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PROSPECTUS
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE CONTRACT
ISSUED BY
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
IN CONNECTION WITH ITS
LLAC VARIABLE ACCOUNT
175 BERKELEY STREET, P.O. BOX 140
BOSTON, MASSACHUSETTS 02117-0140
SERVICE CENTER
100 LIBERTY WAY
DOVER, NEW HAMPSHIRE 03820
1-800-451-7065 EXT. 36327
This prospectus describes Flexible Premium Variable Life Insurance Contracts
(the "Contracts") offered by Liberty Life Assurance Company of Boston ("we" or
"Liberty Life") for prospective insured persons ages 0-80. Subject to certain
restrictions, you may vary the frequency and amount of premium payments and
increase or decrease the level of life insurance benefits under the Contract.
The Contracts currently offer eighteen investment options, each of which is
a Sub-Account of LLAC Variable Account of Liberty Life (the "Variable Account").
Each Sub-Account invests exclusively in shares of one of the following
Portfolios:
AIM VARIABLE INSURANCE FUNDS, INC.: AIM V.I. Capital Appreciation Fund; AIM
V.I. Government Securities Fund; and AIM V.I. International Equity Fund.
DREYFUS: Dreyfus Stock Index Fund; Dreyfus Variable Investment Fund, Capital
Appreciation Portfolio; and Dreyfus Socially Responsible Growth Fund, Inc.
LIBERTY VARIABLE INVESTMENT TRUST: Colonial Small Cap Value Fund, Variable
Series; Colonial High Yield Securities Fund, Variable Series; Colonial
Strategic Income Fund, Variable Series; Colonial Growth & Income Fund,
Variable Series; and Liberty All-Star Equity Fund, Variable Series.
MFS VARIABLE INSURANCE TRUST: MFS Emerging Growth Series; MFS Research
Series; MFS Utilities Series; and MFS Growth with Income Series.
STEIN ROE VARIABLE INVESTMENT TRUST: Stein Roe Balanced Fund, Variable
Series; Stein Roe Growth Stock Fund, Variable Series; and Stein Roe Money
Market Fund, Variable Series.
Not all of the Sub-Accounts may be available under your Contract. You should
contact your representative for further information as to the availability of
the Sub-Accounts. We may make other investment options available in the future.
You also may allocate all or part of your Net Premiums to our Fixed Account.
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THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF
THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Date of this Prospectus is October 1, 1999.
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The Contract does not have a guaranteed minimum Account Value. Your
Contract's Account Value will rise and fall, depending on the investment
performance of the Portfolios underlying the Sub-Accounts to which you allocate
your Net Premiums. You bear the entire investment risk on amounts allocated to
the Sub-Accounts. The investment policies and risks of each Portfolio are
described in the accompanying prospectuses for the Portfolios. The Account Value
will also reflect Net Premiums, amounts withdrawn, and cost of insurance and any
other charges.
When the Insured dies, we will pay a Death Benefit to a Beneficiary
specified by you. We will reduce the amount of the Death Benefit by any unpaid
Indebtedness and any unpaid Contract charge. You may choose between one of two
Death Benefit options: (1) a level amount, which generally equals the Face
Amount of the Contract; or (2) a variable amount, which generally equals the
Face Amount plus the Account Value. In certain circumstances, the Death Benefit
may increase or decrease based on the investment experience of the Portfolios
underlying the Sub-Accounts to which you have allocated your Net Premiums. As
long as the Contract remains in force and you make no withdrawals, the Death
Benefit will never be less than the Face Amount. The minimum Face Amount under
the Contract is $50,000.
The Contract will remain in force as long as (a) the Surrender Value is
sufficient to pay the monthly charges or (b) one of the three Coverage
Guarantees is in effect, regardless of changes in the Account Value. The
Coverage Guarantees are described on pages 18-19. You generally may cancel the
Contract by returning it to us within ten days after you receive it. In some
states, however, this right to return period may be longer, as provided by state
law. We will refund your Premium or Account Value, as provided by state law.
In certain states the Contracts may be offered as group contracts with
individual ownership represented by Certificates. The discussion of Contracts in
this Prospectus applies equally to Certificates under group contracts, unless
the context specifies otherwise.
It may not be advantageous for you to purchase variable life insurance to
replace your existing insurance coverage or if you already own a variable life
insurance contract.
THE CONTRACTS AND THE INVESTMENTS IN THE PORTFOLIOS ARE NOT DEPOSITS, OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK. THE CONTRACTS ARE SUBJECT
TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED. THE CONTRACTS ARE NOT INSURED BY THE FDIC, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY.
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This Prospectus is valid only if accompanied by the current Prospectuses for
the Portfolios listed above. If any of those Prospectuses are missing or
outdated, please contact us and we will send you the Prospectus you need.
PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR YOUR FUTURE
REFERENCE.
The Contract may not be available in all states.
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TABLE OF CONTENTS
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PAGE
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DEFINITIONS......................................................................... 1
FEES AND EXPENSES................................................................... 3
QUESTIONS AND ANSWERS ABOUT YOUR CONTRACT........................................... 8
PURCHASE OF CONTRACT AND ALLOCATION OF NET PREMIUMS................................. 16
Application for a Contract........................................................ 16
Premiums.......................................................................... 17
Modified Endowment Contract....................................................... 18
Guaranteed Coverage Monthly Premium............................................... 18
Allocation of Net Premiums........................................................ 19
Account Value..................................................................... 20
Accumulation Unit Value........................................................... 21
Transfer of Account Value......................................................... 21
Transfers Authorized by Telephone................................................. 22
Dollar Cost Averaging............................................................. 22
Asset Rebalancing................................................................. 23
Asset Allocation Models........................................................... 23
THE INVESTMENT AND FIXED ACCOUNT OPTIONS............................................ 24
Variable Account Investments...................................................... 24
Portfolios...................................................................... 24
Voting Rights................................................................... 28
Additions, Deletions, and Substitutions of Securities........................... 28
The Fixed Account................................................................. 29
CONTRACT BENEFITS AND RIGHTS........................................................ 30
Death Benefit..................................................................... 30
Change in the Face Amount......................................................... 32
Optional Insurance Benefits....................................................... 32
Contract Loans.................................................................... 34
Amount Payable on Surrender of the Contract....................................... 35
Partial Withdrawals............................................................... 36
Proceeds Options.................................................................. 37
Termination and Grace Period...................................................... 38
Reinstatement..................................................................... 38
Cancellation...................................................................... 39
Postponement of Payments.......................................................... 39
DEDUCTIONS AND CHARGES.............................................................. 39
Premium Expense Charge............................................................ 39
Separate Account Expense Charge................................................... 40
Monthly Deduction................................................................. 40
Cost of Insurance Charge.......................................................... 40
Contract Fee...................................................................... 41
Portfolio Expenses................................................................ 41
Withdrawal Charge................................................................. 41
Withdrawal Fee.................................................................... 43
Transfer Fee...................................................................... 44
Special Provisions for Group or Sponsored Arrangements............................ 44
GENERAL CONTRACT PROVISIONS......................................................... 44
Statements to Contract Owners..................................................... 44
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<TABLE>
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Limit on Right to Contest......................................................... 45
Suicide........................................................................... 45
Misstatement as to Age and Sex.................................................... 45
Beneficiary....................................................................... 45
Assignment........................................................................ 46
Creditors' Claims................................................................. 46
Dividends......................................................................... 46
Notice and Elections.............................................................. 46
Modification...................................................................... 46
FEDERAL TAX CONSIDERATIONS.......................................................... 46
Taxation of Liberty Life and the Variable Account................................. 46
Tax Status of the Contract........................................................ 47
Diversification Requirements...................................................... 47
Owner Control..................................................................... 48
Tax Treatment of Life Insurance Death Benefit Proceeds............................ 49
Accelerated Death Benefit......................................................... 49
Tax Deferral During Accumulation Period........................................... 49
Contracts Which Are MECs.......................................................... 49
Characterization of a Contract as a MEC......................................... 49
Tax Treatment of Withdrawals, Loans, Assignments and Pledges
under MECs................................................................... 50
Penalty Tax..................................................................... 50
Aggregation of Contracts........................................................ 50
Contracts Which Are Not MECs...................................................... 50
Tax Treatment of Withdrawals Generally.......................................... 50
Certain Distributions Required by the Tax Laws in the First 15
Contract Years............................................................... 50
Tax Treatment of Loans.......................................................... 50
Actions to Ensure Compliance with the Tax Law................................... 51
Federal Income Tax Withholding.................................................. 51
Tax Advice...................................................................... 51
DESCRIPTION OF LIBERTY LIFE AND THE VARIABLE ACCOUNT................................ 51
Liberty Life Assurance Company of Boston.......................................... 51
Officers and Directors of Liberty Life............................................ 52
Financial Information Concerning Liberty Life..................................... 54
Variable Account.................................................................. 54
Safekeeping of the Variable Account's Assets...................................... 54
State Regulation of Liberty Life.................................................. 54
YEAR 2000 MATTERS................................................................... 55
DISTRIBUTION OF CONTRACTS........................................................... 55
LEGAL PROCEEDINGS................................................................... 56
LEGAL MATTERS....................................................................... 56
REGISTRATION STATEMENT.............................................................. 57
EXPERTS............................................................................. 57
FINANCIAL STATEMENTS................................................................ 57
</TABLE>
This Prospectus Does Not Constitute an Offering in any Jurisdiction in which
Such Offering May Not Be Lawfully Made. Liberty Life Does Not Authorize any
Information or Representations Regarding the Offering Described in this
Prospectus other than as Based in this Prospectus.
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DEFINITIONS
Please refer to this list for the meaning of the following terms:
ACCOUNT VALUE--The sum of the values of your interests in the Sub-Accounts, the
Fixed Account and the Loan Account.
ACCUMULATION UNIT--An accounting unit of measurement which we use to calculate
the value of a Sub-Account.
AGE--An Insured's age at his or her last birthday.
ASSET ALLOCATION MODELS--Models developed by Standard & Poor's Inc. to provide
generalized guidance on how to allocate Account Value among the Sub-Accounts
under the Contract.
ASSET REBALANCING--Our program under which we periodically readjust the
percentage of your Account Value allocated to each Sub-Account to maintain a
pre-set level.
BENEFICIARY(IES)--The person(s) named by you to receive the Death Benefit under
the Contract.
CASH VALUE--The Account Value less any applicable Withdrawal Charges.
CONTRACT ANNIVERSARY--The same day and month as the Contract Date for each
subsequent year the Contract remains in force.
CONTRACT DATE--The effective date of insurance coverage under your Contract. It
is used to determine Contract Anniversaries, Contract Years and the Monthly
Date.
CONTRACT OWNER ("YOU")--The person(s) having the privileges of ownership defined
in the Contract. The Contract Owner(s) may or may not be the same person(s) as
the Insured(s). If your Contract is issued pursuant to a retirement plan, your
ownership privileges may be modified by the plan.
CONTRACT YEAR--Each twelve-month period beginning on the Contract Date and each
Contract Anniversary.
DEATH BENEFIT--The amount payable to the Beneficiary under the Contract upon the
death of the Insured, before payment of any unpaid Indebtedness.
DELIVERY DATE--If you pay your initial Premium upon receipt of your Contract,
the date on which your Contract is personally delivered to you; otherwise, five
days after we mail your Contract for delivery to you.
DOLLAR COST AVERAGING--Our program under which we periodically transfer a fixed
dollar amount to the Sub-Accounts of your choice, until the source you designate
is exhausted or you instruct us to stop.
FACE AMOUNT--The amount designated as such on the Contract Information page or
as subsequently changed in accordance with the terms of the Contract. It is used
to determine the amount of Death Benefit.
FIXED ACCOUNT--The portion of the Account Value allocated to our general
account.
GRACE PERIOD--A 61-day period during which the Contract will remain in force so
as to permit you to pay a sufficient amount to keep the Contract from lapsing.
INDEBTEDNESS--The sum of all unpaid Contract Loans and accrued loan interest.
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INSURED--A person whose life is insured under the Contract.
LOAN ACCOUNT--An account established for amounts transferred from the
Sub-Accounts or the Fixed Account as security for outstanding Indebtedness.
MONTHLY DATE--The same day in each month as the Contract Date. The day of the
month on which the Monthly Deduction is taken from your Account Value.
MONTHLY DEDUCTION--The amount deducted from the Account Value on each Monthly
Date for the cost of insurance charge, the Contract Fee, and the cost of any
benefit Agreement.
NET INVESTMENT FACTOR--The factor we use to determine the change in value of an
Accumulation Unit in any Valuation Period. We determine the Net Investment
Factor separately for each Sub-Account.
NET PREMIUM--A Premium less any Premium Expense Charge.
PLANNED PREMIUM--The amount of Premium selected by you to be paid periodically
as payment for the Contract.
PORTFOLIO(S)--The underlying mutual funds in which the Sub-Accounts invest. Each
Portfolio is an investment company registered with the SEC or a separate
investment series of a registered investment company.
PREMIUM--An amount paid to us as payment for the Contract by you or on your
behalf.
SEC--The United States Securities and Exchange Commission.
SUB-ACCOUNT--A division of the Variable Account, which invests wholly in shares
of one of the Portfolios.
SUB-ACCOUNT VALUE--The value of the assets held in a Sub-Account.
SURRENDER VALUE--The Cash Value less any unpaid Indebtedness.
TAX CODE--The Internal Revenue Code of 1986, as amended.
VALUATION DAY--Each day the New York Stock Exchange ("NYSE") is open for
business and we are open. We currently are open for variable business on each
day the NYSE is open, except for emergencies or other times permitted by the
SEC.
VALUATION PERIOD--The period of time over which we determine the change in the
value of the Sub-Accounts. Each Valuation Period begins at the close of normal
trading on the NYSE, currently 4:00 p.m. Eastern time, on each Valuation Day and
ends at the close of the NYSE on the next Valuation Day, or the next day we are
open, if later.
VARIABLE ACCOUNT--LLAC Variable Account, which is a segregated investment
account of Liberty Life.
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FEES AND EXPENSES
The following tables are designed to help you understand the fees and
expenses that you bear, directly or indirectly, as a Contract Owner. The first
table describes the Contract charges and deductions you directly bear under the
Contract. The second table describes the fees and expenses of the Portfolios
that you bear indirectly when you purchase a Contract. (See "Deductions and
Charges", beginning on page 39).
CONTRACT CHARGES AND DEDUCTIONS
CHARGES DEDUCTED FROM ACCOUNT VALUE
Monthly Cost of Insurance Charge(1)
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CURRENT GUARANTEED
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Ranges from $.05 per $1,000 of net amount at risk to Ranges from $.05 per $1,000 of net amount at risk to
$79 per $1000 net amount at risk. $83.33 per $1,000 of net amount at risk.
Monthly Contract Fee: $9.00 per month for Contracts with Face Amounts under
$100,000.
$6.00 per month for Contracts with Face Amounts of at
least $100,000.
TRANSACTION CHARGES
Transfer Fee: $25 per transfer.(2)
Partial Withdrawal Fee: The lesser of $25 or 2% of the amount withdrawn.
CHARGES DEDUCTED FROM PREMIUM
Maximum Premium Expense Charge: 5.5% of each Premium.(3)
DEFERRED SALES CHARGE
Maximum Withdrawal Charge: $50.00 per thousand dollars of Face Amount.(4)
CHARGES DEDUCTED FROM THE SUB-ACCOUNTS
Annual Variable Account Charges:
Expense Charge: .60% of daily net assets in the Variable Account.(5)
Federal Income Tax Charge: Currently none.(6)
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(1) The cost of insurance charges are based on attained age, sex, rating class,
and history of tobacco use of the Insured. The net amount at risk is the
difference between the Death Benefit divided by 1.0032737 and the Account
Value. See "Deductions and Charges-- Monthly Deduction--Cost of Insurance
Charge," on pages 40-41.
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(2) We currently waive the Transfer Fee on all transfers. We reserve the right
in the future to charge the Transfer Fee on all transfers after the first
twelve transfers in a Contract Year, as described above. See "Transfer Fee"
on page 44.
(3) The current Premium Expense Charge is 5.5% of the total Premiums paid in
each Contract Year up to twelve times the Lifetime Guaranteed Coverage
Monthly Premium and 3.5% of any Premium in excess of that amount. Twelve
times the Guaranteed Coverage Monthly Premium equals the guideline level
premium determined under Section 7702(c) of the Tax Code. We may change the
Premium Expense Charge but it will never exceed 5.5% of each Premium. See
"Premium Expense Charge" on page 39 below.
(4) This charge applies to all surrenders and partial withdrawals, unless you
are eligible for the Medical Waiver of Withdrawal Charge. See "Withdrawal
Charge--Medical Waiver of Withdrawal Charge" on page 43. We also will charge
a withdrawal charge if you decrease the Face Amount of your Contract. The
amount of your withdrawal charge at issue will depend on the Insured's age
at issue, sex, and rating class. The withdrawal charge declines to zero
percent after the tenth Contract Year. The withdrawal charge on a partial
withdrawal or decrease in Face Amount will be a percentage of the then
applicable withdrawal charge on a surrender, based on the percentage
decrease in the Face Amount resulting from the partial withdrawal. The
withdrawal charge is imposed to cover a portion of our premium tax expenses
and a portion of the sales expense incurred by us in distributing the
Contracts. See "Withdrawal Charge," on pages 41-42.
(5) Deducted each Valuation Period in an amount equal to 1/365 of the annual
rate shown, multiplied by the Account Value in the Variable Account on the
relevant Valuation Day, multiplied by the number of days in the relevant
Valuation Period.
(6) We currently do not assess a charge for federal income taxes that may be
attributable to the operations of the Variable Account. We reserve the right
to do so in the future. See "Deductions and Charges--Separate Account
Expense Charge", pages 39-40.
PORTFOLIO EXPENSES(1)
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
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TOTAL FUND TOTAL FUND
MANAGEMENT OTHER ANNUAL
PORTFOLIO FEES EXPENSES EXPENSES
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AIM V.I. Capital Appreciation......................................... 0.62% 0.05% 0.67%(2)
AIM V.I. Government Securities Fund................................... 0.50% 0.26% 0.76%(2)
AIM V.I. International Equity......................................... 0.75% 0.16% 0.91%(2)
Dreyfus Stock Index................................................... 0.25% 0.01% 0.26%(3)
Dreyfus Capital Appreciation.......................................... 0.57% 0.24% 0.81%(3)
Dreyfus Socially Responsible Growth................................... 0.75% 0.05% 0.80%(3)
Colonial Small Cap Value.............................................. 0.80% 3.52% 4.32%(4)
Colonial High Yield Securities........................................ 0.60% 1.24% 1.84%(4)
Colonial Strategic Income............................................. 0.65% 0.13% 0.78%(4)
Colonial Growth & Income.............................................. 0.80% 0.10% 0.90%
Liberty All-Star Equity............................................... 0.80% 0.24% 1.04%(4)
</TABLE>
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<CAPTION>
TOTAL FUND TOTAL FUND
MANAGEMENT OTHER ANNUAL
PORTFOLIO FEES EXPENSES EXPENSES
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<S> <C> <C> <C>
MFS Emerging Growth................................................... 0.75% 0.10% 0.85%
MFS Research.......................................................... 0.75% 0.11% 0.86%
MFS Utilities......................................................... 0.75% 0.26% 1.01%(5)
MFS Growth with Income................................................ 0.75% 0.13% 0.88%(5)
Stein Roe Balanced.................................................... 0.60% 0.05% 0.65%
Stein Roe Growth Stock................................................ 0.65% 0.05% 0.70%
Stein Roe Money Market................................................ 0.50% 0.12% 0.62%
</TABLE>
(1) All Trust and Portfolio expenses are based on 1998 expenses, except Colonial
Small Cap Value and Colonial High Yield Securities. Since those two
Portfolios commenced operations in 1998, their Total Fund Other Expenses are
annualized estimates based on their actual expenses. The expenses of the
Colonial Small Cap Value Fund, Colonial High Yield Securities Fund, Liberty
All-Star Equity Fund, and MFS Utilities Series, as shown in the table above,
do not reflect the agreement of each Portfolio's adviser to reimburse
expenses above the limits shown in notes (4) and (5).
(2) AIM Advisors, Inc. ("AIM") may from time to time waive or reduce its fees.
Effective May 1, 1998, the AIM Portfolios reimburse AIM in an amount up to
0.25% of the average net asset value of each AIM Portfolio for expenses
incurred in providing or assuring that participating insurance companies
provide certain administrative services. However, AIM does not currently
seek any reimbursement with respect to certain services and does not seek
reimbursement of the cost of certain other services in excess of the amounts
charged by participating insurance companies. The Total Fund Other Expenses
for the AIM Portfolios include reimbursement paid for this purpose.
(3) The Dreyfus Corporation ("Dreyfus") has undertaken to reduce its management
fee and/ or reimburse the other expenses of the Dreyfus Stock Index Fund if
necessary to prevent the Portfolio's aggregate expenses from exceeding 0.40%
of the Portfolio's average net assets for the fiscal year. Dreyfus may end
this undertaking on at least 180 days prior notice. In addition, Dreyfus
and/or the subadvisers to the Dreyfus Portfolios may from time to time waive
receipt of their fees and/or voluntarily assume certain expenses of these
Portfolios. During the fiscal year ending December 31, 1998, neither Dreyfus
nor the subadvisers waived any fee or reimbursed expenses.
(4) Liberty Advisory Services Corp. has voluntarily agreed to reimburse all
expenses, including management fees, in excess of the following percentage
of the average annual net assets of each of the Trust's eligible Portfolios:
1.00% for Colonial Small Cap Value Fund, Liberty All-Star Equity, and
Colonial Growth & Income; and .80% for Colonial Strategic Income and
Colonial High Yield Securities. After such reimbursements, each such
Portfolio's Management Fees, Other Expenses, and Total Expenses were as
follows: 0.00%, 1.00%, and 1.00% for the Colonial Small Cap Value Fund;
0.00%, 0.80%, and 0.80% for the Colonial High Yield Securities Fund; and
0.76%, 0.24%, and 1.00% for the Liberty All-Star Equity Portfolio.
(5) Massachusetts Financial Services Company ("MFS") has contractually agreed to
bear expenses for these Portfolios, subject to reimbursement from these
Portfolios, such that
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their "Other Expenses" shall not exceed 0.25% of their average daily net
assets during the current fiscal year. Pursuant to this agreement, the
"Other Expenses" and "Total Annual Expenses" of the MFS Utilities Portfolio
were 0.25% and 1.00%, respectively. MFS did not reimburse other expenses of
the MFS Growth with Income Portfolio during the fiscal year ended December
31, 1998.
The following chart outlines the components of your Account Value. It is
intended to help you to understand how the fees and charges under the Contract
directly and indirectly affect your Account Value and benefits. You should use
this chart in conjunction with the more complete descriptions contained in other
parts of this prospectus and in your Contract.
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PREMIUM
less a Premium Expense Charge of not more than 5.5% of each Premium,
for state premium taxes, certain federal tax liabilities,
and distribution expenses, equals
- --------------------------------------------------------------------------------
NET PREMIUM
Allocated to one or more Sub-Accounts
and/or the Fixed Account
- --------------------------------------------------------------------------------
ACCOUNT VALUE
On the Contract Date, your Account Value is equal to your initial Net Premium
minus any of the charges described below that are due on that date. Thereafter,
your Account Value may change daily, as described below.
- --------------------------------------------------------------------------------
ADJUSTMENTS TO ACCOUNT VALUE:
Over the life of your Contract, your Account Value will increase and/or decrease
as indicated below to reflect the following:
- Addition of new Net Premiums.
- Any increase due to the investment experience of the chosen Sub-Accounts.
- Addition of guaranteed interest at an annual effective rate of 4.0% (plus
any excess interest if applicable) on the portion of the Account Value
allocated to the Fixed Account.
- Addition of interest at an annual effective rate of 6.0% on the portion of
your Loan Account which serves as collateral for your preferred Contract
loans, if any.
- Addition of interest at an effective annual rate of 4.0% on the portion of
your Loan Account which serves as collateral for your other Contract
loans, if any.
- Any decrease due to the investment experience of the chosen Sub-Accounts.
- Subtraction of any amounts withdrawn.
- Subtraction of the charges listed below, as applicable.
- --------------------------------------------------------------------------------
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DAILY CHARGES
- Management fees and expenses are deducted from the share value of each
underlying Portfolio, and are reflected in the investment experience of
the corresponding Sub-Account.
- Subtraction of a daily charge equivalent to an annual rate of 0.60% of
average daily net assets from each Sub-Account for mortality and expense
risk expenses, administrative expenses, and certain other expenses.
- --------------------------------------------------------------------------------
MONTHLY CHARGES DEDUCTED FROM YOUR ACCOUNT VALUE
- Subtraction of a contract fee of $9.00 ($6.00 for Contracts with face
amounts of at least $100,000), for administrative expenses.
- Subtraction of a cost of insurance charge, reflecting the Death Benefit
under your Contract and the Account Value.
- If your Contract includes optional benefit agreements, subtraction of the
cost of those agreements.
- --------------------------------------------------------------------------------
TRANSACTION CHARGES
- Subtraction of a withdrawal charge, if you surrender your Contract,
withdraw Account Value or decrease the Face Amount of your Contract,
within ten years of issuance or any Face Amount increase. The withdrawal
charge is intended to cover state premium taxes, certain federal tax
liabilities, and distribution expenses. We waive the withdrawal charge in
certain circumstances.
- Subtraction of a withdrawal fee of up to $25 for each partial withdrawal,
for administrative expenses.
- Currently we waive the transfer fee. In the future, we may subtract a
transfer fee of up to $25 on each transfer after the first twelve in any
Contract year, for administrative expenses.
- --------------------------------------------------------------------------------
CONTRACT LOANS
- You may borrow a portion of your Account Value. A Contract loan is not
subtracted from your Account Value. However, an amount equal to the amount
of the Contract loan is transferred to the Loan Account, where it serves
as collateral for the loan.
- Interest of 6% annually is charged on Contract loans.
- Outstanding Contract loans, including unpaid interest, are subtracted from
death benefit and surrender proceeds.
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QUESTIONS AND ANSWERS ABOUT YOUR CONTRACT
These are answers to questions that you may have about some of the most
important features of your Contract. The Contract is described more fully in the
remainder of this Prospectus. Please read this Prospectus carefully. Unless
otherwise indicated, the description of the Contract contained in this
Prospectus assumes that the Contract is in force, that there is no Indebtedness,
and that current federal tax laws apply.
