTEED MINIMUM POLICY VALUE. THE
POLICY VALUE MAY DECREASE TO THE POINT WHERE THE POLICY WILL LAPSE AND
PROVIDE NO FURTHER DEATH BENEFIT WITHOUT ADDITIONAL PAYMENTS.
ACKNOWLEDGEMENTS AND AGREEMENTS
I acknowledge receipt of current Prospectuses describing the
[Allmerica Select SPL] policy that I am applying for, and the underlying
funds.
It is agreed that: (1) The application consists of this application form,
the medical questionnaire, if any, and the information on the Second
Insured form, if it applies; (2) The representations are true and complete
to the best of my knowledge and belief; (3) No liability exists and the
insurance applied for will not take effect until the policy is delivered
and the payment is made during the lifetime of the proposed Insured(s) and
then only if the proposed Insured(s) has (have) not consulted any physician
or practitioner of any healing art nor had any tests listed in the
application since its completion; but if the payment is paid prior to
delivery of the policy and a conditional receipt is delivered by the
registered representative, insurance will be effective subject to the terms
of the conditional receipt; and (4) No registered representative or broker
is authorized to amend, alter, or modify the terms of this agreement.
-----------------------------------------------------------------------------
Signature of Insured Date
-----------------------------------------------------------------------------
Print Name of Insured
-----------------------------------------------------------------------------
Signed at City State
-----------------------------------------------------------------------------
Signature of Owner (if other than Insured) Date
-----------------------------------------------------------------------------
Print Name of Owner
-----------------------------------------------------------------------------
Signed at City State
Page 3
<PAGE>
FOR FINANCIAL REPRESENTATIVE USE ONLY
Does the policy applied for replace an existing annuity or life insurance
policy?
/ / Yes / / No
If yes, attach replacement forms as required.
As Registered Representative, I certify witnessing the signature of the
applicant and that the information in this application has been accurately
recorded to the best of my knowledge and belief.
Based on the information furnished by the Owner or Insured in this
application, I certify that I have reasonable grounds for believing the
purchase of the policy applied for is suitable for the Owner. I further
certify that the prospectuses were delivered and that no written sales
materials other than those furnished by the Company were used.
-----------------------------------------------------------------------------
Signature of Registered Representative Date
-----------------------------------------------------------------------------
Print Name of Registered Representative Reg Rep #
-----------------------------------------------------------------------------
TR Code (Indicate A, B, or C)
( ) ( )
-----------------------------------------------------------------------------
Telephone Fax
-----------------------------------------------------------------------------
Name of Broker/Dealer Branch #
-----------------------------------------------------------------------------
Branch Office Street Address
-----------------------------------------------------------------------------
City State Zip
REMARKS: ---------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
FOR HOME OFFICE USE ONLY
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Page 4
<PAGE>
[ALLMERICA SELECT LOGO]
ALLMERICA FINANCIAL
LIFE INSURANCE AND 440 Lincoln Street INFORMATION ON SECOND INSURED
ANNUITY COMPANY Worcester, MA 01653 [SPL APPLICATION]
- -------------------------------------------------------------------------------
1 SECOND INSURED
- -------------------------------------------------------------------------------
First Name Middle Last
- -------------------------------------------------------------------------------
Street Address
- -------------------------------------------------------------------------------
City State Zip
( )
- -------------------------------------------------------------------------------
Daytime Telephone Number Years at this Address
- ------------------ / / M / / F ---------------
Date of Birth Sex State of Birth
- -------------------------------------------------------------------------------
Social Security/Tax I.D. Number Driver's License Number
2 OWNER AND BENEFICIARY
The Owner and Beneficiary are as indicated in Section 6 and 7 of the
accompanying [SPL] application. If Section 6 is Left blank, the owner will
be the insured listed in section 5 Of the [SPL] application.
3 REPLACEMENT OF OTHER CONTRACTS
WILL THE PROPOSED POLICY REPLACE ANY EXISTING ANNUITY OR LIFE INSURANCE
POLICY?
/ / Yes / / No
If yes, list company name and policy number:
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
4 INFORMATION ABOUT THE INSURED
4a CURRENT EMPLOYMENT.
Employer's Name:
--------------------------------------------------------
Occupation and Responsibilities:
----------------------------------------
-------------------------------------------------------------------------
4b INCOME
My annual earned income is $
--------------
My annual unearned income is $
--------------
My net worth is $
--------------
4c DURING THE PAST YEAR, I HAVE SMOKED ONE OR MORE CIGARETTES, CIGARS,
PIPES, OR USED CHEWING TOBACCO.
/ / Yes / / No
4d Height Weight
---------------- ----------------
5 MEDICAL HISTORY
5a DURING THE PAST 10 YEARS, I HAVE HAD, OR BEEN TREATED FOR HEART, LIVER,
LUNG, OR KIDNEY TROUBLE, HIGH BLOOD PRESSURE, STROKE, DIABETES, CANCER,
NERVOUS OR PSYCHOLOGICAL DISORDERS, OR ALCOHOL OR DRUG ABUSE.
/ / Yes / / No
5b DURING THE PAST 10 YEARS, I HAVE HAD, OR BEEN TREATED FOR IMMUNE
SYSTEM DISORDER INCLUDING ACQUIRED IMMUNE DEFICIENCY SYNDROME (AIDS),
AIDS-RELATED COMPLEX, OR ANOTHER IMMUNE DISORDER.
