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PROSPECTUS
Modified Single Payment
Variable Universal Life Insurance Contracts
(Single Life and Survivorship)
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
1-800-400-1377
This prospectus describes Modified Single Payment Variable Universal Life
Insurance Contracts (the "Contracts") offered by Liberty Life Assurance Company
of Boston ("we" or "Liberty Life") for prospective insured persons ages 0-85.
This prospectus describes Contracts which provide insurance coverage on the
life of one Insured ("Single Life Contracts") and Contracts which provide
insurance on the lives of two Insureds ("Survivorship Contracts"). You may pay
a significant initial Payment and, subject to certain restrictions, additional
Payments. Your initial Payment must equal at least $10,000.
The Contracts are modified endowment contracts for Federal income tax
purposes, except in certain cases as described in "Federal Tax Considerations"
beginning on page 39. A loan, distribution or other amount received from a
modified endowment contract during the life of the Insured will be taxed to the
extent of any accumulated income in the Contract. Any taxable withdrawal will
also be subject to an additional ten percent penalty tax, with certain
exceptions.
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.
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 June 2, 1999.
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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 U.S. Growth & Income,
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 Payment to
our Fixed Account.
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 Payment. 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 Payments, amounts withdrawn, and cost of insurance and any other
charges.
The Contract provides for an Initial Death Benefit as shown on the
Contract Information page of your Contract. The Death Benefit payable under
your Contract may be greater than the Initial Death Benefit. 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 Payment. As long as the Contract remains in force and
you make no withdrawals the Death Benefit will never be less than the Initial
Death Benefit.
Under the Single Life Contracts, when the Insured dies, we will pay a
Death Benefit to a Beneficiary specified by you. Under the Survivorship
Contracts, the Death Benefit is payable upon the second death, as long as the
Contract is in force. We will reduce the amount of the Death Benefit payment by
any unpaid Indebtedness and any unpaid Contract charges.
You generally may cancel the Contract by returning it to us within twenty
days after you receive it. In some states, however, this right to return period
may be longer or shorter as provided by state law. We will refund your Payment
or Account Value, as provided by state law.
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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.
--------------------
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 Contracts may not be available in all states.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
DEFINITIONS ....................................................... 1
QUESTIONS AND ANSWERS ABOUT YOUR CONTRACT ......................... 3
FEES AND EXPENSES ................................................. 11
PURCHASE OF CONTRACT AND ALLOCATION OF PAYMENTS ................... 14
Application for a Contract ...................................... 14
Simplified Underwriting ......................................... 15
Full Underwriting ............................................... 15
Payments ........................................................ 15
Allocation of Payments .......................................... 16
Account Value ................................................... 16
Accumulation Unit Value ......................................... 17
Transfer of Account Value ....................................... 17
Transfers Authorized by Telephone ............................... 18
Dollar Cost Averaging ........................................... 18
Asset Rebalancing ............................................... 19
Asset Allocation Models ......................................... 19
THE INVESTMENT AND FIXED ACCOUNT OPTIONS .......................... 20
Variable Account Investments .................................... 20
Portfolios ..................................................... 20
Voting Rights .................................................. 24
Additions, Deletions, and Substitutions of Securities .......... 24
The Fixed Account ............................................... 25
CONTRACT BENEFITS AND RIGHTS ...................................... 26
Death Benefit ................................................... 26
Accelerated Death Benefit ....................................... 26
Optional Insurance Benefits ..................................... 27
Contract Loans .................................................. 27
Amount Payable on Surrender of the Contract ..................... 28
Partial Withdrawals ............................................. 29
Systematic Withdrawals or Loans ................................. 30
Proceeds Options ................................................ 30
Termination and Grace Period .................................... 31
Maturity Benefit ................................................ 32
Extended Maturity Agreement ..................................... 32
Reinstatement ................................................... 32
Cancellation .................................................... 32
Postponement of Payments ........................................ 33
DEDUCTIONS AND CHARGES ............................................ 33
Separate Account Expense Charge ................................. 33
Monthly Deduction ............................................... 34
Cost of Insurance Charge ........................................ 34
Contract Fee .................................................... 35
Fixed Account Expense Charge .................................... 35
</TABLE>
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<TABLE>
<CAPTION>
Page
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<S> <C>
Portfolio Expenses .................................................... 35
Withdrawal Charge ..................................................... 35
Medical Waiver of Withdrawal Charge ................................... 36
Withdrawal Fee ........................................................ 36
Transfer Fee .......................................................... 37
Special Provisions for Group or Sponsored Arrangements ................ 37
GENERAL CONTRACT PROVISIONS ............................................. 37
Statements to Contract Owners ......................................... 37
Limit on Right to Contest ............................................. 38
Suicide ............................................................... 38
Misstatement as to Age and Sex ........................................ 38
Beneficiary ........................................................... 38
Assignment ............................................................ 39
Creditors' Claims ..................................................... 39
Dividends ............................................................. 39
Notice and Elections .................................................. 39
Modification .......................................................... 39
Survivorship Contracts ................................................ 39
FEDERAL TAX CONSIDERATIONS .............................................. 39
Taxation of Liberty Life and the Variable Account ..................... 40
Tax Status of the Contract ............................................ 40
Diversification Requirements .......................................... 41
Owner Control ......................................................... 41
Tax Treatment of Life Insurance Death Benefit Proceeds ................ 42
Accelerated Death Benefit ............................................. 42
Tax Deferral During Accumulation Period ............................... 42
Contracts Which Are MECs .............................................. 43
Characterization of a Contract as a MEC .............................. 43
Tax Treatment of Withdrawals, Loans, Assignments and Pledges
under MECs ......................................................... 43
Penalty Tax .......................................................... 43
Aggregation of Contracts ............................................. 43
Contracts Which Are Not MECs .......................................... 43
Tax Treatment of Withdrawals Generally ............................... 43
Certain Distributions Required by the Tax Law in the First 15
Contract Years ..................................................... 43
Tax Treatment of Loans ................................................ 44
Survivorship Contract ................................................. 44
Treatment of Maturity Benefits and Extension of Maturity Date ......... 44
Actions to Ensure Compliance with the Tax Law ......................... 44
Federal Income Tax Withholding ........................................ 45
Tax Advice ............................................................ 45
DESCRIPTION OF LIBERTY LIFE AND THE VARIABLE ACCOUNT .................... 46
Liberty Life Assurance Company of Boston .............................. 46
</TABLE>
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<TABLE>
<CAPTION>
Page
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<S> <C>
Officers and Directors of Liberty Life ................ 46
Financial Information Concerning Liberty Life ......... 48
Variable Account ...................................... 48
Safekeeping of the Variable Account's Assets .......... 49
State Regulation of Liberty Life ...................... 49
YEAR 2000 MATTERS ....................................... 49
DISTRIBUTION OF CONTRACTS ............................... 50
LEGAL PROCEEDINGS ....................................... 50
LEGAL MATTERS ........................................... 51
REGISTRATION STATEMENT .................................. 51
EXPERTS ................................................. 51
FINANCIAL STATEMENTS .................................... 51
</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.