1. WHAT IS A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE CONTRACT?
The Contract has a Death Benefit, Account Value, and other features
similar to life insurance contracts providing fixed benefits. It is a
"flexible premium" contract because you have a great amount of
flexibility in determining when and how much Premium to pay. It is a
"variable" Contract because the Account Value and, in some circumstances,
the Death Benefit vary according to the investment performance of the
Sub-Accounts to which you have allocated your Net Premiums. The Account
Value is not guaranteed. Payment of the Death Benefit may be guaranteed
under the Contract's two Coverage Guarantees. This Contract provides you
with the opportunity to take advantage of any increase in your Account
Value, but you also bear the risk of any decrease.
2. WHO MAY PURCHASE A CONTRACT?
We will issue a Contract on the life of a prospective Insured age 0-80
who meets our underwriting standards.
3. WHAT IS THE DEATH BENEFIT?
While the Contract is in force, we will pay a Death Benefit to the
Beneficiary upon the death of the Insured. You may choose from two Death
Benefit Options available under this Contract: Option 1 and Option 2.
Under Option 1, the Death Benefit will be the greater of the Face Amount
or a percentage of the Account Value. Under Option 2, the Death Benefit
will be the greater of the Face Amount plus the Account Value or a
percentage of the Account Value. You may change your choice of Death
Benefit Option while this Contract is in force as specified in the
Contract. Before we pay the Death Benefit to the Beneficiary, however, we
will subtract an amount sufficient to repay any outstanding Indebtedness
and to pay any due and unpaid charges. In addition, if you choose Option
1 and you withdraw part of your Account Value, we will reduce the Face
Amount as described in this Prospectus on pages 36-37.
4. WHAT ARE THE GUARANTEED COVERAGE FEATURES OF THE CONTRACT?
Unless otherwise required in your state, this Contract includes three
Coverage Guarantees:
Three-Year Guaranteed Coverage;
Limited Guaranteed Coverage; and
Lifetime Guaranteed Coverage.
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While any Coverage Guarantee is in effect, and you have no outstanding
Indebtedness, your Contract will not lapse if the Cash Value is
insufficient to pay the Monthly Deduction.
Each Coverage Guarantee remains in effect until the date specified in
your Contract, provided that you pay sufficient Premium. Three-Year
Guaranteed Coverage terminates on the third Contract Anniversary. Limited
Guaranteed Coverage terminates automatically at the later of the
Insured's age 75 or 15 years after the Contract Date. Lifetime Guaranteed
Coverage does not have an automatic termination date. Accordingly, if you
pay sufficient Premium, this Coverage Guarantee will stay in effect until
the Insured dies. The amount of Premiums required to keep each Coverage
Guarantee in effect differs, as explained in the Contract and page 18 of
this Prospectus. If you do not pay sufficient Premiums, one or more
Coverage Guarantees will terminate. If Limited or Lifetime Guaranteed
Coverage ends, you will be given a fixed period of time to pay sufficient
additional Premiums to restore the guarantee. Even if all of the
Guarantees terminate, however, your Contract will stay in force provided
that the Surrender Value is sufficient to pay the Monthly Deductions as
they come due. In Massachusetts, Lifetime Guaranteed Coverage is not
available and Limited Guaranteed Coverage ends five years after the
Contract Date. The Coverage Guarantees are explained in more detail in
"Guaranteed Coverage Monthly Premium" on page 18 below.
5. HOW WILL THE ACCOUNT VALUE OF MY CONTRACT BE DETERMINED?
Your Net Premiums are invested in one or more of the Sub-Accounts or
allocated to the Fixed Account, as you instruct us. Your Account Value is
the sum of the values of your interests in the Sub-Accounts, plus the
values in the Fixed Account and the Loan Account. Your Account Value will
depend on the investment performance of the Sub-Accounts and the amount
of interest we credit to the Fixed Account and the Loan Account, as well
as the Net Premiums paid, partial withdrawals, and charges assessed. We
do not guarantee a minimum Account Value on the portion of your Net
Premiums allocated to the Variable Account.
6. WHAT ARE THE PREMIUMS FOR THIS CONTRACT?
You have considerable flexibility as to the timing and amount of your
Premiums. You may pay Premiums during the Insured's lifetime from the
Contract Date until the Contract Anniversary following the Insured's
100th birthday. You may pay Planned Premiums monthly, quarterly,
semiannually or annually. You may change the timing of your Planned
Premiums at any time. You may also pay unscheduled Premiums. You are not
required to pay any level of Premium. However, to take advantage of the
Coverage Guarantees under your Contract, you must pay the cumulative
Guaranteed Coverage Monthly Premium due. We may refuse any Premium that
would cause the Contract to lose its status as a life insurance contract
under the Tax Code. We may require you to provide evidence of
insurability, if an increase in the Death Benefit would result from an
unscheduled Premium.
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7. CAN I INCREASE OR DECREASE MY CONTRACT'S FACE AMOUNT?
Yes, you have considerable flexibility to increase or decrease your
Contract's Face Amount. After the first Contract Year, once each Contract
Year you may request an increase and/or a decrease by sending us a
written request. Your requested increase must be at least $25,000. If you
request an increase in Face Amount, we may require that you provide us
with evidence of insurability that meets our underwriting standards. An
increase in the Face Amount of your Contract will increase the charges
deducted from your Account Value and will result in an additional
Withdrawal Charge for the amount of the increase. If you request a
decrease in the Face Amount of your Contract, we will charge a portion of
the Withdrawal Charge in proportion to the percentage decrease in Face
Amount. We will not decrease the Face Amount of your Contract below
$50,000. For more detail, see "Change in Face Amount", on page 32.
8. WHEN IS THE CONTRACT EFFECTIVE?
If we approve your application, your Contract generally will be effective
as of the later of the date that we receive your initial Premium and the
date we approve your application. The effective date of your Contract
will be designated your Contract's Contract Date. If we have not
previously received your initial Premium, when we deliver your Contract
we will require you to pay Premium to place your insurance in force.
While your application is in underwriting, if you have paid your initial
Premium, we may provide you with temporary life insurance coverage in
accordance with the terms of our conditional receipt.
If we approve your application, you will earn interest and investment
return on your Net Premiums from the Contract Date. We will also begin to
deduct the Contract charges as of the Contract Date. We may temporarily
allocate a portion of your initial Net Premium to our Fixed Account until
we allocate it to the Sub-Accounts in accordance with the procedures
described in the Answer to Question 9.
If we reject your application, we will not issue you a Contract. We will
return any Premiums you have paid, adding interest at the rate required
in your state. We will not subtract any contract charges from the amount
we refund to you.
9. HOW ARE MY NET PREMIUMS ALLOCATED?
Before your Premiums are allocated to the Account Value, we deduct a
Premium Expense Charge from each Premium. The current Premium Expense
Charge is 5.5% of the total Premiums paid in each Contract Year up to
twelve times the Lifetime Guaranteed Coverage Monthly Premium and 3.5% of
any Premium in excess of that amount. This charge covers a portion of our
distribution expenses, state premium tax expenses and certain federal tax
liabilities associated with the receipt of Premiums. For more detail, see
"Premium Expense Charge" on page 39. The remaining amount is called the
Net Premium.
When you apply for the Contract, you specify in your application how to
allocate your Net Premiums among the Sub-Accounts and the Fixed Account.
You must use whole number percentages and the total allocations must
equal 100%. We allocate any subsequent Net Premiums in those percentages
until you give us new written
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instructions. You may allocate your Net Premiums to up to ten
Sub-Accounts and the Fixed Account. You must allocate at least five
percent of your Net Premiums to each option that you choose. In the
future, we may change these limits.
We generally allocate your initial Net Premium to the Sub-Accounts and
the Fixed Account as of the Contract Date. Subsequent Net Premiums
generally will be allocated as of the date your Net Premium is received
in our Service Center. Until the fifth day after the end of the right to
return period, however, we will not allocate more than $2,000 of your Net
Premiums to the Sub-Accounts. Prior to that date, if your Premium
allocation instructions would require us to allocate more than $2,000 to
the Sub-Accounts, we will allocate the first $2,000 to the Sub-Accounts
in accordance with your instructions and temporarily allocate the excess
to the Fixed Account. We generally will then reallocate that excess
amount (including any interest) among the Sub-Accounts and the Fixed
Account, in accordance with your instructions, on the fifteenth day after
the Delivery Date. This period may be longer or shorter, depending on the
length of the right to return period in your state, as it will always
equal five days plus the number of days in the right to return period in
your state. We may increase or decrease this temporary allocation limit
at any time.
You may transfer Account Value among the Sub-Accounts and the Fixed
Account while the Contract is in force, by writing to us or calling us at
1-800-451-7065. We currently are not charging a transfer fee on all
transfers. Under the Contract, however, we may charge a fee of $25 per
transfer on each transfer after the first twelve transfers in any
Contract Year, including Dollar Cost Averaging and Asset Rebalancing
transfers. We may change the number of free transfers at any time,
subject to the limits described in "Transfer Fee" on page 44, but the
transfer fee will never exceed $25 per transfer. While you may also
transfer amounts from the Fixed Account, certain restrictions apply. For
more detail, see "Transfer of Account Value" and "Transfers Authorized by
Telephone", on pages 21 and 22.
You may also use our automatic Dollar Cost Averaging program or our Asset
Rebalancing program. Under the Dollar Cost Averaging program, each month
amounts are automatically transferred to the Sub-Accounts at regular
intervals from the account of your choice. For more detail, see "Dollar
Cost Averaging", on page 22.
Under the Asset Rebalancing program, you periodically can readjust the
percentage of your Account Value allocated to each Sub-Account to
maintain a pre-set level. Investment results will shift the balance of
your Account Value allocations. If you elect Asset Rebalancing, we
periodically transfer your Account Value back to the specified
percentages at the frequency that you specify. For more detail, see
"Asset Rebalancing", on page 23.
10. WHAT ARE MY INVESTMENT CHOICES UNDER THE CONTRACT?
You can allocate and reallocate your Account Value among the
Sub-Accounts, each of which in turn invests in a single Portfolio. Under
the Contract, the Variable Account currently invests in the following
Portfolios:
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AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Capital Appreciation Fund
AIM V.I. Government Securities Fund
AIM V.I. International Equity Fund
DREYFUS
Dreyfus Stock Index Fund
Dreyfus Variable Investment Fund, Capital Appreciation Portfolio
Dreyfus Socially Responsible Growth Fund, Inc.
LIBERTY VARIABLE INVESTMENT TRUST
Colonial Small Cap Value Fund, Variable Series
Colonial High Yield Securities Fund, Variable Series
Colonial Strategic Income Fund, Variable Series
Colonial Growth & Income Fund, Variable Series
Liberty All-Star Equity Fund, Variable Series
MFS VARIABLE INSURANCE TRUST
MFS Emerging Growth Series
MFS Research Series
MFS Utilities Series
MFS Growth with Income Series
STEIN ROE VARIABLE INVESTMENT TRUST
Stein Roe Balanced Fund, Variable Series
Stein Roe Growth Stock Fund, Variable Series
Stein Roe Money Market Fund, Variable Series
Each Portfolio holds its assets separately from the assets of the other
Portfolios. Each Portfolio has distinct investment objectives and
policies, which are described in the accompanying Prospectuses for the
Portfolios.
In addition, the Fixed Account is available.
11. MAY I TAKE OUT A CONTRACT LOAN?
Yes, you may borrow money from us using your Contract as security for the
loan. You may borrow up to 90% of the Cash Value of your Contract. In
some instances Contract Loans are treated as distributions for federal
tax purposes. Therefore, you may incur tax liabilities if you borrow a
Contract Loan. For more detail, see "Contract Loans", on pages 34-35, and
"Contracts Which Are MECs", on page 49.
12. WHAT ARE THE CHARGES DEDUCTED FROM MY PREMIUMS AND MY ACCOUNT VALUE?
PREMIUM EXPENSE CHARGE. As noted above, we deduct a Premium Expense
Charge from each Premium before it is allocated to the Account Value.
This charge currently is 5.5% of the total Premiums paid in each Contract
Year up to twelve times the Lifetime Guaranteed Coverage Monthly Premium
and 3.5% of any Premium in excess of that amount. We may change this
charge at any time, but it will never exceed
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5.5% of each Premium. This charge covers a portion of our state premium
tax expenses, certain federal tax expenses associated with the receipt of
premium, and our distribution expenses.
SEPARATE ACCOUNT EXPENSE CHARGE. On each Valuation Day we deduct the
Separate Account Expense Charge from the Sub-Accounts to compensate
Liberty Life for its expenses incurred and certain risks assumed under
the Contracts. The Separate Account Expense Charge is calculated at an
annual rate equal to .60% of average daily net assets.
MONTHLY DEDUCTION. We also deduct a monthly deduction from your Account
Value for the cost of insurance charge, the Contract Fee, and the cost of
any benefit Agreement. The cost of insurance charge covers our
anticipated mortality costs. The Contract Fee covers certain
administrative expenses in connection with the Contracts. We allocate the
monthly deduction pro rata among your Account Value in the Sub-Accounts
and the Fixed Account.
TRANSFER FEE. We currently waive the transfer fee on all transfers. Under
the Contract, however, we may charge a fee of $25 per transfer on each
transfer, including Portfolio Rebalancing and Dollar Cost Averaging
transfers, after the 12th transfer in any Contract Year. We may change
the number of free transfers at any time, subject to the limits described
in "Transfer Fee" on page 44, but the transfer fee will never exceed $25.
WITHDRAWAL CHARGE. We impose a withdrawal charge to cover a portion of
our premium tax expenses and a portion of the sales expenses we incur in
distributing the Contracts. These sales expenses include agents'
commissions, advertising, and the printing of Prospectuses. The
withdrawal charge is described in the answer to Question 13 below and in
"Withdrawal Charge" on page 41. We also impose a withdrawal fee of up to
$25 on each partial withdrawal after the first in each Contract Year. The
withdrawal fee is used to cover our administrative expenses in processing
your partial withdrawal request.
OTHER. In addition to our charges under the Contract, each Portfolio
deducts amounts from its assets to pay its investment advisory fee and
other expenses. The Prospectuses for the Portfolios describe their
respective charges and expenses in more detail. We may receive
compensation from the investment advisers or administrators of the
Portfolios. Such compensation will be consistent with the services we
provide or the cost savings resulting from the arrangement and therefore
may differ between Portfolios.
FOR MORE INFORMATION. The charges assessed under the Contract are
summarized in the table entitled "Contract Charges and Deductions" on
pages 3-4 and described in more detail in "Deductions and Charges",
beginning on page 39.
13. DO I HAVE ACCESS TO THE VALUE OF MY CONTRACT?
While the Contract is in force, you may surrender your Contract for the
Surrender Value, which is the Cash Value less any Indebtedness, and
unpaid charges. Upon surrender, life insurance coverage under the
Contract will end. You may also withdraw part of your Account Value
through a partial withdrawal. You may not
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withdraw less than $250 at one time. Currently, if the Account Value
after any partial withdrawal would be less than $500, we may treat your
request as a request to surrender your Contract. We may waive or change
this limit. We do not permit any partial withdrawals during the first
Contract Year. For more detail, see "Amount Payable on Surrender of the
Contract" and "Partial Withdrawals", on pages 35 and 36.
We may deduct a withdrawal charge and/or a withdrawal fee on a surrender
or a partial withdrawal.
WITHDRAWAL CHARGE. If you surrender your Contract, take a partial
withdrawal or decrease the Face Amount of your Contract, we may deduct a
withdrawal charge. The withdrawal charge on a full surrender equals the
amount shown in the withdrawal charge table in your Contract, plus any
additional withdrawal charge due to increases in the Face Amount of your
Contract. The amount of the withdrawal charge decreases over time.
Generally, the initial amount of the withdrawal charge is equal to the
Face Amount of your Contract multiplied by the applicable rate per
thousand dollars of Face Amount. The applicable rate depends on the
Insured's issue age, sex and underwriting class. For example, if the
Insured is age 45 when your Contract is issued, the applicable rates per
thousand, for both the Preferred and Standard rate classes, are as
follows:
<TABLE>
<S> <C>
Male Non-Smoker $ 13.68
Male Smoker $ 21.96
Female Non-Smoker $ 9.72
Female Smoker $ 13.32
Unisex Non-Smoker $ 12.84
Unisex Smoker $ 20.16
</TABLE>
The rates for each category are greater or lesser according to the age of
the Insured when your Contract is issued. The maximum rate for each
category is $50.00 per $1,000 of Face Amount.
If you surrender your Contract after ten Contract Years have elapsed, we
will not charge a withdrawal charge (unless you have increased the Face
Amount of your Contract, as explained below). Before that time, we
determine the applicable withdrawal charge by multiplying the initial
withdrawal charge on your Contract by the appropriate withdrawal charge
percentage for the Contract Year in which the surrender occurs.
We also charge a withdrawal charge on partial withdrawals. The applicable
withdrawal charge will be a pro rata share of then current withdrawal
charge on a complete surrender. If you choose Death Benefit Option 1, the
withdrawal charge on a partial withdrawal will be based on the percentage
by which the partial withdrawal reduces the Face Amount of your Contract.
If you choose Death Benefit Option 2, you will pay no withdrawal charge
on a partial withdrawal, because partial withdrawals do not reduce the
Face Amount of Contracts under Option 2.
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If you increase the Face Amount of your Contract, we will determine an
additional withdrawal charge amount applicable to the amount of the
increase. We calculate the additional withdrawal charge using the same
procedures described above, except that we use the Insured's age and
underwriting class at the time of the increase, rather than at the time
your Contract was issued. We will include in your Contract a table
showing the withdrawal charge applicable to your Contract.
If you decrease the Face Amount of your Contract, we will charge a
Withdrawal Charge in proportion to the decrease. The amount charged will
equal the Withdrawal Charge then applicable to a full surrender,
multiplied by the percentage decrease in the Face Amount. The amount
charged will be subtracted from your Account Value.
We also waive the withdrawal charge for qualified medical stays. This
provision can differ by state, so you should refer to your Contract.
WITHDRAWAL FEE. In addition to the withdrawal charge, we may charge a
withdrawal fee on any partial withdrawal after the first in any Contract
Year. The withdrawal fee will equal the lesser of $25 or two percent of
the amount withdrawn. The withdrawal fee does not apply to full
surrenders. The withdrawal fee is intended to compensate us for our
administrative costs in processing your partial withdrawal request.
For more detail, see "Withdrawal Charge", on pages 41-42.
14. WHAT ARE THE TAX CONSEQUENCES OF BUYING THIS CONTRACT?
Your Contract is structured to meet the definition of a life insurance
contract under the Tax Code. We may need to limit the amount of Premiums
you pay under the Contract to ensure that your Contract continues to meet
that definition.
Current federal tax law generally excludes all death benefits from the
gross income of the beneficiary of a life insurance policy. In addition,
you generally are not subject to taxation on any increase in the Account
Value until it is withdrawn. Generally, you will be taxed on surrender
proceeds and the proceeds of any partial withdrawals only if those
amounts, when added to all previous distributions, exceed the total
Premiums paid. Amounts received upon surrender or withdrawal in excess of
Premiums paid will be treated as ordinary income.
In some circumstances, your Contract will be considered a "modified
endowment contract", which is a form of life insurance contract under the
Tax Code. Special rules govern the tax treatment of modified endowment
contracts. Depending on the amount and timing of your Premiums, your
Contract may meet that definition. Under current tax law, death benefit
payments under modified endowment contracts, like death benefit payments
under other life insurance contracts, generally are excluded from the
gross income of the beneficiary. Withdrawals and Contract Loans, however,
are treated differently. Amounts withdrawn and Contract Loans are treated
first as income, to the extent of any gain, and then as a return of
Premium. The income portion of the distribution is includable in your
taxable income. Also, an additional ten percent penalty tax is generally
imposed on the taxable portion of amounts received before age 59 1/2. For
more information on the tax treatment of the Contract, see "Federal Tax
Considerations", beginning on page 46, and consult your tax adviser.
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15. CAN I RETURN THIS CONTRACT AFTER IT HAS BEEN DELIVERED?
In many states, you may cancel your Contract by returning it to us within
ten days after you receive it. In some states, however, this right to
return period may be longer, as provided by state law. If you return your
Contract, the Contract terminates and, in most states, we will pay you an
amount equal to your Premiums. Since state laws differ as to the
consequences of returning a Contract, you should refer to your Contract
for specific information about your circumstances.
16. WHEN DOES COVERAGE UNDER THE CONTRACT END?
Your Contract provides Three-Year Guaranteed Coverage, Limited Guaranteed
Coverage and Lifetime Guaranteed Coverage, which you can keep in effect
for the period specified in your Contract by paying sufficient Premiums.
Under each Coverage Guarantee, if you do not have any outstanding
Indebtedness and your total Premiums at least equal the applicable
Guaranteed Coverage Monthly Premiums (net of any partial withdrawals),
your Contract will not lapse during the applicable coverage period,
regardless of changes in the Account Value. Your Contract will terminate
if you voluntarily surrender your Contract. If no Coverage Guarantee is
in effect, your Contract may also terminate if on a Monthly Date the
Surrender Value is insufficient to pay the Monthly Deduction and you do
not pay an amount sufficient to keep the Contract in force by the end of
the 61-day Grace Period.
17. CAN I GET AN ILLUSTRATION TO HELP ME UNDERSTAND HOW CONTRACT VALUES
CHANGE WITH INVESTMENT EXPERIENCE?
At your request we will furnish you with a free, personalized
illustration of Account Values, Surrender Values and Death Benefits. The
illustration will be personalized to reflect the proposed Insured's age,
sex, underwriting classification, Planned Premiums, and any available
additional benefit agreements that you requested. (See "Optional
Insurance Benefits," at pages 32-33 below.) The illustrated Account
Values, Surrender Values and Death Benefits will be based on certain
hypothetical assumed rates of return for the Variable Account. Your
actual investment experience probably will differ, and as a result the
actual values under your Contract at any time may be higher or lower than
those illustrated. The personalized illustrations will follow the
methodology and format of the hypothetical illustrations that we filed
with the SEC in the registration statement.
PURCHASE OF CONTRACT AND ALLOCATION OF NET PREMIUMS
APPLICATION FOR A CONTRACT. You may apply to purchase a Contract by
submitting a written application to us through one of our authorized sales
representatives. We will not issue Contracts to insure people who are older than
age 80. Before we issue a Contract, we will require you to submit evidence of
insurability satisfactory to us. Acceptance of your application is subject to
our underwriting rules. We reserve the right to reject your application for any
lawful reason. If we do not issue a Contract to you, we will return your Premium
to you. We reserve the right to change the terms or conditions of your Contract
to comply with
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differences in applicable state law. Variations from the information appearing
in this Prospectus due to individual state requirements are described in
supplements which are attached to this Prospectus or in endorsements to the
Contract, as appropriate.
In general, we will deliver your Contract when (1) we have received your
initial Premium and (2) we have determined that your application meets our
underwriting requirements. The Contract Date will be the effective date of
insurance coverage under your Contract. We use the Contract Date to determine
Contract Anniversaries, Contract Years, and Monthly Dates.
We will not accept your initial Premium with your application if the
requested Face Amount of your Contract exceeds our then-current limit. In other
cases, you may choose to pay the initial Premium with your application. If you
did not submit your initial Premium with your application, when we deliver your
Contract we will require you to pay sufficient Premium to place your insurance
in force.
If we approve your application, your Contract generally will be effective as
of the later of the date that we receive your initial Premium and the date we
approve your application. In our discretion, we may permit an earlier Contract
Date. While your application is in underwriting, if you have paid your initial
Premium we may provide you with temporary life insurance coverage in accordance
with the terms of our conditional receipt.
If we approve your application, you will earn interest and/or investment
return on your Net Premium from the Contract Date. We will also begin to deduct
the Contract charges as of the Contract Date. We may temporarily allocate a
portion of your initial Net Premium to our Fixed Account until we allocate it to
the Sub-Accounts and the Fixed Account in accordance with the procedures
described in the "Allocation of Net Premiums" on page 19 below.
If we reject your application, we will not issue you a Contract. We will
return any Premium you have paid, adding interest at the rate required in your
state. We will not subtract any contract charges from the amount we refund to
you.
PREMIUMS. You must pay an initial Premium to purchase a Contract. You may
pay additional Premiums during the Insured's lifetime from the Contract Date
until the Contract Anniversary following the Insured's 100th birthday. You may
pay Planned Premiums at the intervals selected in your application. You may
change the amount or interval of your Planned Premiums at any time by written
request. The amount of each Planned Premium must at least equal our minimum. We
also reserve the right to limit the amount of any increase in a Planned Premium.
You may pay unscheduled Premiums, provided the payment is at least $50.00, and
the Premium will not disqualify the Contract as a life insurance contract under
the Tax Code. If any unscheduled Premium increases the Death Benefit by more
than it increases the Account Value, we will require evidence of insurability
satisfactory to us.
While your Contract will show a Planned Premium amount, you are not required
to pay Planned Premiums. Your Contract will not lapse merely because you did not
pay a Planned Premium.
Even if you pay all of the Planned Premiums, your Contract nevertheless may
enter the Grace Period and thereafter lapse if no Coverage Guarantee is in
effect and the Surrender Value is no longer enough to cover the Monthly
Deductions. However, paying Planned Premiums can help to keep your Contract in
force if your payments at least equal the applicable Guaranteed Coverage
Premiums.
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If you owe any Indebtedness under the Contract, we will treat any
unscheduled Premium as a repayment of the Indebtedness and not as additional
Premium. You may pay Premiums at our Service Center or to an authorized agent.
MODIFIED ENDOWMENT CONTRACT. Under certain circumstances, a Contract could
be classified as a "modified endowment contract", a category of life insurance
contract defined in the Tax Code. If your Contract were to become a modified
endowment contract, distributions and loans from the Contract could result in
current taxable income for you, as well as other adverse tax consequences. These
tax consequences are described in more detail in "Tax Matters--Modified
Endowment Contracts", on pages 49-50.
Your Contract could be deemed to be a modified endowment contract if, among
other things, you pay too much Premium or the Death Benefit is reduced. We will
monitor the status of your Contract and advise you if you need to take action to
prevent your Contract from being deemed a modified endowment contract. If you
pay a Premium that would result in your Contract being deemed a modified
endowment contract, we will notify you and allow you to request a refund of the
excess Premium, or other action, to avoid having your Contract being deemed a
modified endowment contract. If, however, you choose to have your Contract
deemed a modified endowment contract, we will not refund the Premium.
