Great-West Life & Annuity Insurance Company
A Stock Company
8515 East Orchard Road
Englewood, Colorado 80111
(303) 689-3000
[logo] PROSPECTUS
A Flexible Premium Variable Universal Life Insurance Policy
offered by Great-West Life & Annuity Insurance Company
in connection with its COLI VUL-2 Series Account
This Prospectus describes a flexible premium variable universal life
insurance policy (the "Policy") offered by Great-West Life & Annuity Insurance
Company ("Great-West," "we" or "us"). The Policy is designed for use by
corporations and employers to provide life insurance coverage in connection
with, among other things, deferred compensation plans. The Policies are designed
to meet the definition of "life insurance contracts" for federal income tax
purposes.
The Policy allows "you," the Policy owner, within certain limits to:
o choose the type and amount of insurance coverage you need and increase or
decrease that coverage as your insurance needs change;
o choose the amount and timing of premium payments, within certain limits;
o allocate premium payments among 33 investment options and transfer Account
Value among available investment options as your investment objectives
change; and
o access your Policy's Account Value through loans and partial withdrawals
or total surrenders.
This Prospectus contains important information you should understand
before purchasing a Policy. We use certain special terms which are defined in
Appendix A. You should read this Prospectus carefully and keep it for future
reference.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved these securities or determined that this Prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
The Date of this Prospectus is July 26, 1999
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The Policies currently offer 33 investment options, each of which is a
Division of Great-West's COLI VUL-2 Series Account (the "Series Account"). Each
Division uses its assets to purchase, at their net asset value, shares of a
single mutual fund (collectively the "Funds"). The Divisions are referred to as
"variable" because their investment experience depends upon the investment
experience of the Funds in which they invest. Following is a list of the Funds
in which the Divisions currently invest:
American Century Variable Portfolios, Inc.
American Century VP Income & Growth
American Century VP International
American Century VP Value
Dreyfus Stock Index Fund
Dreyfus Variable Investment Fund
Dreyfus Capital Appreciation Portfolio
Dreyfus Growth and Income Portfolio
Federated Insurance Series
Federated American Leaders Fund II
Federated Growth Strategies Fund II
Federated High Income Bond Fund II
Federated International Equity Fund II
INVESCO Variable Investments Fund, Inc.
INVESCO VIF - High Yield Portfolio
INVESCO VIF - Equity Income Portfolio
INVESCO VIF - Total Return Portfolio
Janus Aspen Series
Balanced Portfolio
Flexible Income Portfolio
High-Yield Portfolio
Worldwide Growth Portfolio
Maxim Series Fund, Inc.
Maxim Loomis Sayles Corporate Bond
Portfolio
Maxim INVESCO ADR Portfolio
Maxim INVESCO Balanced Portfolio
Maxim INVESCO Small-Cap Growth
Portfolio
Maxim Ariel MidCap Value Portfolio
Maxim Money Market Portfolio
Maxim U.S. Government Securities Portfolio
Maxim Profile Portfolios:
Maxim Aggressive Profile Portfolio
Maxim Moderately Aggressive Profile
Portfolio
Maxim Moderate Profile Portfolio
Maxim Moderately Conservative Profile
Portfolio
Maxim Conservative Profile Portfolio
Neuberger&Berman Advisers Management
Trust
Guardian Portfolio
Mid-Cap Growth Portfolio
Partners Portfolio
Socially Responsive Portfolio
You should contact your representative for further information as to the
availability of the Divisions. We may add or delete investment options in the
future.
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The Policy does not have a guaranteed minimum Account Value. Your Policy's
Account Value may rise or fall, depending on the investment performance of the
Funds underlying the Divisions to which you have allocated your premiums. You
bear the entire investment risk on amounts allocated to the Divisions. The
investment policies and risks of each Fund are described in the accompanying
prospectuses for the Funds. Your Account Value will also reflect net premiums,
amounts withdrawn and cost of insurance or other charges.