/ / Yes / / No
IF YOU ANSWERED "YES" TO 5a OR 5b, PLEASE COMPLETE ITEMS 5C THROUGH 5F:
5c I HAVE BEEN DIAGNOSED OR TREATED FOR:
------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
I AM CURRENTLY BEING TREATED: / / YES / / NO
-------------------------------------------------------------------------
Primary Physician's Name
-------------------------------------------------------------------------
Health Care Provider
-------------------------------------------------------------------------
Street Address
-------------------------------------------------------------------------
City State Zip
( ) / /
------------------------------------- --------------------------------
Telephone Date of Last Visit
5d DURING THE PAST THREE YEARS, I HAVE PARTICIPATED IN, OR INTEND TO
PARTICIPATE IN:
/ / Scuba Diving / / Skydiving / / Land/Water Racing
/ / Hang Gliding or similar flying activity
5e DURING THE PAST TWO YEARS, I HAVE FLOWN, OR INTEND TO FLY, AS A
TRAINEE, PILOT, OR CREW MEMBER.
/ / Yes / / No
5f DURING THE PAST THREE YEARS, I HAVE HAD A MOTOR VEHICLE LICENSE
SUSPENDED OR REVOKED, OR BEEN CONVICTED OF DRIVING WHILE INTOXICATED OR
OF MORE THAN ONE MOVING VIOLATION.
/ / YES / / No
Page 1
<PAGE>
AUTHORIZATIONS AND SIGNATURES
AUTHORIZATION TO OBTAIN INFORMATION
To all physicians, medical professionals, hospitals, clinics, other health
care providers, employers, Medical Information Bureau, Inc. (MIB), Consumer
reporting Agencies, other insurance support organizations, the United
States Internal Revenue Service, The Puerto Rico Bureau of income tax, and
other persons who have the types of information described about the
proposed insured:
I authorize you to give the Company, its reinsurers, or its agent (a) all
information you have as to illness, injury, medical history, diagnosis,
treatment, and prognosis (including any drug or alcohol abuse condition or
treatment) with respect to any physical or mental condition of the proposed
insured; and (b) any non-medical information, including but not limited to,
an investigative consumer report and copies of my tax returns filed with
the United States Internal Revenue Service and/or Puerto Rico Bureau of
Income Tax, which the Company believes it needs to perform The business
functions described below. I also authorize the company to give the mib
health or non-medical information it has about me and that of any minor
member of my family applying for insurance.
The information obtained will be used to determine if the proposed insured
is eligible for: (a) the insurance requested; or (b) benefits under a
policy which is in force. It will also be used for any other business
purpose which relates to the insurance requested or the policy which is in
force. This authorization will be valid for 30 months. I know that under
Federal Regulations I may revoke this authorization as it applies to drug
and alcohol abuse treatment at any time, but my revocation will not effect
any information that has been released prior thereto. I know that I may
request a copy of this form. I agree that a photocopy is as valid as the
original. I have received the Insurance Information Practices notice.
ACKNOWLEDGEMENTS AND AGREEMENTS
It is agreed that: (1) The application consists of this Application form,
the medical questionnaire, if any, and the information on the Second
insured form; (2) The representations are true and complete to the best of
my knowledge and belief; (3) No liability exists and the insurance applied
for will not take effect until the policy is delivered and the payment is
made during the lifetime of the proposed insured(s) and then only if the
proposed insured(s) has (have) not consulted any physician or practitioner
of any healing art nor had any tests listed in the application since its
completion; but if the payment is paid prior to delivery of the policy and
a conditional receipt is delivered by the registered representative,
insurance will be effective subject to the terms of the conditional
receipt; and (4) No registered representative or broker is authorized to
amend, alter, or modify the terms of this agreement.
-----------------------------------------------------------------------------
Signature of Second Insured Date
-----------------------------------------------------------------------------
Print Name of Second Insured
-----------------------------------------------------------------------------
Signed at City State
-----------------------------------------------------------------------------
Signature of Owner (if other than insured) Date
-----------------------------------------------------------------------------
Print Name of Owner
-----------------------------------------------------------------------------
Signed at City State
Page 2
<PAGE>
EXHIBIT 3
June 30, 1998
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester MA 01653
Gentlemen:
In my capacity as Counsel of Allmerica Financial Life Insurance and Annuity
Company (the "Company"), I have participated in the preparation of this
Initial Registration Statement for the Allmerica Select Separate Account III
on Form S-6 under the Securities Act of 1933 with respect to the Company's
individual modified single premium variable life insurance policies.
I am of the following opinion:
1. The Allmerica Select Separate Account III is a separate account of the
Company validly existing pursuant to the Delaware Insurance Code and the
regulations issued thereunder.
2. The assets held in the Allmerica Select Separate Account III equal to the
reserves and other Policy liabilities of the Policies which are supported
by the Allmerica Select Separate Account II are not chargeable with
liabilities arising out of any other business the Company may conduct.
3. The individual modified single premium variable life insurance policies,
when issued in accordance with the Prospectus contained in the
Registration Statement and upon compliance with applicable local law,
will be legal and binding obligations of the Company in accordance with
their terms and when sold will be legally issued, fully paid and
non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the initial
Registration Statement of the Allmerica Select Separate Account III on
Form S-6 filed under the Securities Act of 1933.
