<PAGE>
ALLMERICA ESTATE OPTIMIZER
VEL ACCOUNT III OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
WORCESTER, MASSACHUSETTS 01653
This prospectus describes ALLMERICA ESTATE OPTIMIZER 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 VEL Account III
("Variable Account"), a separate account of the Company. The Contract permits
you to allocate net premiums among up to twenty (20) 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>
<S> <C>
ALLMERICA INVESTMENT TRUST FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Select Aggressive Growth Fund Overseas Portfolio
Select Capital Appreciation Growth Portfolio
Fund Equity-Income Portfolio
Select Value Opportunity Fund High Income Portfolio
Select Emerging Markets Fund FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Select International Equity II
Fund Asset Manager Portfolio
Select Growth Fund T. ROWE PRICE INTERNATIONAL SERIES, INC.
Select Strategic Growth Fund International Stock Portfolio
Growth Fund DELAWARE GROUP PREMIUM FUND, INC.
Equity Index Fund International Equity Series
Select Growth and Income Fund
Investment Grade Income Fund
Select Income Fund
Government Bond Fund
Money Market Fund
</TABLE>
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF THE
ALLMERICA INVESTMENT TRUST, VARIABLE INSURANCE PRODUCTS FUND, VARIABLE INSURANCE
PRODUCTS FUND II, T. ROWE PRICE INTERNATIONAL SERIES, INC., AND DELAWARE GROUP
PREMIUM FUND, 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 LIFE
P.O. BOX 8014
BOSTON, MA 02266-8014
Prospectus Dated October 26, 1998
Worcester, Massachusetts 01653
(508) 855-1000
<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 POLICY 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
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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......................................................... 21
THE CONTRACT......................................................................... 24
Applying for a Contract.......................................................... 24
Free Look Period................................................................. 24
Conversion Privilege............................................................. 25
Payments......................................................................... 25
Allocation of Payments........................................................... 25
Transfer Privilege............................................................... 26
Death Benefit.................................................................... 27
Guaranteed Death Benefit Rider................................................... 28
Contract Value................................................................... 29
Payment Options.................................................................. 30
Optional Insurance Benefits...................................................... 30
Surrender........................................................................ 30
Partial Withdrawal............................................................... 31
CHARGES AND DEDUCTIONS............................................................... 31
Monthly Deductions............................................................... 31
Daily Deductions................................................................. 32
Surrender Charge................................................................. 33
Transfer Charges................................................................. 34
CONTRACT LOANS....................................................................... 34
CONTRACT TERMINATION AND REINSTATEMENT............................................... 36
OTHER CONTRACT PROVISIONS............................................................ 36
FEDERAL TAX CONSIDERATIONS........................................................... 38
The Company and the Variable Account............................................. 38
Taxation of the Contracts........................................................ 38
VOTING RIGHTS........................................................................ 39
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY...................................... 41
DISTRIBUTION......................................................................... 42
REPORTS.............................................................................. 42
SERVICES............................................................................. 42
LEGAL PROCEEDINGS.................................................................... 43
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS.................................... 43
FURTHER INFORMATION.................................................................. 43
MORE INFORMATION ABOUT THE FIXED ACCOUNT............................................. 43
INDEPENDENT ACCOUNTANTS.............................................................. 44
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
UNAUDITED FINANCIAL STATEMENTS....................................................... UF-1
FINANCIAL STATEMENTS................................................................. F-1
</TABLE>
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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.
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.
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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.
UNDERLYING FUNDS (FUNDS): the investment Funds of Allmerica Investment Trust
("Trust"), the Portfolios of Fidelity Variable Insurance Products Fund
("Fidelity VIP"), Fidelity Variable Insurance Products Fund II ("Fidelity VIP
II"), T. Rowe Price International Series, Inc. ("T. Rowe Price"), and the Series
of Delaware Group Premium Fund, Inc. ("DGPF") which are available under the
Contract.
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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: VEL Account III, one of the Company's separate investment
accounts.
WRITTEN REQUEST: your request in writing, satisfactory to us, received at our
Principal Office.
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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 Rider 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 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."
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.
7
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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?
The Contract permits you to allocate payments to up to twenty Sub-Accounts of
the Variable Account. Each Sub-Account invests its assets in a corresponding
investment portfolio ("Fund") of Allmerica Investment Trust ("Trust"), Variable
Insurance Products Fund ("Fidelity VIP"), Variable Insurance Products Fund II
("Fidelity VIP II"), T. Rowe Price International Series, Inc. ("T. Rowe Price")
or Delaware Group Premium Fund, Inc. ("DGPF").
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 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.
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Fidelity Management & Research Company ("FMR") is the investment adviser of
Fidelity VIP and Fidelity VIP II. 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.
Delaware International Advisers, Ltd. ("Delaware International") is the
investment adviser for the International Equity Series.
The following are the Investment Managers and Sub-Advisers of the Funds:
<TABLE>
<CAPTION>
FUND INVESTMENT ADVISER/SUB-ADVISER
- -------------------------------------- --------------------------------------------
<S> <C>
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 Emerging Markets Fund Schroder Capital Management International
Inc.
T. Rowe Price International Stock Rowe Price-Fleming International, Inc.
Portfolio
Fidelity VIP Overseas Portfolio Fidelity Management and Research Company
Select International Equity Fund Bank of Ireland Asset Management (U.S.)
Limited
Delaware International Equity Series Delaware International Advisers, Ltd
Fidelity VIP Growth Portfolio Fidelity Management and Research Company
Select Growth Fund Putnam Investment Management, Inc.
Select Strategic Growth Fund Cambiar Investors, Inc.
Growth Fund Miller, Anderson & Sherrerd
Equity Index Fund Allmerica Asset Management, Inc.
Fidelity VIP Equity-Income Portfolio Fidelity Management and Research Company
Select Growth and Income Fund John A. Levin & Co., Inc.
Fidelity VIP II Asset Manager Fidelity Management and Research Company
Portfolio
Fidelity VIP High Income Portfolio Fidelity Management and Research Company
Investment Grade Income Fund Allmerica Asset Management, Inc.
Select Income Fund Allmerica Asset Management, Inc
Government Bond Fund Allmerica Asset Management, 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."
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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.
WHAT IF I NEED MY MONEY?
You may borrow up to the Loan Value of your Contract. The Loan Value is 90% of
your 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 a
partial withdrawal transaction fee 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.
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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");
- 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?
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Funds. The levels of fees and expenses vary
among 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.