The Policy provides for a Total Face Amount as shown on the Policy
Specifications page of your Policy. The death benefit payable under your Policy
may be greater than the Total Face Amount. As long as the Policy remains in
force and you make no withdrawals, the death benefit will never be less than the
Total Face Amount. If the Cash Surrender Value is insufficient to pay the Policy
charges, however, your Policy may lapse without value.
When the Insured dies, we will pay a death benefit to the beneficiary
specified by you. We will reduce the amount of the death benefit by any prior
withdrawals, unpaid Policy Debt, and unpaid Policy charges.
You generally may cancel the Policy by returning it to us within ten days
after you receive it. In some states, however, this right to return period may
be longer, as provided by state law. We will refund the greater of your
premiums, less any withdrawals, or Account Value.
It may not be advantageous for you to purchase a Policy to replace existing
life insurance coverage.
This Prospectus is valid only if accompanied by current prospectuses for
the Funds listed above. If any of these prospectuses are missing or outdated,
please contact us and we will send you the prospectus you need.
We may offer this Policy in group form in certain states, with individual
ownership represented by certificates. The description of Policies in this
Prospectus applies equally to certificates under group Policies unless the
context specifies otherwise.
The Policy may not be available in all states.
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Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Topic Page
Summary of Policy.................................................................................................1
Great-West Life & Annuity Insurance Company .....................................................................11
The Series Account...............................................................................................12
The Investment Options...........................................................................................13
Expenses of the Funds............................................................................................19
About the Policy.................................................................................................19
Policy Application, Issuance and Initial Premium............................................................19
Free Look Period............................................................................................20
Premium Payments............................................................................................21
Premium. ...............................................................................................21
Net Premiums............................................................................................21
Allocation of Net Premium...............................................................................22
Planned Periodic Premiums...............................................................................22
Death Benefit...............................................................................................22
Changes in Death Benefit Option.............................................................................25
Changes in Total Face Amount................................................................................26
Minimum Changes.........................................................................................26
Increases...............................................................................................26
Decreases...............................................................................................26
Surrenders..................................................................................................26
Partial Withdrawal..........................................................................................27
Policy Loans................................................................................................27
Transfers Between Divisions.................................................................................28
Dollar Cost Averaging.......................................................................................29
The Rebalancer Option.......................................................................................30
Account Value...............................................................................................31
Net Investment Factor...................................................................................33
Splitting Units.........................................................................................33
Charges and Deductions......................................................................................34
Expense Charges Applied to Premium......................................................................34
Mortality and Expense Risk Charge.......................................................................35
Monthly Deduction.......................................................................................35
Monthly Risk Rates.............................................................................36
Service Charge.................................................................................36
Transfer Fee............................................................................................36
Partial Withdrawal Fee..................................................................................37
Change of Death Benefit Option Fee ...................................................................37
Fund Expenses...........................................................................................37
Paid-Up Life Insurance......................................................................................37
Supplemental Benefits.......................................................................................38
Term Life Insurance Rider...............................................................................38
Change of Insured Rider.................................................................................39
Continuation of Coverage....................................................................................40
Grace Period................................................................................................40
Termination of Policy.......................................................................................40
Reinstatement...............................................................................................41
Deferral of Payment.........................................................................................41
Rights of Owner.............................................................................................42
Rights of Beneficiary.......................................................................................42
Other Policy Provisions.....................................................................................43
Exchange of Policy......................................................................................43
Addition, Deletion or Substitution of Investments.......................................................43
Entire Contract.........................................................................................43
Alteration..............................................................................................44
Modification............................................................................................44
Assignments.............................................................................................44
Non-Participating.......................................................................................44
Misstatement of Age or Sex (Non-Unisex Policy)..........................................................44