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(s), before payment of any unpaid
Indebtedness or Contract charges.
Delivery Date--If your Contract is issued in the field under simplified
underwriting or you pay your initial payment 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.
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.
Initial Death Benefit--The initial amount of insurance under your
Contract, adjusted for any changes in accordance with the terms of your
Contract.
Insured--A person whose life is insured under the Contract.
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Loan Account--An account established for amounts transferred from the
Sub-Accounts or the Fixed Account as security for outstanding
Indebtedness.
Maturity Date--For Single Life Contracts, the Contract Anniversary on
or after the Insured's 100th birthday. For Survivorship Contracts, the
Contract Anniversary on or after the younger Insured's 100th birthday.
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 (when
due), the Expense Charge on the Fixed Account and the cost of any
benefit rider.
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.
Payment--An amount paid to us as payment for the Contract by you or on
your behalf.
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.
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 the Contract Fee less any unpaid
Indebtedness.
Tax Code--The Internal Revenue Code of 1986, as amended.
Valuation Day--Each day the New York Stock Exchange is open for
business and we are open.
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 New York Stock Exchange ("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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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 modified single payment variable universal life insurance
contract?
The Contract has a Death Benefit, Account Value, and other features
similar to life insurance contracts providing fixed benefits. The
Contract permits the Contract Owner to pay a single significant initial
Payment and, subject to restrictions, additional Payments. 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
Payment. The Account Value is not guaranteed. 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 Contracts on the lives of prospective Insureds age 0-85
who meet our underwriting standards. You may purchase a Contract to
provide insurance coverage on the life of one Insured ("Single Life
Contract") or a Contract to provide insurance coverage in the lives of
two Insureds ("Survivorship Contract").
3. What is the Death Benefit?
Under a Single Life Contract, while the Contract is in force, we will
pay a Death Benefit to the Beneficiary upon the death of the Insured.
Under a Survivorship Contract, we will pay the Death Benefit to the
Beneficiary upon the death of the second Insured. The Death Benefit is
equal to the greater of your Contract's Initial Death Benefit and the
Account Value multiplied by a specified percentage. Decreases in the
Account Value of an in force Contract will never cause the Death
Benefit to be less than the Initial Death Benefit. 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 withdraw part of your Account
Value, we will reduce the Initial Death Benefit as described in this
Prospectus on page 29.
4. How will the Account Value of my Contract be determined?
Your Payments 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
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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 Payments paid, partial withdrawals, and charges assessed. We do
not guarantee a minimum Account Value on the portion of your Payments
allocated to the Variable Account.
5. What are the Payments for this Contract?
Your initial Payment must equal at least $10,000. If you choose, you
may make additional Payments of at least $1,000 each, subject to the
restrictions described in this Prospectus. We may require you to
provide evidence of insurability if an increase in the Death Benefit
would result from an additional Payment. We will refuse to accept any
additional Payment that would cause the Contract to lose its status as
a life insurance contract under the Tax Code.
6. When is the Contract effective?
Simplified underwriting. If your application is approved through
simplified underwriting, your Contract will be effective and your life
insurance coverage under the Contract will begin on the date that your
application and initial payment are taken.
Full underwriting. If your application requires full underwriting and
we approve your application, your Contract will be effective as of the
date that we receive your initial Payment. If you submit your initial
Payment with your application, the effective date of your Contract will
be the date of your application, which will be designated your
Contract's Contract Date. Otherwise, when we deliver your Contract we
will require you to pay sufficient Payment to place your insurance in
force. At that time, we also will provide you with a document showing
your Contract's effective date, which will be designated as the
Contract Date. While your application is in underwriting, if you have
paid your initial Payment 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 on your Payment
from the Contract Date. We will also begin to deduct the Contract
charges as of the Contract Date. We will temporarily allocate your
initial Payment to our Fixed Account until we allocate it to the
Sub-Accounts in accordance with the procedures described in the Answer
to Question 7.
If we reject your application, we will not issue you a Contract. We
will return any Payment you have made, adding interest as and at the
rate required in your state. We will not subtract any contract charges
from the amount we refund to you.
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7. How are my Payments allocated?
When you apply for the Contract, you specify in your application how to
allocate your Payment 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 Payment in those percentages until you
give us new written instructions. You may allocate your Payment to up
to ten Sub-Accounts and the Fixed Account. You must allocate at least
five percent of your Payment to each option that you choose. In the
future, we may change these limits.
Initially, we will temporarily allocate your initial Payment to the
Fixed Account as of the Contract Date. We generally will then
reallocate that amount (including any interest) among the Sub-Accounts
and the Fixed Account in accordance with your instructions, on the
twenty-fifth 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. As a general rule, any subsequent
Payment will be allocated to the Sub-Accounts and the Fixed Accounts as
of the date your Payment is received in our Service Center.
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 1-800-400-1377. 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, 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 37,
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 page 18.
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 18.
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 19.
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8. 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:
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 U.S. Growth & Income, 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.
9. 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 most 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
27-28, and "Contracts Which Are MECs", on pages 42-43.
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10. What are the charges deducted from my Account Value?
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 equivalent to
1.65% of average daily net assets.