Very truly yours,
/s/ Sheila B. St. Hilaire
Sheila B. St. Hilaire
Assistant Vice President and Counsel
<PAGE>
EXHIBIT 6
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
June 30, 1998
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester MA 01653
Gentlemen:
This opinion is furnished in connection with the filing by Allmerica
Financial Life Insurance and Annuity Company of the initial Registration
Statement on Form S-6 of its modified single premium variable life
insurance policies ("Policies") allocated to the Allmerica Select Separate
Account III under the Securities Act of 1933. The prospectus included in
the Registration Statement describes the Policies. I am familiar with and
have provided actuarial advice concerning the preparation of the
Registration Statement, including exhibits.
In my professional opinion, the illustration of death benefits and cash
values included in Appendix C of the prospectus, based on the assumptions
stated in the illustrations, are consistent with the provisions of the
Policy. The rate structure of the Policies has not been designed so as to
make the relationship between premiums and benefits, as shown in the
illustrations, appear more favorable to a prospective purchaser of a Policy
for a person age 55 or a person age 65 than to prospective purchasers of
Policies for people at other ages or underwriting classes. I am also of the
opinion that the aggregate fees and charges under the Policy are reasonable
in relation to the services rendered, the expenses expected to be incurred,
and the risks assumed by the Company.
I hereby consent to the use of this opinion as an exhibit to the Initial
Registration Statement.
Sincerely,
/s/ William H. Mawdsley
William H. Mawdsley, FSA, MAAA
Vice President and Actuary
<PAGE>
EXHIBIT 7
Description of Issuance, Transfer and Redemption Procedures for Contracts
Offered by the Allmerica Select Account III of
Allmerica Financial Life Insurance and Annuity Company
Pursuant to Rule 6e-3(T)(b)(12)(ii)
under the Investment Company Act of 1940
The Allmerica Select Separate Account III ("Separate Account") of Allmerica
Financial Life Insurance and Annuity Company ("Company") is registered under
the Investment Company Act of 1940 ('1940 Act') as a unit investment trust.
Within the Separate Account are fourteen Sub-Accounts. Procedures apply
equally to each subaccount and for purposes of this description are defined
in terms of the Separate Account, except where a discussion of both the
Separate Account and the individual Sub-Accounts is necessary. Each
Sub-Account invests, respectively, in shares of a corresponding investment
division of Allmerica Investment Trust ("Trust"), Fidelity Variable Insurance
Products Fund ("VIP") and T. Rowe Price International Series, Inc. ("T. Rowe
Price"), each of which is a "series" type of mutual fund registered under the
1940 Act. The investment experience of a Sub-Account of the Separate
Account depends on the market performance of its corresponding investment
division. Although modified single payment variable life insurance Contracts
funded through the Separate Account may also provide for fixed benefits
supported by the Company's General Account, this description assumes that net
payments are allocated exclusively to the Separate Account and that all
transactions involve only the Sub-Accounts of the Separate Account, except as
otherwise explicitly stated herein.
I. "PUBLIC OFFERING PRICE": PURCHASE AND RELATED TRANSACTIONS --
SECTION 22(d) AND RULE 22C-l
This section outlines Contract provisions and administrative procedures
which might be deemed to constitute, either directly or indirectly, a
"purchase" transaction. Because of the insurance nature of the Contracts,
the procedures involved necessarily differ in certain significant respects
from the purchase procedures for mutual funds and annuity plans. The chief
differences revolve around the structure of the cost of insurance charges
and the insurance underwriting process. Certain Contract provisions, such
as reinstatement and loan repayment, do not result in the issuance of a
Contract but require certain payments by the Contract Owner and involve a
transfer of assets supporting Contract reserve into the Separate Account.
a. INSURANCE CHARGES AND UNDERWRITING STANDARDS
The Contracts are designed as modified single payment variable life
insurance polices. The total of all payments paid can never exceed the
then current maximum payments determined by Internal Revenue Service
rules. If at any time a payment is paid which would result in total
payments exceeding the current maximum payment limitations, the Company
will return the amount in excess of such maximums to the Contract Owner.
The Contract will remain in force so long as the Contract value less any
outstanding debt is sufficient to pay certain monthly charges imposed in
connection with the Contract. Cost of insurance charges for the Contracts
will not be the same for all Contract Owners. The insurance principle of
pooling and distribution of mortality risks is based upon the assumption
that each Contract Owner pays a cost of insurance charge commensurate with
the Insured's mortality risk, which is actuarially determined based upon
factors such as age and health. In the context of life insurance, a
uniform mortality charge (the "cost of insurance charge") for all Insured's
would discriminate unfairly in favor of those Insured's representing
greater mortality risks to the disadvantage of those representing lesser
risks. Accordingly, there will be a different "price" for each actuarial
category of Contract Owners because different cost of insurance rates will
apply. Accordingly, while not all Contract Owners will be subject to the
same cost of insurance rate, there will be a single "rate" for all Contract
Owners in a given actuarial category. The Contracts will be offered and
sold pursuant to the Company's underwriting standards and in accordance
with state insurance laws. Such laws prohibit unfair discrimination among
Insureds, but recognize that payments must be based upon factors such as
age, health and occupation. Tables showing the maximum cost of insurance
charges will be delivered as part of the Contract.
b. APPLICATION AND INITIAL PAYMENT PROCESSING
Payments are payable only to the Company, and may be mailed to the
Principal Office or paid through an authorized agent of the Company.
All payments are credited to the Separate Account or General Account as
of date of receipt at the Principal Office.
13
<PAGE>
The Contract requires a single payment of at least $25,000 on or before the
date of issue. The initial payment is used to determine the face amount
of the Policy, by treating the initial payment as equal to 100% of the
Guideline Single Premium. The Contract owner may indicate the desired
Face Amount on the application. If the Face Amount specified exceeds 100%
of the Guideline Single Premium for the amount of the payment, the
Application will be amended and a Contract with a higher Face Amount will
be issued.