If you replace a modified endowment contract issued by another insurer with
a Contract, your Contract will also be deemed to be a modified endowment
contract. Our ability to determine whether a replaced contract issued by another
insurer is a modified endowment contract is based solely on the sufficiency of
the contract data we receive from the other insurer. We do not consider
ourselves to be liable to you if that data is insufficient to accurately
determine whether the replaced contact is a modified endowment contract. You
should discuss this issue with your tax adviser if it pertains to your
situation.
GUARANTEED COVERAGE MONTHLY PREMIUM. This Contract includes three Coverage
Guarantees:
Three-Year Guaranteed Coverage;
Limited Guaranteed Coverage; and
Lifetime Guaranteed Coverage
These Coverage Guarantees are intended to enable you to ensure that your
Contract will remain in force during a specified period regardless of changes in
the Account Value. The specified period for Three-Year Guaranteed Coverage is
the first three Contract Years. The specified period for Limited Guaranteed
Coverage is the period from the Contract Date until the later of (a) the
Insured's seventy-fifth birthday or (b) the fifteenth Contract Anniversary.
Lifetime Guaranteed Coverage will remain in effect until the Insured's death,
provided that sufficient Guaranteed Coverage Monthly Premiums are paid as
described below.
As a general rule, your Contract will enter the Grace Period, and may lapse,
if the Surrender Value is not sufficient to pay a Monthly Deduction when it is
due. Under each Coverage Guarantee, however, we guarantee that regardless of
declines in your Account Value, your Contract will not enter the Grace Period as
long as you have no outstanding Indebtedness and you have paid sufficient total
Premiums. To keep a Coverage Guarantee in effect, your total Premiums must at
least equal: (a) the total of the applicable Guaranteed Coverage Monthly
Premiums for each month since the Contract Date; plus (b) the amount of
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any partial withdrawals. However, if Lifetime Guaranteed Coverage is still in
effect and the Contract is still in force when the Insured reaches age 100, we
will not require you to pay additional premium, but the Death Benefit thereafter
will be the greater of the Face Amount or 101% of the Account Value. The
Guaranteed Coverage Monthly Premium for each Coverage Guarantee under your
Contract is set forth on the Contract Information Page. The Guaranteed Coverage
Monthly Premium for each Coverage Guarantee is based in the Insured's age at
issue, sex and rate class, your Contract's Face Amount and Death Benefit Option,
any additional benefit agreement, and the duration of the Coverage Guarantee. If
you increase or decrease the Face Amount of your Contract, change your Death
Benefit Option, or add a benefit agreement, we will adjust the Guaranteed
Coverage Monthly Premium amount applicable after the change.
If at any time your total Premiums are insufficient to keep the Limited or
Lifetime Coverage Guarantee in effect, we will notify you and you will have a
fixed period of time, currently sixty months, to satisfy the Premium shortfall.
If you do not, that Coverage Guarantee will end and it cannot be reinstated. If
the Three-Year Coverage Guarantee terminates, it may not be reinstated. If all
of the Coverage Guarantees are no longer in effect, your Contract will stay in
force provided that the Surrender Value is sufficient to pay the Monthly
Deductions as they come due. We may change the amount of time you have to
reinstate a Coverage Guarantee, but we will not reduce it to fewer than twelve
months. For more detail about the circumstances in which the Contract will
lapse, see "Termination and Grace Period", on page 38.
In some states, the Coverage Guarantees may be unavailable or the terms may
differ. In Massachusetts, Lifetime Guaranteed Coverage is not available and
Limited Guaranteed Coverage ends five years after the Contract Date.
ALLOCATION OF NET PREMIUMS. We generally allocate your initial Net Premium
to the Sub-Accounts and the Fixed Account as of the Contract Date. Subsequent
Net Premiums generally will be allocated as of the date your Net Premium is
received in our Service Center. Until the fifth day after the end of the right
to return period, however, we will not allocate more than $2,000 of your Net
Premiums to the Sub-Accounts. Before then, if your Premium allocation
instructions would require us to allocate more than $2,000 to the Sub-Accounts,
we will allocate the first $2,000 to the Sub-Accounts in accordance with your
instructions and temporarily allocate the excess to the Fixed Account. We
generally will then reallocate that excess amount (including any interest) among
the Sub-Accounts and the Fixed Account, in accordance with your instructions, on
the fifteenth day after the Delivery Date. This period may be longer, depending
on the length of the right to return period in your state, as it will always
equal five days plus the number of days in the right to return period in your
state. The amount temporarily allocated to the Fixed Account will earn interest
until it is reallocated to the Sub-Accounts. In our discretion, in the future we
may increase or decrease the temporary allocation limit or otherwise change our
procedures for allocating Net Premiums received before the end of the right to
return period. We will not change the temporary allocation provisions of your
Contract once we have delivered it to you.
If there are outstanding requirements when we issue your Contract that
prevent us from placing your Contract in force, your Premiums will not be
allocated until all requirements are satisfied. In addition, if we permit you to
select a Contract Date before receipt of your initial
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Net Premium and approval of your application, we may initially allocate your
entire Net Premium to our Fixed Account until the date on which we otherwise
would have initially allocated your Net Premiums to the Sub-Accounts.
You must specify your allocation percentages in your Contract application.
Percentages must be in whole numbers and the total allocation must equal 100%.
We will allocate your Net Premiums in those percentages, until you give us new
allocation instructions.
You initially may allocate your Account Value to up to ten Sub-Accounts and
the Fixed Account. Moreover, you may not allocate less than five percent of your
Account Value to any one option. You subsequently may add or delete Sub-Accounts
and/or the Fixed Account from your allocation instructions without regard to
this limit. Your allocation to the Fixed Account, if any, does not count against
this limit. In the future we may change these limits.
Excepting your initial Premium, we generally will allocate your Net Premiums
to the Sub-Accounts and the Fixed Account as of the date we receive your Premium
in our Service Center. If an unscheduled Premium requires underwriting, however,
we may delay allocation until after we have completed underwriting. We will
follow the allocation instructions in our file, unless you send us new
allocation instructions with your Premium. If you have any outstanding
Indebtedness, we will apply any unscheduled Premium to your outstanding loan
balance until it is fully repaid, unless you instruct us otherwise in writing.
We will make all valuations in connection with the Contract, other than the
initial Premium and other Premiums requiring underwriting, on the date we
receive your Premium or request for other action at our Service Center, if that
date is a Valuation Day. Otherwise we will make that determination on the next
succeeding day which is a Valuation Day.
ACCOUNT VALUE. Your Account Value is the sum of the value of your interest
in the Sub-Accounts you have chosen, plus your Fixed Account balance, plus your
Loan Account balance. Your Account Value may increase or decrease daily to
reflect the performance of the Sub-Accounts you have chosen, the addition of
interest credited to the Fixed Account and the Loan Account, the addition of Net
Premium, and the subtraction of partial withdrawals and charges assessed. There
is no minimum guaranteed Account Value.
On the Contract Date, your Account Value will equal the initial Net Premium
less the Monthly Deduction for the first Contract Month.
On each Valuation Day, the value of your interest in a particular
Sub-Account will equal:
(1) The total value of your Accumulation Units in the Sub-Account; plus
(2) Any Net Premium received from you and allocated to the Sub-Account
during the current Valuation Period; plus
(3) Any Account Value transferred to the Sub-Account during the current
Valuation Period; minus
(4) Any Account Value transferred from the Sub-Account during the current
Valuation Period; minus
(5) Any amounts withdrawn by you (plus the applicable withdrawal charge and
withdrawal fee) from the Sub-Account during the current Valuation Period;
minus
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(6) The portion of any Monthly Deduction allocated to the Sub-Account during
the current Valuation Period for the Contract Month following the Monthly
Date.
On each Valuation Day, your Fixed Account balance will equal:
(1) The Fixed Account balance on the previous Valuation Day; plus
(2) Any Net Premium allocated to it; plus
(3) Any Account Value transferred to it from the Sub-Accounts or the Loan
Account; plus
(4) Interest credited to it; minus
(5) Any Account Value transferred out of it; minus
(6) Any amounts withdrawn by you (plus the applicable withdrawal charge);
minus
(7) The portion of any Monthly Deduction allocated to the Fixed Account.
All values under the Contract equal or exceed those required by law.
Detailed explanations of methods of calculation are on file with the appropriate
regulatory authorities.
ACCUMULATION UNIT VALUE. The Accumulation Unit Value for each Sub-Account
will vary to reflect the investment experience of the corresponding Portfolio
and the deduction of certain expenses. We will determine the Accumulation Unit
Value for each Sub-Account on each Valuation Day. A Sub-Account's Accumulation
Unit Value for a particular Valuation Day will equal the Sub-Account's
Accumulation Unit Value on the preceding Valuation Day multiplied by the Net
Investment Factor for that Sub-Account for the Valuation Period then ended. The
Net Investment Factor for each Sub-Account is: (1) divided by (2) minus (3),
where: (1) is the sum of (a) the net asset value per share of the corresponding
Portfolio at the end of the current Valuation Period and (b) the per share
amount of any dividend or capital gains distribution by that Portfolio, if the
ex-dividend date occurs in that Valuation Period; (2) is the net asset value per
share of the corresponding Portfolio at the beginning of the Valuation Period;
and (3) is an amount equal to the Separate Account Expense Charge imposed during
the Valuation Period.
You should refer to the Prospectuses for the Portfolios, which accompany
this Prospectus, for a description of how the assets of each Portfolio are
valued, since that determination directly affects the investment experience of
the corresponding Sub-Account and, therefore, your Account Value.
TRANSFER OF ACCOUNT VALUE. While the Contract is in force, you may transfer
Account Value among the Fixed Account and Sub-Accounts in writing or by
telephone. You may not request a transfer of less than $250 from a single
Sub-Account, unless the amount requested is your entire balance in the
Sub-Account. If less than $500 would remain in a Sub-Account after a transfer,
we may require you to transfer the entire balance of the Sub-Account. We reserve
the right to change these minimums.
We currently are waiving the transfer fee on all transfers, including Dollar
Cost Averaging and Asset Rebalancing transfers. Under the Contract, however, we
may charge a maximum transfer fee of $25 on each transfer after the first twelve
transfers in any Contract Year. We may impose a limit on the number of free
transfers or change that number, at any time.
We currently do not limit the number of Sub-Accounts to which you may
allocate your Account Value, other than in your initial allocation. We may
impose a limit in the future.
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As a general rule, we only make transfers on days when we and the NYSE are
open for business. If we receive your request on one of those days, we will make
the transfer that day. Otherwise, we will make the transfer on the first
subsequent day on which we and the NYSE are open. Transfers pursuant to a Dollar
Cost Averaging or Asset Rebalancing program will be made at the intervals you
have selected in accordance with the procedures and requirements we establish.
You may make transfers from the Fixed Account to the Sub-Accounts only
during the 60 days after each Contract Anniversary. You must submit your request
no later than the end of this 60-day period. In addition, in each Contract Year,
the largest amount that you may transfer out of the Fixed Account is the greater
of: (a) the amount transferred in the prior Contract Year; (b) twenty percent of
the current Fixed Account balance; or (c) the entire balance if it is not more
than $250. The Contract permits us to defer transfers from the Fixed Account for
up to six months from the date you ask us.
We will not charge a transfer fee on a transfer of all of the Account Value
in the Sub-Accounts to the Fixed Account.
TRANSFERS AUTHORIZED BY TELEPHONE. You may make transfers by telephone,
unless you advise us in writing not to accept telephonic transfer instructions.
The cut off time for telephone transfer requests is 4:00 p.m. Eastern time.
Timely requests will be processed on that day at that day's price.
We use procedures that we believe provide reasonable assurances that
telephone authorized transfers are genuine. For example, we tape telephone
conversations with persons purporting to authorize transfers and request
identifying information. Accordingly, we disclaim any liability for losses
resulting from allegedly unauthorized telephone transfers. However, if we do not
take reasonable steps to help ensure that a telephone authorization is valid, we
may be liable for such losses. We may suspend, modify or terminate the telephone
transfer privilege at any time without notice.
DOLLAR COST AVERAGING. Under our automatic Dollar Cost Averaging program,
while the Contract is in force you may authorize us to transfer a fixed dollar
amount each month to the Sub-Accounts of your choice in accordance with the
procedures and requirements that we establish. The transfers will continue until
you instruct us to stop, or until your chosen source of transfer payments is
exhausted. We currently are waiving the contractual transfer fee on all
transfers, including Dollar Cost Averaging transfers. If we limit the number of
free transfers, however, transfers under the Dollar Cost Averaging Program will
count toward that limit. See "Transfer Fee" on page 44.
Your request to participate in this program will be effective when we
receive your completed application at our Service Center. Call or write us for a
copy of the application and additional information concerning the program. We
may change, terminate, limit or suspend Dollar Cost Averaging at any time.
The theory of dollar cost averaging is that by spreading your investment
over time, you may be able to reduce the effect of transitory market conditions
on your investment. In addition, because a given dollar amount will purchase
more units when the unit prices are relatively low rather than when the prices
are higher, in a fluctuating market, the average cost per unit may be less than
the average of the unit prices on the purchase dates. However, participation in
this program does not assure you of a greater profit from your purchases
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under the program; nor will it prevent or necessarily reduce losses in a
declining market. Moreover, other investment programs may not work in concert
with Dollar Cost Averaging. Therefore, you should monitor your use of these
programs, as well as other transfers or withdrawals, while Dollar Cost Averaging
is being used. You may not participate in both the Dollar Cost Averaging and
Asset Rebalancing Programs at the same time.
ASSET REBALANCING. Asset Rebalancing allows you to readjust the percentage
of your Account Value allocated to each Sub-Account to maintain a pre-set level.
Over time, the variations in each Sub-Account's investment results will shift
the balance of your Account Value allocations. Under the Asset Rebalancing
feature, we periodically will transfer your Account Value, including new Net
Premium (unless you specify otherwise), back to the percentages you specify in
accordance with procedures and requirements that we establish. All of your
Account Value allocated to the Sub-Accounts must be included in an Asset
Rebalancing program. You may not include your Fixed Account balance in an Asset
Rebalancing program. We currently are waiving the contractual transfer fee on
all transfers, including Asset Rebalancing transfers. If we limit the number of
free transfers, however, transfers under an Asset Rebalancing program will count
toward that limit. See "Transfer Fee" at page 44.
You may request Asset Rebalancing when you apply for your Contract or by
submitting a completed written request to us at our Service Center. Please call
or write us for a copy of the request form and additional information concerning
Asset Rebalancing.
Asset Rebalancing is consistent with maintaining your allocation of
investments among market segments, although it is accomplished by reducing your
Account Value allocated to the better performing segments. Other investment
programs may not work in concert with Asset Rebalancing. Therefore, you should
monitor your use of these programs, as well as other transfers or withdrawals,
while Asset Rebalancing is being used. We may change, terminate, limit, or
suspend Asset Rebalancing at any time. You may not participate in both the
Dollar Cost Averaging and Asset Rebalancing Program at the same time.
ASSET ALLOCATION MODELS. Standard & Poor's Inc. ("S&P") has developed
several asset allocation models for use with the Contract. The purpose of these
models is to provide generalized guidance on how to allocate Account Value among
the Sub-Accounts in a manner that is consistent with various investment
objectives and risk tolerances. You may use a questionnaire and scoring system
developed by S&P in order to help you to determine which model might be
appropriate for you. Although we have arranged for the preparation of these
asset allocation models and related materials, it is up to you to decide whether
to use a model and, if so, which model to use. Moreover, the models are not
individualized investment advice. Accordingly, we recommend that you consult
your financial adviser before adopting a model.
If you decide to use a model, we will automatically allocate your Net
Premiums in accordance with the percentages specified in one of the S&P models.
You may only use one model at a time. We also will automatically enroll you in
our Asset Rebalancing Program and we will periodically rebalance your total
Sub-Account Values in accordance with your chosen model. If you wish to allocate
a portion of your Net Premiums or Account Value to the Fixed Account, you must
instruct us specifically, because none of the models includes the Fixed Account.
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You may choose to use an S&P asset allocation model at any time. You also
may discontinue your use at any time. We will automatically discontinue your use
of a model if you (a) discontinue the Asset Rebalancing Program or (b) give us
instructions changing your allocations of Net Premiums or Account Value among
the Subaccounts. Call us at our Service Center or contact your sales
representative for additional information or forms.
For each model, S&P determines the percentage allocations among the
Sub-Accounts based upon a comparison of the model's investment objectives and
the relevant underlying Portfolios' investment objectives and portfolio
composition. These models are specific to this Contract. Similarly named models
developed for use with our other products may differ.
Periodically, S&P will review the models. As a result of those reviews, S&P
may decide that to better seek to meet a model's goal, it would be appropriate
to change the percentage allocations among the Sub-Accounts. If you are using
that model, we will notify you before we implement the change.
THE INVESTMENT AND FIXED ACCOUNT OPTIONS
VARIABLE ACCOUNT INVESTMENTS
PORTFOLIOS. Each of the Sub-Accounts invests in the shares of one of the
Portfolios. Each Portfolio is a separate investment series of an open-end
management investment company registered under the Investment Company Act of
1940 (the "1940 Act"). We briefly describe the Portfolios below. You should read
the current Prospectuses for the Portfolios for more detailed and complete
information concerning the Portfolios, their investment objectives and
strategies, and the investment risks associated with the Portfolios. If you do
not have a Prospectus for a Portfolio, contact us and we will send you a copy.
Each Portfolio holds its assets separate from the assets of the other
Portfolios, and each Portfolio has its own distinct investment objective and
policies. Each Portfolio operates as a separate investment fund, and the income,
gains, and losses of one Portfolio have no effect on the investment performance
of any other Portfolio.
The Portfolios which currently are the permissible investments of the
Variable Account under this Contract are separate series of AIM Variable
Insurance Funds, Inc. ("AIM Funds"), Liberty Variable Investment Trust ("Liberty
Trust"), MFS Variable Insurance Trust ("MFS Trust"), and Stein Roe Variable
Investment Trust ("Stein Roe Trust"), and separately incorporated mutual funds
and a single series of a mutual fund managed by The Dreyfus Corporation (the
"Dreyfus Portfolios"). The investment objectives of the Portfolios are briefly
described below.
PORTFOLIOS OF AIM FUNDS
AND VARIABLE ACCOUNT SUB-ACCOUNTS
AIM V.I. CAPITAL APPRECIATION. Capital appreciation through investments in
common stocks, with emphasis on medium-sized and smaller emerging growth
companies.
AIM V.I. GOVERNMENT SECURITIES. High level of current income consistent with
reasonable concern for safety of principal by investing in debt securities
issued, guaranteed or otherwise backed by the United States Government.
AIM V.I. INTERNATIONAL EQUITY. Long-term growth of capital by investing in
international equity securities, the issuers of which are considered by the
adviser to have strong earnings momentum.
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DREYFUS PORTFOLIOS AND
VARIABLE ACCOUNT SUB-ACCOUNTS
DREYFUS STOCK INDEX FUND (DREYFUS STOCK INDEX SUB-ACCOUNT). Investment
results that correspond to the price and yield performance of publicly traded
common stocks in the aggregate, as represented by the Standard & Poor's 500
Composite Stock Price Index.(1)
DREYFUS VARIABLE INVESTMENT FUND, CAPITAL APPRECIATION PORTFOLIO (DREYFUS
CAPITAL APPRECIATION SUB-ACCOUNT). Long-term capital growth consistent with the
preservation of capital, with current income as a secondary objective, by
investing primarily in the common stocks of domestic and foreign issuers.
DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. (DREYFUS SOCIALLY RESPONSIBLE
GROWTH SUB-ACCOUNT). Capital growth, with current income as a secondary goal, by
investing principally in common stocks, or securities convertible into common
stocks, of companies which, in the opinion of the Portfolio's management, not
only meet traditional investment standards, but also show evidence that they
conduct their business in a manner that contributes to the enhancement of the
quality of life in America.
PORTFOLIOS OF LIBERTY TRUST AND
VARIABLE ACCOUNT SUB-ACCOUNTS
COLONIAL SMALL CAP VALUE FUND (COLONIAL SMALL CAP VALUE SUB-ACCOUNT).
Long-term growth by investing primarily in smaller capitalization equity
securities.
COLONIAL HIGH YIELD SECURITIES FUND (COLONIAL HIGH YIELD SECURITIES
SUB-ACCOUNT). High current income and total return by investing primarily in
lower rated corporate debt securities. The Portfolio may invest up to 100% of
its assets in lower rated bonds (commonly referred to as "junk bonds") which are
regarded as speculative as to payment of principal and interest. Therefore, the
corresponding Sub-Account may not be suitable for all Contract Owners. You
should carefully assess the risks associated with the Portfolio before
investing.
COLONIAL STRATEGIC INCOME FUND (COLONIAL STRATEGIC INCOME SUB-ACCOUNT). A
high level of current income, as is consistent with prudent risk and maximizing
total return, by diversifying investments primarily in U.S. and foreign
government and lower rated corporate debt securities. The Portfolio may invest a
substantial portion of its assets in lower rated bonds (commonly referred to as
"junk bonds"). Therefore, the corresponding Sub-Account may not be suitable for
all Contract Owners. You should carefully assess the risks associated with the
Portfolio before investing.
COLONIAL GROWTH & INCOME FUND, FORMERLY KNOWN AS THE COLONIAL U.S. STOCK
FUND (COLONIAL U.S. STOCK SUB-ACCOUNT). Long-term growth and income, by
investing primarily in large capitalization stocks, with up to 10% of the
Portfolio's assets invested in debt securities.
LIBERTY ALL-STAR EQUITY FUND (LIBERTY ALL-STAR EQUITY SUB-ACCOUNT). Total
investment return, comprised of long-term capital appreciation and current
income, through investment primarily in a diversified portfolio of equity
securities.
(1) "Standard & Poor's 500", "S&P 500-Registered Trademark-", and "S&P" are
trademarks of the McGraw-Hill Companies Inc. and have been licensed for use
by the Portfolio. The Portfolio is not sponsored, endorsed, sold or promoted
by S&P or The McGraw-Hill Companies, Inc.
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PORTFOLIOS OF MFS TRUST
AND VARIABLE ACCOUNT SUB-ACCOUNTS
MFS EMERGING GROWTH SERIES (MFS EMERGING GROWTH SUB-ACCOUNT). Long-term
growth of capital by investing primarily in common stocks of companies that the
adviser believes are early in their life cycle but have the potential to become
major enterprises.
MFS RESEARCH SERIES (MFS RESEARCH SUB-ACCOUNT). Long-term growth of capital
and future income by investing a substantial portion of the Portfolio's assets
in equity securities of companies believed to possess better than average
prospects for long-term growth. The Portfolio may invest up to twenty percent of
its assets in foreign securities that are not traded on a U.S. exchange.
MFS UTILITIES SERIES (MFS UTILITIES SUB-ACCOUNT). Capital growth and current
income, by investing, under normal circumstances, at least 65% (but up to 100%
at the discretion of the adviser) of its assets in equity and debt securities of
both domestic and foreign companies in the utilities industry.
MFS GROWTH WITH INCOME SERIES (MFS GROWTH WITH INCOME SUB-ACCOUNT).
Reasonable current income and long-term growth of capital and income by
investing, under normal market conditions, at least 65% of its assets in equity
securities of companies that are believed to have long-term prospects for growth
and income. This Portfolio may also invest up to 75% (and generally expects to
invest not more than fifteen percent) of its net assets in foreign securities
that are not traded on a U.S. exchange.
PORTFOLIOS OF STEIN ROE TRUST AND
VARIABLE ACCOUNT SUB-ACCOUNTS
STEIN ROE BALANCED FUND (STEIN ROE BALANCED SUB-ACCOUNT). High total
investment return through investment in a changing mix of securities.
STEIN ROE GROWTH STOCK FUND (STEIN ROE GROWTH STOCK SUB-ACCOUNT). Long-term
growth of capital through investment primarily in common stocks.
STEIN ROE MONEY MARKET FUND (STEIN ROE MONEY MARKET SUB-ACCOUNT). High
current income from short-term money market instruments while emphasizing
preservation of capital and maintaining excellent liquidity.
NOT ALL SUB-ACCOUNTS MAY BE AVAILABLE UNDER YOUR CONTRACT. You should
contact your representative for further information on the availability of the
Sub-Accounts.
AIM ADVISORS, INC. ("AIM") is the investment adviser to each Portfolio of
the AIM Funds. AIM has operated as an investment adviser since 1976.
LIBERTY ADVISORY SERVICES CORP. (FORMERLY KNOWN AS KEYPORT ADVISORY SERVICES
CORP.), an affiliate of Liberty Life, is the manager for Liberty Trust and its
Portfolios. Colonial Management Associates, Inc. ("Colonial"), an affiliate of
Liberty Life, serves as sub-adviser for the Portfolios (except for the Liberty
All-Star Equity Fund). Colonial has provided investment advisory services since
1931. Liberty Asset Management Company, an affiliate of Liberty Life,
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serves as sub-adviser for the Liberty All-Star Equity Fund and the current
portfolio managers are J.P. Morgan Investment Management Inc., Oppenheimer
Capital, Wilke/Thompson Capital Management Inc., Westwood Management Corp., and
Boston Partners Asset Management, L.P.
THE DREYFUS CORPORATION ("DREYFUS") serves as investment adviser for each of
the Dreyfus Portfolios. Dreyfus has operated as an investment adviser since
1947. Mellon Equity Associates, an affiliate of Dreyfus, serves as index fund
manager to the Dreyfus Stock Index Fund. Sarofim serves as sub-investment
adviser to the Dreyfus Capital Appreciation Fund. NCM Capital Management Group,
Inc. serves as sub-investment adviser to the Dreyfus Socially Responsible Growth
Fund, Inc.
MASSACHUSETTS FINANCIAL SERVICES COMPANY ("MFS") is the investment adviser
to each Portfolio of the MFS Trust. MFS and its predecessor organizations have a
history of money management dating back to 1924 and the founding of the first
mutual fund in the United States.
STEIN ROE & FARNHAM INCORPORATED ("STEIN ROE") is the investment adviser for
each Portfolio of Stein Roe Trust. In 1986, Stein Roe was organized and
succeeded to the business of Stein Roe & Farnham, a partnership. Stein Roe is an
affiliate of Liberty Life. Stein Roe and its predecessor have provided
investment advisory and administrative services since 1932.
We do not promise that the Portfolios will meet their investment objectives.
Amounts you have allocated to Sub-Accounts may grow in value, decline in value,
or grow less than you expect, depending on the investment performance of the
Portfolios in which those Sub-Accounts invest. You bear the investment risk that
those Portfolios possibly will not meet their investment objectives. You should
carefully review the Portfolios' Prospectuses before allocating amounts to the
Sub-Accounts.