<TABLE>
<CAPTION>
MANAGEMENT FEE TOTAL EXPENSES
(AFTER ANY VOLUNTARY OTHER (AFTER ANY APPLICABLE
UNDERLYING FUND WAIVER) FUND EXPENSES LIMITATIONS)
- --------------------------------------------------------- --------------------- ----------------- ----------------------
<S> <C> <C> <C>
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 Emerging Markets Fund @........................... 1.35% 0.65% 2.00%(1)
Select International Equity Fund......................... 0.92%* 0.20% 1.12%(1),(3)
DGPF International Equity Series......................... 0.75%(4) 0.15% 0.90%(4)
Fidelity VIP Overseas Portfolio.......................... 0.75% 0.17% 0.92%(2)
T. Rowe Price International Stock Portfolio.............. 1.05% 0.00% 1.05%
Select Growth Fund....................................... 0.85% 0.08% 0.93%(1),(3)
Select Strategic Growth Fund @........................... 0.85% 0.13% 0.98%(1)
Growth Fund.............................................. 0.46%* 0.06% 0.52%(1),(3)
Fidelity VIP Growth Portfolio............................ 0.60% 0.09% 0.69%(2)
Equity Index Fund........................................ 0.31% 0.13% 0.44%(1)
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 II Asset Manager Portfolio.................. 0.55% 0.10% 0.65%(2)
Fidelity VIP High Income Portfolio....................... 0.59% 0.12% 0.71%
Investment Grade Income Fund............................. 0.44%* 0.10% 0.54%(1)
Select Income Fund....................................... 0.58%* 0.13% 0.71%(1)
Government Bond Fund..................................... 0.50% 0.17% 0.67%(1)
Money Market Fund........................................ 0.27% 0.08% 0.35%(1)
</TABLE>
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* 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.
@ 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 Growth Fund and
Select Growth Fund, 1.10% for the Select Growth and Income, 1.00% for the
Investment Grade Income Fund and Government Bond Fund, and 0.60% for the
Money Market Fund and Equity Index 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,
0.67% for Fidelity VIP Growth Portfolio, 0.90% for Fidelity VIP Overseas
Portfolio and 0.64% for Fidelity VIP II Asset Manager 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, 1.10% for the Select International Equity
Fund, 0.91% for the Select Growth Fund, 0.50% for the Growth Fund, 0.98% for
the Select Value Opportunity Fund, and 0.74% for the Select Growth and
Income Fund.
(4) Effective July 1, 1997, Delaware International Advisers, Ltd., the
investment adviser for the International Equity Series, has agreed to limit
total annual expenses of the Fund to 0.95%. This limitation replaces a prior
limitation of 0.80% that expired on June 30, 1997. The new limitation will
be in effect through October 31, 1998. The fee ratios shown above have been
adjusted to assume that the new voluntarily limitation took effect on
January 1, 1997. In 1997, the actual ratio of total annual expenses of the
International Equity Series was 0.85%, and the actual management fee ratio
was 0.70%.
12
<PAGE>
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 -- A surrender charge on a withdrawal exceeding the "Free
10% Withdrawal," described below. This charge applies on surrenders or
partial withdrawals within ten Contract years from Date of Issue. The
surrender charge begins at 10.00% of the amount that exceeds the Free 10%
Withdrawal amount and decreases to 0% by the tenth Contract year.
- Partial Withdrawal Transaction Fee -- A transaction fee of 2.0% of the
amount withdrawn, not to exceed $25, for each partial withdrawal for
processing costs.
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 "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 this 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.
13
<PAGE>
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 36, 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.
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 36,
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 of
Total 5 Fund
Underlying Fund Return Years (if less)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
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%
T. Rowe Price International Stock Portfolio -4.95% N/A 3.75%
Fidelity VIP Overseas Portfolio 3.62% 10.38% 6.85%
Select International Equity Fund -3.37% N/A 6.82%
DGPF International Equity Series -1.39% 7.91% 7.62%
Fidelity VIP Growth Portfolio 15.60% 14.28% 14.44%
Select Growth Fund 26.16% 11.49% 12.74%
Select Strategic Growth Fund N/A N/A N/A
Growth Fund 17.26% 12.65% 14.29%
Equity Index Fund 24.52% 15.81% 16.42%
Fidelity VIP Equity-Income Portfolio 20.22% 16.41% 14.10%
Select Growth and Income Fund 14.62% 12.85% 11.74%
Fidelity VIP II Asset Manager Portfolio 12.76% 9.25% 9.71%
Fidelity VIP High Income Portfolio 9.76% 10.22% 9.96%
Investment Grade Income Fund 1.48% 3.74% 6.43%
Select Income Fund 1.20% 3.08% 2.86%
Government Bond Fund -0.88% 2.18% 3.57%
Money Market Fund -2.54% 0.89% 3.15%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Growth, Investment
Grade and Money Market; 9/28/90 for Equity Index; 8/26/91 for Government Bond;
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; 1/28/87 for Fidelity VIP Overseas; 9/06/89 for Fidelity VIP II
Asset Manager; 10/29/92 for DGPF International Equity; 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 of
Total 5 Fund
Underlying Fund Return Years (if less)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
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%
T. Rowe Price International Stock Portfolio 2.17% N/A 7.09%
Fidelity VIP Overseas Portfolio 10.56% 13.08% 8.61%
Select International Equity Fund 3.71% N/A 10.14%
DGPF International Equity Series 5.65% 10.64% 10.30%
Fidelity VIP Growth Portfolio 22.38% 16.95% 16.31%
Select Growth Fund 32.86% 14.18% 15.32%
Select Strategic Growth Fund N/A N/A N/A
Growth Fund 24.02% 15.33% 16.16%
Equity Index Fund 31.23% 18.48% 18.60%
Fidelity VIP Equity-Income Portfolio 26.96% 19.07% 15.97%
Select Growth and Income Fund 21.41% 15.53% 14.32%
Fidelity VIP II Asset Manager Portfolio 19.57% 11.96% 11.71%
Fidelity VIP High Income Portfolio 16.61% 12.92% 11.77%
Investment Grade Income Fund 8.46% 6.54% 8.19%
Select Income Fund 8.19% 5.90% 5.55%
Government Bond Fund 6.15% 5.02% 5.93%
Money Market Fund 4.52% 3.77% 4.85%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Growth, Investment
Grade and Money Market; 9/28/90 for Equity Index; 8/26/91 for Government Bond;
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; 1/28/87 for Fidelity VIP Overseas; 9/06/89 for Fidelity VIP II
Asset Manager; 10/29/92 for DGPF International Equity; 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
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 twenty-one (21)
Sub-Accounts. You may have allocations in up to twenty (20) Sub-Accounts at one
time. Each Sub-Account invests in a Fund of the Trust, VIP, VIP II, T. Rowe
Price or DGPF. 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. Fourteen different investment portfolios of the Trust are available
under the Contracts, each issuing a series of shares: Select Aggressive Growth
Fund, Select Capital Appreciation Fund, Select Value Opportunity Fund, Select
Emerging Markets Fund, Select International Equity Fund, Select Growth Fund,
Select Strategic Growth Fund, Growth Fund, Allmerica Equity Index Fund, Select
Growth and Income Fund, Select Income Fund, Investment Grade Income Fund,
Government Bond 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. Four of its investment portfolios are available
under the Contract: Fidelity VIP High Income Portfolio, Fidelity VIP
Equity-Income Portfolio, Fidelity VIP Growth Portfolio and Fidelity VIP Overseas
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.