Suicide. ...............................................................................................45
Incontestability........................................................................................45
Report to Owner.........................................................................................45
Illustrations...........................................................................................46
Notice and Elections....................................................................................46
Performance Information and Illustrations........................................................................46
Fund Performance............................................................................................46
Adjusted Fund Performance...................................................................................47
Other Information...........................................................................................47
Policy Illustrations........................................................................................48
Federal Income Tax Considerations................................................................................48
Tax Status of the Policy....................................................................................48
Diversification of Investments..............................................................................49
Policy Owner Control........................................................................................49
Tax Treatment of Policy Benefits............................................................................49
Life Insurance Death Benefit Proceeds...................................................................49
Tax Deferred Accumulation...............................................................................49
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Distributions............................................................................................50
Modified Endowment Contracts.............................................................................50
Distributions Under Modified Endowment Contracts.........................................................51
Distributions Under a Policy That Is Not a MEC...........................................................51
Multiple Policies........................................................................................52
Treatment When Insured Reaches Attained Age 100..........................................................52
Federal Income Tax Withholding...........................................................................52
Actions to Ensure Compliance with the Tax Law............................................................52
Trade or Business Entity Owns or is Directly or Indirectly a Beneficiary of the Policy.......................53
Other Employee Benefit Programs..............................................................................53
Policy Loan Interest.........................................................................................54
Our Taxes....................................................................................................54
Distribution of the Policy........................................................................................54
Voting Rights.....................................................................................................55
Our Directors and Executive Officers..............................................................................56
Other Information.................................................................................................59
State Regulation.............................................................................................59
Legal Proceedings............................................................................................59
Legal Matters................................................................................................59
Experts......................................................................................................59
Registration Statements......................................................................................60
Year 2000 Compliance.........................................................................................60
Financial Statements..............................................................................................62
Appendix A -- Glossary of Terms...................................................................................A-1
Appendix B -- Table of Death Benefit Percentages..................................................................B-1
Appendix C -- Sample Hypothetical Illustrations...................................................................C-1
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This Prospectus does not constitute an offering in any jurisdiction
where the offering would not be lawful. You should rely only on the information
contained in this Prospectus or in the prospectus or statement of additional
information of the Funds. We have not authorized anyone to provide you with
information that is different.
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Summary of Policy
This is a summary of some of the most important features of
your Policy. The Policy is more fully described in the remainder
of the Prospectus. Please read this Prospectus carefully. Unless
otherwise indicated, the description of the Policy in this
Prospectus assumes that the Policy is in force, there is no
Policy Debt and current federal tax laws apply.
Corporate-Owned Variable Life Insurance
o The Policy provides for life insurance coverage on the
Insured and for a Cash Surrender Value which is payable if
your Policy is terminated during the Insured's lifetime. You
may also take partial withdrawals from and borrow portions
of your Account Value.
o The Account Value and death benefit of your Policy may
increase or decrease depending on the investment performance
of the Divisions to which you have allocated your premiums
and the death benefit option you have chosen. Your Policy
has no guaranteed minimum Cash Surrender Value. If the Cash
Surrender Value is insufficient to cover Policy charges,
your Policy may lapse without value.
o Under certain circumstances, a Policy may become a "modified
endowment contract" ("MEC") for federal tax purposes. This
may occur if you reduce the Total Face Amount of your Policy
or pay excessive premiums. We will monitor your premium
payments and other Policy transactions and notify you if a
payment or other transaction might cause your Policy to
become a MEC. We will not invest any premium or portion of a
premium that would cause your Policy to become a MEC. We
will promptly refund the money to you and, if you elect to
have a MEC contract, you can return the money to us with a
signed form of acceptance.
o We will issue Policies to corporations and employers to
provide life insurance coverage in connection with, among
other things, deferred compensation plans. We will issue
Policies on the lives of prospective Insureds who meet our
underwriting standards. An Insured's Issue Age must be
between 20 and 85 for Policies issued on a fully
underwritten basis and between 20 and 70 for Policies issued
on a guaranteed underwriting or a simplified underwriting
basis.
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Free Look Period
You may return your Policy to us for any reason within 10
days of receiving it, or such longer period as required by
applicable state law, and receive the greater of your premiums,
less any withdrawals, or your Account Value.
Premium Payments
o You must pay us an Initial Premium to put your Policy in
force. The minimum Initial Premium will vary based on
various factors, including the age of the Insured and the
death benefit option you select.
o Thereafter, you choose the amount and timing of premium
payments, within certain limits.