Each Portfolio is subject to certain investment restrictions and policies,
which may not be changed without the approval of a majority of the shareholders
of the Portfolio. See the accompanying Prospectuses of the Portfolios for
further information.
We automatically reinvest all dividends and capital gains distributions from
the Portfolios in shares of the distributing Portfolio at their net asset value.
The income and realized and unrealized gains or losses on the assets of each
Sub-Account are separate and are credited to or charged against the particular
Sub-Account without regard to income, gains or losses from any other Sub-Account
or from any other part of our business. We will use the Net Premiums you
allocate to a Sub-Account to purchase shares in the corresponding Portfolio and
will redeem shares in the Portfolios to meet Contract obligations or make
adjustments in reserves. The Portfolios are required to redeem their shares at
net asset value and to make payment within seven days.
Certain of the Portfolios sell their shares to separate accounts underlying
both variable life insurance and variable annuity contracts. It is conceivable
that in the future it may be unfavorable for variable life insurance separate
accounts and variable annuity separate accounts to invest in the same Portfolio.
Although neither we nor any of the Portfolios currently foresees any such
disadvantages either to variable life insurance or variable annuity contract
owners, each Portfolio's Board of Directors intends to monitor events in order
to identify any material conflicts between variable life and variable annuity
contract owners and
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to determine what action, if any, should be taken in response thereto. If a
Board of Directors were to conclude that separate investment funds should be
established for variable life and variable annuity separate accounts, Contract
Owners will not bear the attendant expenses.
VOTING RIGHTS. As a general matter, you do not have a direct right to vote
the shares of the Portfolios held by the Sub-Account to which you have allocated
your Account Value. Under current interpretations, however, you are entitled to
give us instructions on how to vote those shares on certain matters. We will
notify you when your instructions are needed and will provide proxy materials or
other information to assist you in understanding the matter at issue. We will
determine the number of votes for which you may give voting instructions as of
the record date set by the relevant Portfolio for the shareholder meeting at
which the vote will occur.
As a general rule, you are the person entitled to give voting instructions.
However, if you assign your Contract, the assignee may be entitled to give
voting instructions. Retirement plans may have different rules for voting by
plan participants.
If you send us written voting instructions, we will follow your instructions
in voting the Portfolio shares attributable to your Contract. If you do not send
us written instructions, we will vote the shares attributable to your Contract
in the same proportions as we vote the shares for which we have received
instructions from other Contract Owners. We will vote shares that we hold in the
same proportions as we vote the shares for which we have received instructions
from other Contract Owners.
We may, when required by state insurance regulatory authorities, disregard
Contract Owner voting instructions if the instructions require that the shares
be voted so as to cause a change in the sub-classification or investment
objective of one or more of the Portfolios or to approve or disapprove an
investment advisory contract for one or more of the Portfolios.
In addition, we may disregard voting instructions in favor of changes
initiated by Contract Owners in the investment objectives or the investment
adviser of the Portfolios if we reasonably disapprove of the proposed change. We
would disapprove a proposed change only if the proposed change is contrary to
state law or prohibited by state regulatory authorities or we reasonably
conclude that the proposed change would not be consistent with the investment
objectives of the Portfolio or would result in the purchase of securities for
the Portfolio which vary from the general quality and nature of investments and
investment techniques utilized by the Portfolio. If we disregard voting
instructions, we will include a summary of that action and our reasons for that
action in the next semi-annual financial report to you.
This description reflects our view of currently applicable law. If the law
changes or our interpretation of the law changes, we may decide that we are
permitted to vote the Portfolio shares without obtaining instructions from our
Contract Owners, and we may choose to do so.
ADDITIONS, DELETIONS, AND SUBSTITUTIONS OF SECURITIES. If the shares of any
of the Portfolios are no longer available for investment by the Variable Account
or if, in our judgment, further investment in the shares of a Portfolio is no
longer appropriate in view of the purposes of the Contract, we may add or
substitute shares of another Portfolio or mutual fund for Portfolio shares
already purchased or to be purchased in the future by Net Premiums under the
Contract. Any substitution will comply with the requirements of the 1940 Act.
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We also reserve the right to make the following changes in the operation of
the Variable Account and the Sub-Accounts:
(a) to operate the Variable Account in any form permitted by law;
(b) to take any action necessary to comply with applicable law or obtain and
continue any exemption from applicable laws;
(c) to transfer assets from one Sub-Account to another, or from any
Sub-Account to our general account;
(d) to add, combine, or remove Sub-Accounts in the Variable Account;
(e) to assess a charge for taxes attributable to the operation of the
Variable Account or for other taxes, as described in "Deductions and
Charges--Separate Account Expense Charge" on pages 39-40 below; and
(f) to change the way in which we assess other charges, as long as the
total other charges do not exceed the maximum guaranteed charges under
the Contracts.
If we take any of these actions, we will comply with the then applicable
legal requirements.
THE FIXED ACCOUNT.
THE PORTION OF THE CONTRACT RELATING TO THE FIXED ACCOUNT IS NOT REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "1933 ACT") AND THE FIXED ACCOUNT IS NOT
REGISTERED AS AN INVESTMENT COMPANY UNDER THE 1940 ACT. ACCORDINGLY, NEITHER THE
FIXED ACCOUNT NOR ANY INTERESTS IN THE FIXED ACCOUNT ARE SUBJECT TO THE
PROVISIONS OR RESTRICTIONS OF THE 1933 ACT OR THE 1940 ACT, AND THE DISCLOSURE
REGARDING THE FIXED ACCOUNT HAS NOT BEEN REVIEWED BY THE STAFF OF THE SECURITIES
AND EXCHANGE COMMISSION. THE STATEMENTS ABOUT THE FIXED ACCOUNT IN THIS
PROSPECTUS MAY BE SUBJECT TO GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL
SECURITIES LAWS REGARDING ACCURACY AND COMPLETENESS.
You may allocate part or all of your Net Premiums to the Fixed Account.
Under this option, we guarantee the principal amount allocated to the Fixed
Account and the rate of interest that will be credited to the Fixed Account, as
described below. From time to time we will set a current interest rate
applicable to Net Premiums and transfers allocated to the Fixed Account during a
Contract Year. We guarantee that the current rate in effect when a Net Premium
or transfer to the Fixed Account is made will apply to that amount until at
least the next Contract Anniversary. We may declare different rates for amounts
that are allocated to the Fixed Account at different times. We determine
interest rates in accordance with then-current market conditions and other
factors.
The effective interest rate credited at any time to your Contract's Fixed
Account is the weighted average of all of the interest rates for your Contract.
The rates of interest that we set will never be less than the minimum guaranteed
interest rate shown in your Contract. We may credit interest at a higher rate,
but we are not obligated to do so.
During the 60 days after each Contract Anniversary, you may transfer all or
part of your Fixed Account Balance to the Sub-Accounts, subject to the
requirements and limits described in "Transfer of Account Value" on page 21.
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Amounts allocated to the Fixed Account become part of the general account of
Liberty Life. Liberty Life invests the assets of the general account in
accordance with applicable laws governing the investments of insurance company
general accounts.
We may delay payment of partial or full withdrawals from the Fixed Account
for up to 6 months from the date we receive your written withdrawal request. If
we defer payment for more than 30 days, we will pay interest (if required) on
the deferred amount at such rate as may be required by the applicable state or
jurisdiction.
CONTRACT BENEFITS AND RIGHTS
DEATH BENEFIT. While your Contract is in force, we will pay Death Proceeds
to the Beneficiary upon the death of the Insured. As described below in
"Proceeds Options", on pages 37-38, we will pay the Death Benefit proceeds in a
lump sum or under an optional payment plan.
The Death Benefit proceeds payable to the Beneficiary equal the applicable
Death Benefit, less any Indebtedness, and less any due and unpaid charges. The
proceeds may be increased, if you have added an Agreement that provides an
additional benefit. We will determine the amount of the Death Benefit proceeds
as of the date of the Insured's death. We will usually pay the Death Benefit
proceeds within seven days after we have received due proof of death and all
other requirements we deem necessary have been satisfied.
The amount of the Death Benefit will be based on the Death Benefit Option
you have selected, any increases or decreases in the Face Amount, and in some
instances your Account Value. If you withdraw part of your Account Value, we
will reduce the Death Benefit as described in this Prospectus on page 36.
DEATH BENEFIT OPTIONS. You may choose one of two Death Benefit options.
Under Option 1, the Death Benefit will be the greater of: (a) the then current
Face Amount of your Contract; or (b) the Account Value multiplied by the
applicable corridor percentage as described below. Under Option 2, the Death
Benefit will be the greater of: (a) the then current Face Amount of your
Contract plus the Account Value; or (b) the Account Value multiplied by the
applicable corridor percentage as described below. We set the corridor
percentages so as to seek to ensure that the Contracts will qualify for
favorable federal income tax treatment. The corridor percentages are stated in
the Contract. They vary according to the age of the Insured. Under this formula,
an increase in Account Value due to favorable investment experience may increase
the Death Benefit above the Face Amount, and a decrease in Account Value due to
unfavorable investment experience may decrease the Death Benefit (but not below
the Face Amount).
EXAMPLES:
<TABLE>
<CAPTION>
EXAMPLE A EXAMPLE B
----------- -----------
<S> <C> <C>
Face Amount..................................................... $ 100,000 $ 100,000
Death Benefit Option 1
Insured's Age................................................... 60 60
Account Value on Date of Death.................................. $ 80,000 $ 50,000
Applicable Corridor Percentage.................................. 130% 130%
Death Benefit................................................... $ 104,000 $ 100,000
</TABLE>
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In Example A, the Death Benefit equals $104,000, i.e., the greater of
$100,000 (the Face Amount) and $104,000 (the Account Value at the Date of Death
of $80,000, multiplied by the corridor percentage of 130%). This amount, less
any Indebtedness and unpaid charges, constitutes the Death Benefit proceeds that
we would pay to the Beneficiary.
In Example B, the Death Benefit is $100,000, i.e., the greater of $100,000
(the Face Amount) or $65,000 (the Account Value of $50,000 multiplied by the
corridor percentage of 130%).
Option 1 is designed to provide a specific amount of Death Benefit that does
not vary with changes in the Account Value. Therefore, under Option 1, as your
Account Value increases, the net amount at risk under your Contract will
decrease. Under Option 2, on the other hand, the amount of the Death Benefit
generally increases to reflect increases in the Account Value. Therefore, if you
select Option 2, your Contract generally will involve a constant net amount at
risk. Since the cost of insurance charge on your Contract is based upon the net
amount at risk, the cost of insurance charge will generally be less under a
Contract with an Option 1 Death Benefit than under a similar Contract with an
Option 2 Death Benefit. As a result, if the Sub-Accounts you select experience
favorable investment results, your Account Value will tend to increase faster
under Option 1 than under Option 2, but the total Death Benefit under Option 2
will increase or decrease directly with changes in Account Value. Thus, you may
prefer Option 1 if you are more interested in the possibility of increasing your
Account Value based upon favorable investment experience, while you may prefer
Option 2 if you are seeking to increase total Death Benefits.
After the first Contract Year, once each Contract Year you may change the
Death Benefit option by writing to us at our Service Center. If you ask to
change from Option 2 to Option 1, we will increase the Face Amount of your
Contract to equal the Option 2 Death Benefit as of the effective date of the
change. If you ask to change from Option 1 to Option 2, we will change the Face
Amount of your Contract to equal the Option 1 Death Benefit less the Account
Value as of the effective date of the change. The change will take effect on the
Monthly Date on or immediately following the date we approve your request. If
you change your Contract's Death Benefit Option, your Contract's Guaranteed
Coverage Monthly Premium amounts will change prospectively from the date of the
change.
We may require you to provide evidence of insurability for a change in Death
Benefit option. We will not permit you to change the Death Benefit option under
your Contract if afterward the Face Amount remaining in force would be less than
$50,000.
DEATH BENEFIT AT ATTAINED AGE 100. If the Insured is living and your
Contract is in effect on the first Contract Anniversary after the Insured's
100th birthday, we will make the following changes in your Contract:
-- If Lifetime Guaranteed Coverage is in effect, the Death Benefit will
equal the greater of the Face Amount of your Contract or 101% of the
Account Value of your Contract. Otherwise, the Death Benefit will equal
101% of the Account Value of your Contract;
-- You may not pay additional Premiums; and
-- We no longer will charge the cost of insurance charge as part of your
Monthly Deductions.
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CHANGE IN THE FACE AMOUNT. While the Contract is in force, you may change
the Face Amount after the first Contract Year. Write or call our Service Center
to obtain the necessary form. The change will take effect when we approve your
request.
If you request a decrease in Face Amount, we will first apply it to coverage
provided by the most recent increase in Face Amount, then to the next most
recent increase successively and finally to the Face Amount under the original
application. We will not permit a decrease in the Face Amount of your Contract
if afterward the Face Amount remaining in force would be less than $50,000.
We will charge a portion of the Withdrawal Charge on any decrease in Face
Amount that you request. The amount of the Withdrawal Charge will equal the then
applicable Withdrawal Charge on a total surrender of your Contract, multiplied
by the percentage decrease in the Face Amount. We will deduct this charge from
your Account Value, allocating it among the Sub-Accounts and the Fixed Account
in proportion to your Account Value in each option.
If a request for a Face Amount decrease would cause your Contract to fail to
qualify for treatment as a life insurance contract under the Tax Code, we may
decline your request. In the alternative, we may give you the option of
withdrawing sufficient Account Value from your Contract to enable it to continue
to be treated as a life insurance contract for tax purposes after the requested
Face Amount decrease. We will not charge a separate Withdrawal Charge on any
amount withdrawn in connection with a Face Amount decrease.
To apply for an increase in the Face Amount, you must submit to us a
supplemental application, accompanied by satisfactory evidence of insurability.
We will not permit any increase in Face Amount after the Insured's 80th
birthday. The minimum amount of a Face Amount increase is $25,000. You may not
increase the Face Amount of your Contract more often than once every twelve
months.
You should be aware that an increase in the Face Amount of your Contract
will affect the cost of insurance charges applicable to your Contract. We will
deduct a larger amount of cost of insurance charges, because an increase in the
Face Amount also will increase the net amount at risk under your Contract. We
will not approve a request for a Face Amount increase if the Surrender Value is
too small to pay the Monthly Deduction for the Contract month following the
increase. As described in "Withdrawal Charge" on pages 41-42, your maximum
withdrawal charge will also increase. Increases in the Face Amount of your
Contract will increase the Guaranteed Coverage Monthly Premium amount. Likewise,
decreases in the Face Amount of your Contract will decrease the Guaranteed
Coverage Monthly Premium amount.
OPTIONAL INSURANCE BENEFITS. You may ask to add one or more Agreements to
your Contract to provide additional optional insurance benefits. We may require
evidence of insurability before we issue an Agreement to you. We will deduct the
cost of any Agreements as part of the Monthly Deduction. Addition of an optional
insurance benefit may also increase your Guaranteed Coverage Monthly Premium
amount. The Agreements we currently offer are described below. For more
information concerning what options we may offer, please ask your sales
representative or contact us at 800-451-7065. In our discretion we may offer
Agreements or stop offering an Agreement at any time.
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Not all of these Agreements may be available in your state, and the terms of
these benefits may differ in some states. In addition, if your Contract was
issued in connection with a Qualified Plan, we may not be able to offer you some
of the benefits provided by these Agreements. Contact us for more information.
ACCELERATED DEATH BENEFIT AGREEMENT. You may elect to add an Accelerated
Death Benefit Agreement to your Contract. If such Agreement has been attached,
you may request payment of a portion of the Death Benefit as an Accelerated
Death Benefit if either: (1) the Insured has a Terminal Condition; or (2) the
Insured is Chronically Ill, as these terms are defined in the Contract. You
generally may request an Accelerated Death Benefit equal to up to the lesser of
90% of the Death Benefit (before subtracting any indebtedness) or $250,000. We
will reduce the amount you request by a discount for the early payment, a $100
processing fee, and the repayment of a pro rata portion of your indebtedness.
You may choose for the Accelerated Death Benefit to be paid in a lump sum or in
installments, as described in the Contract.
If you request an Accelerated Death Benefit, the balance of the Death
Benefit (net of the amount previously requested) is payable upon the Insured's
death. You may request an Accelerated Death Benefit only once.
If your request for an Accelerated Death Benefit is based on the Insured's
being Chronically Ill, in some circumstances a portion of your Accelerated Death
Benefit may not qualify for exemption from federal income tax. Accordingly, you
should consult your tax adviser before requesting an Accelerated Death Benefit.
For more information, see "Accelerated Death Benefit", on page 49.
WAIVER OF SPECIFIED MONTHLY PREMIUM. Under this Agreement, we will
contribute a specified monthly amount to the Account Value while the Insured is
disabled as defined in the Agreement. You cannot add both the Waiver of
Specified Monthly Premium and the Waiver of Monthly Deduction Agreement to your
Contract.
WAIVER OF MONTHLY DEDUCTION. Under this Agreement, we will waive the Monthly
Deduction while the Insured is disabled as defined in the Agreement. You cannot
add both the Waiver of Specified Monthly Premium and the Waiver of Monthly
Deduction Agreement to your Contract.
CHILDREN'S PROTECTION BENEFIT. Under this Agreement we will pay a Death
Benefit to the Beneficiary if one of the Insured's children dies before the
child's 25th birthday while the Agreement is in force. If the Insured dies while
this Agreement is in force, the benefit becomes fully paid up. Until the child's
25th birthday, you may convert the Agreement for a new Contract on the child's
life, subject to certain conditions as defined in the Agreement. We will not
require evidence of insurability to convert the Agreement.
ACCIDENTAL DEATH AND DISMEMBERMENT. Under this Agreement, we will pay a
benefit if the Insured dies from accidental bodily injury or suffers a bodily
injury as specified in the Agreement.
PRIMARY INSURED TERM INSURANCE. This Agreement provides additional term life
insurance coverage on the primary Insured. Until the primary Insured reaches age
75, you may exchange this Agreement for a new contract or an increase in the
Face Amount of your Contract without evidence of insurability. In addition, if
you convert this Agreement on or
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after its first anniversary, but no later than its fourth anniversary, we will
contribute a conversion credit toward the premium for the new contract. We will
not require evidence of insurability to exchange or convert the Agreement. The
addition of a Term Insurance Agreement does not affect the withdrawal charge on
your Contract. As a result, if you provide a portion of your insurance coverage
through a Term Insurance Rider instead of through increasing the Face Amount of
your Contract, your withdrawal charge will be lower. However, under some
combinations of coverage, your cost of insurance charges may be higher.
ADDITIONAL INSURED TERM INSURANCE. This Agreement provides life insurance
coverage on an additional Insured. We will pay the Face Amount of the Agreement
to the named Beneficiary when we receive due proof that the additional Insured
died while the Agreement was in force. Until the additional Insured's 75th
birthday, you may exchange the Agreement for a new Contract on the additional
Insured's life, subject to certain conditions as defined in the Agreement. In
addition, if you convert this Agreement on or after its first anniversary, but
no later than its fourth anniversary, we will contribute a conversion credit
toward the premium for the new contract. We will not require evidence of
insurability to exchange or convert the Agreement.
CONTRACT LOANS. While the Contract is in force, you may borrow money from us
using the Contract as the only security for your loan. Loans have priority over
the claims of any assignee or any other person. You may borrow up to 90% of the
Cash Value of your Contract as of the end of the Valuation Period in which we
receive your loan request. Any outstanding indebtedness will count against that
limit. Thus, for example, if the Cash Value of your Contract was $10,000 and you
already had $5,000 in Indebtedness outstanding, you could borrow an additional
$4,000 ($10,000 X 90% - $5,000). The minimum loan amount is $250. In addition,
if you have named an irrevocable Beneficiary, you must also obtain his or her
written consent before we make a Contract Loan to you.
The interest rate on all Contract Loans is the Loan Interest Rate shown in
your Contract. Interest on Contract Loans accrues daily and is due on each
Contract Anniversary. If you do not pay the interest on a Contract Loan when
due, the unpaid interest will become part of the Contract Loan and will accrue
interest at the same rate.
When we make a Contract Loan to you, we will transfer to the Loan Account a
portion of the Account Value equal to the loan amount. We will take the
transfers pro rata from the Fixed Account and the Sub-Accounts, unless you
instruct us otherwise in writing. You may not transfer more than a pro rata
share from the Fixed Account.
We will credit interest to the portion of the Loan Account attributable to
"Preferred Loans", as defined below, at the Loan Interest Rate shown in your
Contract. We will treat as a Preferred Loan the portion of your loan equal in
amount to (a) your Account Value, minus (b) your total Payments, minus (c) your
current preferred loan balance, minus (d) any interest that has accrued on your
Indebtedness since the previous Contract Anniversary, plus (e) all prior partial
withdrawals in excess of earnings. We will credit interest to the remainder of
the Loan Account at the minimum guaranteed interest rate shown in your Contract.
On each Contract Anniversary, we will also transfer to the Loan Account an
amount of Account Value equal to the amount by which the Indebtedness exceeds
the value of the Loan Account.
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If you have any unpaid Indebtedness and your Surrender Value is insufficient
to pay a Monthly Deduction when due, your Contract will enter the Grace Period
and may terminate, as explained in the section entitled "Termination and Grace
Period," on page 38. If your Contract lapses while a Contract Loan is
outstanding and your Contract is not a MEC, you may owe taxes or suffer other
adverse tax consequences. See "Federal Tax Considerations-- Contracts Which Are
Not MECs" on page 50 below. Please consult a tax adviser for details.
If you have an outstanding Contract Loan, decreases in your Account Value,
including decreases due to negative investment results in the Sub-Accounts you
have chosen, could cause your Contract to enter the Grace Period and lapse. If
you have an outstanding Contract Loan and do not pay loan interest when due,
unpaid interest will be added to your Contract Loan and will bear interest at
the same rate. If your investment gains are insufficient, your outstanding
Contract Loan could exceed your Surrender Value, resulting in your Contract
entering the Grace Period.
You may repay all or any part of any Contract Loan without penalty at any
time while the Contract is still in effect and the Insured is living. If you
have a Contract Loan outstanding, we will treat any unscheduled Premium we
receive from you as a loan repayment, unless you instruct us otherwise in
writing. We will deduct an amount equal to your loan repayment from the Loan
Account and allocate your Net Premium among the Sub-Accounts and the Fixed
Account on the same basis as Planned Premium are allocated, unless you instruct
us otherwise.
A Contract Loan, whether or not repaid, will have a permanent effect on your
Account Value because the investment results of each Sub-Account and the
interest paid on the Fixed Account will apply only to the amounts remaining in
those accounts. The longer a loan is outstanding, the greater the effect is
likely to be. The effect could be favorable or unfavorable. If the Sub-Accounts
and/or Fixed Account earn more than the annual interest rate for amounts held in
the Loan Account, your Account Value will not increase as rapidly as it would if
you had not taken a Contract Loan. If the Sub-Accounts and/or Fixed Account earn
less than that rate, then your Account Value will be greater than it would have
been if you had not taken a Contract Loan. Also, if you do not repay a Contract
Loan, your Indebtedness will be subtracted from the Death Benefit and Surrender
Value otherwise payable.
You may realize taxable income when you take a Contract Loan. In some
instances, a Contract is treated as a "modified endowment contract" for federal
tax purposes. In that situation, Contract Loans are treated as withdrawals for
tax purposes, and the amount of the loan may be treated as taxable income to
you. In addition, you may also incur an additional ten percent penalty tax. You
should also be aware that interest on Contract Loans is generally not
deductible. See "Federal Tax Considerations--Contracts Which Are MECs" on page
49 below. Accordingly, before you take a Contract Loan, you should consult your
tax adviser and carefully consider the potential impact of a Contract Loan on
your rights and benefits under the Contract.
AMOUNT PAYABLE ON SURRENDER OF THE CONTRACT. While your Contract is in
force, you may fully surrender your Contract. Upon surrender, we will pay you
the Surrender Value determined as of the day we receive your written request at
our Service Center. Your Contract
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will terminate on the day we receive your written request. We may require that
you give us your Contract document before we pay you the Surrender Value. Before
we pay a full surrender, you must provide us with tax withholding information.
The Surrender Value equals the Account Value, minus any applicable
withdrawal charge, minus any Indebtedness. We will determine the Surrender Value
as of the end of the Valuation Period during which we received your request for
surrender. We generally will pay you the Surrender Value of the Contract within
seven days of our receiving your complete written request or on the effective
surrender date you have requested, whichever is later. The determination of the
withdrawal charge is described on pages 41-42.
You may receive the Surrender Value in a lump sum or under any of the
proceeds options described in "Proceeds Options" on pages 37-38.
The tax consequences of surrendering the Contract are discussed in "Federal
Tax Considerations," beginning on page 46.
PARTIAL WITHDRAWALS. Beginning in the second Contract Year, you may receive
a portion of the Surrender Value by making a partial withdrawal from your
Contract. You must request the partial withdrawal in writing. Your request will
be effective on the date we receive it at our Service Center. Before we pay any
partial withdrawal, you must provide us with tax withholding information.
When you request a partial withdrawal, we will pay you the amount requested
and subtract the amount requested plus any applicable withdrawal charge and
withdrawal fee from your Account Value. We may waive the withdrawal charge on
some or all of your withdrawals. The determination of the withdrawal charge is
described on pages 41-42.
You may specify how much of your partial withdrawal you wish to be taken
from each Sub-Account. The amount requested from a specific Sub-Account may not
exceed the value of that option less any applicable withdrawal charge and
withdrawal fee. If you do not specify the option from which you wish to take
your partial withdrawal, we will take it pro rata from the Sub-Accounts and the
Fixed Account.
During the first Contract Year, you may not make partial withdrawals. After
the first Contract Year, you may take partial withdrawals as often as you
choose. You may not, however, withdraw less than $250 at one time. In addition,
we may refuse to permit any partial withdrawal that would leave less than $250
in a Sub-Account from which the withdrawal was taken unless the entire
Sub-Account balance is withdrawn. If a partial withdrawal plus any applicable
withdrawal charge would reduce the Account Value to less than $500, we may treat
your request as a request to withdraw the total Account Value and terminate your
Contract. We may waive or change these limits.
If you have selected Death Benefit Option 1, a partial withdrawal will
reduce the Face Amount of your Contract as well as the Account Value. We will
reduce the Face Amount by the amount of the partial withdrawal and any charges
associated with it. The withdrawal charge on the partial surrender will equal
the then current withdrawal charge on a full surrender multiplied by the
percentage decrease in the Face Amount resulting from the partial withdrawal.