FIDELITY VIP II
Variable Insurance Products Fund II ("Fidelity VIP II"), managed by Fidelity
Management (see discussion under "Fidelity VIP"), is an open-end, diversified,
management investment company organized as a Massachusetts business trust on
March 21, 1988 and is registered with the SEC under the 1940 Act. One of its
investment portfolios is available under the Contract: the Fidelity VIP II Asset
Manager Portfolio.
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.
DELAWARE GROUP PREMIUM FUND, INC.
Delaware Group Premium Fund, Inc. ("DGPF") is an open-end, diversified,
management investment company registered with the SEC under the 1940 Act. Such
registration does not involve supervision by the SEC of the investments or
investment policy of DGPF or its separate investment series. DGPF was
established to provide a vehicle for the investment of assets of various
separate accounts supporting variable insurance policies. One investment
portfolio ("Series") is available under the Contract: the International Equity
Series. The investment adviser for the International Equity Series is Delaware
International Advisers, Ltd. ("Delaware International"). See "Investment
Advisory Services to DGPF."
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Funds is set forth below. The
Funds are listed by general investment risk characteristics. MORE DETAILED
INFORMATION REGARDING THE INVESTMENT OBJECTIVES, RESTRICTIONS AND RISKS,
EXPENSES PAID BY THE FUNDS AND OTHER RELEVANT INFORMATION REGARDING THE 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.
18
<PAGE>
SELECT AGGRESSIVE GROWTH FUND -- The Select Aggressive Growth Fund of the Trust
seeks above-average capital appreciation by investing primarily in common stocks
of companies which are believed to have significant potential for capital
appreciation.
SELECT CAPITAL APPRECIATION FUND -- The Select Capital Appreciation Fund of the
Trust 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 invests primarily in common stock
of industries and companies which are believed to be experiencing favorable
demand for their products and services, and which operate in a favorable
competitive environment and regulatory climate.
SELECT VALUE OPPORTUNITY FUND -- The Select Value Opportunity Fund of the Trust
seeks long-term growth 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.
SELECT EMERGING MARKETS FUND -- The Select Emerging Markets Fund of the Trust
seeks long-term growth of capital by investing in the world's emerging markets.
The Fund may invest in high yielding, lower-rated fixed-income securities
(commonly referred to as "junk bonds") which are subject to greater risk than
investments in higher-rated securities.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- The T. Rowe Price International
Stock Portfolio seeks long-term growth of capital through investments primarily
in common stocks of established, non-U.S. companies.
FIDELITY VIP OVERSEAS PORTFOLIO -- The Overseas Portfolio of Fidelity VIP seeks
long-term growth of capital primarily through investments in foreign securities
and provides a means for aggressive investors to diversify their own portfolios
by participating in companies and economies outside of the United States.
SELECT INTERNATIONAL EQUITY FUND -- The Select International Equity Fund of the
Trust seeks maximum long-term total return (capital appreciation and income)
primarily by investing in common stocks of established non-U.S. companies.
DGPF INTERNATIONAL EQUITY SERIES -- The International Equity Series of DGPF
seeks long-term growth without undue risk to principal by investing primarily in
equity securities of foreign issuers providing the potential for capital
appreciation and income.
FIDELITY VIP GROWTH PORTFOLIO -- The Growth Portfolio of Fidelity VIP 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 also may be found in other types of securities, including bonds and
preferred stocks.
SELECT GROWTH FUND -- The Select Growth Fund of the Trust seeks to achieve
long-term growth of capital by investing in a diversified portfolio consisting
primarily of common stocks selected on the basis of their long-term growth
potential.
SELECT STRATEGIC GROWTH FUND -- seeks long-term growth of capital by investing
primarily in common stocks of established companies.
GROWTH FUND -- The Growth Fund of the Trust is invested in common stocks and
securities convertible into common stocks that are believed to represent
significant underlying value in relation to current market prices. The objective
of the Growth Fund is to achieve long-term growth of capital. Realization of
current investment income, if any, is incidental to this objective.
19
<PAGE>
EQUITY INDEX FUND -- The Equity Index Fund of the Trust seeks to provide
investment results that correspond to the aggregate price and yield performance
of a representative selection of United States publicly traded common stocks.
The Equity Index Fund seeks to achieve its objective by attempting to replicate
the aggregate price and yield performance of the Standard & Poor's Composite
Index of 500 Stocks.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- The Equity-Income Portfolio of Fidelity
VIP seeks reasonable income by investing primarily in income-producing equity
securities. In choosing these securities, the Portfolio also will consider the
potential for capital appreciation. The Portfolio's goal is to achieve a yield
which exceeds the composite yield on the securities comprising the S&P 500. The
Portfolio may invest in high yielding, lower-rated fixed-income securities
(commonly referred to as "junk bonds") which are subject to greater risk than
investments in higher-rated securities. See "Risks of Lower-Rated Debt
Securities" in the Fidelity VIP prospectus.
SELECT GROWTH AND INCOME FUND -- The 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.
FIDELITY VIP II ASSET MANAGER PORTFOLIO -- The Asset Manager Portfolio of
Fidelity VIP II seeks high total return with reduced risk over the long term by
allocating its assets among domestic and foreign stocks, bonds and short-term
fixed-income instruments.
FIDELITY VIP HIGH INCOME PORTFOLIO -- The High Income Portfolio of Fidelity VIP
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 often
are considered to be speculative, and involve greater risk of default or price
changes than securities assigned a high quality rating.
INVESTMENT GRADE INCOME FUND -- The Investment Grade Income Fund of the Trust is
invested in a diversified portfolio of fixed income securities with the
objective of seeking as high a level of total return (including both income and
capital appreciation) as is consistent with prudent investment management.
SELECT INCOME FUND -- The Select Income Fund of the Trust seeks a high level of
current income. The Fund will invest primarily in investment grade, fixed-income
securities.
GOVERNMENT BOND FUND -- The Government Bond Fund of the Trust has the investment
objectives of seeking high income, preservation of capital and maintenance of
liquidity, primarily through investments in debt instruments issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, and in
related options, futures and repurchase agreements.
MONEY MARKET FUND -- The Money Market Fund of the Trust is invested in a
diversified portfolio of high-quality, short-term money market instruments with
the objective of obtaining maximum current income consistent with the
preservation of capital and liquidity.
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS WHICH
BEST MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES OF THE
TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF, 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
20
<PAGE>
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.
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
Financial 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 consultation 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.
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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 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 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 Growth Fund First $250 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Select Strategic Growth Fund * 0.85%
Growth Fund First $100 million 0.60%
Next $150 million 0.60%
Next $250 million 0.40%
Over $500 million 0.35%
Equity Index Fund First $50 million 0.35%
Next $200 million 0.30%
Over $250 million 0.25%
Select Growth and Income Fund First $100 million 0.75%
Next $150 million 0.70%
Over $250 million 0.65%
Investment Grade Income Fund First $50 million 0.50%
Next $50 million 0.45%
Over $100 million 0.40%
Select Income Fund First $50 million 0.60%
Next $50 million 0.55%
Over $100 million 0.45%
Government Bond Fund * 0.50%
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, Government Bond Fund, and Select
Strategic Growth Fund, each rate applicable to AFIMS does not vary according
to the level of assets in the Fund.