Death Benefit
o You may choose from among three death benefit options --
The Total Face o a fixed benefit equal to the Total Face Amount of your
Amount is the Policy;
minimum amount
of life insu- o a variable benefit equal to the sum of the Total Face
rance coverage Amount and your Policy's Account Value; or
specified in
your Policy o an increasing benefit equal to the sum of the Total
Face Amount and the accumulated value of all premiums
paid under your Policy accumulated at the interest rate
shown on the Policy Specifications page of your Policy.
o For each option, the death benefit may be greater if
necessary to satisfy federal tax law requirements.
o We will deduct any outstanding Policy Debt and unpaid Policy
charges before we pay a death benefit. In addition, prior
partial withdrawals may reduce the death benefit payable
under the first and third options.
o At any time, you may increase or decrease the Total Face
Amount, subject to our approval and other requirements set
forth in the Policy.
o After the first Policy Year, you may change your death
benefit option once each Policy Year.
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The Series Account
o We have established a separate account to fund the variable
benefits under the Policy.
o The assets of the separate account are insulated from the
claims of our general creditors.
Investment Options
o You may allocate your net premium payments among the 33
variable Divisions listed on the front cover of this
Prospectus.
o Each Division invests exclusively in shares of a single
mutual fund. Each Fund has distinct investment objectives
and policies, which are described in the accompanying
prospectuses for the Funds.
o You may transfer amounts from one Division to another.
Supplemental Benefits
o The following riders are available --
o term life insurance; and
o change of insured.
o We will deduct the cost, if any, of the rider(s) from your
Policy's Account Value on a monthly basis.
Accessing Your Policy's Account Value
o You may borrow from us using your Account Value as
collateral. Loans may be treated as taxable income if your
Policy is a "modified endowment contract" for federal income
Cash Surrender tax purposes and you have had positive net investment
Value is Account performance.
Value minus
any accrued o You may surrender your Policy for its Cash Surrender Value.
and unpaid There are no surrender charges associated with your Policy.
policy charges
and any o You may withdraw a portion of your Policy's Account Value at
Policy Debt. any time while your Policy is in force.
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o A withdrawal may reduce your death benefit, depending on
which death benefit option you have chosen.
o We will charge an administrative fee not greater than $25
per withdrawal on partial withdrawals after the first in a
Policy Year.
Account Value
o Your Policy's Account Value will reflect --
Account Value
is the sum of o the premiums you pay;
and the amount
of the Loan o the investment performance of the Divisions you select;
Account
o any Policy loans or partial withdrawals;
o your Loan Account balance; and
o the charges we deduct under the Policy.
Policy Charges and Deductions
o Expense Charges Against Premiums-- We will deduct a charge
from your premium payments that is guaranteed to be no more
than 10% to cover our sales expenses, premium tax expenses,
and certain federal tax consequences and other obligations
resulting from the receipt of premiums. The premium charge
consists of two portions: (i) a sales charge and (ii) a
"deferred acquisition cost" tax charge ("DAC charge") and
premium tax charge. The current sales charge in Policy Years
1 - 10 consists of 5.5% of premiums up to the target annual
premium plus 3.0% of premiums in excess of target, and 0% of
premiums in years thereafter. The current DAC and premium
tax charge equals 3.5% of premium in all Policy Years. We
may change these rates at any time subject to the overall
guarantee set forth above.
o Monthly Deduction -- At the beginning of each Policy Month,
we will deduct from your Policy's Account Value --
o a Monthly Risk Charge, to cover our anticipated costs
of providing insurance under the Policy;
o the cost of any supplemental benefit riders you choose
to add to your Policy;
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o a Service Charge to cover certain administrative
expenses in connection with the Policies. The Service
Charge is guaranteed not to exceed $15.00 each Policy
Month. Currently, this charge is $10.00 each Policy
Month for the first three Policy Years and $7.50 per
Policy Month thereafter; and
o any extra risk charge if the Insured is in a rated
class as specified in your Policy.