The Face Amount after a partial withdrawal may not be less than $50,000. If you
have previously increased the Face Amount of your Contract, your partial
withdrawals will first
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reduce the Face Amount of the most recent increase, then the next most recent
increases successively, then the Face Amount of the original Contract. We will
notify you of any change in the Face Amount in our next quarterly or annual
report to you.
Under Option 2, a reduction in Account Value as a result of a partial
withdrawal will typically result in a dollar for dollar reduction in the life
insurance proceeds payable under the Contract. It will not, however, affect the
Face Amount. Accordingly, we will not charge a Withdrawal Charge on a partial
withdrawal from a Contract under Option 2.
The tax consequences of partial withdrawals are discussed in "Federal Tax
Considerations" beginning on page 46.
PROCEEDS OPTIONS. We will pay the Surrender Value or Death Benefit proceeds
under the Contract in a lump sum or under one of the proceeds options that we
then offer. The amount applied to a proceeds option must be at least $2,000 of
Account Value and result in installment payments of not less than $20. Unless we
consent in writing, the proceeds options described below are not available if
the payee is an assignee, administrator, executor, trustee, association,
partnership, or corporation. We will not permit surrenders or partial
withdrawals after payments under a proceeds option involving life contingencies,
such as Option 4 below, commence. We will transfer to our general account any
amount placed under a proceeds option and it will not be affected by the
investment performance of the Variable Account.
You may request a proceeds option by writing to us at our Service Center
before the death of the Insured. If you change the Beneficiary, the existing
choice of proceeds option will become invalid and you may either notify us that
you wish to continue the pre-existing choice of proceeds option or select a new
one.
The following proceeds options are available under the Contract:
OPTION 1 -- INTEREST. We will pay interest monthly on proceeds left with us.
We will credit interest to unpaid balances at a rate that we will declare
annually. We will never declare an effective annual rate of less than 3 1/2%.
OPTION 2 -- FIXED AMOUNT. We will pay equal monthly installments until the
proceeds are exhausted. We will credit interest to unpaid balances at a rate
that we will declare annually. We will never declare an effective annual rate of
less than 3 1/2%.
OPTION 3 -- FIXED PERIOD. We will pay monthly installments for a period
selected by you of not more than 25 years.
OPTION 4 -- LIFE INCOME, WITH OR WITHOUT A GUARANTEE PERIOD. We will pay
proceeds in periodic payments to the payee for as long as the payee is alive. If
no Guarantee Period is selected, payments will stop when the payee dies. It is
possible for the payee to receive only one payment, if the payee dies before the
second payment is due. If a Guarantee Period is selected and the payee dies
before the end of the Guarantee Period, we will continue payments to a named
beneficiary until the end of the Guarantee Period. We offer Guarantee Periods of
ten years, fifteen years or twenty years. We base the payments on the 1983
Individual Annuity Mortality Table, adjusted to include ten years of mortality
improvement under Projection Scale G.
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LIBERTY SECURITY ACCOUNT-REGISTERED TRADEMARK-. We will credit interest to
proceeds left with us in the Liberty Security Account-Registered Trademark-. We
will credit interest to your Liberty Security Account-Registered Trademark-
balance at a rate we declare. We periodically may change that rate, but it will
never be less than 3.0% annually. The beneficiary will be able to write checks
against such account at any time and in any amount up to the total in the
account. The checks must be for a minimum amount of $250.
When we begin to make payments under Options 3 and 4, we will tell you the
amount of your installment payment. Your installment payment will never be less
than the amounts determined using the tables in the Contract. It may be higher.
In addition, we may agree to other proceeds option plans. Write or call us
to obtain information about them.
TERMINATION AND GRACE PERIOD. The Contract will terminate and life insurance
coverage will end when one of the following events first occurs:
(a) you surrender your Contract;
(b) the Grace Period ends; or
(c) the Insured dies.
Your Contract will enter the Grace Period if on a Monthly Date the Surrender
Value is insufficient to pay the Monthly Deduction and either (a) no Coverage
Guarantee is in effect or (b) at least one of the Coverage Guarantees is in
effect, but you have outstanding Indebtedness under your Contract. You will be
given a 61-day Grace Period in which to pay an amount sufficient to keep the
Contract in force after the end of the Grace Period.
At least 61 days before the end of the Grace Period, we will send you and
any assignee a notice telling you that you must pay at least the amount shown in
the notice by the end of the Grace Period to prevent your Contract from
terminating. The amount shown in the notice will be determined as provided in
the Contract. You may pay a larger amount if you wish. If you do not pay us the
amount shown in the notice before the end of the Grace Period, your Contract
will end at the end of the Grace Period.
The Contract will continue in effect through the Grace Period. If the
Insured dies during the Grace Period, we will pay a Death Benefit in accordance
with your instructions. However, we will reduce the proceeds by an amount equal
to the Monthly Deductions due and unpaid. See "Death Benefit," on page 30.
As described in "Guaranteed Coverage Monthly Premium" on page 18, your
Contract has a Three-year Guaranteed Coverage Period, a Limited Guaranteed
Coverage Period and a Lifetime Guaranteed Coverage Period, provided that you pay
sufficient Premiums. Under each Coverage Guarantee, if you do not have any
outstanding Indebtedness and you have paid sufficient Premiums, your Contract
will not lapse during the applicable Guaranteed Coverage Period.
REINSTATEMENT. If the Contract lapses during the life of the Insured, you
may apply for reinstatement of the Contract by paying us the reinstatement
Premium. You must request reinstatement within five years from the end of the
Grace Period while the Insured is living. The reinstatement Premium is equal to
an amount sufficient to cover three months of monthly deductions following the
date of reinstatement. If you choose, you may pay a larger amount.
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If Indebtedness was outstanding at the time of lapse, you must either repay or
reinstate the loan before we will reinstate your Contract. In addition, you must
provide evidence of insurability satisfactory to us. The Account Value on the
reinstatement date will reflect the Account Value at the time of termination of
the Contract plus the Premium paid at the time of reinstatement. All Contract
charges will continue to be based on your original Contract Date.
CANCELLATION. In many states, you may cancel your Contract by returning it
to us within ten days after you receive it. In some states, however, this right
to return period may be longer, as provided by state law. If you return your
Contract, the Contract terminates and, in most states, we will pay you an amount
equal to your Payment. We will pay the refund within seven days of receiving
your request. No withdrawal charge is imposed upon return of a Contract within
the right to return period. This right to return may vary in certain states in
order to comply with the requirements of state insurance laws and regulations.
Accordingly, you should refer to your Contract for specific information about
your circumstances.
POSTPONEMENT OF PAYMENTS. We may defer for up to fifteen days the payment of
any amount attributable to a Premium paid by check to allow the check a
reasonable time to clear. We ordinarily will pay any amount attributable to the
Account Value allocated to the Variable Account within seven days, except:
(1) whenever the New York Stock Exchange ("NYSE") is closed (other than
customary weekend and holiday closings);
(2) when trading on the NYSE is restricted or an emergency exists, as
determined by the SEC, so that disposal of the Variable Account's
investments or determination of the value of its net assets is not
reasonable practicable; or
(3) at any other time permitted by the SEC for your protection.
In addition, we may delay payment of Account Value in the Fixed Account for
up to six months or a shorter period if required by law. If we defer payment for
more than 30 days we will pay interest (if required) on the deferred amount at
such rate as may be required by the applicable state or jurisdiction.
DEDUCTIONS AND CHARGES
We assess charges and deductions under the Contracts against the
Sub-Accounts and the Account Value. Additional deductions and expenses are paid
out of the Portfolios' assets, as described in the Prospectuses of the
Portfolios.
PREMIUM EXPENSE CHARGE. We charge a premium expense charge on each Premium
paid. The current premium expense charge is 5.5% of the total Premiums paid in
each Contract Year up to twelve times the Lifetime Guaranteed Coverage Monthly
Premium and 3.5% of any Premium in excess of that amount. Twelve times the
Guaranteed Coverage Monthly Premium equals the guideline level premium
determined under Section 7702(c) of the Tax Code. We may change the premium
expense charge, but it will never exceed 5.5% of each Premium.
The premium expense charge is intended to cover a portion of our state
premium tax expenses, certain federal tax liabilities resulting from the receipt
of Premiums, and a portion of our distribution expenses. State premium tax rates
vary from 0% to 4.0%. We do not vary the
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<PAGE>
premium expense charge to reflect the actual premium tax rate in individual
states, or the absence of premium tax in certain states. Accordingly, the
portion of this charge attributable to state premium taxes may be more or less
than the premium taxes assessed in your state.
SEPARATE ACCOUNT EXPENSE CHARGE. On each Valuation Day, we will take a
deduction from the Sub-Accounts to compensate Liberty Life for its expenses
incurred in connection with this Contract. The separate account expense charge
will be calculated at an annual rate equivalent to .60% of average daily net
assets of each Sub-Account, as described in the table of Contract Charges and
Deductions on pages 3-4. The amount deducted will be determined on each
Valuation Day.
The separate account expense charge is intended to cover all expenses under
the Contract other than distribution expenses, and the cost of insurance charges
and the other expenses covered by the monthly deduction and premium expense
charge, which are charged for separately and described below. Accordingly, the
separate account expense charge is intended to compensate us for incurring the
following expenses and assuming certain risks under the Contracts:
-- mortality and expense risk;
-- certain federal taxes and other expenses associated with the receipt of
Premiums; and
-- a portion of our administrative expenses, such as salaries, postage,
telephone, office equipment and periodic reports.
The mortality risk assumed in relation to the Contract includes the risk
that the cost of insurance charges specified in the Contract will be
insufficient to meet claims and the risks under the Guaranteed Death Benefit. We
also assume a risk that, on the Monthly Date preceding the death of an Insured,
the Death Benefit will exceed the amount on which the cost of insurance charges
were based. The expense risk assumed is that expenses incurred in issuing and
administering the Contracts will exceed the administrative charges set in the
Contract.
We currently are not maintaining a provision for taxes attributable to the
operations of the Variable Account (as opposed to the federal tax related to the
receipt of Premiums under the Contracts). In the future, however, we may make
such a charge. Charges for other taxes, if any, attributable to the Variable
Account or to this class of Contracts may also be made.
MONTHLY DEDUCTION. Each month on the Monthly Date we will take a Monthly
Deduction from your Account Value. The Monthly Deduction will consist of a cost
of insurance charge, a contract fee, and any charges for optional benefit
Agreements. We deduct the Monthly Deduction pro rata from your interests in the
Sub-Accounts and your Fixed Account balance.
COST OF INSURANCE CHARGE. The cost of insurance charge is intended to pay
for the cost of providing life insurance coverage for the Insured. We guarantee
that this charge will not exceed the maximum cost of insurance charge determined
on the basis of the rates shown in the mortality table guaranteed in the
Contract.
The current monthly cost of insurance charge is equal to the current cost of
insurance rate times the net amount at risk. The net amount at risk is (a) minus
(b) where:
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(a) is the Death Benefit on the first day of the Contract Month divided by
the sum of one plus the Guaranteed Monthly Equivalent Interest Rate shown
in your Contract; and
(b) is the Account Value on that day before the deduction of the Monthly
Deduction.
Rates may differ based on the age, sex, rating class and history of tobacco
use of the Insured. Your guaranteed cost of insurance rates are set forth in the
mortality tables in your Contract. Because the net amount for which we are at
risk under your Contract may vary monthly, your cost of insurance charge is
likely to differ each month. If the Insured is still living and your Contract is
in effect on the first Contract Anniversary after the Insured's 100th birthday,
we will discontinue charging you a cost of insurance charge.
We determine the cost of insurance charge separately for the initial Face
Amount and each subsequent increase. The current cost of insurance charge covers
our anticipated mortality costs for standard and substandard risks. We determine
the current cost of insurance rates based on our expectations as to our future
mortality experience and other factors. We guarantee, however, that we will
never charge you a cost of insurance charge higher than the amount determined
using the maximum guaranteed cost of insurance rates shown in the Contract. We
base our cost of insurance rates on the sex, issue age, Contract Year, rating
class, and history of tobacco use of the Insured. However, we issue unisex
Contracts in Montana. Our cost of insurance rates are based on the 1980
Commissioners Standard Ordinary ("1980 CSO") Mortality Table based on the
Insured's sex, age last birthday, and history of tobacco use. Our cost of
insurance rates for unisex Contracts will never exceed a maximum based on the
1980 CSO Mortality Table B assuming a blend of 80% male and 20% female lives.
CONTRACT FEE. We charge a contract fee of $9.00 per month if your Contract's
Face Amount is less than $100,000. We charge a contract fee of $6.00 per month
if your Contract's Face Amount is $100,000 or greater. The contract fee is
intended to compensate us for administrative expenses such as salaries, postage,
telephone, office equipment and periodic reports.
PORTFOLIO EXPENSES. You indirectly bear the charges and expenses of the
Portfolios whose shares are held by the Sub-Accounts to which you allocate your
Account Value. The Variable Account purchases shares of the Portfolios at net
asset value. Each Portfolio's net asset value reflects investment advisory fees
and administrative expenses already deducted from the Portfolio's assets. For a
summary of current estimates of these charges and expenses, see pages 13-14. For
more information concerning the investment advisory fees and other charges
against the Portfolios, see the Prospectuses and the statements of additional
information for the Portfolios, which are available upon request.
We may receive compensation from the investment advisers or administrators
of the Portfolios. Such compensation will be consistent with the services we
provide or the cost savings resulting from the arrangement and therefore may
differ between Portfolios.
WITHDRAWAL CHARGE. In general. If you surrender your Contract, take a
partial withdrawal, or decrease your Contract's Face Amount, you may pay a
withdrawal charge. The withdrawal charge on surrender equals the amount shown in
the withdrawal charge table in your Contract, plus any additional withdrawal
charge due to increases in the Face Amount of your Contract. The amount of the
withdrawal charge decreases over time. The withdrawal charge
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on a partial withdrawal on a decrease in Face Amount is an amount in proportion
to the percentage decrease in Face Amount. The withdrawal charge is explained in
more detail below. For additional information concerning the rates applicable to
you, please consult your sales representative. In addition, a table of the
applicable rates is on file with the SEC as an exhibit to the registration
statement for this product.
The withdrawal charge and the premium expense charge are imposed to cover
our actual distribution and premium tax expenses, which include agents' sales
commissions and other sales and distribution expenses. We expect to recover
total sales expenses and premium tax expenses of the Contracts over the life of
the Contracts. However, to the extent distribution costs and premium taxes are
not recovered by the withdrawal charge or the premium expense charge, we may
make up any shortfall from the assets of our general account, which includes
funds derived from the daily deductions charged to the Sub-Accounts and other
fees and charges under the Contracts.
INITIAL WITHDRAWAL CHARGE. When we issue your Contract, we determine the
initial withdrawal charge. To determine the initial amount of the withdrawal
charge, we multiply the initial Face Amount of your Contract by the applicable
rate per thousand dollars of Face Amount. The applicable rate depends on the
Insured's issue age, sex and underwriting class. For example, if the Insured is
age 45 when your Contract is issued, the applicable rates per thousand are as
follows:
<TABLE>
<S> <C>
Male Non-Smoker $ 13.68
Male Smoker $ 21.96
Female Non-Smoker $ 9.72
Female Smoker $ 13.32
Unisex Non-Smoker $ 12.84
Unisex Smoker $ 20.16
</TABLE>
Accordingly, if the Insured were a male non-smoker age 45 and the Contract's
Face Amount were $100,000, the withdrawal charge initially would be $1,368. The
rates for each category are greater or lesser according to the age of the
Insured when your Contract is issued. The maximum rates for each category is
$50.00 per $1,000 of Face Amount.
WITHDRAWAL CHARGE ON SURRENDER. If you surrender your Contract after ten
Contract Years have elapsed, we will not charge a withdrawal charge (unless you
have increased the Face Amount of your Contract, as explained below). Before
that time, we determine the applicable withdrawal charge by multiplying the
initial withdrawal charge on your Contract by the appropriate withdrawal charge
percentage for the Contract Year in which the surrender occurs. Those
percentages are:
<TABLE>
<CAPTION>
% OF
INITIAL % OF INITIAL
CONTRACT WITHDRAWAL CONTRACT WITHDRAWAL
YEAR CHARGE YEAR CHARGE
- --------- ----------- ------------- -------------
<S> <C> <C> <C>
1 100% 6 70%
2 100% 7 60%
3 100% 8 50%
4 90% 9 40%
5 80% 10 20%
</TABLE>
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WITHDRAWAL CHARGE ON PARTIAL WITHDRAWAL. We also charge a withdrawal charge
on a partial withdrawal from your Contract. The applicable withdrawal charge
will be a pro rata share of the then current withdrawal charge on a complete
surrender, based on the percentage decrease in Face Amount resulting from the
partial withdrawal.
If you choose Death Benefit Option 1, a partial withdrawal decreases the
Face Amount on a dollar-for-dollar basis. Accordingly, the percentage used to
calculate the Withdrawal Charge equals the sum of the partial withdrawal plus
the Withdrawal Charge divided by the Face Amount prior to the withdrawal.
If you choose Death Benefit Option 2, a partial withdrawal does not affect
the Face Amount. Accordingly, there is no Withdrawal Charge on partial
withdrawals from Contracts under Option 2.
WITHDRAWAL CHARGE ON DECREASES IN INITIAL FACE AMOUNT. If you request a
decrease in the Face Amount of your Contract, we will charge you a Withdrawal
Charge. The amount of the charge will equal the then applicable Withdrawal
Charge on a full surrender multiplied by the percentage decrease in your
Contract's Face Amount (I.E., the amount of the decrease divided by the Face
Amount before the decrease). We will deduct the Withdrawal Charge pro rata from
your Account Value in each Sub-Account and the Fixed Account. If you need to
take a partial withdrawal in connection with a Face Amount decrease in order for
your Contract to continue to be treated as a life insurance contract under the
Tax Code, we will not charge any additional Withdrawal Charge with respect to
the amount required to be withdrawn.
WITHDRAWAL CHARGE ON INCREASES IN INITIAL FACE AMOUNT. If you increase the
Face Amount of your Contract, we will determine an additional withdrawal charge
applicable to the amount of the increase. We calculate the additional withdrawal
charge using the same procedures described above, except that we use the
Insured's age and underwriting class at the time of the increase, rather than at
the time your Contract was issued. If you surrender your Contract, make a
partial withdrawal, or decrease the Face Amount of your Contract after an
increase in Face Amount, we separately calculate the withdrawal charge
applicable to the initial Face Amount and each increase and add those amounts to
determine the total Withdrawal Charge.
Each Face Amount increase also has a withdrawal charge associated with it.
It reduces at the same rate as the initial withdrawal charge shown above.
MEDICAL WAIVER OF WITHDRAWAL CHARGE. After the first Contract Year, we will
waive the withdrawal charge on all withdrawals under your Contract if on at
least 45 days of any continuous 60 day period beginning after the first Contract
Year any Insured or his or her spouse has a Qualifying Medical Stay, as defined
in the Contract. To obtain this waiver, you must apply in writing within 180
days of your initial eligibility. You may not claim this benefit if the medical
treatment is provided by a resident of your household or a member of your
immediate family. Additional restrictions may apply if the Insured's spouse had
a Qualifying Medical Stay within 45 days before the Contract Date. We may
require you to provide us with written proof of your eligibility. This waiver is
described in more detail in the Contract. This provision may vary in some states
and is discussed in more detail in the Contract.
WITHDRAWAL FEE. In addition to a withdrawal charge, we charge a withdrawal
fee on any partial withdrawal after the first in any Contract Year. The
withdrawal fee will equal the lesser
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of $25 or two percent of the amount of the partial withdrawal. The withdrawal
fee does not apply to full surrenders. The withdrawal fee is intended to
compensate us for our administrative costs in effecting a partial withdrawal.
TRANSFER FEE. The Contract permits us to charge a maximum transfer fee of
$25 per transfer on each transfer after the first twelve transfers in any
Contract Year, including transfers under our Dollar Cost Averaging and Asset
Rebalancing Programs. We currently are waiving the transfer fee on all
transfers. We may impose a limit on the number of free transfers, or change that
number, at any time. If we limit the number of free transfers, we will notify
you of any reduction in the number of free transfers at least 90 days in advance
of the effective date of the change, and the change will not be effective until
your next Contract Anniversary.
We will deduct the transfer fee from the Account Value remaining in the
Sub-Account or the Fixed Account from which the transfer was made. If that
amount is insufficient to pay the transfer fee, we will subtract it from the
transferred amount.
SPECIAL PROVISIONS FOR GROUP OR SPONSORED ARRANGEMENTS. Where permitted by
state insurance laws, Contracts may be purchased under group or sponsored
arrangements. We may reduce or waive the charges and deductions described above
for Contracts issued under these arrangements. Among other things, we may waive
withdrawal charges and deductions to employees, officers, directors, agents, and
immediate family members of the foregoing. We will reduce these charges and
deductions in accordance with our rules in effect when we approve the
application for a Contract. To qualify for a reduction, a group or sponsored
arrangement must satisfy our criteria as to, for example, the size of the group,
the expected number of participants and anticipated Premiums from the group.
Generally, the sales contacts and effort, administrative costs and mortality
cost per Contract vary based on such factors as the size of the group or
sponsored arrangements, the purposes for which Contracts are purchased and
certain characteristics of the group's members. The amount of reduction and the
criteria for qualification will reflect the reduced sales effort and
administrative costs resulting from, and the different mortality experience
expected as a result of, sales to qualifying groups and sponsored arrangements.
From time to time, we may modify on a uniform basis both the amounts of
reductions and the criteria for qualification. Reductions in these charges will
not be unfairly discriminatory against any person, including the affected
Contract Owners and all other owners of all other contracts funded by the
Variable Account.
GENERAL CONTRACT PROVISIONS
STATEMENTS TO CONTRACT OWNERS. We will maintain all records relating to the
Variable Account and the Sub-Accounts. Each year we will send you a report
showing information concerning your Contract transactions in the past year and
the current status of your Contract. The report will include information such as
the Account Value as of the end of the current and the prior year, the current
Death Benefit, Surrender Value, Indebtedness, partial withdrawals, earnings,
Payments paid, and deductions made since the last annual report. We will also
include any information required by state law or regulation. If you ask us, we
will send you an additional report at any time. We may charge you up to $25 for
this additional report. We will tell you the current charge before we send you
the report.
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In addition, we will send you the financial statements of the Portfolios and
other reports as specified in the 1940 Act. We also will mail you confirmation
notices or other appropriate notices of Contract transactions quarterly or more
frequently within the time periods specified by law. Please give us prompt
written notice of any address change. Please read your statements and
confirmations carefully and verify their accuracy and contact us promptly with
any question.
LIMIT ON RIGHT TO CONTEST. In the absence of fraud, we may not contest the
insurance coverage under the Contract after the Contract has been in force for
two years after the Contract Date while the Insured is alive or for two years
after any increase in the Face Amount. The two-year incontestability period may
vary in certain states to comply with the requirements of state insurance laws
and regulations.
In issuing a Contract, we rely on your application. Your statements in that
application and any supplemental applications, in the absence of fraud, are
considered representations and not warranties. In the absence of fraud, we will
not use any statement made in connection with the Contract application to void
the Contract or to deny a claim, unless that statement is a part of the
application or an amendment thereto.
SUICIDE. If the Insured commits suicide while sane or kills him- or herself
while insane within two years of the Contract Date, we are not required to pay
the full Death Benefit that would otherwise be payable. Instead, we will pay you
an amount equal to the Account Value less any Indebtedness, or the minimum
amount required by the state in which your Contract was issued, and the Contract
will end. Likewise, if the Insured dies by suicide while sane or kills him- or
herself while insane within two years after the effective date of any increase
in the Face Amount, the amount we will pay you with respect to that increase
will be limited to the Monthly Deductions taken in connection with that
increase.
MISSTATEMENT AS TO AGE AND SEX. If the age or sex of the Insured is
incorrectly stated in the application, we will adjust any proceeds appropriately
as specified in the Contract.
BENEFICIARY. You name the original Beneficiary(ies) and Contingent
Beneficiary(ies) in the application for the Contract. You may change the
Beneficiary or Contingent Beneficiary at any time while the Insured is alive,
except irrevocable Beneficiaries and irrevocable Contingent Beneficiaries may
not be changed without their consent.
You must request a change of Beneficiary in writing. We will provide a form
to be signed and filed with us. Your request for a change in Beneficiary or
Contingent Beneficiary will take effect as of the date you signed the form after
we acknowledge receipt in writing. Until we acknowledge receipt of your change
instructions, we are entitled to rely on your most recent instructions in our
files. Accordingly, we are not liable for making a payment to the person shown
in our files as the Beneficiary or treating that person in any other respect as
the Beneficiary, even if instructions that we subsequently receive from you seek
to change your Beneficiaries effective as of a date before we made the payment
or took the action in question.
If you name more than one Beneficiary, we will divide the Death Benefit
among your Beneficiaries according to your most recent written instructions. If
you have not given us written instructions, we will pay the Death Benefit in
equal shares to the Beneficiaries. If one of the Beneficiaries dies before you,
we will divide the Death Benefit among the surviving
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<PAGE>
Beneficiaries. If no Beneficiary is living, the Contingent Beneficiary will be
the Beneficiary. The interest of any revocable Beneficiary is subject to the
interest of any assignee. If no Beneficiary or Contingent Beneficiary is living,
the Beneficiary is the Contract Owner or the Contract Owner's estate.
ASSIGNMENT. While the Insured is alive, you may assign your Contract as
collateral security. You must notify us in writing if you assign the Contract.
Until we receive notice from you, we are not liable for any action we may take
or payments we may make that may be contrary to the terms of your assignment. We
are not responsible for the validity of an assignment. Your rights and the
rights of the Beneficiary may be affected by an assignment. An assignment may
result in income tax and a ten percent penalty tax. You should consult your tax
adviser before assigning your Contract.
CREDITORS' CLAIMS. To the extent permitted by law, no benefits payable under
this Contract will be subject to the claims of your or the Beneficiary's
creditors.
DIVIDENDS. We will not pay any dividend under the Contract.
NOTICE AND ELECTIONS. To be effective, all notices and elections under the
Contract must be in writing, signed by you, and received by us at our Service
Center. Certain exceptions may apply. Unless otherwise provided in the Contract,
all notices, requests and elections will be effective when received at our
Service Center complete with all necessary information.