We also deduct a monthly deduction from your Account Value for the cost
of insurance charge, the Contract Fee (when due), the Fixed Account
Expense Charge, and the cost of any benefit rider. The cost of
insurance charge covers our anticipated mortality costs. The Contract
Fee covers certain administrative expenses in connection with the
Contracts. The Fixed Account Expense Charge is intended to cover state
premium taxes and administration expenses. The Fixed Account Expense
Charge equals 0.04% of the Account Value in the Fixed Account on each
Monthly Date, which is equivalent to an annual rate of 0.48% of the
average monthly Account Value in the Fixed Account.
We subtract the Fixed Account Expense Charge from your Fixed Account
balance. We allocate the remainder of the monthly deduction pro rata
among your Account Value in the Sub-Accounts and the Fixed Account.
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. We may change the numbers of free transfers at any time,
subject to the limits described in "Transfer Fee" on page 37, but the
transfer fee will never exceed $25.
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 11 below and in "Withdrawal
Charge", on pages 35-36. 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.
The charges assessed under the Contract are summarized in the table
entitled "Contract Charges and Deductions" on pages 11-12 and described
in more detail in "Deductions and Charges", beginning on page 33.
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.
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11. 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, the
Contract Fee, 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 withdraw
less than $250 at one time. Currently, if the Account Value after any
partial withdrawal would be less than $10,000, 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 28-29.
We may deduct a Withdrawal Charge and/or withdrawal fee on a surrender
or a partial withdrawal.
Withdrawal Charge. If you surrender your Contract, the Withdrawal
Charge will equal a percentage of your initial Payment net of all
previous withdrawal amounts on which you paid a Withdrawal Charge. If
you make a partial withdrawal from your Contract, the Withdrawal Charge
will equal a percentage of the amount withdrawn until your total
partial withdrawals on which you paid a Withdrawal Charge equals your
initial Payment. After that limit is reached, partial withdrawals are
not subject to the Withdrawal Charge. The Withdrawal Charge is intended
to cover our actual premium tax expenses and sales expenses.
The rate used to determine the Withdrawal Charge depends on the year
the withdrawal is made. The Withdrawal Charge declines to zero percent
after the seventh Contract Year. The Withdrawal Charge is assessed at
the following rates:
<TABLE>
<CAPTION>
Contract Withdrawal Contract Withdrawal
Year Charge Year Charge
- ---------- ------------ ---------- -----------
<S> <C> <C> <C>
1 9.75% 5 7.25%
2 9.50% 6 5.00%
3 9.25% 7 4.75%
4 7.50% 8+ 0%
</TABLE>
We will waive the Withdrawal Charge on the portion of a withdrawal
equal to the greater of:
Ten percent of the Account Value, less any prior free partial
withdrawals and preferred loans since the most recent Contract
Anniversary; or earnings not previously withdrawn.
We also will waive the Withdrawal Charge for qualified medical stays.
Withdrawal fee. 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
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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 35-36.
12. 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
Payments you pay under the Contract to ensure that your Contract
continues to meet that definition.
In most 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. 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
Payment. 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
591/2. For more information on the tax treatment of the Contract, see
"Federal Tax Considerations", beginning on page 39, and consult your
tax adviser.
13. Can I return this Contract after it has been delivered?
In many states, you may cancel your Contract by returning it to us
within twenty days after you receive it. In some states, however, this
right to return period may be longer or shorter, 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. Since state
laws differ as to the consequences of returning a Contract, you should
refer to your Contract for specific information about your
circumstances.
14. When does coverage under the Contract end?
Your Contract has a Guaranteed Death Benefit. Under this provision, if
you do not have any outstanding Indebtedness, your Contract will never
lapse. Your Contract will remain in force until payment of the Death
Benefit or the Maturity Date, unless you voluntarily surrender your
Contract at an earlier date. If you have outstanding Indebtedness, the
Contract will enter a 61-day Grace Period if on a Monthly Date the
Surrender Value is insufficient to pay the Monthly Deduction. The
Contract will terminate at the end of the Grace Period, unless you pay
an amount sufficient to keep the Contract in force. The Contract also
will terminate on the Maturity Date, unless you enter into an Extended
Maturity Agreement.
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15. 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 Insureds'
age, sex, underwriting classification, proposed initial Payment, and
any available riders requested. 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 the 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.
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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 33.)
Contract Charges and Deductions
Charges Deducted from Account Value
Monthly Cost of Insurance Charge:
<TABLE>
<CAPTION>
Current Guaranteed
- ------------------------------------------------ ----------------------------------------------
<S> <C>
The lower of: (i) the product of the current Ranges from $.01 per $1,000 of net amount
asset-based cost of insurance charge times at risk to $82.50 per $1,000 of net amount at
the Account Value on the Monthly Date;(1) risk(2)
and (ii) the product of the applicable
guaranteed cost of insurance rate times the
net amount at risk.(2) The current asset-
based rate for Single Life Contracts for the
Standard (NT)(3) rate class is 0.45% annually
of Account Value. The current asset-based
rate for Survivorship Contracts where both
Insureds are in the Standard (NT) rate class
is 0.15% annually of Account Value.
Contract Fee: $30.00 per year, deducted annually(4)
Monthly Fixed Account 0.48% annually of the average monthly
Expense Charge: Account Value in the Fixed Account
(0.04% per month)(5)
Transaction Charges
Transfer Fee: $25 per transfer(6)
Partial Withdrawal Fee: The lesser of $25 or 2% of the amount
withdrawn
Deferred Sales Charge
Maximum Withdrawal Charge: 9.75% of the initial Payment(7)
Charges Deducted from the Sub-Accounts
Annual Variable Account Charges:
Expense Charge: 1.65% of daily net assets in the Variable
Account(8)
Federal Income Tax Charge: Currently none.(9)
</TABLE>
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(1) The asset-based cost of insurance rate differs depending on Contract type,
rating class, and history of tobacco use of the Insured(s). The
asset-based rates that we set will reflect our expectations as to
mortality experience under the Contracts and other relevant factors, such
that the aggregate actual cost of insurance charges paid under the
Contracts will compensate us for our aggregate mortality risks under the
Contracts. In our discretion, we may change the asset-based rate used in
the current cost of insurance formula. Even if we change the asset-based
rate, however, you will never be charged more than the amount determined
using the guaranteed cost of insurance tables in your Contract. For
further explanation, see "Deductions and Charges--Monthly Deduction--Cost
of Insurance Charge," on pages 33-34.