o Separate Account Charges -- On each Valuation Day we deduct
a Mortality and Expense Risk Charge from the Divisions to
compensate Great-West for the mortality and expense risks we
assume by issuing your Policy. The Mortality and Expense
Risk Charge will not exceed 0.90% of net asset value
annually of your Account Value. Currently, this charge is
0.40% in Policy Years 1 through 5, 0.25% in Policy Years 6
through 20, and 0.10% thereafter.
o Surrender Charges -- Your Policy has no surrender charges.
o Transfer Fee -- You may transfer Account Value among the
Divisions free of charge up to the first 12 transfers in one
calendar year. Thereafter, subject to certain exceptions, a
maximum administrative charge of $10 per transfer will be
deducted from your Account Value for all transfers in excess
of 12 made in the same calendar year.
o Partial Withdrawal Fee -- You may make one free partial
withdrawal of your Account Value each Policy Year.
Thereafter, a maximum administrative charge of $25 will be
deducted from your Account Value for all partial withdrawals
after the first made in the same Policy Year.
o Change of Death Benefit Option Fee -- A maximum
administrative charge of $100 will be deducted from your
Account Value each time you change your death benefit
option.
The charges assessed under the Policy are described in more
detail in "Charges and Deductions", beginning on page .
Fees and Expenses of the Funds
You will indirectly bear the costs of investment management
fees and expenses paid from the assets of the mutual fund
portfolios you select. The prospectuses for the Funds describe
their respective charges and expenses in more detail. We may
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receive compensation from the investment advisers or
administrators of the Funds. Such compensation will be consistent
with the services we provide or the cost savings resulting from
the arrangement and therefore may differ between Funds.
Table of Fees and Expenses of the Funds
<TABLE>
<CAPTION>
Gross Less Fee Net Total
Total Annual Waivers & Annual
Management Other Operating Expense Re- Operating
Fund Fees Expenses Expenses imbursement Expenses
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
American Century Variable Portfolios, Inc.
o American Century VP Income & 0.70% 0.00% 0.70% 0.00% 0.70%
Growth
o American Century VP International 1.50% 0.00% 1.50% 0.00% 1.50%
o American Century VP Value 1.00% 0.00% 1.00% 0.00% 1.00%
Dreyfus Stock Index Fund 0.25% 0.01% 0.26% 0.00% 0.26%
Dreyfus Variable Investment Fund
o Dreyfus Capital Appreciation Portfolio 0.75% 0.06% 0.81% 0.00% 0.81%
o Dreyfus Growth and Income Portfolio 0.75% 0.03% 0.78% 0.00% 0.78%
Federated Insurance Series
o Federated American Leaders Fund II 0.75% 0.14% 0.89% 0.01%1 0.88%
o Federated Growth Strategies Fund II 0.75% 0.42% 1.17% 0.31%2 0.86%
o Federated High Income Bond Fund II 0.60% 0.18% 0.78% 0.00% 0.78%
o Federated International Equity Fund II 1.00% 0.72% 1.72% 0.47%3 1.25%
INVESCO Variable Investments Fund, Inc.
o INVESCO VIF - High Yield Portfolio 0.60% 0.47% 1.07% 0.00% 1.07%
o INVESCO VIF - Equity Income Portfolio 0.75% 0.42% 1.17% 0.24%4 0.93%
o INVESCO VIF - Total Return Portfolio 0.75% 0.49% 1.24% 0.23%5 1.01%
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Table of Fees and Expenses of the Funds (cont.)