MODIFICATION. We reserve the right to modify the Contract without your
express consent, in the circumstances described in this Prospectus or as
necessary to conform to applicable law or regulation or any ruling issued by a
governmental agency. The provisions of the Contract will be construed so as to
comply with the requirements of Section 7702 of the Tax Code.
FEDERAL TAX CONSIDERATIONS
NOTE: THE FOLLOWING DISCUSSION IS BASED UPON OUR UNDERSTANDING OF CURRENT
FEDERAL INCOME TAX LAW APPLICABLE TO LIFE INSURANCE CONTRACTS IN GENERAL. WE
CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN THOSE LAWS WILL BE MADE.
ALSO, WE DO NOT GUARANTEE THE TAX STATUS OF THE CONTRACTS. YOU BEAR THE COMPLETE
RISK THAT THE CONTRACTS MAY NOT BE TREATED AS "LIFE INSURANCE CONTRACTS" UNDER
FEDERAL INCOME TAX LAWS.
In addition, this discussion does not include a detailed description of the
federal income tax consequences of the purchase of these Contracts or any
discussion of special tax rules that may apply to certain purchase situations.
We also have not tried to consider any other possibly applicable state or other
tax laws, for example, the estate tax consequences of the Contracts. You should
seek tax advice concerning the effect on your personal tax liability of the
transactions permitted under the Contract, as well as any other questions you
may have concerning the tax status of the Contract or the possibility of changes
in the tax law.
TAXATION OF LIBERTY LIFE AND THE VARIABLE ACCOUNT. Liberty Life is taxed as
a life insurance company under Part I of Subchapter L of the Tax Code. The
operations of the Variable Account are taxed as part of the operations of
Liberty Life. Investment income and realized capital gains are not taxed to the
extent that they are applied under the Contracts.
Accordingly, we do not anticipate that Liberty Life will incur any federal
income tax liability attributable to the operation of the Variable Account (as
opposed to the federal tax
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<PAGE>
related to the receipt of Payments under the Contracts). Therefore, we are not
making any charge or provision for federal income taxes. However, if the tax
treatment of the Variable Account is changed, we may charge the Variable Account
for its share of the resulting federal income tax.
In several states we may incur state and local taxes on the operations of
the Variable Account. We currently are not making any charge or provision for
them against the Variable Account. We do, however, use part of the Withdrawal
Charge to offset these taxes. If these taxes should be increased, we may make a
charge or provision for them against the Sub-Accounts. If we do so, the results
of the Sub-Accounts will be reduced.
TAX STATUS OF THE CONTRACT. The Contract is structured to satisfy the
definition of a life insurance contract under the Tax Code. As a result, the
Death Benefit ordinarily will be fully excluded from the gross income of the
Beneficiary. The Death Benefit will be included in your gross estate for federal
estate tax purposes if the proceeds are payable to your estate. The Death
Benefit will also be included in your estate, if the Beneficiary is not your
estate but you retained incidents of ownership in the Contract. Examples of
incidents of ownership include the right to change Beneficiaries, to assign the
Contract or revoke an assignment, and to pledge the Contract or obtain a
Contract Loan. If you own and are the Insured under a Contract and if you
transfer all incidents of ownership in the Contract more than three years before
your death, the Death Benefit will not be included in your gross estate. State
and local estate and inheritance tax consequences may also apply.
In addition, certain transfers of the Contract or Death Benefit, either
during life or at death, to individuals (or trusts for the benefit of
individuals) two or more generations below that of the transferor may be subject
to the federal generation-skipping transfer tax.
In the absence of final regulations or other pertinent interpretations of
the Tax Code, some uncertainty exists as to whether a substandard risk Contract
will meet the statutory definition of a life insurance contract. If a Contract
were deemed not to be a life insurance contract for tax purposes, it would not
provide most of the tax advantages usually provided by a life insurance
contract. We reserve the right to amend the Contracts to comply with any future
changes in the Tax Code, any regulations or rulings under the Tax Code and any
other requirements imposed by the Internal Revenue Service ("IRS").
In addition, you may use the Contract in various arrangements, including
non-qualified deferred compensation or salary continuance plans, split dollar
insurance plans, executive bonus plans, retiree medical benefit plans and
others. The tax consequences of such plans may vary depending on the particular
facts and circumstances of each individual arrangement. Therefore, if you are
contemplating the use of a Contract in any arrangement the value of which
depends in part on its tax consequences, you should be sure to consult a
qualified tax adviser regarding the tax treatment of the proposed arrangement.
DIVERSIFICATION REQUIREMENTS. Section 817(h) of the Tax Code requires that
the underlying assets of variable life insurance contracts be diversified. The
Tax Code provides that a variable life insurance contract will not be treated as
a life insurance contract for federal income tax purposes for any period and any
subsequent period for which the investments are
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not adequately diversified. If the Contract were disqualified for this reason,
you would lose the tax deferral advantages of the Contract and would be subject
to current federal income taxes on all earnings allocable to the Contract.
The Tax Code provides that variable life insurance contracts such as the
Contract meet the diversification requirements if, as of the close of each
quarter, the underlying assets meet the diversification standards for a
regulated investment company, and no more than 55% of the total assets consist
of cash, cash items, U.S. Government securities and securities of other
regulated investment companies. For purposes of determining whether or not the
diversification standards of Section 817(h) of the Tax Code have been met, each
United States government agency or instrumentality is treated as a separate
issuer.
The United States Treasury Department (the "Treasury Department") also has
issued regulations that establish diversification requirements for the
segregated asset accounts underlying variable contracts such as the Contracts.
These regulations amplify the diversification requirements set forth in the Tax
Code and provide an alternative to the provision described above. Under these
regulations, a segregated asset account will be deemed adequately diversified
if: (1) no more than 55% of the value of the total assets of the account is
represented by any one investment; (2) no more than 70% of the value of the
total assets of the account is represented by any two investments; (3) no more
than 80% of the value of the total assets of the account is represented by any
three investments; and (4) no more than 90% of the value of the total assets of
the account is represented by any four investments.
These diversification standards are applied to each Sub-Account of the
Variable Account by looking to the investments of the Portfolio underlying the
Sub-Account. One of our criteria in selecting the Portfolios is that their
investment managers intend to manage them in compliance with these
diversification requirements.
OWNER CONTROL. In certain circumstances, variable life insurance contract
owners will be considered the owners, for tax purposes, of separate account
assets underlying their contracts. In those circumstances, the contract owners
could be subject to taxation on the income and gains from the separate account
assets.
In published rulings, the Internal Revenue Service has stated that a
variable insurance contract owner will be considered the owner of separate
account assets, if the owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. When the
diversification regulations were issued, the Treasury Department announced that
in the future, it would provide guidance on the extent to which variable
contract owners could direct their investments among Sub-Accounts without being
treated as owners of the underlying assets of the Variable Account. As of the
date of this Prospectus, no such guidance has been issued. We cannot predict
when or whether the Treasury Department will issue that guidance or what
position the Treasury Department will take. In addition, although regulations
are generally issued with prospective effect, it is possible that regulations
may be issued with retroactive effect.
The ownership rights under the Contract are similar in many respects to
those described in IRS rulings in which the contract owners were not deemed to
own the separate account assets. In some respects, however, they differ. For
example, under the Contract you have many more investment options to choose from
than were available under the contracts
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involved in the published rulings, and you may be able to transfer Account Value
among the investment options more frequently than in the published rulings.
Because of these differences, it is possible that you could be treated as the
owner, for tax purposes, of the Portfolio shares underlying your Contract and
therefore subject to taxation on the income and gains on those shares. Moreover,
it is possible that the Treasury Department's position, when announced, may
adversely affect the tax treatment of existing Contracts. We therefore reserve
the right to modify the Contract as necessary to attempt to prevent you from
being considered the owner for tax purposes of the underlying assets.
The remainder of this discussion assumes that the Contract will be treated
as a life insurance contract for federal tax purposes.
TAX TREATMENT OF LIFE INSURANCE DEATH BENEFIT PROCEEDS. In general, the
amount of the Death Benefit payable under a Contract is excludable from gross
income under the Tax Code. Certain transfers of the Contract, however, may
result in a portion of the Death Benefit being taxable.
If the Death Benefit is not received in a lump sum and is, instead, applied
under one of the proceeds options, payments generally will be prorated between
amounts attributable to the Death Benefit, which will be excludable from the
Beneficiary's income, and amounts attributable to interest (accruing after the
Insured's death), which will be includable in the Beneficiary's income.
ACCELERATED DEATH BENEFIT. In general, the tax treatment of an Accelerated
Death Benefit is the same as the tax treatment of Death Benefits, as described
above. However, where an Accelerated Death Benefit is based on the Insured's
being "Chronically Ill", the Tax Code limits the amount of the Accelerated Death
Benefit that will qualify for exclusion from federal income taxation. In some
circumstances, an Accelerated Death Benefit under the Contract may exceed these
limits, and the excess amount therefore may be taxable. Accordingly, if you are
considering requesting an Accelerated Death Benefit, you should first consult a
qualified tax adviser.
TAX DEFERRAL DURING ACCUMULATION PERIOD. Under existing provisions of the
Tax Code, except as described below, any increase in your Account Value is
generally not taxable to you unless you receive or are deemed to receive amounts
from the Contract before the Insured dies. If you surrender your Contract, the
Cash Value (less any Contract Fee paid upon surrender) will be includable in
your income to the extent the amount received exceeds the "investment in the
contract." The "investment in the contract" generally is the total Premiums and
other consideration paid for the Contract, less the aggregate amount received
under the Contract previously to the extent such amounts received were
excludable from gross income. Whether partial withdrawals (or other amounts
deemed to be distributed) from the Contract constitute income depends, in part,
upon whether the Contract is considered a "modified endowment contract" ("MEC")
for federal income tax purposes.
CONTRACTS WHICH ARE MECs
CHARACTERIZATION OF A CONTRACT AS A MEC. In general, this Contract will not
constitute a MEC, unless: (1) it was received in exchange for another life
insurance contract which was a MEC; (2) excess Premiums are paid into the
Contract, causing it to fail the "7-pay" test under
49
<PAGE>
Section 7702A of the Tax Code, or (3) there is a decrease in the Face Amount or
an Agreement is removed, such that the Contract no longer complies with the
"7-pay" test under Section 7702A of the Tax Code. Other "material" changes to
your Contract may also cause it to be treated as a MEC.
TAX TREATMENT OF WITHDRAWALS, LOANS, ASSIGNMENTS AND PLEDGES UNDER MECS. If
your Contract is a MEC, withdrawals from your Contract will be treated first as
withdrawals of income and then as a recovery of your investment in the Contract.
Thus, you may realize taxable income upon a withdrawal if the Account Value
exceeds the investment in the Contract. You may also realize taxable income when
you take a Contract Loan, because any loan (including unpaid loan interest)
under the Contract will be treated as a withdrawal for tax purposes. In
addition, if you assign or pledge any portion of the value of your Contract (or
agree to assign or pledge any portion), the assigned or pledged portion of your
Account Value will be treated as a withdrawal for tax purposes. Before
assigning, pledging, or requesting a loan under a Contract that is a MEC, you
should consult a qualified tax adviser.
PENALTY TAX. Generally, withdrawals (or the amount of any deemed
withdrawals) from a MEC are subject to a penalty tax equal to ten percent of the
portion of the withdrawal that is includable in income, unless the withdrawals
are made: (1) after you reach age 59 1/2, (2) because you have become disabled
(as defined in the Tax Code), or (3) as substantially equal periodic payments
over your life or life expectancy (or the joint lives or life expectancies of
you and your beneficiary, as defined in the Tax Code). Certain other exceptions
to the ten-percent penalty tax may apply.
AGGREGATION OF CONTRACTS. All life insurance contracts which are MECs and
which are purchased by the same person from us or any of our affiliates within
the same calendar year will be aggregated and treated as one contract for
purposes of determining the amount of a withdrawal (including a deemed
withdrawal) that is includable in taxable income.
CONTRACTS WHICH ARE NOT MECs
TAX TREATMENT OF WITHDRAWALS GENERALLY. If your Contract is not a MEC, the
amount of any withdrawal from the Contract will be treated first as a
non-taxable recovery of premiums and then as income from the Contract. Thus,
only the portion of a withdrawal that exceeds the investment in the Contract
immediately before the withdrawal will be includable in taxable income.
CERTAIN DISTRIBUTIONS REQUIRED BY THE TAX LAW IN THE FIRST 15 CONTRACT
YEARS. Where cash distributions are required under the Tax Code in connection
with a reduction in benefits during the first 15 years after the Contract is
issued (or if withdrawals are made in anticipation of a reduction in benefits,
within the meaning of the Tax Code, during this period), some or all of such
amounts may be includable in taxable income.
TAX TREATMENT OF LOANS. If your Contract is not a MEC, a loan received under
the Contract generally will be treated as indebtedness for tax purposes, rather
than a withdrawal of Account Value. As a result, you will not realize taxable
income on any part of the loan as long as the Contract remains in force. If you
surrender your Contract or your Contract lapses, however, any outstanding loan
balance will be treated as an amount received by you as part of the Surrender
Value. Accordingly, you may be subject to taxation on the loan amount at
50
<PAGE>
that time. Moreover, if any portion of your Contract Loan is a preferred loan, a
portion of your Contract Loan may be includable in your taxable income.
Generally, you may not deduct interest paid on loans under the Contract, even if
you use the loan proceeds in your trade or business.
ACTIONS TO ENSURE COMPLIANCE WITH THE TAX LAW. We believe that the maximum
amount of Premiums we intend to permit for the Contracts will comply with the
Tax Code definition of a life insurance contract. We will monitor the amount of
your Premiums, and, if your total Premiums during a Contract Year exceed those
permitted by the Tax Code, we will refund the excess Premiums within 60 days of
the end of the Contract Year and will pay interest and other earnings (which
will be includable in taxable income) as required by law on the amount refunded.
We reserve the right to increase the Death Benefit (which may result in larger
charges under a Contract) or to take any other action deemed necessary to ensure
the compliance of the Contract with the federal tax definition of a life
insurance contract.
FEDERAL INCOME TAX WITHHOLDING. We will withhold and remit to the federal
government a part of the taxable portion of withdrawals made under a Contract,
unless the Owner notifies us in writing at or before the time of the withdrawal
that he or she chooses not to have withholding. As a Contract Owner, you will be
responsible for the payment of any taxes and early distribution penalties that
may be due on the amounts received under the Contract, whether or not you choose
withholding. You may also be required to pay penalties under the estimated tax
rules, if your withholding and estimated tax payments are insufficient to
satisfy your total tax liability.
TAX ADVICE. This summary is not a complete discussion of the tax treatment
of the Contract. You should seek tax advice from an attorney who specializes in
tax issues.
DESCRIPTION OF LIBERTY LIFE AND THE VARIABLE ACCOUNT
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON. Liberty Life Assurance Company of
Boston was incorporated on September 17, 1963 as a stock life insurance company.
Its executive and administrative offices are located at 175 Berkeley Street,
Boston, Massachusetts 02117.
Liberty Life writes individual life insurance on both a participating and a
non-participating basis and group life and disability insurance and individual
and group annuity contracts on a non-participating basis. The variable life
insurance contracts described in this Prospectus are issued on a
non-participating basis. Liberty Life is licensed to do business in all states,
in the District of Columbia, and in Canada. We intend to market the Contracts
everywhere in the United States we conduct life insurance business. Liberty Life
has been rated "A" by A.M. Best and Company, independent analysts of the
insurance industry. The Best's A rating is in the second highest rating
category, which also includes a lower rating of A-. Best's Ratings merely
reflect Best's opinion as to the relative financial strength of Liberty Life and
Liberty Life's ability to meet its contractual obligations to its Contract
holders. The ratings are not intended to reflect the financial strength or
investment experience of the Variable Account. We may from time to time
advertise these ratings in our sales literature.
51
<PAGE>
Liberty Life is a member of the Insurance Marketplace Standards Association
("IMSA"). Accordingly, we may use the IMSA logo and membership in IMSA in
advertisements. Being a member means that Liberty Life has chosen to participate
in IMSA's Life Insurance Ethical Market Conduct Program.
Liberty Life is an indirect wholly-owned subsidiary of Liberty Mutual
Insurance Company ("Liberty Mutual") and Liberty Mutual Fire Insurance Company.
Liberty Mutual is a multi-line insurance and financial services institution.
Pursuant to a Guarantee Agreement dated February 3, 1998, Liberty Mutual,
our ultimate parent, unconditionally guarantees to us on behalf of and for the
benefit of Liberty Life and owners of life insurance contracts and annuity
contracts issued by Liberty Life that it will, on demand, make funds available
to us for the timely payment of contractual obligations under any insurance
policy or annuity contract issued by us. Liberty Mutual may terminate this
guarantee on notice to Liberty Life.
Liberty Life also acts as a sponsor for two other of its separate accounts
that are registered investment companies: Variable Account J and Variable
Account K. The officers and employees of Liberty Life are covered by a fidelity
bond in the amount of $70,000,000.
OFFICERS AND DIRECTORS OF LIBERTY LIFE. Our directors and officers are
listed below, together with information as to their dates of election and
principal business occupations during the past five years (if other than their
present occupation). Where no dates are given, the person has held that position
for at least the past five years.
GARY L. COUNTRYMAN; Chairman of the Board, June 1998 to date; Chief
Executive Officer and Chairman of the Board, March 1987 to June 1998; Director,
March 1981; Chairman of the Board, Liberty Mutual Insurance Company, April 1998
to date; Chairman of the Board and Chief Executive Officer, Liberty Mutual
Insurance Company, April 1992 to April 1998.
EDMUND F. KELLY; President and Chief Executive Officer, June 1998 to date;
President and Chief Administrative Officer, June 1995 to June 1998; Director,
July 1992 to date; President and Chief Executive Officer, Liberty Mutual
Insurance Company, April 1998 to date; President and Chief Operating Officer,
Liberty Mutual Insurance Company, April 1992 to April 1998.
MORTON E. SPITZER; Executive Vice President, Chief Operating Officer
Individual, July 1992 to date; Director, August 1995 to date.
JEAN M. SCARROW; Executive Vice President, Chief Operating Officer--Group,
and Director, May 1997 to date; Senior Vice President, Liberty Mutual Insurance
Company, May 1997 to date; Vice President, Liberty Mutual Insurance Company,
April 1995 to May 1997; employee of Liberty Mutual Insurance Company since June
1985.
A. ALEXANDER FONTANES; Vice President, March 1992 to date; Director, August
1995 to date; Senior Vice President and Chief Investment Officer, Liberty Mutual
Insurance Company.
JOHN B. CONNERS; Director, August 1995 to date; Executive Vice President and
Manager-- Personal Market, Liberty Mutual Insurance Company.
J. PAUL CONDRIN, III; Vice President and Director, April 1997 to date;
Senior Vice President and Chief Financial Officer, Liberty Mutual Insurance
Company.
52
<PAGE>
CHRISTOPHER C. MANSFIELD; Director, August 1995 to date; Senior Vice
President and General Counsel, Liberty Mutual Insurance Company.
ELIZABETH C. COSGROVE; Vice President, May 1999 to date; Marketing Manager,
May 1994 to May 1999.
ANNE G. DELANEY; Vice President--Administration--Individual Life Operations,
July 1999 to date; Senior Vice President--Administration, GE Financial
Assurance, 1991-1999.
ANDREW M. GIRDWOOD, JR.; Vice President, March 1984 to date.
RICHARD W. HADLEY; Vice President, and Comptroller, June 1993 to date.
RICHARD B. LASSOW; Vice President, September 1994 to date; Chief
Actuary--Individual Life, Connecticut Mutual Life Insurance Company, September
1989 to June 1994.
WILLIAM J. O'CONNELL; Vice President and Assistant General Counsel, November
1998 to date
JOHN S. O'DONNELL; Vice President, April 1991 to date.
STEVEN M. SENTLER; Vice President, September 1994 to date; Second Vice
President, Travelers Insurance Company, December 1978 to November 1993.
JOHN A. TYMOCHKO; Vice President, March 1993 to date.
BARRY S. GILVAR; Secretary, August 1995 to date; Assistant Secretary, March
1993 to August 1995; Vice President and Secretary, Liberty Mutual Insurance
Company.
ELLIOT J. WILLIAMS; Treasurer, April 1997 to date; Vice President and
Treasurer, Liberty Mutual Insurance Company.
GERALD H. DOLAN; Assistant Treasurer, June 1996 to date; Assistant
Controller and Manager--Corporate Tax, Liberty Mutual Insurance Company, January
1999 to date; Assistant Controller and Director--Corporate Tax, Liberty Mutual
Insurance Company, prior to January 1999.
BERNARD GILLEN; Assistant Treasurer, June 1996 to date; Director--Tax
Compliance, Liberty Mutual Insurance Company.
JAMES W. JAKOBEK; Assistant Treasurer, September 1990 to date; Vice
President and Manager, Liberty Mutual Insurance Company.
CHARLENE ALBANESE; Assistant Secretary, December 1997 to date;
Manager--Individual Life Policy Services, Liberty Mutual Insurance Company,
August 1998 to date; Assistant Manager-- Individual Life Policy Services,
Liberty Mutual Insurance Company, July 1997 to August 1998; Manager--Individual
Life Policy Services, Liberty Mutual Insurance Company, April 1991 to July 1997.
DIANE S. BAINTON; Assistant Secretary, November 1995 to date; Assistant
Secretary, Liberty Mutual Insurance Company.
KATHERINE DESIDERIO; Assistant Secretary, November 1995 to date; Hearing
Representative, Liberty Mutual Insurance Company.
53
<PAGE>
JAMES R. PUGH; Assistant Secretary, November 1995 to date; Senior Corporate
Counsel, Liberty Mutual Insurance Company.
HARVEY SWEDLOVE; Assistant Secretary, February 1997 to date; Vice President
and General Counsel, Liberty Canada Holdings, Ltd., January 1996 to date;
Consultant, Maris Management, Ltd., June 1994 to December 1995; Vice President
and General Counsel, Camrost Development Corporation, August 1987 to June 1994.
The business address of each of the foregoing officers and directors is 175
Berkeley Street, Boston, Massachusetts 02117.
FINANCIAL INFORMATION CONCERNING LIBERTY LIFE. You should consider the
financial statements for Liberty Life that are attached to the end of this
Prospectus only as bearing on the Company's ability to meet its obligations
under the Contract. They do not relate to the investment performance of the
assets held in the Variable Account.
VARIABLE ACCOUNT. LLAC Variable Account was originally established on July
10, 1998, as a segregated asset account of Liberty Life, under the laws of the
Commonwealth of Massachusetts. The Variable Account meets the definition of a
"separate account" under the federal securities laws and is registered with the
SEC as a unit investment trust under the 1940 Act. The SEC does not supervise
the management of the Variable Account or Liberty Life.
We own the assets of the Variable Account, but we hold them separate from
our other assets. To the extent that these assets are attributable to the
Account Value of the Contracts offered by this Prospectus, these assets are not
chargeable with liabilities arising out of any other business we may conduct.
Income, gains, and losses, whether or not realized, from assets allocated to the
Variable Account are credited to or charged against the Variable Account without
regard to our other income, gains, or losses. Our obligations arising under the
Contracts are general corporate obligations of Liberty Life.
The Variable Account is divided into Sub-Accounts. The assets of each
Sub-Account are invested in the shares of one of the Portfolios. We do not
guarantee the investment performance of the Variable Account, its Sub-Accounts
or the Portfolios. Values allocated to the Variable Account will rise and fall
with the values of shares of the Portfolios and are also reduced by Contract
charges. In the future, we may use the Variable Account to fund other variable
universal life insurance contracts. We will account separately for each type of
variable life insurance contract funded by the Variable Account.
SAFEKEEPING OF THE VARIABLE ACCOUNT'S ASSETS. We hold the assets of the
Variable Account. We keep those assets physically segregated and held separate
and apart from our general account assets. We maintain records of all purchases
and redemptions of shares of the Portfolios.
STATE REGULATION OF LIBERTY LIFE. We are subject to the laws of
Massachusetts and regulated by the Massachusetts Division of Insurance. Every
year we file an annual statement with the Division of Insurance covering our
operations for the previous year and our financial condition as of the end of
the year. We are inspected periodically by the Division of Insurance to verify
our contract liabilities and reserves. We also are examined periodically by the
54
<PAGE>
National Association of Insurance Commissioners. Our books and records are
subject to review by the Division of Insurance at all times. We are also subject
to regulation under the insurance laws of every jurisdiction in which we
operate.
YEAR 2000 MATTERS
We have been addressing Year 2000 matters since late 1995. We have allocated
significant resources, both internal and external, to an on going, carefully
planned and managed effort to examine all relevant internal computing systems to
identify areas that may require changes. Our efforts include both applications
that we have developed internally and software that has been acquired from
external sources. In addition to the effort to modify existing systems, we have
established Year 2000 compliance standards for all new internal systems.
We completed our Year 2000 efforts on all critical internal application
systems ahead of our self-imposed 12/31/98 schedule. We believe that these
systems are Year 2000 capable in accordance with our corporate standards and
guidelines.
We continue to monitor and test third party software to determine whether it
meets our Year 2000 standards. As needed, we will replace, upgrade or work
around non-compliant products. The effort with respect to third party software
will continue through 1999 as needed. Extended testing is dictated by routine
changes, upgrades, and updates issued by our vendors.
Prior to 1998 with respect to banks and in 1998 for other suppliers, we
established an on-going effort to identify key partners and to reach out to
these entities to determine whether and to what extent there could be an impact
on our business. We have issued Year 2000 readiness surveys to key business
suppliers identified by our Strategic Business Units. We are evaluating
responses to determine which suppliers may present risk and to put in place
appropriate business continuity plans.
Our objective is to provide uninterrupted service to all of our
policyholders and customers through and beyond 2000.
We do not expect that the cost of addressing the Year 2000 issues will be
material to Liberty Life's financial condition or its results of operation.
DISTRIBUTION OF CONTRACTS
Liberty Life Distributors LLC ("LLD") serves as distributor of the
Contracts. LLD is located at 100 Liberty Way, Dover New Hampshire 03820. LLD is
our wholly-owned subsidiary. It is registered as a broker-dealer under the
Securities Exchange Act of 1934, and is a member of the National Association of
Securities Dealers, Inc.
The Contracts described in this Prospectus are sold by registered
representatives of broker-dealers or bank employees who are licensed insurance
agents appointed by the Company, either individually or through an incorporated
insurance agency. LLD enters into selling agreements with affiliated and
unaffiliated broker-dealers and banks whose personnel participate in the offer
and sale of the Contracts. In some states, Contracts may be sold by
representatives or employees of banks that may be acting as broker-dealers
without separate registration under the Securities Exchange Act of 1934,
pursuant to legal and regulatory exceptions.