(2) The guaranteed 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 1.0028709 and
the Account Value. See "Deductions and Charges--Monthly Deduction--Cost of
Insurance Charge," on pages 33-34.
(3) The Standard (NT) rate class is our best rate class for Insureds who have
not used tobacco of any kind within the past twenty-four months.
(4) The Contract Fee is deducted annually on the Contract Anniversary. If you
surrender your Contract during a Contract Year, we will deduct the
Contract Fee from your surrender proceeds. We currently waive the Contract
Fee on Contracts with an Account Value of at least $50,000.
(5) Deducted monthly in an amount equal to 1/12 of the annual rate shown,
multiplied by the Account Value in the Fixed Account on the relevant
Monthly Date.
(6) We currently waive the Transfer Fee on all transfers. We reserve the right
in the future to charge the Transfer Fee on all transfers as described
above. See "Transfer Fee" on page 37.
(7) This charge applies only upon withdrawals of the initial Payment. It does
not apply to withdrawals of any additional Payments paid under a Contract.
The Withdrawal Charge declines to zero percent after the seventh Contract
Year. It 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.
In any Contract Year, we will not charge any Withdrawal Charge on that
portion of your withdrawals equal to the greater of: (a) ten percent of
the Account Value, less any prior free partial withdrawals and preferred
loans since the most recent Contract Anniversary; or (b) earnings not
previously withdrawn. "Earnings", for this purpose, is defined on page 36.
See "Deductions and Charges--Withdrawal Charge," pages 35-36.
(8) 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.
(9) 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", page 33.
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Portfolio Expenses(1)
(As a percentage of average net assets)
(after fee waivers and expense reimbursements, as indicated in the notes)
<TABLE>
<CAPTION>
Total Fund Total Fund
Management Other Annual
Portfolio Fees Expenses Expenses
- --------------------------------------------- ------------ ------------ ------------------------
<S> <C> <C> <C>
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 ................ 0.56% 0.25% 0.81%(3)
Dreyfus Socially Responsible Growth ......... 0.75% 0.05% 0.80%(3)
Colonial Small Cap Value .................... 0.00% 1.00% 1.00% (4.32%)(4)
Colonial High Yield Securities .............. 0.00% 0.80% 0.80% (1.84%)(4)
Colonial Strategic Income ................... 0.65% 0.13% 0.78% (4)
Colonial U.S. Growth & Income ............... 0.80% 0.10% 0.90%
Liberty All-Star Equity ..................... 0.76% 0.24% 1.00% (1.04%)(4)
MFS Emerging Growth ......................... 0.75% 0.10% 0.85%
MFS Research ................................ 0.75% 0.11% 0.86%
MFS Utilities ............................... 0.75% 0.25% 1.00% (1.01%)(5)
MFS Growth with Income ...................... 0.75% 0.13% 0.88%(5)
Stein Roe Balanced .......................... 0.45% 0.20% 0.65%
Stein Roe Growth Stock ...................... 0.50% 0.20% 0.70%
Stein Roe Money Market ...................... 0.35% 0.27% 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
reflect the agreement of each Portfolio's adviser to reimburse expenses
above the limits shown in notes (3) 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
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<PAGE>
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 U.S. Growth & Income; and .80% for Colonial Strategic
Income and Colonial High Yield Securities. Each percentage shown in
parentheses is an estimate of what the total expenses would be in the
absence of expense reimbursement.
Without such reimbursements, each such Portfolio's Management Fees, Other
Expenses, and Total Expenses would have been as follows: 0.80%, 3.52%, and
4.32% for Colonial Small Cap Value Fund, 0.60%, 1.24% and 1.84% for the
Colonial High Yield Securities Fund, and 0.80%, 0.24%, and 1.04% 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 their "Other Expenses" shall not exceed 0.25% of
their average daily net assets during the current fiscal year. Otherwise,
the "Other Expenses" and "Total Annual Expenses" of the MFS Utilities
Portfolio would be 0.26% and 1.01%, respectively. MFS did not reimburse
other expenses of the MFS Growth with Income Portfolio during the fiscal
year ended December 31, 1998.
PURCHASE OF CONTRACT AND ALLOCATION OF PAYMENTS
Application for a Contract. You may apply to purchase a Contract by
submitting a written application to us through one of our authorized agents. We
will not issue Contracts to insure people who are older than age 85. 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
Payment to you. We reserve the right to change the terms or conditions of your
Contract to comply with 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 Payment 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 Payment with your application if the
requested Initial Death Benefit of your Contract exceeds our then-current
limit. In other cases, you may choose to pay the initial Payment with your
application. If you did not submit your initial Payment with your application,
when we deliver your Contract we will require you to pay sufficient Payment to
place your insurance in force.
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<PAGE>
Simplified underwriting. Under our current underwriting rules, which we
may change when and as we decide, proposed Insureds are eligible for simplified
underwriting without a medical examination, if the application responses and
initial payment meet our simplified underwriting standards. Simplified
underwriting is not available if the initial Payment exceeds the limits set in
our simplified underwriting standards.
Simplified underwriting also is not available if the Insured would be more
than 80 years old on the Contract Date. For Survivorship Contracts, both
Insureds must meet our simplified underwriting requirements. Simplified
underwriting limits may vary by state.
If your application is approved through simplified underwriting, your
Contract will be effective and your life insurance coverage under the Contract
will begin on the date of your application. Your Contract Date will be the date
your application and initial payment are taken.
Full underwriting. If your application requires full underwriting and we
approve your application, your Contract will be effective as of the date that
we receive your initial Payment. If you submit your initial Payment with your
application, the effective date of your Contract will be the date of your
application, which will be designated your Contract's Contract Date. Otherwise,
when we deliver your Contract we will require you to pay sufficient Payment to
place your insurance in force. At that time, we also will provide you with a
document showing your Contract's effective date, which will be designated as
the Contract Date. While your application is in underwriting, if you have paid
your initial Payment 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 on your Payment
from the Contract Date. We will also begin to deduct the Contract charges as of
the Contract Date. We will temporarily allocate your initial Payment to our
Fixed Account until we allocate it to the Sub-Accounts and the Fixed Account in
accordance with the procedures described in "Allocation of Payments" on page 16
below.