AFIMS's fee, computed for each Fund of the Trust, will be paid from the assets
of such Fund. Pursuant to the Management Agreement with the Trust, AFIMS has
entered into agreements (Sub-Adviser Agreements) with other investment advisers
(Sub-Advisers) under which each Sub-Adviser manages the investments of one or
more of the Funds. Under the Sub-Adviser Agreement, the Sub-Adviser is
authorized to engage in portfolio transactions on behalf of the applicable Fund,
subject to such general or specific instructions as may be given by the
Trustees. The terms of a Sub-Adviser Agreement cannot be materially changed
without the approval of
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a majority in interest of the shareholders of the affected Fund. AFIMS is solely
responsible for the payment of all fees for investment management services to
the Sub-Advisers.
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.
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP AND FIDELITY VIP II
For managing investments and business affairs, each Portfolio pays a monthly fee
to Fidelity Management. The prospectuses of Fidelity VIP and Fidelity VIP II
contain additional information concerning the Portfolios, including information
about 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 Fidelity Management
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 Fidelity Management. 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 fee rates of the Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity
VIP II Asset Manager and Fidelity VIP Overseas Portfolios each are made of two
components:
1. A group fee rate based on the monthly average net assets of all of the
mutual funds advised by Fidelity Management. 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 0.20% for the Fidelity VIP Equity-Income
Portfolio, 0.30% for the Fidelity VIP Growth Portfolio, 0.25% for the
Fidelity VIP II Asset Manager Portfolio and 0.45% for the Fidelity VIP
Overseas 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% 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. The Fidelity VIP Growth Portfolio
may have a fee as high as 0.82% of its average net assets. The Asset Manager
Portfolio may have a fee as high as 0.77% of its average net assets. The
Fidelity VIP Overseas Portfolio may have a fee as high as 0.97% of its average
net assets. The actual fee rate may be less depending on the total assets in the
funds advised by Fidelity Management.
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. T. Rowe
Price Associates, Inc., an affiliate of Price-Fleming, serves as Sub-Adviser to
the Select Capital Appreciation Fund of the Trust.
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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.
INVESTMENT ADVISORY SERVICES TO DGPF
Each Series of DGPF pays an investment adviser an annual fee for managing the
portfolios and making the investment decisions for the Series. The investment
adviser for the International Equity Series is Delaware International Advisers
Ltd. ("Delaware International"). The annual fee paid by the International Equity
Series to Delaware International is equal to 0.75% of the average daily net
assets of the Series.
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 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:
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<PAGE>
- 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
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, but may not
have Contract Value in more than twenty (20) Sub-Accounts at one time. 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%.
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<PAGE>
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.
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 of the Sub-Account which invests in the Money Market
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 Account
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
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<PAGE>
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 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
- 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.
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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 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
- 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.
MINIMUM SUM INSURED -- The minimum sum insured is a percentage of the Contract
Value as set forth in "APPENDIX A -- MINIMUM SUM INSURED TABLE." The 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. The minimum sum insured under
this Contract meets or exceeds the IRS Guideline Minimum Sum Insured.
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 ($50,000X2.65); Contract Value of $60,000 will produce a guideline
minimum sum insured of $159,000 ($60,000X2.65); and Contract Value of $75,000
will produce a guideline minimum sum insured of $198,750 ($75,000X2.65).
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.
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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.
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.
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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.
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."
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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 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. However, such
Insureds will be subject to the Distribution Expense Charge.
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
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
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<PAGE>
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.
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 expense 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. Premium taxes vary from state-to-state, ranging
from zero to 5%. The deduction may be higher or lower than the actual
premium tax imposed by the applicable jurisdiction, and is made whether or
not any premium tax applies.
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."
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<PAGE>
SURRENDER CHARGE
A contingent surrender charge is deducted from Contract Value in the case of
surrender and/or a partial withdrawal for up to 10 years from Date of Issue of
the Contract. The payments you make for the Contract are the maximum amount
subject to a surrender charge. Certain withdrawals may be made without surrender
charges, but any part of a withdrawal that is assessed a surrender charge
reduces the remaining payments that will be subject to a surrender charge in the
future.
In any Contract year, you may withdraw, without a surrender charge, up to:
- 10% of the Contract Value at the time of the withdrawal, MINUS
- The total of any prior free withdrawals in the same Contract year ("Free
10% Withdrawal.")
The 10% Free Withdrawal amount applies to both partial withdrawals and a full
surrender of the Contract.
We will apply a surrender charge only to the amount by which your requested
withdrawal exceeds the remaining 10% Free Withdrawal amount for that Contract
year. This excess withdrawal amount, which is subject to a surrender charge
based on the table below, reduces the remaining amount of your payments that
will be subject to a surrender charge in the future. If the amount of the
remaining payments that are subject to a surrender charge is reduced to zero, we
will no longer assess a surrender charge, even if the surrender or partial
withdrawal is within 10 years of the Contract's Date of Issue. During the first
Contract year, the surrender charge could be as much as 10% of your purchase
payments. See the EXAMPLES, below.
The surrender charge applicable to the excess withdrawal amount will depend upon
the number of years that the Contract has been in force, based on the following
schedule:
<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>
* For a Contract that lapses and reinstates, see "REINSTATEMENT."
The amount withdrawn from Contract Value equals the amount you request plus the
contingent surrender charge and the partial withdrawal transaction fee
(described below).
The right to make the Free 10% Withdrawal is not cumulative from Contract year
to Contract year. For example, if you withdraw only 8% of Contract Value 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.
PARTIAL WITHDRAWAL TRANSACTION FEE
For each partial withdrawal (including a Free 10% 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 partial withdrawal.
EXAMPLES
In each example below, it is assumed that you have not taken any loans from the
Contract.
EXAMPLE 1. Assume that you made an initial payment of $100,000 to the Contract,
and that the Contract Value is $120,000 when you request a full surrender of the
Contract eight months later. The amount of the Free 10% Withdrawal is $12,000
(10% of Contract Value). The amount of the Contract Value that is subject to a
surrender charge is $108,000 (the $120,000 Contract Value minus the Free 10%
Withdrawal of $12,000). However, the amount of the surrender charge is capped at
$10,000 (the first year surrender charge of 10%
33
<PAGE>
times your $100,000 payment to the Contract). The Surrender Value is $110,000
(the Contract Value of $120,000 minus the surrender charge of $10,000).
EXAMPLE 2. Assume that you made an initial payment of $100,000 for the
Contract, and that you request a partial withdrawal of $15,000 at the beginning
of the fifth Contract year when the Contract Value is $130,000. The amount of
the Free 10% Withdrawal is $13,000 (10% of the Contract Value). The amount of
the partial withdrawal that is subject to a surrender charge is $2,000 (the
$15,000 you requested minus the Free 10% Withdrawal of $13,000). The amount of
the surrender charge is $140 ($2,000 times the 7.00% surrender charge applicable
in the fifth Contract year). The remaining Contract Value is $114,835 (the
$130,000 Contract Value at the time of the withdrawal minus the $15,000 you
requested, the $140 surrender charge, and the $25 partial withdrawal transaction
fee). The amount of the Contract Value that is subject to a surrender charge is
$98,000 (your $100,000 initial payment minus the $2,000 that was subject to the
surrender charge).