55
<PAGE>
Generally, representatives will receive a commission of not more than 30% of
the Premiums received in the first year on Premiums up to the commissionable
Premium, plus not more than 4% of any additional Premiums in the first Contract
Year. Commissions on Premiums paid in subsequent years are lower.
Representatives also will generally receive a commission on a Face Amount
increase. In addition we may pay or permit other promotional incentives in cash,
or credit or other compensation. We also may pay override payments, expense
reimbursement allowances, bonuses, broker-dealer fees, training allowances, and
service fees.
The distribution agreement with LLD provides for indemnification of LLD by
Liberty Life for liability to owners arising out of services rendered or
contracts issued.
The name and position of each officer and manager of LLD as of January 1,
1999, is as follows:
John B. Conners, Chairman of the Board of Managers
J. Paul Condrin, Manager
A. Alexander Fontanes, Manager
Christopher C. Mansfield, Manager
Morton E. Spitzer, Manager
John T. Treece, Jr., President
Richard B. Lassow, Vice President, Administration
Richard W. Hadley, Treasurer
Elliott J. Williams, Assistant Treasurer
Barry S. Gilvar, Secretary
Williams J. O'Connell, Assistant Secretary
James R. Pugh, Assistant Secretary
Lee W. Rabkin, Assistant Secretary
The principal business address of Mr. Treece is 100 Liberty Way, Dover, New
Hampshire 03820-5808. The principal business address of the remaining officers
and managers of LLD is 175 Berkeley Street, Boston, Massachusetts 02117.
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting the Variable Account.
Liberty Life is engaged in routine lawsuits which, in our management's judgment,
are not of material importance to its total assets or material with respect to
the Variable Account.
LEGAL MATTERS
All matters of Massachusetts law pertaining to the Contract, including the
validity of the Contract and our right to issue the Contract under Massachusetts
law, have been passed upon by William J. O'Connell, Esq., Vice President and
Assistant General Counsel. The law firm of Jorden Burt Boros Cicchetti Berenson
& Johnson, 1025 Thomas Jefferson St., Suite 400, East Lobby, Washington, D.C.
20007-5201, serve as special counsel to Liberty Life with regard to the federal
securities laws.
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REGISTRATION STATEMENT
We have filed a registration statement with the SEC, Washington, D.C., under
the Securities Act of 1933 as amended, with respect to the Contracts offered by
this Prospectus. This Prospectus does not contain all the information set forth
in the registration statement and the exhibits filed as part of the registration
statement. You should refer to the registration statement and the exhibits for
further information concerning the Variable Account, Liberty Life, and the
Contracts. The descriptions in this Prospectus of the Contracts and other legal
instruments are summaries. You should refer to those instruments as filed for
their precise terms.
EXPERTS
The financial statements of Liberty Life Assurance Company of Boston as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998, included in this Prospectus have been audited by Ernst &
Young LLP, 200 Clarendon Street, Boston, Massachusetts, independent auditors, as
set forth in their report appearing elsewhere herein, and are included in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing. Actuarial matters included in this Prospectus and the
registration statement of which it is a part, including the hypothetical
Contract illustrations, have been examined by Richard B. Lassow, FSA, MAAA, Vice
President and Actuary of the Company, and are included in reliance upon his
opinion as to their reasonableness.
FINANCIAL STATEMENTS
No financial statements are included for the Variable Account. As of July
31, 1999, it had not yet commenced operations, had no assets or liabilities, and
had received no income nor incurred any expense. The financial statements of
Liberty Life that are included should be considered only as bearing upon Liberty
Life's ability to meet its contractual obligations under the Contracts. Liberty
Life's financial statements do not bear on the investment experience of the
assets held in the Variable Account. The most current financial statements of
Liberty Life are those as of the end of the most recent fiscal year. Liberty
Life does not prepare such financial statements more often than annually and
believes that any incremental benefit to prospective Contract Owners that may
result from preparing and delivering more current financial statements, though
unaudited, does not justify the additional cost that would be incurred. Liberty
Life represents that there have been no adverse material changes in Liberty
Life's financial position or operations between the end of the most recent
fiscal year and the date of this Prospectus.
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LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Independent Auditors............................................................................ F-2
Audited Financial Statements
Balance Sheets............................................................................................ F-3
Statements of Income...................................................................................... F-4
Statements of Stockholders' Equity........................................................................ F-5
Statements of Cash Flows.................................................................................. F-6
Notes to Financial Statements............................................................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Liberty Life Assurance Company of Boston
We have audited the accompanying balance sheets of Liberty Life Assurance
Company of Boston (the Company) as of December 31, 1998 and 1997, and the
related statements of income, stockholders' equity, and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Liberty Life Assurance
Company of Boston at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
February 8, 1999
F-2
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------ ----------
<S> <C> <C>
ASSETS (IN THOUSANDS)
Investments:
Fixed maturities, available for sale.............................. $ 2,506,333 $2,143,658
Equity securities, available for sale........................... 1 3,187
Policy loans.................................................... 53,153 49,331
Short-term investments.......................................... 38,359 57,956
Other invested assets........................................... 50,760 43,747
------------ ----------
Total investments................................................. 2,648,606 2,297,879
Cash and cash equivalents......................................... 117,610 37,211
Amounts recoverable from reinsurers............................... 58,277 55,313
Premiums receivable............................................... 22,390 13,606
Federal income taxes recoverable.................................. 718
Investment income due and accrued................................. 28,624 23,764
Deferred policy acquisition costs................................. 98,856 89,154
Other assets...................................................... 12,594 7,977
Assets held in separate accounts.................................. 1,914,657 1,487,078
------------ ----------
Total assets...................................................... $ 4,901,614 $4,012,700
------------ ----------
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Future policy benefits.......................................... $ 1,335,685 $1,128,468
Policyholders' and beneficiaries' funds......................... 832,234 687,458
Policy and contract claims...................................... 38,792 42,222
Dividends to policyholders...................................... 11,826 11,246
Experience rating refund reserves............................... 823 1,760
Liability for participating policies............................ 74,664 72,811
Federal income taxes payable.................................... 18,603
Deferred federal income taxes................................... 101,900 102,767
Due to Parent................................................... 13,408 8,262
Accrued expenses and other liabilities.......................... 170,709 112,724
Liabilities related to separate accounts........................ 1,914,657 1,487,078
------------ ----------
Total liabilities................................................. 4,513,301 3,654,796
Stockholders' equity:
Common stock, $312.50 par value; 8,000 shares authorized, issued
and outstanding................................................ 2,500 2,500
Additional paid-in capital...................................... 52,500 52,500
Retained earnings............................................... 176,269 170,995
Accumulated other comprehensive income.......................... 157,044 131,909
------------ ----------
Total stockholders' equity........................................ 388,313 357,904
------------ ----------
Total liabilities and stockholders' equity........................ $ 4,901,614 $4,012,700
------------ ----------
------------ ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Revenues:
Premiums, net............................................ $ 469,510 $ 415,636 $ 283,965
Net investment income.................................... 164,998 144,989 122,527
Realized capital gains on investments.................... 18,311 8,074 6,722
Contractholder charges and assessments................... 9,816 7,335 5,759
Other revenues........................................... 20,289 9,010 4,469
---------- --------- ---------
Total revenues............................................. 682,924 585,044 423,442
Benefits and expenses:
Death and other policy benefits.......................... 298,277 249,449 173,281
Recoveries from reinsurers on ceded claims............... (12,740) (11,382) (11,454)
Provision for future policy benefits and other policy
liabilities............................................. 213,368 186,883 121,347
Interest credited to policyholders....................... 42,355 38,128 32,252
Change in deferred policy acquisition costs.............. (12,920) (16,709) (15,247)
General expenses......................................... 120,495 100,535 69,926
Insurance taxes and licenses............................. 11,960 10,069 6,956
Dividends to policyholders............................... 11,561 9,279 12,610
---------- --------- ---------
Total benefits and expenses................................ 672,356 566,252 389,671
---------- --------- ---------
Income from continuing operations before federal income
taxes and earnings of participating policies............ 10,568 18,792 33,771
Federal income taxes..................................... 3,441 6,726 10,327
---------- --------- ---------
Income from continuing operations before earnings of
participating policies.................................. 7,127 12,066 23,444
Earnings of participating policies net of federal income
tax benefit of $3,317 in 1998, $3,719 in 1997 and $2,514
in 1996................................................. 1,853 4,307 3,247
---------- --------- ---------
Income from continuing operations........................ 5,274 7,759 20,197
Discontinued operations:
Loss from operations on discontinued group health, net
of federal income tax benefits of $29 in 1997 and $175
in 1996............................................... (54) (325)
---------- --------- ---------
Net income............................................... $ 5,274 $ 7,705 $ 19,872
---------- --------- ---------
---------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
----------- ----------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996................. $ 2,500 $ 2,500 $ 143,418 $ 123,832 $ 272,250
Additional paid-in capital................. 50,000 50,000
Comprehensive income:
Net income............................... 19,872 19,872
Other comprehensive income, net of tax:
Net unrealized losses on investments.... (41,545) (41,545)
Foreign currency translation
adjustment............................. 182 182
------------
Comprehensive income....................... (21,491)
----------- ----------- ------------ ---------------- ------------
Balance at December 31, 1996............... 2,500 52,500 163,290 82,469 300,759
Comprehensive income:
Net income............................... 7,705 7,705
Other comprehensive income, net of tax:
Net unrealized gains on investments..... 48,996 48,996
Foreign currency translation
adjustment............................. 444 444
------------
Comprehensive income....................... 57,145
----------- ----------- ------------ ---------------- ------------
Balance at December 31, 1997............... 2,500 52,500 170,995 131,909 357,904
Comprehensive income:
Net income............................... 5,274 5,274
Other comprehensive income, net of tax:
Net unrealized gains on investments..... 24,174 24,174
Foreign currency translation
adjustment............................. 961 961
------------
Comprehensive income....................... 30,409
----------- ----------- ------------ ---------------- ------------
Balance at December 31, 1998............... $ 2,500 $ 52,500 $ 176,269 $ 157,044 $ 388,313
----------- ----------- ------------ ---------------- ------------
----------- ----------- ------------ ---------------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected................................... $ 445,376 $ 413,539 $ 280,613
Investment income received........................... 137,106 117,860 98,899
Other considerations received........................ 13,595 10,300 10,331
Policyholder claims paid............................. (210,111) (188,976) (124,297)
Surrender benefits paid.............................. (76,775) (44,534) (33,748)
General expenses paid................................ (102,627) (89,327) (67,834)
Insurance taxes and licenses paid.................... (12,584) (9,955) (3,959)
Policyholder dividends paid.......................... (10,996) (10,962) (12,008)
Federal income taxes recovered (paid), including
capital gains taxes................................. 773 (5,829) (5,858)
Intercompany net receipts............................ 5,146 (645) (426)
Other (payments) receipts............................ (3,268) 11,157 12,218
------------ ---------- ----------
Net cash provided by operating activities............ 185,635 202,628 153,931
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from fixed maturities sold.................. 301,907 159,987 128,493
Proceeds from fixed maturities matured............... 52,370 89,033 91,292
Cost of fixed maturities acquired.................... (639,354) (550,588) (480,206)
Proceeds from equity securities sold................. 6,973 5,039 125,997
Cost of equity securities acquired................... (342) (369) (122,197)
Change in policy loans............................... (3,822) (3,986) (4,673)
Investment cash in transit........................... (1,881) 59 126
Proceeds from short-term investments sold or
matured............................................. 1,002,551 802,596 833,144
Cost of short-term investments acquired.............. (982,689) (780,872) (790,040)
Proceeds from other long-term investments sold....... 8,623 7,962 5,997
Cost of other long-term investments acquired......... (14,934) (10,972) (6,904)
------------ ---------- ----------
Net cash used in investing activities................ (270,598) (282,111) (218,971)
CASH FLOWS FROM FINANCING ACTIVITIES
Additional paid-in capital........................... -- -- 50,000
Policyholders' deposits on investment contracts...... 239,357 185,488 139,579
Policyholders' withdrawals from investment
contracts........................................... (133,503) (82,425) (65,343)
Change in securities loaned.......................... 59,508 (20,741) (89,625)
------------ ---------- ----------
Net cash provided by financing activities.............. 165,362 82,322 34,611
------------ ---------- ----------
Change in cash and cash equivalents.................... 80,399 2,839 (30,429)
Cash and cash equivalents, beginning of year........... 37,211 34,372 64,801
------------ ---------- ----------
Cash and cash equivalents, end of year................. $ 117,610 $ 37,211 $ 34,372
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-6
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Reconciliation of net income to net cash provided by
operating activities:
Net income............................................... $ 5,274 $ 7,705 $ 19,872
Adjustments to reconcile net income to net cash provided
by operating activities:
Realized capital gains on investments................ (18,311) (8,074) (6,722)
Accretion of bond discount........................... (22,783) (23,586) (20,271)
Interest credited to policyholders................... 43,958 38,128 32,252
Changes in assets and liabilities:
(Repayments of) proceeds from securities loaned.... (59,508) 20,741 89,625
Amounts recoverable from reinsures................. (2,964) (6,513) (11,881)
Premiums receivable................................ (8,784) (5,185) (3,447)
Investment income due and accrued.................. (4,860) (2,944) (3,545)
Deferred policy acquisition costs.................. (12,920) (16,709) (15,247)
Other assets....................................... (4,617) (1,514) 495
Future policy benefits............................. 207,217 191,626 127,800
Policy and contract claims......................... (3,430) 11,828 11,050
Dividends to policyholders......................... 580 (1,673) 610
Experience rating refund liabilities............... (937) (640) 1,210
Liability for participating policies............... 1,853 4,307 3,248
Change in federal income tax balances.............. 19,321 (1,260) 542
Deferred federal income taxes...................... (15,107) 2,128 3,805
Due to Parent...................................... 5,146 (645) (427)
Accrued expenses and other liabilities............. 56,507 (5,092) (75,038)
---------- --------- ---------
Net cash provided by operating activities.......... $ 185,635 $ 202,628 $ 153,931
---------- --------- ---------
---------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-7
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Liberty Life Assurance Company of Boston (the Company) is domiciled in the
Commonwealth of Massachusetts. The Company is directly owned 100% by Liberty
Mutual Property-Casualty Holding Corporation, a subsidiary directly owned 90% by
Liberty Mutual Insurance Company and 10% by Liberty Mutual Fire Insurance
Company (Liberty Mutual).
The Company insures life, annuity and accident and health risks for groups
and individuals. The Company also issues structured settlement contracts and
administers separate account contracts. The Company is licensed and sells its
products in all 50 states, the District of Columbia and Canada.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the financial statements, and the
reported amounts of revenues and expenses during the year. Actual amounts could
subsequently differ from such estimates.
REPORTING CHANGES
During 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "REPORTING COMPREHENSIVE INCOME." SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components and requires that selected changes in stockholders' equity be added
to net income and reported as comprehensive income. The Company adopted this
Statement retroactively and has reported this information within the statement
of stockholders' equity and the footnotes to the financial statements. The
adoption of SFAS No. 130 had no impact on the Company's financial position or
results of operations.
During 1998, the Company adopted SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION." SFAS No. 131 establishes standards
for the disclosure of information about the Company's operating segments, which
are defined on the same basis that the Company is managed, including disclosures
about products and services, geographic areas, and major customers. The adoption
of SFAS No. 131 did not affect the Company's financial position or results of
operations, nor did it affect the manner in which the Company defines its
operating segments. Data reported for all periods has been presented to conform
to the requirements of SFAS No. 131.
F-8
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
(SOP) 98-1, "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED
FOR INTERNAL USE." SOP 98-1 provides guidance for determining whether computer
software is for internal use and when costs incurred for internal use software
are to be capitalized. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998. The adoption of SOP 98-1 is not expected to have a material
impact on the Company's financial statements.
In April 1998, the AICPA issued SOP 98-5, "REPORTING THE COSTS OF START-UP
ACTIVITIES." The SOP is effective beginning on January 1, 1999, and requires
that start-up costs capitalized prior to January 1, 1999 be written-off and any
future start-up costs be expensed as incurred. Restatement of previously issued
financial statements is not permitted. SOP 98-5 is not expected to have a
material impact on the Company's financial statements.
In December 1997, the AICPA issued SOP 97-3, "ACCOUNTING BY INSURANCE AND
OTHER ENTERPRISES FOR INSURANCE-RELATED ASSESSMENTS." SOP 97-3 provides guidance
for assessments related to insurance activities and requirements for disclosure
of certain information. SOP 97-3 is effective for financial statements issued
for periods beginning after December 31, 1998. Restatement of previously issued
financial statements is not permitted. SOP 97-3 is not expected to have a
material impact on the Company's financial statements.
SOP 98-7, "DEPOSIT ACCOUNTING: ACCOUNTING FOR INSURANCE AND REINSURANCE
CONTRACTS THAT DO NOT TRANSFER INSURANCE RISK," provides guidance on how to
account for insurance and reinsurance contracts that do not transfer insurance
risk under a method referred to as deposit accounting. SOP 98-7 is effective for
fiscal years beginning after June 15, 1999. SOP 98-7 is not expected to have a
material impact on the Company's financial statements.
INVESTMENTS
Fixed maturity and equity securities are classified as available for sale
and are carried at fair value. Unrealized gains and losses on fixed maturity and
equity securities are reflected in accumulated other comprehensive income, net
of applicable deferred income taxes.
For the mortgage-backed bond portion of the fixed maturity investment
portfolio, the Company recognizes income using a constant effective yield based
on anticipated prepayments over the estimated economic life of the security.
When actual prepayments differ significantly from anticipated prepayments, the
effective yield is recalculated to reflect actual payments to date and
anticipated future payments and any resulting adjustments are included in
investment income.
F-9
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Short-term investments include investments with maturities of less than one
year at the date of acquisition.
Other invested assets, principally investments in limited partnerships, are
accounted for using the equity method.
Policy loans are reported at unpaid loan balances.
Realized capital gains and losses are determined on the specific
identification basis.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs are the costs of acquiring new business which vary
with, and are primarily related to, the production of new business. Such costs
include commissions, costs of policy underwriting and variable agency expenses.
Acquisition costs related to traditional and group life insurance and certain
long-duration group accident and health insurance, to the extent recoverable
from future policy revenues, are deferred and amortized over the premium-paying
period of the related policies using assumptions consistent with those used in
computing policy benefit reserves. Costs relating to group life and disability
insurance policies are amortized straight line over a five-year period. For
universal life insurance and investment products, to the extent recoverable from
future gross profits, deferred policy acquisition costs are amortized generally
in proportion to the present value of expected gross profits from surrender
charges and investment, mortality and expense margins. Deferred policy
acquisition costs are adjusted for amounts relating to unrealized gains and
losses on fixed maturity and equity securities the Company has designated as
available for sale. This adjustment, net of tax, is included with the net
unrealized gains or losses that are reflected in accumulated other comprehensive
income.
RECOGNITION OF TRADITIONAL LIFE PREMIUM REVENUE AND RELATED EXPENSES
Premiums on traditional life insurance policies are recognized as revenue
when due. Benefits and expenses are associated with premiums so as to result in
the recognition of profits over the life of the policies. This association is
accomplished by providing liabilities for future policy benefits and the
deferral and subsequent amortization of acquisition costs.
RECOGNITION OF UNIVERSAL LIFE REVENUE AND POLICY ACCOUNT BALANCES
Revenues from universal life policies represent investment income from the
related invested assets and amounts assessed against policyholders. Included in
such assessments are mortality charges, surrender charges paid and
administrative fees. Policy account balances consist of consideration received
plus credited interest, less accumulated policyholder charges, assessments and
withdrawals. Credited interest rates were between 5.5% and 6.3% in 1998, 1997
and 1996.
F-10
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT CONTRACTS
The Company writes certain annuity and structured settlement contracts
without mortality risk which are accounted for as investment contracts. Revenues
for investment contracts consist of investment income from the related invested
assets, with profits recognized to the extent investment income earned exceeds
the amount credited to the contract. This method of computing the liability for
future policy benefits effectively results in recognition of profits over the
benefit period. Policy account balances consist of consideration received plus
credited interest less policyholder withdrawals. Credited interest rates for
annuity contracts were between 5.0% and 5.85% in 1998, 5.30% and 7.25% in 1997
and 5.35% and 7.05% in 1996. Credited interest rates for structured settlement
contracts were between 6.1% and 11.4% in 1998, 1997 and 1996.
FUTURE POLICY BENEFITS
Liabilities for future policy benefits for traditional life policies have
been computed using the net level premium method based on estimated future
investment yield, mortality and withdrawal experience. Interest rate assumptions
were between 4.5% and 10.25% for all years of issue. Mortality assumptions have
been calculated principally on an experience multiple applied to the 1955-60 and
1965-70 Select and Ultimate Basic Tables for issues prior to 1986, the 1986
Bragg Non-Smoker/Smoker Select and Ultimate Basic Tables for 1986 to 1992 issues
and the 1991 Bragg Non-Smoker/Smoker Select and Ultimate Basic Tables for 1993
and subsequent issues. Withdrawal assumptions generally are based on the
Company's experience.
The liability for future policy benefits with respect to structured
settlement contracts with life contingencies and single premium group annuities
(group pension) is determined based on interest crediting rates between 6.1% and
11.4%, and the mortality assumptions are based on the 1971 GAM and IAM tables.
Future policy benefits for long-term disability cases are computed using the
1987 Commissioners' Group Disability Table adjusted for the Companys'
experience.
POLICY AND CONTRACT CLAIMS
Accident and health business policy and contract claims principally include
claims in course of settlement and claims incurred but not reported, which are
determined based on a formula derived as a result of the Company's past
experience. Claims liabilities may be more or less than the amounts paid when
the claims are ultimately settled. Such differences are considered changes in
estimates and are recorded in the statement of income in the year the claims are
settled.
F-11
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REINSURANCE
All assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis in the accompanying balance sheets. The accompanying
statements of income reflect premiums, benefits and settlement expenses net of
reinsurance ceded.
Reinsurance premiums, commissions, expense reimbursements, benefits and
reserves related to reinsured business are accounted for on bases consistent
with those used in accounting for original policies issued and the terms of the
reinsurance contracts.
FEDERAL INCOME TAXES
Income taxes have been provided using the liability method in accordance
with SFAS No. 109, "Accounting for Income Taxes." Under this method, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect of a change in tax rates on deferred tax
assets and liabilities is recognized in income in the period that includes the
enactment date. The measurement of deferred tax assets is reduced by a valuation
allowance if, based upon the available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized.
PARTICIPATING POLICIES
Participating policies approximate 28%, 29% and 33% of ordinary life
insurance in force at December 31, 1998, 1997 and 1996, respectively, and 13%,
12% and 18% of ordinary insurance premium revenue in 1998, 1997 and 1996,
respectively. Dividends to participating policyholders are calculated as the sum
of the difference between the assumed mortality, interest and loading, and the
actual experience of the Company relating to participating policyholders. As a
result of statutory regulations, the major portion of earnings from
participating policies inures to the benefit of the participating policyholders
and is not available to stockholders. Undistributed earnings of the
participating block of business is represented by the liability for
participating policies in the accompanying balance sheets. The payment of
dividends to stockholders is further restricted by insurance laws of the
Commonwealth of Massachusetts.
FOREIGN CURRENCY TRANSLATIONS
The Company enters into certain transactions that are denominated in a
currency other than the U.S. dollar. Functional currencies are assigned to
foreign currencies. These amounts are accumulated and then converted to U.S.
dollars. The unrealized gain or loss from the
F-12
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
translation is reflected in accumulated other comprehensive income, net of
deferred federal income taxes. The translations are calculated using current
exchange rates for the balance sheet and average exchange rates for the
statement of income.
SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered, principally for annuity
contracts, and for which the contractholder, rather than the Company, bears the
investment risk. Separate account contractholders have no claim against the
assets of the general account of the Company. Separate account assets are
reported at market value. The operations of the separate accounts are not
included in the accompanying financial statements. Fees charged on separate
account policyholder deposits are included in other income.
RECLASSIFICATION
Certain 1996 and 1997 amounts have been reclassified to conform to the 1998
presentation.
F-13
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
2. INVESTMENTS
FIXED MATURITIES
The amortized cost, gross unrealized gains and losses, and fair value of
investments in fixed maturities available for sale are summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies......... $ 378,791 $ 108,906 $ (163) $ 487,534
Debt securities issued by states
and municipalities................ 55,805 3,651 59,456
Corporate securities............... 998,995 102,351 (1,687) 1,099,659
U.S. government guaranteed
mortgage-backed securities........ 823,966 36,695 (977) 859,684
------------ ----------- ----------- ------------
Total fixed maturities available
for sale.......................... $ 2,257,557 $ 251,603 $ (2,827) $ 2,506,333
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............ $ 403,296 $ 99,877 $ (80) $ 503,093
Debt securities issued by states and
municipalities....................... 50,794 2,848 53,642
Corporate securities.................. 773,208 68,035 (601) 840,642
U.S. government guaranteed
mortgage-backed securities........... 712,132 34,543 (394) 746,281
---------- ----------- ----------- ----------
Total fixed maturities available for
sale................................. $1,939,430 $ 205,303 $ (1,075) $2,143,658
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
F-14
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
2. INVESTMENTS (CONTINUED)
The amortized cost and fair value of the Company's investment in fixed
maturities available for sale by contractual maturity is summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
--------------------------
AMORTIZED FAIR
COST VALUE
------------ ------------
<S> <C> <C>
Maturity in one year or less................................ $ 37,559 $ 37,981
Maturity after one year through five years.................. 316,747 340,845
Maturity after five years through ten years................. 508,497 551,012
Maturity after ten years.................................... 570,788 716,811
U.S. government guaranteed mortgage-backed securities....... 823,966 859,684
------------ ------------
Total fixed maturities available for sale................... $ 2,257,557 $ 2,506,333
------------ ------------
------------ ------------
</TABLE>
The expected maturities in the foregoing table may differ from the
contractual maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.
Gross gains of $11,163, $1,145 and $1,472, and gross losses of $516, $1,019
and $1,411, were realized on the sales of fixed maturities available for sale
during 1998, 1997 and 1996, respectively.
At December 31, 1998, bonds with a cost of $8,851 were on deposit with state
insurance departments to satisfy regulatory requirements.