If we reject your application, we will not issue you a Contract. We will
return any Payment you have made, adding interest as and at the rate required
in your state. We will not subtract any contract charges from the amount we
refund to you.
Payments. You must pay an initial Payment to purchase a Contract. The
initial Payment purchases a Death Benefit initially equal to your Contract's
Initial Death Benefit. The minimum initial Payment is $10,000. We may waive or
change this minimum. If you choose, you may pay additional Payments, subject to
the conditions described below.
You may pay additional Payments at any time and in any amount necessary to
avoid termination of your Contract. You may also pay additional Payments
subject to the following conditions:
(1) each additional Payment must be at least $1,000; and
(2) the Payment will not disqualify your Contract as a life insurance
contract under the Tax Code.
We intend to require satisfactory evidence of insurability as a condition
for accepting any Payment that would result in an increase in the Death
Benefit. Any such increase will take effect on the first Monthly Date after we
approve the increase. In the future, we may waive this requirement.
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<PAGE>
Allocation of Payments. Initially, we will temporarily allocate your
initial Payment to the Fixed Account as of the Contract Date. We generally will
then reallocate that amount (including any interest) among the Sub-Accounts and
the Fixed Account in accordance with your instructions, on the twenty-fifth day
after the Delivery Date. This period may be longer or shorter, depending on the
length of the right of 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.
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 subsequent Payments 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.
We generally will allocate your additional Payments to the Sub-Accounts
and the Fixed Account as of the date your Payment is received in our Service
Center. If an additional Payment requires underwriting, however, we may delay
allocation until the next Monthly Date after we have completed underwriting. We
will follow the allocation instructions in our file, unless you send us new
allocation instructions with your Payment. If you have any outstanding
Indebtedness, we will apply your additional payment 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 Payment and other Payments requiring underwriting, on the date a
Payment is received or your request for other action is received 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
Payments, 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 Payment
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 Payment 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
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<PAGE>
(5) Any amounts withdrawn by you (plus the applicable Withdrawal Charge and
withdrawal fee) from the Sub-Account during the current Valuation
Period; minus
(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 Payment 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 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 before the
Maturity Date, 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. 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 to 12 or less per Contract Year,
we
17
<PAGE>
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 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.
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 assurance 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 at fixed intervals 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 37.
Your request to participate in this program will be effective when we
receive your completed application at our Service Center at the address given
on the first page of this Prospectus. 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.
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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 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 Payments (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 37.
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 Programs 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 Payments
in accordance with the percentages specified in one of the S&P models. You may
only use one model at a
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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 Payments or
Account Value to the Fixed Account, you must instruct us specifically, because
none of the models includes the Fixed Account.
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 Payments or Account Value among
the Sub-Accounts. Call us at our Service Center or contact your agent 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. 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.
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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.
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.
Contract Owners 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 U.S. Growth & Income Fund (Colonial Stock Sub-Account), formerly
known as Colonial U.S. Stock Fund. Long-term growth and income by investing
primarily in large capitalization equity securities.
(1) "Standard & Poor's 500", "S&P 500", 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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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.
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
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services since 1931. Liberty Asset Management Company, an affiliate of Liberty
Life, 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 Payments
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 to determine what action, if any, should
be taken in response thereto. If a Board of Directors were to conclude
23
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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 Payments 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 page 33 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 Investment Company
Act of 1940. 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 Payments 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 Payments and transfers allocated to the Fixed Account during a
Contract Year. We guarantee that the current rate in effect when a Payment 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 pages
17-18.
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.
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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 the Death
Benefit proceeds upon the death of the Insured or, if your Contract is a
Survivorship Contract, upon the death of the second Insured to die. We will pay
the Death Benefit proceeds to the named Beneficiary(ies) or, if none survives,
to contingent Beneficiary(ies). We will pay the Death Benefit proceeds in a
lump sum or apply them under an optional payment plan. The optional payment
plans are described in "Proceeds Options" on pages 30-31.
The Death Benefit proceeds payable to the Beneficiary equal the Death
Benefit, less any Indebtedness and less any due and unpaid charges. The
proceeds may be increased, if you have added a rider 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 Death Benefit will be the greater of: (a) the Initial Death Benefit or
(b) the Account Value multiplied by the applicable corridor percentage. 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 therefore increase the Death Benefit above the Initial Death
Benefit, and a decrease in Account Value due to unfavorable investment
experience may decrease the Death Benefit (but not below the Initial Death
Benefit). As explained on page 29, however, we will reduce the Initial Death
Benefit if you take a partial withdrawal from your Contract.
Examples:
<TABLE>
<CAPTION>
Example A Example B
----------- ----------
<S> <C> <C>
Initial Death Benefit ................... $100,000 $100,000
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>
In Example A, the Death Benefit equals $104,000, i.e., the greater of
$100,000 (the Initial Death Benefit) 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 Initial Death Benefit) or $65,000 (the Account Value of $50,000 multiplied
by the corridor percentage of 130%).
Accelerated Death Benefit. 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
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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. Under
Survivorship Contracts, the Accelerated Death Benefit may not be requested
until after the death of one of the Insureds.
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 42.
The terms of this benefit may differ in some states. Contact us for more
information.
Optional Insurance Benefits. You may ask to add one or more riders to your
Contract to provide additional optional insurance benefits. We may require
evidence of insurability before we issue a rider to you. We will deduct the
cost of any riders as part of the Monthly Deduction. For more information
concerning what options we may offer, please ask your agent or contact us at
800-400-1377. In our discretion we may offer riders or stop offering a rider at
any time.
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
$100,000 and you already had $50,000 in Indebtedness outstanding, you could
borrow an additional $40,000 ($100,000 \x 90% - $50,000). 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.
You may realize taxable income when you take a Contract Loan. In most
instances, a Contract is treated as a "modified endowment contract" for federal
tax purposes. As a result, Contract Loans are treated as withdrawals for tax
purposes, and the amount of the loan equal to any increase in your Account
Value 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. On the other hand, although a
Contract Loan is treated as a withdrawal for tax purposes, it is treated
differently for Contract purposes. For example, under the Contract, a Contract
Loan, unlike a partial withdrawal, does not reduce the Initial Death Benefit.
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.
While the Contract remains in force, you may repay a Contract Loan in
whole or in part without any penalty at any time while the Insured is living.