Gross Less Fee Net Total
Janus Aspen Series
o Balanced Portfolio 0.72% 0.02% 0.74% 0.00% 0.74%
o Flexible Income Portfolio 0.65% 0.08% 0.73% 0.00% 0.73%
o High-Yield Portfolio 0.75% 1.36% 2.11% 1.11%6 1.00%
o Worldwide Growth Portfolio 0.67% 0.07% 0.74% 0.02%6 0.72%
Maxim Series Fund, Inc.
o Maxim Loomis Sayles Corporate Bond 0.90% 0.00% 0.90% 0.00% 0.90%
Portfolio
o Maxim INVESCO ADR Portfolio 1.00% 0.28% 1.28% 0.00% 1.28%
o Maxim INVESCO Balanced Portfolio 1.00% 0.00% 1.00% 0.00% 1.00%
o Maxim INVESCO Small-Cap Growth 0.95% 0.15% 1.10% 0.00% 1.10%
Portfolio
o Maxim Ariel MidCap Value Portfolio 0.95% 0.08% 1.03% 0.00% 1.03%
o Maxim Money Market Portfolio 0.46% 0.00% 0.46% 0.00% 0.46%
o Maxim U.S. Government Securities 0.60% 0.00% 0.60% 0.00% 0.60%
Portfolio
Maxim Profile Portfolios:
o Maxim Aggressive Profile Portfolio 0.25% 0.00% 0.25% 0.00% 0.25%
o Maxim Moderately Aggressive Portfolio 0.25% 0.00% 0.25% 0.00% 0.25%
o Maxim Moderate Profile Portfolio 0.25% 0.00% 0.25% 0.00% 0.25%
o Maxim Moderately Conservative Profile 0.25% 0.00% 0.25% 0.00% 0.25%
Portfolio
o Maxim Conservative Profile Portfolio 0.25% 0.00% 0.25% 0.00% 0.25%
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Table of Fees and Expenses of the Funds (cont.)
Gross Less Fee Net Total
Neuberger&Berman Advisers Management Trust
o Guardian Portfolio 0.85% 0.29% 1.14% 0.14%7 1.00%
o Mid-Cap Growth Portfolio 0.85% 0.58% 1.43% 0.43%8 1.00%
o Partners Portfolio 0.78% 0.06% 0.84% 0.00% 0.84%
o Socially Responsive Portfolio 0.85% 1.65% 2.50% 1.00%9 1.50%
1 Federated Insurance Series - American Leaders Fund The management
fee has been reduced to reflect the voluntary waiver of a portion
of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management
fee is 0.75%. The Fund did not pay or accrue the shareholder
services fee during the fiscal year ended December 31 1998. The
Fund has no present intention of paying or accruing the
shareholder services fee during the fiscal year ended December 31
1999. The maximum shareholder services fee is 0.25% The total
operating expenses would have been 0.89% absent the voluntary
waiver of a portion of the management fee.
2 Federated Insurance Series - Growth Strategies Fund The
management fee has been reduced to reflect the voluntary waiver
of a portion of the management fee. The adviser can terminate
this voluntary waiver at any time at its sole discretion. The
maximum management fee is 0.75%. The Fund did not pay or accrue
the shareholder services fee during the fiscal year ended
December 31 1998. The Fund has no present intention of paying or
accruing the shareholder services fee during the fiscal year
ended December 31 1999. The maximum shareholder services fee is
0.25%. The total operating expenses would have been 1.17% absent
the voluntary waiver of a portion of the management fee.
3 Federated Insurance Series - International Equity Fund The
management fee has been reduced to reflect the voluntary waiver
of a portion of the management fee. The adviser can terminate
this voluntary waiver at any time at its sole discretion. The
maximum management fee is 1.00%. The Fund did not pay or accrue
the shareholder services fee during the fiscal year ended
December 31 1998. The Fund has no present intention of paying or
accruing the shareholder services fee during the fiscal year
ended December 31 1999. The maximum shareholder services fee is
0.25% The total operating expenses would have been 1.72% absent
the voluntary waiver of a portion of the management fee.
4 INVESCO Variable Investments Fund, Inc. - Equity Income Portfolio
Certain expenses of the Portfolio are being voluntarily absorbed
by INVESCO. Accordingly, "Other Expenses" and "Net Total Annual
Operating Expenses" after absorption for the fiscal year ended
December 31, 1998, were 0.18% and 0.93%, respectively. The
Portfolio's actual Net Total Annual Operating Expenses were lower
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than the figures shown, because its transfer agent fees and/or
custodian fees were reduced under expense offset arrangements.