F-15
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
2. INVESTMENTS (CONTINUED)
EQUITY SECURITIES AND OTHER INVESTED ASSETS
Unrealized gains and losses on investments in equity securities available
for sale and other invested assets are reflected in stockholders' equity and do
not affect operations. The cost, gross unrealized gains and losses, and fair
value of those investments are summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Equity securities........................ $ 1 $ 1
Other invested assets.................... 49,674 $ 5,071 $ (3,985) 50,760
--------- ----------- ----------- ---------
Total.................................... $ 49,675 $ 5,071 $ (3,985) $ 50,761
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Equity securities........................ $ 3,003 $ 401 $ (217) $ 3,187
Other invested assets.................... 39,217 6,304 (1,774) 43,747
--------- ----------- ----------- ---------
Total.................................... $ 42,220 $ 6,705 $ (1,991) $ 46,934
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
NET INVESTMENT INCOME
Major categories of the Company's net investment income are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Investment income:
Fixed maturities.................................... $ 160,351 $ 139,894 $ 118,365
Equity securities................................... 83
Policy loans........................................ 3,238 3,020 2,672
Short-term investments and cash equivalents......... 2,598 2,376 1,633
Other invested assets............................... 2,003 1,623 1,476
---------- --------- ---------
Gross investment income............................... 168,190 146,913 124,229
Less investment expenses.............................. 3,192 1,924 1,702
---------- --------- ---------
Net investment income................................. $ 164,998 $ 144,989 $ 122,527
---------- --------- ---------
---------- --------- ---------
</TABLE>
F-16
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
2. INVESTMENTS (CONTINUED)
REALIZED CAPITAL GAINS ON INVESTMENTS
Realized capital gains on investments were derived from the following
sources:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Fixed maturities............................................ $ 10,647 $ 126 $ 61
Equity securities........................................... 3,629 4,575 3,812
Other invested assets....................................... 4,035 3,373 2,849
--------- --------- ---------
Realized capital gains on investments....................... $ 18,311 $ 8,074 $ 6,722
--------- --------- ---------
--------- --------- ---------
</TABLE>
CONCENTRATION OF INVESTMENTS
There were no investments in a single entity's fixed maturities in excess of
ten percent of stockholders' equity at December 31, 1998 and 1997.
3. REINSURANCE
Certain premiums and benefits are assumed from and ceded to other insurance
companies under various reinsurance agreements. The Company cedes business to
reinsurers
F-17
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
3. REINSURANCE (CONTINUED)
to share risks under life, health, and annuity contracts for the purpose of
providing the Company with increased capacity to write larger risks and maintain
its exposure to loss within capital resources. The effect of reinsurance assumed
and ceded on premiums was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------
ASSUMED
FROM CEDED TO
DIRECT OTHER OTHER NET
AMOUNT COMPANIES COMPANIES AMOUNT
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Individual Life and Annuity........... $ 148,153 $ 3,873 $ 1,907 $ 150,119
Group Life and Disability............. 317,155 482 14,758 302,879
Group Pension and Other............... 20,908 5,354 9,750 16,512
---------- ----------- ----------- ----------
Total premiums........................ $ 486,216 $ 9,709 $ 26,415 $ 469,510
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------
ASSUMED
FROM CEDED TO
DIRECT OTHER OTHER NET
AMOUNT COMPANIES COMPANIES AMOUNT
--------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Individual Life and Annuity............. $ 142,357 $ 6,022 $ 1,456 $ 146,923
Group Life and Disability............... 265,620 2,698 10,699 257,619
Group Pension and Other................. 15,263 4,169 11,094
--------- ------------- ----------- ---------
Total premiums.......................... $ 423,240 $ 8,720 $ 16,324 $ 415,636
--------- ------------- ----------- ---------
--------- ------------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------
ASSUMED
FROM CEDED TO
DIRECT OTHER OTHER NET
AMOUNT COMPANIES COMPANIES AMOUNT
--------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Individual Life and Annuity............. $ 102,373 $ 2,939 $ 5,536 $ 99,776
Group Life and Disability............... 187,766 55 7,746 180,075
Group Pension and Other................. 6,438 2,324 4,114
--------- ------------- ----------- ---------
Total premiums.......................... $ 296,577 $ 2,994 $ 15,606 $ 283,965
--------- ------------- ----------- ---------
--------- ------------- ----------- ---------
</TABLE>
Amounts payable or recoverable for reinsurance on policy and contract
liabilities are not subject to periodic or maximum limits. At December 31, 1998,
no individual reinsurer owed the Company an amount that was equal to or greater
than 3% of the Company's surplus.
The Company remains obligated for amounts ceded in the event that the
reinsurers do not meet their obligations.
F-18
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
4. FEDERAL INCOME TAXES
The Company is included in a consolidated federal income tax return with
Liberty Mutual and its other subsidiaries. Under a written tax sharing
agreement, approved by the Board of Directors, Liberty Mutual collects from and
refunds to the subsidiaries the amount of taxes or benefits determined as if
Liberty Mutual and the subsidiaries filed separate returns.
Federal income tax expense (benefit) attributable to income from operations
was composed of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Continuing operations:
Current.................................................. $ 18,548 $ 4,598 $ 7,011
Deferred................................................. (15,107) 2,128 3,316
--------- --------- ---------
Federal income tax expense................................. $ 3,441 $ 6,726 $ 10,327
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1998 1997 1996
----- ----- ---------
<S> <C> <C> <C>
Discontinued operations:
Current......................................................... $ 0 $ (29) $ (175)
Deferred........................................................ 0 0 0
-- ----- ---------
Federal income tax benefit........................................ $ 0 $ (29) $ (175)
-- ----- ---------
-- ----- ---------
</TABLE>
A reconciliation of federal income tax expense as recorded in the statements
of income with expected federal income tax expense computed at the applicable
federal income tax rate of 35% is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected income tax expense................................. $ 3,699 $ 6,577 $ 11,820
Adjustments to income taxes resulting from:
Reconciliation of prior year tax return................. (756) 68 (1,226)
Other, net.............................................. 498 81 (267)
--------- --------- ---------
Federal income tax expense.................................. $ 3,441 $ 6,726 $ 10,327
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-19
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
4. FEDERAL INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred liabilities are summarized as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------------
1998 1997
----------- ----------
<S> <C> <C>
Deferred tax assets:
Dividends to policyholders................................... $ 2,984 $ 2,816
Unearned interest on policy loans............................ 338 323
Unearned group premium adjustment............................ 91 1,021
Accrued surrender charges on deposit funds................... 1,531 426
Bonds purchased at market premium............................ 3,318
Recapture of statutory reinsurance........................... 21,777
Other........................................................ 292 93
----------- ----------
Total deferred tax assets...................................... 30,331 4,679
----------- ----------
Deferred tax liabilities:
Future policy benefits....................................... (23,343) (11,483)
Deferred acquisition costs................................... (21,504) (20,772)
Bonds purchased at market discount........................... (2,115)
Bonds market valuation adjustment............................ (83,366) (68,569)
Unrealized gain on other long-term investments............... (380) (1,649)
Reconciliation of taxes on other long-term investments....... (1,145) (951)
Cumulative foreign currency translations..................... (1,370) (852)
Deferred and uncollected premium adjustment.................. (791) (646)
Other........................................................ (332) (409)
----------- ----------
Total deferred tax liabilities................................. (132,231) (107,446)
----------- ----------
Net deferred tax liability..................................... $ (101,900) $ (102,767)
----------- ----------
----------- ----------
</TABLE>
In the opinion of management, it is more likely than not that the Company
will realize the benefit of the deferred tax assets and, therefore, no valuation
allowance has been established.
Prior to 1984, a portion of the Company's income was not taxed, but was
accumulated in a "policyholders' surplus account." In the event that those
amounts are distributed to stockholders', or the balance of the account exceeds
certain limitations under the Internal Revenue Code, the excess amounts would
become taxable at current rates. The policyholders' surplus account balance at
December 31, 1998 and 1997 was approximately $4,000. Management does not intend
to take actions nor does management expect any events to occur that would cause
federal income taxes to become payable on that amount. However, if such taxes
were assessed, the amount of taxes payable would be approximately $1,400 in 1998
and 1997.
F-20
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
5. UNPAID CLAIMS LIABILITY FOR GROUP ACCIDENT AND HEALTH BUSINESS
The following table provides a reconciliation of the beginning and ending
balances of unpaid claim liabilities, principally included in future policy
benefits, net of reinsurance recoverables:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
---------------------
1998 1997
---------- ---------
<S> <C> <C>
Unpaid claim liabilities, at beginning of year........... $ 254,002 $ 163,035
Less reinsurance recoverables............................ 490 238
---------- ---------
Net balance at beginning of year......................... 253,512 162,797
Claims incurred related to:
Current year........................................... 247,527 196,941
Prior years--incurred.................................. 9,693 6,432
Prior years--interest.................................. 13,400 9,132
---------- ---------
Total incurred........................................... 270,620 212,505
Claims paid related to:
Current year........................................... 78,851 76,710
Prior years............................................ 79,198 45,080
---------- ---------
Total paid............................................... 158,049 121,790
---------- ---------
Net balance at end of year............................... 366,083 253,512
Add reinsurance recoverables........................... 852 490
---------- ---------
Unpaid claim liabilities, at end of year................. $ 366,935 $ 254,002
---------- ---------
---------- ---------
</TABLE>
The adverse development during 1998 and 1997 primarily resulted from a
higher incidence of new claims on certain policies. Interest accrued on prior
year reserves has been calculated on the opening reserve balance less one half
year's cash payments at the average rate at which the Company's reserves were
discounted during 1998 and 1997.
6. RISK-BASED CAPITAL AND RETAINED EARNINGS
Life insurance companies are subject to certain Risk-Based Capital (RBC)
requirements as specified by the NAIC. Under those requirements, the amount of
capital and surplus maintained by a life insurance company is to be determined
based on the various risk factors related to it. At December 31, 1998, the
Company meets the RBC requirements.
The payment of dividends by the Company to stockholders is limited and
cannot be made except from earned profits. The maximum amount of dividends that
may be paid by life insurance companies without prior approval of the
Commonwealth of Massachusetts Insurance Commissioner is subject to restrictions
relating to statutory surplus and net gain from operations.
According to a resolution voted by the Board of Directors of the Company,
not more than the larger of 10% of statutory profits on participating business
or fifty cents per thousand
F-21
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
6. RISK-BASED CAPITAL AND RETAINED EARNINGS (CONTINUED)
dollars of participating business in force in a given year may accrue to the
benefit of stockholders. The amount of statutory unassigned (deficit) surplus
held for the benefit of participating policyholders and stockholders was
$(14,047) and $73,746, respectively, at December 31, 1998. Dividends paid to
policyholders were $10,996 in 1998, and there were no dividends paid to
stockholders in 1998.
7. COMMITMENTS AND CONTINGENCIES
The Company is named as a defendant in various legal actions arising
principally from claims made under insurance policies and contracts. Those
actions are considered by the Company in estimating reserves for policy and
contract liabilities. The Company's management believes that the resolution of
those actions will not have a material effect on the Company's financial
position or results of operations.
The Company is subject to insurance guaranty fund laws in the states in
which it does business. These laws assess insurance companies amounts to be used
to pay benefits to policyholders and claimants of insolvent insurance companies.
Many states allow these assessments to be credited against future premium taxes.
At December 31, 1998, 1997 and 1996, the Company has accrued $645, $576 and
$888, respectively, of premium tax deductions. The Company recognizes its
obligations for guaranty fund assessments when it receives notice that an amount
is payable to a guaranty fund. Expenses incurred for guaranty fund assessments
were $23, $443 and $150 in 1998, 1997 and 1996, respectively.
8. SEPARATE ACCOUNTS
Separate Accounts held by the Company represent primarily funds which are
administered for pension plans. The assets consist of common stock, long-term
bonds, real estate and short-term investments which are carried at estimated
fair value. Investment income and changes in asset values do not affect the
operating results of the Company. Separate Accounts business is maintained
independently from the general account of the Company. The Company provides
administrative services for these contracts. Fees earned by the Company related
to these contracts included in other revenues were $2,016, $1,700 and $1,503 for
the years ended December 31, 1998, 1997 and 1996, respectively.
9. BENEFIT PLANS
Significant benefit plans are sponsored by Liberty Mutual and the associated
costs are shared by members of the Liberty Companies. Liberty Mutual's sponsored
plans are summarized as follows:
F-22
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
9. BENEFIT PLANS (CONTINUED)
(a) PENSION PLAN
Liberty Mutual sponsors noncontributory defined benefit pension plans (the
Plans) covering U.S. employees who have attained age 21 and have completed
one year of service and Canadian employees who have completed one year of
service. The benefits are based on years of service and the employee's
"final average compensation" which is the employee's average annual
compensation for the highest five consecutive calendar years during the ten
years immediately preceding retirement.
In 1997, Liberty Mutual adopted SFAS No. 87, EMPLOYERS' ACCOUNTING FOR
PENSIONS, for vested employees. In 1996, the accounting policy was primarily
to recognize expense equal to the amount funded. Assets of the Plans consist
primarily of investments in life insurance company separate accounts and a
collective investment trust fund, which invests primarily in fixed income
and Standard and Poor's Index of 500 equity securities. At December 31, 1998
and 1997, assets of the Plans totaling $1,548,141 and $1,197,094,
respectively, were held in separate accounts managed by the Company.
Under the intercompany pooling agreement, there was no pension expense
charged to the Company in 1998 and 1997 and $395 of pension expense charged
to the Company in 1996.
(b) POSTRETIREMENT BENEFITS
Liberty Mutual provides certain health care and life insurance benefits
(postretirement) for retired employees. Substantially all employees may
become eligible for these benefits if they reach retirement age and have ten
years of service working for the Liberty Companies. Alternatively, retirees
may elect certain prepaid health care benefit plans. Life insurance benefits
are based upon a participant's final compensation subject to the plan
maximum.
Under the intercompany pooling arrangement, $372, $166 and $236 of
postretirement expense was charged to the Company in 1998, 1997 and 1996,
respectively.
(c) THRIFT-INCENTIVE PLAN
Liberty Mutual sponsors a defined contribution savings plan for all
employees of the Liberty Companies who meet certain eligibility
requirements. During 1998, 1997 and 1996, employees were permitted to
contribute up to 16% of their annual compensation on a combined before-tax
and after-tax basis, subject to certain limitations imposed by the Tax
Reform Act of 1986. In 1998, 1997 and 1996, Liberty Mutual made matching
contributions of $1.00, $1.00 and $0.87, respectively, for each dollar
contributed by employees, up to 6% of their annual compensation. Liberty
Mutual's expense was $40,278, $36,850 and $30,075 in 1998, 1997 and 1996,
respectively.
F-23
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
9. BENEFIT PLANS (CONTINUED)
Under the intercompany pooling arrangement, the Company's expense related to
the Thrift-Incentive Plan is borne by Liberty Mutual.
10. RELATED-PARTY TRANSACTIONS
Under a Service Agreement between the Company and Liberty Mutual, the latter
provides personnel, office space, equipment, computer processing and other
services. The Company reimburses Liberty Mutual for these services at cost, and
for any other special services supplied at the Company's request. Substantially
all of the Company's general expenses incurred in 1998, 1997 and 1996 related to
this agreement.
The Company insures the group term life and disability risks for Liberty
Mutual employees. Premiums associated with these policies amounted to $17,249,
$15,768 and $13,903 in 1998, 1997 and 1996, respectively.
The Company insures key officers of Liberty Mutual Group under an Optional
Life Insurance Plan. Premiums associated with this plan amounted to $9,329,
$8,252 and $4,967 in 1998, 1997 and 1996, respectively.
Liberty Mutual purchases structured settlement annuity contracts, with and
without life contingencies, from the Company. Premiums under these contracts
amounted to $137,663, $136,161 and $91,754 in 1998, 1997 and 1996, respectively.
The related policy and contract reserves with respect to all structured
settlement annuity contracts purchased by Liberty Mutual amounted to $714,886
and $595,146 at December 31, 1998 and 1997, respectively.
Liberty Mutual deposited $3,206 and $774 with the Company in 1998 and 1997,
respectively, to fund certain Liberty Mutual environmental claim transactions.
Such amounts have been included in the liability for policyholders' and
beneficiaries' funds at December 31, 1998 and 1997, respectively.
In 1996, Keyport Life Insurance Company began ceding 100% of the premiums
and benefits of certain structured settlement annuity contracts, with and
without life contingencies, to the Company. Premiums under these contracts
amounted to $4,280, $6,002 and $3,194 in 1998, 1997 and 1996, respectively. The
related policy and contract reserves with respect to these structured settlement
annuity contracts assumed by the Company amounted to $13,223 and $8,501 at
December 31, 1998 and 1997, respectively.
F-24
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
11. DEFERRED POLICY ACQUISITION COSTS
Details with respect to deferred policy acquisition costs are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Balance, beginning of year................................ $ 89,154 $ 77,424
Additions............................................... 31,405 28,736
Amortization............................................ (18,485) (12,027)
Valuation adjustment for unrealized gain on fixed
maturities............................................. (3,218) (4,979)
--------- ---------
Balance, end of year...................................... $ 98,856 $ 89,154
--------- ---------
--------- ---------
</TABLE>
12. STATUTORY FINANCIAL INFORMATION
The Company prepares their statutory-basis financial statements in
accordance with accounting practices prescribed or permitted by the Division of
Insurance of the Commonwealth of Massachusetts. Prescribed statutory accounting
practices include state laws, regulations and administrative rules, as well as
guidance published by the NAIC. Permitted accounting practices encompass all
accounting practices that are not prescribed by the sources noted above.
During 1998, the Company entered into a reinsurance agreement with Liberty
Mutual Insurance Company to cede to Liberty Mutual 100% of its existing group
long and short-term disability, individual accident and sickness, and student
accident and health business. The Company received permission from the
Commonwealth of Massachusetts to treat this agreement as prospective reinsurance
in its entirety for 1998. This agreement increased the Company's statutory net
gain from operations before federal income taxes by $64,898 in 1998. There are
no other material permitted practices.
Statutory net income (loss) and capital and surplus is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Statutory net income (loss)............................ $ 9,741 $ (8,549) $ 3,554
Statutory capital and surplus.......................... 115,449 126,669 137,933
</TABLE>
F-25
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
13. STOCKHOLDERS' EQUITY
The components of accumulated other comprehensive income are as follows:
<TABLE>
<CAPTION>
NET FOREIGN ACCUMULATED
UNREALIZED CURRENCY OTHER
GAINS TRANSLATION COMPREHENSIVE
(LOSSES) ADJUSTMENT INCOME
----------- ------------- ----------------
<S> <C> <C> <C>
Balance at January 1, 1996.................. $ 122,875 $ 957 $ 123,832
Gross unrealized losses (net of deferred
income tax benefit of $20,222)............. (37,556) (37,556)
Less reclassification adjustment for gains,
realized in net income (net of tax expense
of $2,353)................................. (4,369) (4,369)
Adjustment to deferred policy acquisition
costs (net of deferred income tax expense
of $205)................................... 380 380
----------- ----------------
Net unrealized losses....................... (41,545) (41,545)
Foreign currency translation adjustment..... 182 182
----------- ------------- ----------------
Balance at December 31, 1996................ 81,330 1,139 82,469
Gross unrealized gains (net of deferred
income tax expense of $30,951)............. 57,480 57,480
Less reclassification adjustment for gains,
realized in net income (net of tax expense
of $2,826)................................. (5,248) (5,248)
Adjustment to deferred policy acquisition
costs and present value of future profits
(net of deferred income tax benefit of
$1,743).................................... (3,236) (3,236)
----------- ----------------
Net unrealized gains........................ 48,996 48,996
Foreign currency translation adjustment..... 444 444
----------- ------------- ----------------
Balance at December 31, 1997................ 130,326 1,583 131,909
Gross unrealized gains (net of deferred
income tax expense of $20,552)............. 38,168 38,168
Less reclassification adjustment for gains,
realized in net income (net of tax expense
of $6,409)................................. (11,902) (11,902)
Adjustment to deferred policy acquisition
costs (net of deferred income tax benefit
of $1,126)................................. (2,092) (2,092)
----------- ----------------
Net unrealized gains........................ 24,174 24,174
Foreign currency translation adjustment..... 961 961
----------- ------------- ----------------
Balance at December 31, 1998................ $ 154,500 $ 2,544 $ 157,044
----------- ------------- ----------------
----------- ------------- ----------------
</TABLE>
F-26
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
13. STOCKHOLDERS' EQUITY (CONTINUED)
Net unrealized investment gains, included in the balance sheets as a
component of stockholders' equity are summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Balance, end of year comprises:
Unrealized investment gains on:
Fixed maturities............................ $ 248,776 $ 204,228 $ 121,967
Equity investments and other................ 1,086 4,714 6,576
---------- --------- ---------
Total........................................... 249,862 208,942 128,543
Amounts of unrealized investment gains
attributable to:
Deferred policy acquisition costs........... (11,616) (8,398) (3,419)
Deferred federal income taxes............... (83,746) (70,218) (43,794)
---------- --------- ---------
Total........................................... (95,362) (78,616) (47,213)
---------- --------- ---------
Net unrealized investment gains................. $ 154,500 $ 130,326 $ 81,330
---------- --------- ---------
---------- --------- ---------
</TABLE>
14. SEGMENT INFORMATION
The Company's business is organized in three principal segments: Individual
Life and Annuity, Group Life and Disability, and Group Pension and Other. In the
Individual Life and Annuity segment, the Company sells a variety of individual
products, including participating whole life, term insurance, universal life,
structured settlements, and immediate and deferred annuity contracts. These
products are sold through a combination of distribution methods, including
Company agents, Liberty Mutual personal markets agents, direct marketers, and
banks. In the Group Life and Disability segment, the Company sells group life
and long-term and short-term disability products to corporate and organizational
customers through the Company's group market agency force. The Group Pension and
Other segment is a closed block of active pension customers, as well as
international customer life and disability products.
The accounting policies of the segments are the same as those described in
Note 1. The Company evaluates performance based on the income from continuing
operations before federal income taxes and earnings of participating policies of
the segments.
F-27
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
14. SEGMENT INFORMATION (CONTINUED)
The following table summarizes selected financial information by segment:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1998 1997 1996
------------ ---------- ---------
<S> <C> <C> <C>
Revenues:
Individual Life and Annuity.................... $ 274,175 $ 250,751 $ 186,696
Group Life and Disability...................... 351,384 301,684 203,911
Group Pension and Other........................ 57,365 32,609 32,835
------------ ---------- ---------
Total revenues................................... $ 682,924 $ 585,044 $ 423,442
------------ ---------- ---------
------------ ---------- ---------
Income (loss) from continuing operations before
federal income taxes and earnings of
participating policies:
Individual Life and Annuity.................. $ 31,446 $ 28,874 $ 24,319
Group Life and Disability.................... (23,160) (11,588) 8,377
Group Pension and Other...................... 2,282 1,506 1,075
------------ ---------- ---------
Total income from continuing operations before
federal income taxes and earnings of
participating policies.......................... $ 10,568 $ 18,792 $ 33,771
------------ ---------- ---------
------------ ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------------
1998 1997
------------ ----------
<S> <C> <C> <C>
Assets:
Individual Life and Annuity.................... $ 1,875,583 $1,640,099
Group Life and Disability...................... 571,695 522,569
Group Pension and Other........................ 2,454,336 1,850,032
------------ ----------
Total assets..................................... $ 4,901,614 $4,012,700
------------ ----------
------------ ----------
</TABLE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values generally represent quoted market value prices for securities
traded in the public marketplace, or analytically determined values using bid or
closing prices for securities not traded in the public marketplace.
The following methods and assumptions were used by the Company in estimating
the "fair value" disclosures for financial instruments in the accompanying
financial statements and notes thereto:
FIXED MATURITIES
Fair values for publicly-traded fixed maturates are determined using values
reported by an independent pricing service. Fair values of private placement
fixed maturities are determined by obtaining market indications from various
broker-dealers.
F-28
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
EQUITY SECURITIES
The fair values for equity securities are based upon quoted market prices,
where available; for equity securities that are not actively traded,
estimated fair values are based on values of issues of comparable yield and
quality.
POLICY LOANS
The carrying amounts reported in the accompanying balance sheets for these
financial instruments approximate their fair values.
SHORT-TERM INVESTMENTS
The carrying amounts reported in the accompanying balance sheets for these
financial instruments approximate their fair values.
OTHER INVESTED ASSETS
The fair values of other invested assets are based on the financial
statements of the underlying funds.
INVESTMENT CONTRACTS
The fair values for the Company's liabilities under investment-type
insurance contracts, including individual and group annuities, are estimated
using discounted cash flow calculations, based on interest rates currently
being offered for similar contracts with maturities consistent with those
remaining for the contracts being valued.
POLICY ACCOUNT BALANCES
The fair values of the Company's liabilities for insurance contracts other
than investment-type contracts are not required to be disclosed. However,
the fair values of liabilities under all insurance contracts are taken into
consideration in the Company's overall management of interest rate risk,
such that the Company's exposure to changing interest rates is minimized
through the matching of investment maturities with amounts due under
insurance contracts.
Additional data with respect to fair values of the Company's investments is
disclosed is Note 2.
F-29
<PAGE>
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amount and fair value of the Company's financial instruments
are summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
-------------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Fixed maturities.................... $ 2,506,333 $ 2,506,333 $2,143,658 $2,143,658
Equity securities................... 1 1 3,187 3,187
Policy loans........................ 53,153 53,153 49,331 49,331
Short-term investments.............. 38,359 38,359 57,956 57,956
Other invested assets............... 50,760 50,760 43,747 43,747
Individual and group annuities...... 100,748 99,988 131,549 131,297
</TABLE>
16. DISCONTINUED OPERATIONS
On December 31, 1993, the Company discontinued its Group Medical insured and
administrative services line of business. Substantially all of the insured
operating assets and future policy liabilities, as of December 31, 1993, were
ceded to Liberty Mutual effective January 1, 1994, until the termination date of
the contracts. After termination there is no additional insurance risk
associated with this particular line of business and all insured operating
assets and future policy liabilities will be extinguished.
17. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize the date "00" as
the year 1900 rather than the Year 2000. This may cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in similar
normal business activities.
The Company has allocated significant resources to examining all relevant
internal computing systems to identify areas that may require changes. Efforts
include an examination of both internally developed and purchased software
applications to ensure vendor Year 2000 compliance and working with major
vendors to ensure Year 2000 compliance. As of December 31, 1998, the Company had
substantially completed their Year 2000 efforts and will continue monitoring and
working toward infrastructure readiness throughout 1999.
F-30
<PAGE>
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