Additional payments of at least $10,000 may be made as long as the total
payments do not exceed the maximum payment specified in the Contract. The
total of all payments can never exceed the then-current maximum payment
limitation determined by Internal Revenue Service rules. Where total
payments would exceed the current maximum payment limits, the Company will
only accept that part of a payment which will make total payments equal the
maximum. The Company will return any part of a payment that is greater
than that amount. However, the Company will accept a payment needed to
prevent Contract lapse during a contract year.
Upon receipt of a completed application from a prospective Contract Owner,
the Company will follow certain insurance underwriting procedures designed
to determine whether the proposed Insured is insurable. This process may
involve such verification procedures as medical examinations and may
require that further information be provided by the proposed Contract Owner
before a determination can be made. A Contract cannot be issued until this
underwriting procedure has been completed.
If at the time of Application a prospective Contract Owner makes a
payment, the Company will provide fixed conditional insurance in the amount
of insurance applied for, up to a maximum of $500,000, pending underwriting
approval. If the application is approved, the Contract will be issued as
of the date of the underwriting approval. If the prospective Contract Owner
does not wish to make any payment until the Contract is issued, upon
delivery of the Contract the Company will require payment of sufficient
payment to place the insurance in-force.
Pending completion of insurance underwriting and Contract issuance
procedures, the initial payment will be held in the Company's General
Account. If the application is approved and the Contract is issued and
accepted, the initial payment held in the General Account will be credited
with interest not later than the date of receipt of the payment at the
Company's Principal Office. Not later than three days of underwriting
approval of the Contract, the amounts held in the Company's General Account
will be allocated to the Sub-Accounts according to Contract Owner's
instructions; provided, however, that if the contract is issued in a "full
refund" state, the Sub-Account investments will initially be allocated to
the Money Market Fund and thereafter transferred according to the Contract
Owner's instructions at the end of the free look period. Amounts remaining
in the General Account will continue to be credited interest from date of
receipt of the payment at the Principal Office. If a Contract is not
issued, the payments will be returned to the Applicant without interest
unless the Contract Owner has elected on the application to instead receive
an Annuity Contract.
These processing procedures are designed to provide insurance, starting
with the date of the application, to the proposed Contract Owner in
connection with payment of the initial payment and will not dilute any
benefit it payable to any existing Contract Owner. Although a Contract
cannot be issued until the underwriting process has been completed, the
proposed Contract Owner will receive immediate insurance coverage, if the
proposed Contract Owner has paid an initial payment and proves to be
insurable. If the initial payment is not paid with the application,
variability of benefits will commence within three days of underwriting
approval, subject to the restrictions indicated above. The Company will
require that the Contract be delivered within a specific delivery period
to protect itself against anti-selection by the prospective Contract
Owner resulting from a deterioration of the health of the proposed Insured.
c. PAYMENT ALLOCATIONS
The Contract Owner may allocate net payments among the Company's General
Account and the Sub-Accounts of the Separate Account. Each Sub-Account of
the Separate Account invests its assets in shares of a corresponding
Underlying Fund. Purchases and redemptions of such shares are made at net
asset value, with no deduction for sales load.
Payments allocated to a Sub-Account, transfers to that Sub-Account, and
reserve adjustment transfers, if any, will be netted as of each valuation
date against amounts withdrawn from the Sub-Account in connection with
Contract surrenders, partial withdrawals, transfers, and death benefits, as
well as the asset charge and amounts paid to the
14
<PAGE>
Company in lieu of taxes, if any. A net purchase or sale of Underlying
Fund shares will be made for a Sub-Account at net asset value. All
income, dividends and realized gain distributions of a Underlying Fund
will be reinvested in shares of the respective Underlying Fund at net
asset value. Valuation dates currently occur on each day on which the
New York Stock Exchange is open for trading, and on such other days
where there is a sufficient degree of trading in a Underlying Fund's
securities such that the current net asset value of the Sub-Accounts
may be materially affected.
The Contract Owner may change the allocation of net payments without charge
at any time by providing written notice to the Principal Office. The
change will be effective as of the date of receipt of the notice at the
Principal Office. The Contract Owner may transfer amounts among all of the
Sub-Accounts and the General Account, subject to certain restrictions.
d. REPAYMENT OF LOAN
The Contract Owner may borrow money secured by Contract Value. The total
amount the Contract Owner may borrow is the Loan Value. The Loan Value is
90% of the Contract Value minus any surrender charges.
The minimum loan is $1,000. The maximum loan is the Loan Value minus any
outstanding loans. The Company will usually pay the loan within seven days
after the Company receives a written request for the loan. The Company
will allocate the loan among the Sub-Accounts and the Fixed Account
according to the Contract Owner's instructions. If the Contract Owner does
not make an allocation, the Company will make a pro-rata allocation among
the Sub-Accounts and Fixed Account. The Company will transfer Contract
Value in each Sub-Account, equal to the Contract loan amount, to the Fixed
Account. The Company will not count this transfer as a transfer subject to
the transfer charge, described below. Contract Value equal to the
outstanding loan amount will earn monthly interest in the Fixed Account at
an annual rate of at least 4.0%.
Contract loans will permanently affect the Contract Value and Surrender
Value, and may permanently affect the Death Benefit. The effect could be
favorable or unfavorable, depending on whether the investment performance
of the Sub-Accounts is less than or greater than the interest credited to
the Contract Value in the Fixed Account that secures the loan. A loan made
under the Contract may be repaid with an amount equal to the original loan
plus loan interest.