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The interest rate on Preferred Loans equals the minimum guaranteed
interest rate shown in your Contract; the interest rate on other Contract Loans
will be two percent per annum higher. 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 other than withdrawals of
earnings. 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 Loan Account at
the minimum guaranteed 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.
If you purchase a Contract in exchange for another life insurance contract
under which a loan is outstanding, in our discretion we may permit you to
continue that loan under your Contract. We will advise you of the applicable
interest rate.
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 pages 31-32. 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. Please consult a tax adviser for
details.
You may repay all or any part of any Contract Loan while the Contract is
still in effect. If you have a Contract Loan outstanding, we will treat any
payment 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 payment among the Sub-Accounts and the
Fixed Account on the same basis as additional Payments are allocated, unless
you instruct us otherwise.
A Contract Loan, whether or not repaid, will have a permanent effect on
the 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.
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 will
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<PAGE>
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 the Contract Fee, 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 35-36.
You may receive the Surrender Value in a lump sum or under any of the
proceeds options described in "Proceeds Options" on pages 30-31.
The tax consequences of surrendering the Contract are discussed in
"Federal Tax Considerations," beginning on page 39.
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 35-36.
You may specify how much of your partial withdrawal you wish 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 any 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 $500
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 $10,000, we may
treat your request as a request to withdraw the total Account Value and
terminate your Contract. We may waive or change this limit.
A partial withdrawal will reduce the Initial Death Benefit under your
Contract as well as the Account Value. We will reduce the Initial Death Benefit
proportionately to the reduction in the Account Value caused by the partial
withdrawal. Thereafter, we will calculate contract charges and any Death
Benefit payable under your Contract using the revised Initial Death Benefit. We
will notify you of the new Initial Death Benefit in our next quarterly or
annual report to you.
Withdrawals generally will be subject to income tax and a ten percent
penalty tax. The tax consequences of partial withdrawals are discussed in
"Federal Tax Considerations" beginning on page 39.
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<PAGE>
Systematic Withdrawals or Loans. You may enroll in our systematic
withdrawal program by sending a completed enrollment form to our Service
Center. We will pay systematic withdrawals or loans to you or a payee that you
choose. Each systematic withdrawal payment must be at least $250. We will take
systematic withdrawal payments pro rata from the Sub-Accounts and the Fixed
Account, unless you instruct us otherwise. You may not withdraw or borrow more
than a pro rata share from the Fixed Account under this program. We will treat
systematic withdrawals in the same way as other partial withdrawals in applying
the Withdrawal Charge and the withdrawal fee. In our discretion we may stop
paying systematic withdrawals if your Account Value falls below our current
minimum. Systematic Loans are subject to the same limitations and requirements
as other Contract Loans, as described in Contract Loans on pages 27-28. We
reserve the right to modify or suspend the systematic withdrawal or loan
program. In our discretion, any change may apply to existing systematic plans.
Write us or call us at 1-800-400-1377 for more information about our Systematic
Withdrawal or Loan Program.
If you take payments under our systematic withdrawal program prior to age
591/2, you may be subject to a ten percent penalty tax, in addition to any
other tax liability you may have. Accordingly, you should consult a qualified
tax counselor before entering into a systematic withdrawal plan. For more
information, see "Federal Tax Considerations--Tax Deferral During Accumulation
Period: Penalty Tax" on page 42.
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 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 which we will declare
annually. We will never declare an effective annual rate of less than 31/2%.
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
which we will declare annually. We will never declare an effective annual rate
of less than 31/2%.
Option 3 -- Fixed Period. We will pay monthly installments for a period
selected by you of not more than 25 years.
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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.
Liberty Security Account. We will credit interest to proceeds left with us
in the Liberty Security Account. We will credit interest to your Liberty
Security Account 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 Contract reaches the Maturity Date;
(c) the Grace Period ends; or
(d) 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 you have any
unpaid Indebtedness. You will be given a 61-day Grace Period in which to pay an
additional 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 26.
If you have no outstanding Indebtedness, your Contract will not lapse.
Under the Contract's Guaranteed Death Benefit provision, in that circumstance,
if on a Monthly Date the Sur-
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render Value is not large enough to cover the full Monthly Deduction, we will
apply the remaining Surrender Value to partially pay the Monthly Deduction and
waive any insufficiency. Thereafter, we will waive all future Monthly
Deductions until the Surrender Value is sufficient to pay the Monthly
Deduction.
Maturity Benefit. If the Insured is still living and the Contract is in
force on the Maturity Date, we will pay you a Maturity Benefit. The Maturity
Benefit will equal the Surrender Value on the Maturity Date. The Maturity Date
will be the Contract Anniversary after the Insured's 100th birthday.
Extended Maturity Agreement. You may continue your Contract after the
Maturity Date if the Insured is still living on that date and you write to us
before the Maturity Date to enter into an extended maturity agreement. Under
that agreement, among other things:
(1) the Death Benefit proceeds will equal the Surrender Value;
(2) you will pay no further cost of insurance charges; and
(3) you may not pay additional Payments; and
(4) the guaranteed death benefit does not apply.
Other Contract provisions may also be modified after the Maturity Date.
We will continue to charge the Separate Account Expense Charge during the
maturity extension period, even though there no longer will be a mortality risk
under your Contract. We will continue to impose this charge, because the
portion of this charge attributable to mortality risk reflects our expectations
as to the mortality risks and the amount of such charges expected to be paid
under all Contracts, including Contracts covered by Maturity Extension
Agreements.
Your decision whether or not to enter into an extended maturity agreement
will have tax consequences. Accordingly, before you make that decision you
should consult your tax adviser.
Reinstatement. If the Contract lapses during the life of the Insured, you
may apply for reinstatement of the Contract by paying us the reinstatement
Payment. You must request reinstatement within five years from the end of the
Grace Period and before the Maturity Date. The reinstatement Payment 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. 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 Payment paid at the time of reinstatement.
All Contract charges will continue to be based on your original Contract Date.
A Survivorship Contract may be reinstated only if both Insureds are still
alive, or if one Insured is alive and the lapse occurred after the death of the
first Insured.
Cancellation. In many states, you may cancel your Contract by returning it
to us within twenty days after you receive it. In some states, however, this
right to return period may be longer or shorter, 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
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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 Payment 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.