Assume that, later in the same year, your Contract Value has grown to $150,000
and you make a request for a partial withdrawal of $10,000. The amount of the
Free 10% Withdrawal is $2,000 (the $15,000 that is 10% of Contract Value at the
time of withdrawal minus the prior Free 10% Withdrawal in that year of $13,000).
The amount of the withdrawal that is subject to a surrender charge is $8,000
(the $10,000 you requested minus the current Free 10% Withdrawal of $2,000). The
amount of the surrender charge is $560 ($8,000 times the 7.00% surrender charge
applicable in the fifth contract year). The remaining Contract Value is $139,415
(the $150,000 Contract Value at the time of the withdrawal minus the $10,000 you
requested, the $560 surrender charge, and the $25 partial withdrawal transaction
fee). The amount of the Contract Value that is subject to a surrender charge is
now $90,000 (the $98,000 of the initial payment that was still subject to a
surrender charge after the first withdrawal minus the $8,000 that is subject to
the surrender charge at the second 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 in that
Contract year or in later Contract years. However, if you change your
instructions for automatic transfers, the first automatic transfer thereafter
will count as one transfer.
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 results of a loan repayment.
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 Contract Value minus any surrender charges. 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."
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<PAGE>
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
Contract Year 1 2 3 4 5 6 7 8 9
--- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unloaned Gain 0% 10% 20% 30% 40% 50% 60% 70% 80%
Available
<CAPTION>
Beginning of
Contract Year 10 11
--- ---------
<S> <C> <C>
Unloaned Gain 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."
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.
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<PAGE>
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.
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.
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<PAGE>
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 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.
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.
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<PAGE>
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 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
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<PAGE>
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.
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.
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<PAGE>
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that Fund shares be voted so as
(1) to cause to change in the sub-classification or investment objective of one
or more of the Funds, or (2) to approve or disapprove an investment advisory
contract for the Funds. In addition, we may disregard voting instructions that
are in favor of any change in the investment policies or in any investment
adviser or principal underwriter if the change has been initiated by Contract
Owners or the Trustees. Our disapproval of any such change must be reasonable
and, in the case of a change in investment policies or investment adviser, based
on a good faith determination that such change would be contrary to state law or
otherwise is inappropriate in light of the objectives and purposes of the Funds.
In the event we do disregard voting instructions, a summary of and the reasons
for that action will be included in the next periodic report to Contract Owners.
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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
Warren E. Barnes Vice President and Corporate Controller of First
Vice President and Corporate Allmerica since 1997; Vice President of Allmerica
Controller Trust Company since 1997; Vice President and
Co-Controller, First Allmerica 1997; Vice President
and Assistant Controller, First Allmerica 1996 to
1997; Assistant Vice President and Assistant
Controller, First Allmerica 1995 to 1996; Assistant
Vice President Corporate Accounting and Reporting,
First Allmerica 1993 to 1995
John P. Kavanaugh Director and Chief Investment Officer of First
Director, Vice President and Allmerica since 1996; Vice President, First
Chief 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 since
General Counsel 1986, and Assistant Secretary, First Allmerica since
1991
J. Barry May Director of First Allmerica since 1996; Director and
Director 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 of
Director 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 Chief
Director and Chairman of the Board Executive Officer, First Allmerica since 1989
Edward J. Parry, III Director and Chief Financial Officer of First
Director, Vice President, Allmerica since 1996; Vice President and Treasurer,
Chief Financial Officer and First Allmerica since 1993
Treasurer
Richard M. Reilly Director of First Allmerica since 1996; Vice
Director, President and President, First Allmerica since 1990; Director,
Chief 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 since
Director and Vice President 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>
41
<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 5.5% 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, the distribution expense charge, and
investment earnings on amounts allocated under the Contracts to the Fixed
Account in excess of the interest credited on amounts in 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 Overseas Portfolio, Fidelity VIP Equity-Income Portfolio,
Fidelity VIP Growth Portfolio, Fidelity VIP High Income Portfolio, and Fidelity
VIP II Asset Manager 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.
42
<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
Funds may also be 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.
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
Fixed 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
43
<PAGE>
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.
FINANCIAL STATEMENTS
Financial Statements for the Company are included in this Prospectus, starting
after the Appendices. 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.
44
<PAGE>
APPENDIX A -- MINIMUM SUM INSURED TABLE
The minimum sum insured is a percentage of the Contract Value as set forth
below. The minimum sum insured meets or exceeds the minimum guideline sum
insured according to federal tax regulations:
MINIMUM SUM INSURED
<TABLE>
<CAPTION>
Age of Insured Percentage of
on Date of Death Contract Value
------------------ -----------------
<S> <C>
0-40.................................................... 265%
45...................................................... 230%
50...................................................... 200%
55...................................................... 165%
60...................................................... 145%
65...................................................... 135%
70...................................................... 130%
71...................................................... 128%
72...................................................... 127%
75...................................................... 127%
80...................................................... 127%
85...................................................... 127%
90...................................................... 127%
91...................................................... 127%
92...................................................... 127%
93...................................................... 127%
94...................................................... 127%
95...................................................... 127%
96...................................................... 120%
97...................................................... 113%
98...................................................... 106%
99...................................................... 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.
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
C-1
<PAGE>
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; a
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. 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 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). The tables also assume that
the Guaranteed Death Benefit Rider is in effect. (The Contract will lapse when
the Surrender Value or Contract Value is zero, unless the Guaranteed Death
Benefit Rider is in effect.)
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 payments 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. These are assumed to be at an annual rate
of 0.85% of the average daily net assets of the Underlying Funds, which is the
approximate average of the expenses of the Underlying Funds in 1997. 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 0.85% 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 Growth Fund and Select Growth Fund,
1.10% for the Select Growth and Income, 1.00% for the Select Income Fund,
Investment Grade Income Fund and Government Bond Fund, and 0.60% for the Money
Market Fund and Equity Index 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,
the manager 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.
Effective July 1, 1997, Delaware International Advisers Ltd., the investment
adviser for the International Equity Series, has agreed to limit total annual
expenses of the Fund to 0.95%. This limitation replaces a prior limitation of
0.80% that expired on June 30, 1997. The new limitation will be in effect
through October 31, 1998. In 1997, the actual ratio of total annual expenses of
the International Equity Series was 0.85%.