When a loan is made, the Company will transfer from each Sub-Account of
the Separate Account to the General Account an amount of that Sub-
Account's Contract value equal to the loan amount allocated to the
Sub-Account. Since the Company will credit such assets with interest at
a rate which is below the interest rate charged on the loan, the
difference will be retained by the Company to cover certain expenses
and contingencies. Upon repayment of debt, the Company will reduce the
Contract value in the general account attributable to the loan and
transfer assets supporting corresponding reserves to the Sub-Accounts
according to either Contract Owner's instruction or, if none, the
payment allocation percentages then in effect. Loan repayments allocated
to the Separate Account cannot exceed Contract value previously
transferred from the Separate Account to secure the debt.
If the surrender value is insufficient to cover the next monthly deduction
plus loan interest accrued, or if Contract debt exceeds the Contract value
less surrender charges, the Company will notify the Contract Owner and any
assignee of record. The Contract Owner will then have a grace period of 62
days, measured from the date the notice is mailed, to make sufficient
payments to prevent termination.
Failure to make a sufficient payment within the grace period will result in
termination of the Contract without any Contract value. The death benefit
payable during the grace period will be reduced by any overdue charges. If
the Insured dies during the grace period, the death proceeds will still be
payable, but any monthly deductions due and unpaid through the Contract
month in which the Insured dies will be deducted from the death proceeds.
If the Contract has not been surrendered and the Insured is alive, the
terminated Contract may be reinstated anytime within three years after the
date of default by submitting the following to the Company: (1) a written
application for reinstatement; (2) evidence of insurability satisfactory to
the Company; and (3) a payment that is large enough (a) to cover the cost
of all contract charges that were due and unpaid during the grace period,
(b) to keep the contract in force for three months, and (c) to reinstate
any loan against the Contract that existed at the end of the grace period.
The Contract value on the date of reinstatement is the net payment paid to
reinstate the Contract increased by interest
15
<PAGE>
from the date the payment was received at the Company's Principal Office;
plus an amount equal to the Contract value less debt on the date of
default minus the monthly deduction due on the date of reinstatement.
The surrender charge on the date of reinstatement is the surrender
charge which was in effect on the date of default.
PREFERRED LOAN OPTION - Any portion of the Outstanding Loan that represents
earnings in the Contract, a loan from an exchanged life insurance policy
that was as carried over to the Contract, or the gain in the exchanged life
insurance policy that was carried over to the Contract may be treated as a
preferred loan. The available percentage of the gain carried over from an
exchanged policy less any policy loan carried over which will be eligible
for preferred loan treatment is as follows:
<TABLE>
<CAPTION>
Beginning of 1 2 3 4 5 6 7 8 9 10 11
Contract Year
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unloaned 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Gain
Available
</TABLE>
The guaranteed annual interest rate credited to the Contract Value securing a
preferred loan will be at least 5.5%.
Interest accrues daily at the annual rate of 6.0%. Interest is due and
payable in arrears at the end of each Contract year or for as short a
period as the loan may exist. Interest not paid when due will be added to
the Outstanding Loan by transferring Contract Value equal to the interest
due to the Fixed Account. The interest due will bear interest at the same
rate.
e. CORRECTION OF MISSTATEMENT OF AGE
If the Insured's age or sex is not correctly stated in the Contract
application, the Company will adjust benefits under the Contract to reflect
the correct age and sex. The adjustment will be based upon the ratio of
the maximum payment for the Contract to the maximum payment for the
Contract issued for the correct age or sex. The Company will not reduce
the Death Benefit to less than the Guideline Minimum Sum Insured. For a
unisex Contract, there is no adjusted benefit for misstatement of sex.
f. CONTESTABILITY
A Contract is contestable for two years, measured from the issue date, for
material misrepresentations made in the initial application for the
Contract. Contract changes may be contested for two years after the
effective date of a change, and a reinstatement may be contested for two
years after the effective date of reinstatement. No statement will be used
to contest a Contract unless it is contained in an application.
g. REDUCTION IN COST OF INSURANCE RATE CLASSIFICATION
By administrative practice, the Company will reduce the cost of insurance
rate classification for an outstanding Contract if new evidence of
insurability demonstrates that the Contract Owner qualifies for a lower
classification. After the reduced rating is determined, the Contract Owner
will pay a lower monthly cost of insurance charge each month.
II. "REDEMPTION PROCEDURE": SURRENDER AND RELATED TRANSACTIONS
The Contracts provide for the payment of monies to a Contract Owner or
beneficiary upon presentation of a Contract. Generally except for the
payments of death proceeds, the imposition of cost of insurance and
administrative charges, and the possible effect of a contingent surrender
charge, the payee will receive a pro rata or proportionate share of the
Separate Account's assets, within the meaning of the 1940 Act, in any
transaction involving "redemption procedures". The amount received by the
payee will depend-upon the particular benefit for which the Contract is
presented, including, for example, the cash surrender value or death
benefit. There are also certain Contract provisions (e.g., partial
withdrawals or the loan privilege) under which the Contract will not be
presented to the Company but which will affect the Contract Owner's
benefits and may involve a transfer of the assets supporting the Contract
reserve out of the Separate Account. Any combined transactions on the
same day which counteract the effect of each other will be allowed. The
Company will assume the Contract Owner is aware of the possible conflicting
16
<PAGE>
nature of the transactions and desires their combined result. If a
transaction is requested which the Company will not allow (e.g., a request
for a decrease in face amount) the Company will reject the whole
transaction and not just the portion which causes the disallowance. The
Contract Owner will be informed of the rejection and will have an
opportunity to give new instructions.
a. FREE LOOK PRIVILEGE - The Contract provides for a free look period
under the Right to Cancel provision. The Contract Owner has the
right to examine and cancel the Contract by returning it to the
Company or one of its representatives on or before the tenth day
(or such later date as may be required by state law) after the
Contract owner receives the Contract.