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. This Expense Charge will be
calculated at an annual rate equivalent to 1.65% of average daily net assets of
each Sub-Account, as described in the table of Contract Charges and Deductions
on pages 11-12. The amount deducted will be determined on each Valuation Day.
The Separate Account Expense Charge, together with the Fixed Account
Expense Charge, is intended to cover all expenses under the Contract other than
distribution expenses, and the Cost of Insurance Charge and the other expenses
covered by the Monthly Deduction, which are charged for separately and
described below. Accordingly, the Expense Charges are intended to compensate us
for incurring the following expenses and assuming certain risks under the
Contracts:
-- a portion of state premium taxes and other state and local taxes;
-- administrative expenses such as salaries, postage, telephone, office
equipment, and periodic reports;
-- mortality and expense risk; and
-- certain federal taxes and other expenses associated with the receipt of
Payments.
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 preced-
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ing 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 Payments 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 (when due), the Fixed Account
Expense Charge, and any charges for optional benefit riders. We deduct the
Fixed Account Expense Charge from your Fixed Account balance. We deduct the
remainder of 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 the lesser of:
(a) the applicable current asset-based cost of insurance rate times the
Account Value on the Monthly Date; or
(b) the applicable guaranteed cost of insurance rate multiplied by the net
amount at risk on the Monthly Date.
Our current asset-based cost of insurance rate for the Single Life,
Standard Rating Class (NT) is 0.45% of Account Value annually. Our current
asset-based cost of insurance rate for Second to Die Contracts, when both
Insureds are in the Standard Rating Class (NT), is 0.15% of Account Value
annually. Rates for other classes may differ based on the type of Contract and
the rating class and history of tobacco use of the Insured(s).
Your guaranteed cost of insurance rates are set forth in the mortality
tables in your Contract. The net amount at risk is (a) - (b), where:
(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) the Account Value on that day before the deduction of the Monthly
Deduction for the Cost of Insurance.
Because your Account Value and 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. In general, under these formulas, when your current
monthly cost of insurance charge is determined using the asset-based rate, an
increase in your Account Value increases your current monthly cost of insurance
charge, up to the guaranteed maximum cost of insurance charge determined as
described above. Since that maximum charge is based on the net amount at risk,
which generally declines as your Account Value increases, increases in your
Account Value generally reduce the guaranteed maximum cost of insurance charge.
Thus, if the asset-
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based charge would be higher than the guaranteed maximum charge, further
increases in your Account Value generally will reduce your current cost of
insurance charge.
The 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 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 Table B assuming a blend of 80%
male and 20% female lives.
Contract Fee. We charge a Contract Fee of $30.00 per year. We deduct the
Contract Fee on each Contract Anniversary. If you surrender your Contract
during a Contract Year, we will deduct the full Contract Fee from your
surrender proceeds. The Contract Fee is intended to compensate us for
administrative expenses such as salaries, postage, telephone, office equipment
and periodic reports. We currently waive the Contract Fee on a Contract, if the
Account Value is at least $50,000.
Fixed Account Expense Charge. On each Monthly Date we charge a Fixed
Account Expense Charge of 0.04% of the Account Value in the Fixed Account,
which is equivalent to an annual rate of 0.48% of the average monthly Account
Value in the Fixed Account. The Fixed Account Expense Charge is intended to
cover state premium taxes and administrative expenses.
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
above. 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. If you surrender your Contract or take a partial
withdrawal during the first seven Contract Years, we may subtract a Withdrawal
Charge from the proceeds. The Withdrawal Charge will be calculated at the rate
shown below.
If you surrender your Contract, the Withdrawal Charge will equal a
percentage of your initial Payment net of all previous withdrawal amounts on
which you paid a Withdrawal Charge. If you make a partial withdrawal from your
Contract, the Withdrawal Charge will equal a percentage of the amount withdrawn
until your total partial withdrawals on which you paid
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a Withdrawal Charge equals your initial Payment. Partial Withdrawals above that
amount are not subject to the Withdrawal Charge.
The rate used to determine the Withdrawal Charge depends on the year the
withdrawal is made. The Withdrawal Charge declines to zero percent after the
seventh Contract Year. The Withdrawal Charge is assessed at the following
rates:
<TABLE>
<CAPTION>
Contract Withdrawal Contract Withdrawal
Year Charge Year Charge
- ---------- ------------ ---------- -----------
<S> <C> <C> <C>
1 9.75% 5 7.25%
2 9.50% 6 5.00%
3 9.25% 7 4.75%
4 7.50% 8+ 0%
</TABLE>
We will waive the Withdrawal Charge on that portion of your withdrawals
equal to the greater of:
(a) ten percent of the Account Value less any prior free partial
withdrawals and preferred loans taken since the most recent Contract
Anniversary; or
(b) earnings not previously withdrawn. For this purpose, "earnings" will
equal the Account Value, minus the total Payments on your Contract,
minus all outstanding preferred loans, minus any interest that has
accrued on Indebtedness since the previous Contract Anniversary, plus
all prior partial withdrawals other than withdrawals of earnings.
Additional Payments do not increase the amount of Withdrawal Charge you
may be required to pay. Only your initial Payment is used in our formula for
calculating Withdrawal Charges.
The Withdrawal Charge is imposed to cover our actual premium tax and sales
expenses, which include agents' sales commissions and other sales and
distribution expenses. We expect to recover total premium tax and sales
expenses of the Contracts over the life of the Contracts. However, to the
extent premium taxes and distribution costs are not recovered by the Withdrawal
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.
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.
Withdrawal Fee. We 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 of the partial withdrawal. The withdrawal fee does
not apply to full surrenders. The
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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, 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 to 12
or less per Contract Year, 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 Payments 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
Contact 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 Investment Company Act of 1940, as
amended. 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 Initial Death Benefit. 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, 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.
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 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.
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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.