NET ANNUAL RATES OF INVESTMENT
Taking into account the Separate Account mortality and expense risk charge of
0.90%, and the assumed 0.85% 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 (-1.75%), 4.25% and 10.25%, 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
SINGLE PREMIUM VARI-EXEPTIONAL LIFE
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 75,520
11 42,758 17,006 17,006 74,596 32,643 32,643 74,596 60,411 60,411 81,555
12 44,896 16,609 16,609 74,596 33,827 33,827 74,596 66,205 66,205 88,714
13 47,141 16,220 16,220 74,596 35,053 35,053 74,596 72,554 72,554 96,497
14 49,498 15,841 15,841 74,596 36,324 36,324 74,596 79,512 79,512 104,956
15 51,973 15,471 15,471 74,596 37,642 37,642 74,596 87,138 87,138 114,150
16 54,572 15,109 15,109 74,596 39,007 39,007 74,596 95,494 95,494 124,143
17 57,300 14,756 14,756 74,596 40,421 40,421 74,596 104,653 104,653 133,955
18 60,165 14,411 14,411 74,596 41,887 41,887 74,596 114,689 114,689 145,655
19 63,174 14,074 14,074 74,596 43,406 43,406 74,596 125,688 125,688 159,624
20 66,332 13,745 13,745 74,596 44,980 44,980 74,596 137,742 137,742 174,933
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 75,520
Age 70 51,973 15,471 15,471 74,596 37,642 37,642 74,596 87,138 87,138 114,150
Age 75 66,332 13,745 13,745 74,596 44,980 44,980 74,596 137,742 137,742 174,933
</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. VALUES WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE RATES OF RETURN AVERAGED THE HYPOTHETICAL 0%, 6%, AND 12%, BUT
FLUCTUATED ABOVE AND BELOW THE AVERAGE IN INDIVIDUAL CONTRACT YEARS.
D-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SINGLE PREMIUM VARI-EXEPTIONAL LIFE
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 55,542 55,542 74,981
12 44,896 8,275 8,275 74,596 25,800 25,800 74,596 60,598 60,598 81,201
13 47,141 6,286 6,286 74,596 25,468 25,468 74,596 66,073 66,073 87,878
14 49,498 4,081 4,081 74,596 24,966 24,966 74,596 71,997 71,997 95,036
15 51,973 1,628 1,628 74,596 24,266 24,266 74,596 78,400 78,400 102,704
16 54,572 0 0 74,596 23,324 23,324 74,596 85,309 85,309 110,901
17 57,300 0 0 74,596 22,080 22,080 74,596 92,786 92,786 118,766
18 60,165 0 0 74,596 20,471 20,471 74,596 100,832 100,832 128,057
19 63,174 0 0 74,596 18,402 18,402 74,596 109,413 109,413 138,954
20 66,332 0 0 74,596 15,776 15,776 74,596 118,532 118,532 150,535
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 78,400 78,400 102,704
Age 75 66,332 0 0 74,596 15,776 15,776 74,596 118,532 118,532 150,535
</TABLE>
* These illustrations assume that the Guaranteed Death Benefit Rider is in
effect. If the Guaranteed Death Benefit Rider is not in effect, there will be no
Death Benefit when the Surrender Value or Contract Value are zero.
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. VALUES WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE RATES OF RETURN AVERAGED THE HYPOTHETICAL 0%, 6%, AND 12%, BUT
FLUCTUATED ABOVE AND BELOW THE AVERAGE IN INDIVIDUAL CONTRACT YEARS.
D-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SINGLE PREMIUM VARI-EXEPTIONAL LIFE
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 76,948
11 42,758 17,006 17,006 76,948 32,643 32,643 76,948 60,411 60,411 81,555
12 44,896 16,609 16,609 76,948 33,827 33,827 76,948 66,205 66,205 88,714
13 47,141 16,220 16,220 76,948 35,053 35,053 76,948 72,554 72,554 96,497
14 49,498 15,841 15,841 76,948 36,324 36,324 76,948 79,512 79,512 104,956
15 51,973 15,471 15,471 76,948 37,642 37,642 76,948 87,138 87,138 114,150
16 54,572 15,109 15,109 76,948 39,007 39,007 76,948 95,494 95,494 124,143
17 57,300 14,756 14,756 76,948 40,421 40,421 76,948 104,653 104,653 133,955
18 60,165 14,411 14,411 76,948 41,887 41,887 76,948 114,689 114,689 145,655
19 63,174 14,074 14,074 76,948 43,406 43,406 76,948 125,688 125,688 159,624
20 66,332 13,745 13,745 76,948 44,980 44,980 76,948 137,742 137,742 174,933
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 76,948
Age 70 51,973 15,471 15,471 76,948 37,642 37,642 76,948 87,138 87,138 114,150
Age 75 66,332 13,745 13,745 76,948 44,980 44,980 76,948 137,742 137,742 174,933
</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. VALUES WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE RATES OF RETURN AVERAGED THE HYPOTHETICAL 0%, 6%, AND 12%, BUT
FLUCTUATED ABOVE AND BELOW THE AVERAGE IN INDIVIDUAL CONTRACT YEARS.
D-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SINGLE PREMIUM VARI-EXEPTIONAL LIFE
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 55,572 55,572 76,948
12 44,896 8,617 8,617 76,948 26,058 26,058 76,948 60,657 60,657 81,280
13 47,141 6,716 6,716 76,948 25,792 25,792 76,948 66,185 66,185 88,026
14 49,498 4,624 4,624 76,948 25,373 25,373 76,948 72,177 72,177 95,273
15 51,973 2,302 2,302 76,948 24,771 24,771 76,948 78,663 78,663 103,048
16 54,572 0 0 76,948 23,935 23,935 76,948 85,669 85,669 111,369
17 57,300 0 0 76,948 22,829 22,829 76,948 93,265 93,265 119,379
18 60,165 0 0 76,948 21,401 21,401 76,948 101,461 101,461 128,856
19 63,174 0 0 76,948 19,563 19,563 76,948 110,232 110,232 139,994
20 66,332 0 0 76,948 17,222 17,222 76,948 119,581 119,581 151,868
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 78,663 78,663 103,048
Age 75 66,332 0 0 76,948 17,222 17,222 76,948 119,581 119,581 151,868
</TABLE>
* These illustrations assume that the Guaranteed Death Benefit Rider is in
effect. If the Guaranteed Death Benefit Rider is not in effect, there will be no
Death Benefit when the Surrender Value or Contract Value are zero.
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. VALUES WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE RATES OF RETURN AVERAGED THE HYPOTHETICAL 0%, 6%, AND 12%, BUT
FLUCTUATED ABOVE AND BELOW THE AVERAGE IN INDIVIDUAL CONTRACT YEARS.