If the Contract provides for a full refund under its "Right to
Cancel" provision (as may be required by state law), the refund
will be the entire Payment. If the Contract does not provide for
a full refund (as provided by state law), the Contract Owner will
receive amounts allocated to the Fixed Account, plus the value of
the Units in the Variable Account, plus all fees, charges and taxes
which have been imposed.
b. CONVERSION PRIVILEGE - During the first 24 Contract months after the
date of issue, subject to certain restrictions, the Contract Owner may
convert the Contract to a flexible payment fixed Contract by
transferring all Contract value in the Sub-Accounts to the General
Account and by simultaneously changing the allocation of future
payments to the General Account.
c. CHARGES AND DEDUCTIONS -- The following charges will apply to the
Contract under the circumstances described. Some of these charges
apply throughout the Contract's duration.
MONTHLY DEDUCTIONS - On the Monthly Processing Date, the Company will
deduct an amount to cover charges and expenses incurred in connection
with the Contract. This Monthly Deduction will be deducted by
subtracting values from the Fixed Account accumulation and/or
canceling Units from each applicable Sub-Account in the ratio that the
Contract Value in the Sub-Account bears to the Contract Value. The
amount of the Monthly Deduction will vary from month to month. If the
Contract Value is not sufficient to cover the Monthly Deduction which
is due, the Contract may lapse. The Monthly Deduction is comprised of
the following charges:
- Maintenance Fee: The Company will make a deduction of $2.50 from
any Contract with less than $100 in Contract Value to cover
charges and expenses incurred in connection with the Contract.
This charge is to reimburse the Company for expenses related to
issuance and maintenance of the Contract. The Company does not
intend to profit from this charge.
- Administration Charge: The Company imposes a monthly charge at
an annual rate of 0.20% of the Contract Value. This charge is to
reimburse us for administrative expenses incurred in the
administration of the Contract. It is not expected to be a
source of profit.
- Monthly Insurance Protection Charge: Immediately after the
Contract is issued, the Death Benefit will be greater than the
Payment. While the Contract is in force, prior to the Final
Payment Date, the Death Benefit will generally be greater than
the Contract Value. To enable the Company us to pay this excess
of the Death Benefit over the Contract Value, a monthly cost of
insurance charge is deducted. This charge varies depending on
the type of Contract and the Underwriting Class. In no event
will the current deduction for the cost of insurance exceed the
guaranteed maximum insurance protection rates set forth in the
Contract. These guaranteed rates are based on the Commissioners
1980 Standard Ordinary Mortality Tables, Tobacco User or
Non-Tobacco User (Mortality Table B for unisex Contracts and
Mortality Table D for second-to-die Contracts) and the Insured=s
sex and age. The Tables used for this purpose set forth different
mortality estimates for males and females and for tobacco user
and non-tobacco user. Any change in the insurance protection
rates will apply to all Insured of the same age, sex and
Underwriting Class whose Contracts have been in force for the
same period.
The Underwriting Class of an Insured will affect the insurance
protection rate. The Company currently place Insureds into
standard Underwriting Classes and non-standard Underwriting
Classes. The Underwriting Classes are also divided into two
categories: tobacco user and non-tobacco user. The Company will
place Insureds under the age of 18 at the Date of Issue in a
standard or non-standard Underwriting Class. The
17
<PAGE>
Company will then classify the Insured as a non-tobacco user.
- Distribution Expense: During the first ten Contract years, the
Company makes a monthly deduction to compensate for a portion of
the sales expense which are incurred by us with respect to the
Contracts. This charge is equal to 0.90% of the Contract Value.
- Federal & State Payment Tax Charge: During the first Contract
year, the Company makes a monthly deduction equal to 1.50% on
an annual basis to partially compensate the Company for the
increase in federal tax liability from the application of
Section 848 of the Internal Revenue Code and to offset a
portion of the average payment tax the Company is expected to
pay to various state and local jurisdictions. The Company
expects to pay an average payment tax of approximately 2.5% of
payments in all states, although such rates can generally
range from 0% to 4%. The Company does not intend to profit
from the payment tax portion of this charge.
DAILY DEDUCTIONS - The Company assesses each Sub-Account with a
charge for mortality and expense risks. Fund expenses are also
reflected in the Variable Account.
- Mortality and Expense Risk Charge: The Company imposes a daily
charge at a current annual rate of 0.90% of the average daily net
asset value of each Sub-Account.
- Fund Expenses - The value of the Units of the Sub-Accounts will
reflect the investment advisory fee and other expenses of the
Funds whose shares the Sub-Accounts purchase.
No charges are currently made against the Sub-Accounts for
federal or state income taxes. Should income taxes be imposed,
the Company may make deductions from the Sub-Accounts to pay the
taxes.
SURRENDER CHARGE - The Contract's contingent surrender charge is a
deferred sales charge and an unrecovered payment tax charge. The
deferred sales charge compensates us for distribution expenses,
including commissions to our representatives, advertising and the
printing of prospectuses and sales literature. The unrecovered payment
tax charge is designed to reimburse us for the unrecovered federal and
state taxes the Company has paid.