Survivorship Contracts. We offer Contracts on a single life and "last
survivor" basis. The Survivorship Contract operates almost identically to the
Single Life Contract. The primary difference is that the Survivorship Contract
has two Insureds and the Death Benefit is paid only upon the death of the last
surviving Insured. Other significant differences are:
(1) the cost of insurance charge differs because we base it on the
anticipated mortality of two Insureds and we do not pay the Death
Benefit until both Insureds have died;
(2) for a Survivorship Contract to qualify for simplified underwriting,
both Insureds must meet our standards;
(3) for a Survivorship Contract to be reinstated, both Insureds must be
alive on the date of reinstatement;
(4) under a Survivorship Contract, provisions regarding incontestability,
suicide, and misstatements of age or sex apply to each Insured; and
(5) the Accelerated Death Benefit is only available upon the Terminal
Illness or Chronic Illness of the surviving Insured, as these terms
are defined in the Contract.
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
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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 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
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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 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
investment 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, an investment 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
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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 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 (occurring
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 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 Payments 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.
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Contracts Which Are MECs
Characterization of a Contract as a MEC. In general, this Contract will
constitute a MEC unless (1) it was received in exchange for another life
insurance contract which was not a MEC, (2) no Payments or other consideration
(other than the exchanged contract) are paid into the Contract during the first
7 Contract Years, and (3) there is no withdrawal or reduction in the death
benefit during the first 7 Contract Years. In addition, even if the Contract
initially is not a MEC, it may, in certain circumstances, become a MEC if there
is a later increase in benefits or any other "material change" of the Contract
within the meaning of the tax law.
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 Payments. 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 which 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 591/2, (2) because you have
become disabled (as defined in the tax law), 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 law). Certain
other exceptions to the ten percent penalty tax may apply.
Payments under our systematic withdrawal program possibly may not qualify
for the exception from penalty tax for "substantially equal periodic payments"
which is described above. Accordingly, this Contract may be inappropriate for
Contract Owners who expect to take substantially equal periodic payments prior
to age 591/2. You should consult a qualified tax adviser before entering into a
systematic withdrawal plan.
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 Payments 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. As indicated above, the Tax Code limits the amount of Payments that may
be made and the Account Values that can accumulate relative to the Death
Benefit. Where cash distributions are required
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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, 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 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.
Survivorship Contract. Although we believe that the Contract, when issued
as a Survivorship Contract, meets the definition of life insurance contract
under the Tax Code, the Tax Code does not directly address how it applies to
Survivorship Contracts. In the absence of final regulations or other guidance
under the Tax Code regarding this form of Contract, there is necessarily some
uncertainty whether a Survivorship Contract will meet the Tax Code's definition
of a life insurance contract. If you are considering purchasing a Survivorship
Contract, you should consult a qualified tax adviser.
If the Contract Owner is the last surviving Insured, the Death Benefit
proceeds will generally be includable in the Contract Owner's estate on his or
her death for purposes of the federal estate tax. If the Contract Owner dies
and was not the last surviving Insured, the fair market value of the Contract
may be included in the Contract Owner's estate. In general, the Death Benefit
proceeds are not included in the last surviving Insured's estate if he or she
neither retained incidents of ownership at death nor had given up ownership
within three years before death.
Treatment of Maturity Benefits and Extension of Maturity Date. At the
Maturity Date, we pay the Surrender Value to you. Generally, the excess of the
Cash Value (less any applicable Contract Fee) over your investment in the
Contract will be includable in your taxable income at that time. If you extend
the Maturity Date past the year in which the Insured reaches age 100 pursuant
to an extended maturity agreement (which must be done before the original
Maturity Date), we believe the Contract will continue to qualify as life
insurance under the Tax Code. However, there is some uncertainty regarding this
treatment. It is possible, therefore, that you would be viewed as
constructively receiving the Surrender Value in the year in which the Insured
attains age 100 and would realize taxable income at that time, even if the
Contract proceeds were not distributed at that time.
Actions to Ensure Compliance with the Tax Law. We believe that the maximum
amount of Payments 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 Payments, and, if your total Payments during a Contract Year exceed those
permitted by the Tax Code, we will refund the excess Payments 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.
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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 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.
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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.
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 executive
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.
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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 Markets, 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.
Christopher C. Mansfield; Director, August 1995 to date; Senior Vice
President and General Counsel, Liberty Mutual Insurance Company.
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.
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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.
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 Investment Company Act of 1940. 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
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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
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 which we have developed internally and software which 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.
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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 the 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 which may be acting as broker-dealers
without separate registration under the Securities Exchange Act of 1934,
pursuant to legal and regulatory exceptions.
The maximum sales compensation payable by the Company is not more than
seven percent of the initial Payment. In addition, we may pay or permit other
promotional incentives, in cash, or credit or other compensation. We may also
pay asset-based expense 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 March 31,
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
William 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 law suits which, in our management's
judgment, are not of material importance to its total assets or material with
respect to the Variable Account.
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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.
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 on such report given upon 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 Douglas Wood, FSA, MAAA,
Associate 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. It has not
yet commenced operations, has no assets or liabilities, and has received no
income or 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. Liberty Life's most current audited financial
statements 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. There
has been no material adverse change in Liberty Life's financial position since
the date of the audited financial statements.
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Audited Financial Statements
Liberty Life Assurance Company
of Boston
Years ended December 31, 1998 and 1997
<PAGE>
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
------------- -------------
Assets (In Thousands)
<S> <C> <C>
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
----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C>
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
------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C>
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
------------ ----------- ------------
(In Thousands)
<S> <C> <C> <C>
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.
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
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)
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.
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.
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)
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.
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.
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)
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.
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
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)
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 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-12
<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-13
<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.
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>
F-14
<PAGE>
Liberty Life Assurance Company of Boston
Notes to Financial Statements (continued)
(In Thousands)
2. Investments (continued)
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>
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 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:
F-15
<PAGE>
Liberty Life Assurance Company of Boston
Notes to Financial Statements (continued)
(In Thousands)
3. Reinsurance (continued)
<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.
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.
F-16
<PAGE>
Liberty Life Assurance Company of Boston
Notes to Financial Statements (continued)
(In Thousands)
4. Federal Income Taxes (continued)
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-17
<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-18
<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.
F-19
<PAGE>
Liberty Life Assurance Company of Boston
Notes to Financial Statements (continued)
(In Thousands)
6. Risk-Based Capital and Retained Earnings (continued)
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 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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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
========== ========== ========
<CAPTION>
At December 31
1998 1997
----------- ------------
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-26
<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 in Note 2.
F-27
<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.
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