D-6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SINGLE PREMIUM VARI-EXEPTIONAL LIFE
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 73,207
10 40,722 18,000 18,000 73,207 32,572 32,572 73,207 57,026 57,026 73,207
11 42,758 17,615 17,615 73,207 33,821 33,821 73,207 62,620 62,620 79,527
12 44,896 17,237 17,237 73,207 35,117 35,117 73,207 68,763 68,763 87,329
13 47,141 16,868 16,868 73,207 36,463 36,463 73,207 75,508 75,508 95,895
14 49,498 16,507 16,507 73,207 37,861 37,861 73,207 82,915 82,915 105,302
15 51,973 16,153 16,153 73,207 39,313 39,313 73,207 91,049 91,049 115,632
16 54,572 15,807 15,807 73,207 40,820 40,820 73,207 99,981 99,981 126,976
17 57,300 15,468 15,468 73,207 42,385 42,385 73,207 109,789 109,789 139,432
18 60,165 15,137 15,137 73,207 44,010 44,010 73,207 120,559 120,559 153,110
19 63,174 14,813 14,813 73,207 45,697 45,697 73,207 132,386 132,386 168,130
20 66,332 14,495 14,495 73,207 47,449 47,449 73,207 145,373 145,373 184,623
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 73,207
</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. VALUES WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE RATES OF RETURN AVERAGED THE HYPOTHETICAL 0%, 6%, AND 12%, BUT
FLUCTUATED ABOVE AND BELOW THE AVERAGE IN INDIVIDUAL CONTRACT YEARS.
D-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SINGLE PREMIUM VARI-EXEPTIONAL LIFE
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 51,330 51,705 73,207
10 40,722 15,142 15,142 73,207 30,275 30,275 73,207 56,028 56,028 73,207
11 42,758 13,598 13,598 73,207 30,560 30,560 73,207 61,281 61,281 77,827
12 44,896 11,747 11,747 73,207 30,640 30,640 73,207 66,946 66,946 85,022
13 47,141 9,525 9,525 73,207 30,473 30,473 73,207 73,022 73,022 92,738
14 49,498 6,853 6,853 73,207 30,006 30,006 73,207 79,510 79,510 100,978
15 51,973 3,625 3,625 73,207 29,165 29,165 73,207 86,402 86,402 109,730
16 54,572 0 0 73,207 27,854 27,854 73,207 93,676 93,676 118,968
17 57,300 0 0 73,207 25,936 25,936 73,207 101,292 101,292 128,641
18 60,165 0 0 73,207 23,221 23,221 73,207 109,187 109,187 138,668
19 63,174 0 0 73,207 19,454 19,454 73,207 117,279 117,279 148,945
20 66,332 0 0 73,207 14,286 14,286 73,207 125,466 125,466 159,342
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 56,028 56,028 73,207
</TABLE>
* These illustrations assume that the Guaranteed Death Benefit Rider is in
effect. If the Guaranteed Death Benefit Rider is not in effect, there will be no
Death Benefit when the Surrender Value or Contract Value are zero.
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. VALUES WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE RATES OF RETURN AVERAGED THE HYPOTHETICAL 0%, 6%, AND 12%, BUT
FLUCTUATED ABOVE AND BELOW THE AVERAGE IN INDIVIDUAL CONTRACT YEARS.
D-8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SINGLE PREMIUM VARI-EXEPTIONAL LIFE
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 72,969
10 40,722 17,998 17,998 72,969 32,569 32,569 72,969 57,017 57,017 72,969
11 42,758 17,613 17,613 72,969 33,818 33,818 72,969 62,610 62,610 79,515
12 44,896 17,236 17,236 72,969 35,114 35,114 72,969 68,752 68,752 87,315
13 47,141 16,866 16,866 72,969 36,460 36,460 72,969 75,496 75,496 95,880
14 49,498 16,505 16,505 72,969 37,858 37,858 72,969 82,902 82,902 105,286
15 51,973 16,151 16,151 72,969 39,310 39,310 72,969 91,035 91,035 115,614
16 54,572 15,805 15,805 72,969 40,817 40,817 72,969 99,965 99,965 126,956
17 57,300 15,467 15,467 72,969 42,381 42,381 72,969 109,772 109,772 139,410
18 60,165 15,136 15,136 72,969 44,006 44,006 72,969 120,540 120,540 153,086
19 63,174 14,811 14,811 72,969 45,693 45,693 72,969 132,365 132,365 168,103
20 66,332 14,494 14,494 72,969 47,445 47,445 72,969 145,350 145,350 184,594
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 72,969
</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. VALUES WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE RATES OF RETURN AVERAGED THE HYPOTHETICAL 0%, 6%, AND 12%, BUT
FLUCTUATED ABOVE AND BELOW THE AVERAGE IN INDIVIDUAL CONTRACT YEARS.
D-9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SINGLE PREMIUM VARI-EXEPTIONAL LIFE
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 51,267 51,642 72,969
10 40,722 15,035 15,035 72,969 30,175 30,175 72,969 55,952 55,952 72,969
11 42,758 13,465 13,465 72,969 30,435 30,435 72,969 61,190 61,190 77,711
12 44,896 11,586 11,586 72,969 30,489 30,489 72,969 66,836 66,836 84,882
13 47,141 9,336 9,336 72,969 30,295 30,295 72,969 72,892 72,892 92,572
14 49,498 6,636 6,636 72,969 29,800 29,800 72,969 79,357 79,357 100,784
15 51,973 3,384 3,384 72,969 28,933 28,933 72,969 86,226 86,226 109,507
16 54,572 0 0 72,969 27,597 27,597 72,969 93,477 93,477 118,715
17 57,300 0 0 72,969 25,657 25,657 72,969 101,071 101,071 128,360
18 60,165 0 0 72,969 22,927 22,927 72,969 108,949 108,949 138,365
19 63,174 0 0 72,969 19,152 19,152 72,969 117,029 117,029 148,626
20 66,332 0 0 72,969 13,989 13,989 72,969 125,212 125,212 159,019
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 55,952 55,952 72,969
</TABLE>
* These illustrations assume that the Guaranteed Death Benefit Rider is in
effect. If the Guaranteed Death Benefit Rider is not in effect, there will be no
Death Benefit when the Surrender Value or Contract Value are zero.
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. VALUES WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE RATES OF RETURN AVERAGED THE HYPOTHETICAL 0%, 6%, AND 12%, BUT
FLUCTUATED ABOVE AND BELOW THE AVERAGE IN INDIVIDUAL CONTRACT YEARS.