<TABLE>
<CAPTION>
Contract 1 2 3 4 5 6 7 8 9 10+
Year*
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Surrender 10.00% 9.25% 8.50% 7.75% 7.00% 6.25% 4.75% 3.25% 1.50% 0%
Charge
- -----------------------------------------------------------------------------------------------------
</TABLE>
PARTIAL WITHDRAWAL COSTS - For each partial withdrawal, the Company
deducts a transaction fee of 2.0% of the amount withdrawn, not to
exceed $25. This fee reimburses the Company for the cost of
processing the withdrawal. A partial withdrawal charge may also be
deducted from Contract Value. However, in any Contract year, you may
withdraw, without a partial withdrawal charge, up to 10% of the
Contract Value minus the total of any prior free withdrawals in the
same Contract year ("Free 10% Withdrawal.")
The right to make the Free 10% Withdrawal is not cumulative from
Contract year to Contract year. For example, if only 8% of Contract
Value were withdrawn in the second Contract year, the amount which
could be withdrawn in future Contract years would not be increased by
the amount the Contract Owner did not withdraw in the second Contract
year.
TRANSFER CHARGES - The first 12 transfers in a Contract year are
free. After that, the Company may deduct a transfer charge not to
exceed $25 from amounts transferred in that Contract year. If the
Contract Owner applies for automatic transfers, the first automatic
transfer counts as one transfer. Each future automatic transfer is
without charge and does not reduce the remaining number of transfers
that may be made without charge. Each of the following transfers of
Contract Value from the Sub-Accounts to the Fixed Account is free
and does not count as one of the 12 free transfers in a Contract year:
18
<PAGE>
- A conversion within the first 24 months from Date of Issue;
- A transfer to the Fixed Account to secure a loan; and
- A transfer from the Fixed Account as a result of a loan
repayment.
d. DEATH BENEFIT
The death benefit is the greater of the face amount or Guideline
Minimum Sum Insured. The Company will pay a net death benefit to the
beneficiary within seven days after receipt at its Principal Office of
the Contract, due proof of death of the Insured, and all other
requirements necessary to make payment. For second-to-die Contracts,
the net death benefit is payable on the death of the last surviving
Insured; there is no net death benefit payable on the death of the
first Insured to die. The Company will normally pay the net death
benefit within seven days of receiving due proof of the Insured's
death, but the Company may delay payment of net death benefits. The
Beneficiary may receive the net death benefit in a lump sum or under a
payment option, unless the payment option has been restricted by the
Contractowner.
Before the final payment date, the net death benefit is the death
benefit minus any outstanding loan, rider charges and monthly
deductions due and unpaid through the Contract month in which the
Insured dies, as well as any partial withdrawals and surrender
charges. After the final payment date, the net death benefit is the
Contract value minus any outstanding loan. In most states, the
Company will compute the net death benefit on the date it receives due
proof of the insured's death.
Guaranteed Death Benefit Rider - If at the time of issue the Contract
Owner has made purchase payments equal to 100% of the Guideline Single
Premium, a Guaranteed Death Benefit Rider will be added to the
Contract at no additional charge. If the Guaranteed Death Benefit
Rider is in effect on the Final Payment Date, a guaranteed Net Death
Benefit will be provided thereafter unless the Guaranteed Death
Benefit Rider is terminated, as described below. The guaranteed Net
Death Benefit will be:
- the GREATER of (a) the Face Amount as of the Final Payment Date
or (b) the Contract Value as of the date due proof of death is
received by the Company,
- REDUCED by the Outstanding Loan, if any, through the contract
month in which the Insured dies.
The Guaranteed Death Benefit Rider will terminate (and may not be
reinstated) on the first to occur of the following:
- Foreclosure of the Outstanding Loan, if any; or
- A request for a partial withdrawal or preferred loan after the
Final Payment Date; or
- Upon your written request.
GUIDELINE MINIMUM SUM INSURED - The guideline minimum sum insured is a
percentage of the Contract Value. The guideline minimum sum insured is
computed based on federal tax regulations to ensure that the Contract
qualifies as a life insurance contract and that the insurance proceeds
will be excluded from the gross income of the Beneficiary.
<TABLE>
<CAPTION>
GUIDELINE MINIMUM SUM INSURED
-----------------------------
Age of Insured Percentage of
on Date of Death Contract Value
---------------- --------------
<S> <C>
40 and under............................... 265%
45 ........................................ 230%
50 ........................................ 200%
55 ........................................ 165%
60 ........................................ 145%
65 ........................................ 135%
70 ........................................ 130%
75 ........................................ 120%
80 ........................................ 120%
85 ........................................ 120%
90 ........................................ 110%
91 ........................................ 108%
92 ........................................ 106%
93 ........................................ 105%
94 ........................................ 105%
</TABLE>
19
<PAGE>
<TABLE>
<S> <C>
95 ........................................ 105%
96 ........................................ 104%
97 ........................................ 103%
98 ........................................ 102%
99 and above .............................. 100%
</TABLE>
For the ages not listed, the progression between the listed
ages is linear.
The Company will make payment of the death proceeds out of its
general account, and will transfer assets from the Separate Account
to the general account in an amount equal to the reserve in the
Separate Account attributable to the Contract. The excess, if any,
of the death proceeds over the amount transferred will be paid out
of the general account reserve maintained for that purpose.
e. TRANSFERS AMONG SUBACCOUNTS
The Contracts permit net payments to be allocated either to the
Company's General Account or to the Sub-Accounts of the Separate
Account. Each Sub-Account invests exclusively in a corresponding
investment portfolio ("Underlying Fund") of AIT, Fidelity VIP or T.