D-10
<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) (UNAUDITED)
QUARTER ENDED JUNE SIX MONTHS ENDED
30, JUNE 30,
(IN MILLIONS) 1998 1997 1998 1997
-------------------------------------------------- ------ ------- ------ -------
<S> <C> <C> <C> <C>
REVENUES
Premiums........................................ $ -- $ 8.3 $ 0.4 $ 16.3
Universal life and investment product policy
fees........................................ 66.1 51.5 128.0 101.4
Net investment income......................... 36.1 42.0 74.8 84.3
Net realized investment gains (losses)........ 5.1 (1.4) 22.2 (3.1)
Other income.................................. (1.0) 0.3 (0.1) 0.4
------ ------- ------ -------
Total revenues............................ 106.3 100.7 225.3 199.3
------ ------- ------ -------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses......................... 41.8 49.1 81.8 98.3
Policy acquisition expenses................... 14.9 12.9 31.7 26.7
Loss from cession of disability income
business.................................... -- -- -- 53.9
Other operating expenses...................... 24.5 24.2 49.9 47.6
------ ------- ------ -------
Total benefits, losses and expenses....... 81.2 86.2 163.4 226.5
------ ------- ------ -------
Income (loss) before federal income taxes......... 25.1 14.5 61.9 (27.2)
------ ------- ------ -------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current....................................... 3.3 7.5 17.5 (8.7)
Deferred...................................... 5.3 (2.3) 4.2 (0.5)
------ ------- ------ -------
Total federal income tax expense
(benefit)............................... 8.6 5.2 21.7 (9.2)
------ ------- ------ -------
Net income (loss)................................. 16.5 9.3 40.2 (18.0)
OTHER COMPREHENSIVE (LOSS) INCOME
Net (depreciation) appreciation on available for
sale securities............................... (3.2) 25.0 (9.1) 8.6
Benefit (provision) for deferred federal income
taxes......................................... 1.1 (8.8) 3.2 (3.0)
------ ------- ------ -------
Other comprehensive (loss) income......... (2.1) 16.2 (5.9) 5.6
------ ------- ------ -------
Comprehensive income (loss)....................... $ 14.4 $ 25.5 $ 34.3 $ (12.4)
------ ------- ------ -------
------ ------- ------ -------
</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)
SIX MONTHS ENDED
JUNE 30,
(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)............................. 40.2 (18.0)
------- -------
Balance at end of period...................... 253.3 158.4
------- -------
ACCUMULATED OTHER COMPREHENSIVE INCOME
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period................ 38.5 20.5
Net (depreciation) appreciation on available
for sale securities......................... (9.1) 8.6
Benefit (provision) for deferred federal
income taxes................................ 3.2 (3.0)
------- -------
Other comprehensive (loss) income......... (5.9) 5.6
------- -------
Balance at end of period...................... 32.6 26.1
------- -------
Total shareholder's equity................ $ 675.3 $ 533.3
------- -------
------- -------
</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)
JUNE 30, DECEMBER 31,
(IN MILLIONS) 1998 1997
-------------------------------------------------- --------- ------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost
of $1,310.3 and $1,340.5)................... $ 1,375.6 $ 1,402.5
Equity securities at fair value (cost of $33.9
and $34.4).................................. 43.0 54.0
Mortgage loans................................ 230.6 228.2
Real estate................................... 5.9 12.0
Policy loans.................................. 148.0 140.1
Other long term investments................... 20.7 20.3
--------- ------------
Total investments......................... 1,823.8 1,857.1
--------- ------------
Cash and cash equivalents....................... 31.8 31.1
Accrued investment income....................... 33.8 34.2
Deferred policy acquisition costs............... 853.0 765.3
Reinsurance receivables:
Future policy benefits........................ 264.7 242.5
Outstanding claims, losses and loss adjustment
expenses.................................... 14.9 5.5
Unearned premiums............................. 2.8 1.7
Other......................................... 17.7 1.4
--------- ------------
Total reinsurance receivables............. 300.1 251.1
--------- ------------
Property and Equipment.......................... 4.0 --
Other assets.................................... 11.2 10.7
Separate account assets......................... 9,695.1 7,567.3
--------- ------------
Total assets.............................. $12,752.8 $10,516.8
--------- ------------
--------- ------------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits........................ $ 2,124.1 $ 2,097.3
Outstanding claims, losses and loss adjustment
expenses.................................... 24.5 18.5
Unearned premiums............................. 2.8 1.8
Contractholder deposit funds and other policy
liabilities................................. 37.0 32.5
--------- ------------
Total policy liabilities and accruals..... 2,188.4 2,150.1
--------- ------------
Expenses and taxes payable...................... 79.3 77.6
Reinsurance premiums payable.................... 26.2 4.9
Short term debt................................. 10.0 --
Deferred federal income taxes................... 77.0 75.9
Separate account liabilities.................... 9,696.4 7,567.3
--------- ------------
Total liabilities......................... 12,077.5 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.......... 32.6 38.5
Retained earnings............................... 253.3 213.1
--------- ------------
Total shareholder's equity................ 675.3 641.0
--------- ------------
Total liabilities and shareholder's equity.... $12,752.8 $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)
SIX MONTHS ENDED
JUNE 30,
(IN MILLIONS) 1998 1997
-------------------------------------------------- ------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................. $ 40.2 $ (18.0)
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Net realized (gains) losses............... (22.1) 3.1
Net amortization and depreciation......... (1.1) 0.2
Loss from cession of disability income
business................................ -- 53.9
Deferred federal income taxes............. 4.2 (0.6)
Change in deferred acquisition costs...... (88.7) (58.5)
Change in premiums and notes receivable,
net of reinsurance...................... 21.1 --
Change in accrued investment income....... 0.4 (2.1)
Change in policy liabilities and accruals,
net..................................... 38.5 (6.9)
Change in reinsurance receivable.......... (49.1) (1.0)
Change in expenses and taxes payable...... 2.5 (6.2)
Separate account activity, net............ 1.3 0.4
Other, net................................ (0.4) (1.3)
------- -------
Net cash used in operating
activities.......................... (53.2) (37.0)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of
available-for-sale fixed maturities......... 108.4 366.9
Proceeds from disposals of equity
securities.................................. 38.5 2.0
Proceeds from disposals of other
investments................................. 9.4 0.1
Proceeds from mortgages matured or
collected................................... 37.4 32.0
Purchase of available-for-sale fixed
maturities.................................. (78.3) (334.3)
Purchase of equity securities................. (26.4) (1.7)
Purchase of other investments................. (41.1) (28.5)
Capital Expenditures.......................... (4.0) --
------- -------
Net cash provided by investing
activities.......................... 43.9 36.5
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in short term debt..................... 10.0 --
------- -------
Net cash provided by financing
activities.......................... 10.0 --
------- -------
Net change in cash and cash equivalents........... .7 (0.5)
Cash and cash equivalents, beginning of period.... 31.1 18.8
------- -------
Cash and cash equivalents, end of period.......... $ 31.8 $ 18.3
------- -------
------- -------
</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 second quarter and six months
ended June 30, 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 American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SOP No. 98-1"). SOP No. 98-1 requires
that certain costs incurred in developing internal-use computer
UF-5
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
software be capitalized and provides guidance for determining whether computer
software is to be considered for internal use. This statement is effective for
fiscal years beginning after December 15, 1998. In the second quarter, the
Company adopted SOP No.98-1 effective January 1, 1998. Resulting an increase in
pre-tax income of $4.0 million. The adoption of SOP No. 98-1 had no material
effect on the results of operations or financial position for the three months
ended March 31, 1998.
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 June 30, 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
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
of the investment assets sold. When an other-than-temporary impairment of the
value of a specific investment or a group of investments is determined, a
realized investment loss is recorded. Changes in the valuation allowance for
mortgage loans 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.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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>
FOR THE YEARS ENDED DECEMBER 31, PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY 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>
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (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-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (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-12
<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>
BALANCE AT
FOR THE YEAR ENDED DECEMBER 31, BALANCE AT DECEMBER
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS 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-13
<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.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1997.
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-15
<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-16
<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-17
<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-18
<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
F-19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
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-20