Rowe. Subject to the consent of the Company, the Contract Owner may
transfer amounts among all of the Sub-Accounts and between the
Sub-Accounts and the General Account, subject to certain restrictions.
The Contract Owner may apply for automatic transfers from the Money
Market Sub-Account to one or more of the other Sub-Accounts.
Automatic transfers may be made at intervals of one, three, six or
twelve months. Each automatic transfer must be at least $100. If the
the Sub-Account from which the automatic transfer is to be made is
reduced to $0 (zero), the automatic transfer will cease. The Contract
Owner must then reapply for any future automatic transfers. The
Contract Owner may also apply for automatic account rebalancing, in
order to reallocate Contract Value among the Sub-Accounts at intervals
of one, two, three, six or twelve months. The Fixed Account is not
included in the automatic account rebalancing.
The first 12 transfers in a Contract year are free. Thereafter, the
Company will deduct a transfer charge not to exceed $25 from amounts
transferred in that Contract year. The first automatic transfer
counts as one transfer toward the 12 free transfers allowed in each
Contract year. Each subsequent automatic transfer is free and does
not reduce the remaining number of transfers that are free in a
Contract year. Any transfers made for a conversion privilege,
Contract loan or material change in investment Contract will not
count toward the 12 free transfers.
The transfer privilege is subject to the Company's consent. The
Company reserves the right to impose limits on transfers including,
but not limited to, the:
- Minimum amount that may be transferred;
- Minimum amount that may remain in a Sub-Account following a
transfer from that Sub-Account;
- Minimum period between transfers involving the Fixed Account; and
- Maximum amounts that may be transferred from the Fixed Account.
f. SURRENDER FOR CASH VALUES
The Company will generally pay the net cash surrender value from the
Sub-Accounts within seven days after receipt, at its Principal Office,
of the Contract and a signed request for surrender (amounts payable
form Fixed Account allocations may be postponed for no more than 6
months). Computations with respect to the investment experience of
each Sub-Account will be made at the close of trading of the New York
Stock Exchange on each day in which the degree of trading in the
corresponding portfolio might materially affect the net return of the
Sub-Account and on which the Company is open. This will enable the
Company to pay a net cash value on surrender based on the next
computed value after the surrender request is received. For valuation
purposes, the surrender is effective on the date the Company receives
the request at its Principal Office (although insurance coverage ends
the day the request is mailed).
20
<PAGE>
The Contract value (equal to the value of all accumulations in the
Separate Account) may increase or decrease from day to day depending
on the investment experience of the Separate Account. Calculation
of the Contract value for any given day will reflect the actual
payments, expenses charged and deductions taken.
g. DEFAULT AND OPTIONS ON LAPSE
The duration of insurance coverage depends upon the Contract value
being sufficient to cover the monthly deductions plus loan interest
accrued. If the surrender value at the beginning of a month is less
than the deductions for that month plus loan interest accrued, a grace
period of 62 days will begin. Written notice will be sent to the
Contract Owner and any assignee on the Company's records stating that
such a grace period has begun and giving the amount of payment
necessary to prevent termination.
If sufficient payment is not received during the grace period, the
Contract will terminate without value. Notice of such termination
will be sent to the owner and any assignee. If the Insured should die
during the grace period, an amount sufficient to cover the overdue
monthly deductions and other charges will be deducted from the death
proceeds.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant has duly caused this Initial
Registration Statement to be signed by the Initial Undersigned, in the City
or Worcester, Commonwealth of Massachusetts, on the 25th day of June, 1998.
ALLMERICA SELECT SEPARATE ACCOUNT III
OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Abigail M. Armstrong
---------------------------------
Abigail M. Armstrong, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ John F. O'Brien Director and Chairman
- ------------------------------- of the Board
John F. O'Brien
/s/ Bruce C. Anderson Director and Vice President
- ------------------------------
Bruce C. Anderson
/s/ Robert E. Bruce Director and Chief Information Officer
- ----------------------------
Robert E. Bruce
/s/ John P. Kavanaugh Director and Vice President
- ----------------------------
John P. Kavanaugh
/s/ John F. Kelly Director, Senior Vice President June 25, 1998
- ----------------------------- and General Counsel
John F. Kelly
/s/ J. Barry May Director
- -----------------------------
J. Barry May
/s/ James R. McAuliffe Director
- -----------------------------
James R. McAuliffe
/s/ Edward J. Parry III Director, Vice President and
- --------------------------- Chief Financial Officer
Edward J. Parry III
/s/ Richard M. Reilly Director, President and
- ----------------------------- Chief Executive Officer
Richard M. Reilly
/s/ Robert P. Restropo, Jr. Director
- -------------------------
Robert P. Restropo, Jr.
/s/ Eric A. Simonsen Director and Vice President
- ----------------------
Eric A. Simonsen
/s/ Phillip E. Soule Director and Vice President
- -------------------------
Phillip E. Soule
</TABLE>
22
<PAGE>
EXHIBIT 8
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this Initial
Registration Statement of the Allmerica Select Separate Account III of
Allmerica Financial Life Insurance and Annuity Company on Form S-6 of our
report dated February 3, 1998, relating to the financial statements of
Allmerica Financial Life Insurance and Annuity Company, which appears in such
Prospectus. We also consent to the reference to us under the heading
"Independent Accountants" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 2, 1998