Because of an SEC requirement, the figures shown do not reflect
these reductions.
5 INVESCO Variable Investments Fund, Inc. - Total Return Portfolio
Certain expenses of the Portfolio are being voluntarily absorbed
by INVESCO. Accordingly, "Other Expenses" and "Net Total Annual
Operating Expenses" after absorption for the fiscal year ended
December 31, 1998, were 0.26% and 1.01%, respectively. The
Portfolio's actual Net Total Annual Operating Expenses were lower
than the figures shown, because its transfer agent fees and/or
custodian fees were reduced under expense offset arrangements.
Because of an SEC requirement, the figures shown do not reflect
these reductions.
6 Janus Aspen Series Fee reductions reduce the management fee to
the level of the corresponding Janus retail fund. Janus Capital
may modify or terminate the waivers at any time upon at least 90
days' notice to the Trustees.
7 Neuberger Berman Advisers Management Trust - Guardian Portfolio
Management has voluntarily undertaken to limit the Portfolio's
operating expenses which exceed in aggregate 1% per annum of the
Portfolio's average daily net assets.
8 Neuberger Berman Advisers Management Trust - Mid-Cap Growth
Portfolio Management has voluntarily undertaken to limit the
Portfolio's operating expenses which exceed in aggregate 1% per
annum of the Portfolio's average daily net assets.
9 Neuberger Berman Advisers Management Trust - Socially Responsive
Portfolio Management has voluntarily undertaken to limit the
Portfolio's operating expenses which exceed in aggregate 1.50%
per annum of the Portfolio's average daily net assets.
</TABLE>
The Fund expenses shown above are assessed at the Fund level and are not
direct charges against Series Account assets or reductions from Account Values.
These expenses are taken into consideration in computing each Fund's net asset
value, which is the share price used to calculate the Unit Values of the Series
Account.
The management fees and other expenses are more fully described in the
prospectuses for each Fund. The information relating to the Fund expenses was
provided by the Fund and was not independently verified by us.
What if Charges and Deductions Exceed Account Value?
o Your Policy may terminate if your Account Value at the
beginning of any Policy Month is insufficient to pay all
charges and deductions then due.
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o If your Policy would terminate due to insufficient value, we
will send you notice and allow you a 61 day Grace Period.
o If, within the Grace Period, you do not make a premium
payment sufficient to cover all accrued and unpaid charges
and deductions, your Policy will terminate at the end of the
Grace Period without further notice.
Reinstatement
If your Policy terminates due to insufficient value, we will
reinstate it within three years at your request, subject to
certain conditions.
Paid-Up Life Insurance
If the Insured reaches Attained Age 100 and your Policy is
in force, the Policy's Account Value, less Policy Debt, will be
applied as a single premium to purchase "paid-up" insurance. Your
Policy's Account Value will remain in the Series Account
allocated to the Divisions in accordance with your instructions.
The death benefit under this paid-up insurance generally will be
equal to your Account Value. As your Account Value changes based
on the investment experience of the Divisions, the death benefit
will increase or decrease accordingly.
Federal Tax Considerations
Your Policy is structured to meet the definition of a "life
insurance contract" under the Tax Code. We may need to limit the
amount of your premium payments to ensure that your Policy
continues to meet that definition.
Your purchase of, and transactions under, your Policy may
have tax consequences that you should consider before purchasing
a Policy. In general, the death benefit will be excluded from the
gross income of the beneficiary. Increases in Account Value will
not be taxable as earned, although there may be income tax due on
a surrender of your Policy or partial withdrawal of your Policy's
Account Value. For more information on the tax treatment of the
Policy, see "Federal Income Tax Considerations" beginning on page
and consult your tax adviser.
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Great-West Life & Annuity Insurance Company
Great-West Life & Annuity Insurance Company ("Great-West")
is a stock life insurance company that was originally organized
under the laws of the state of Kansas as the National Interment
Association. Our name was changed to Ranger National Life
Insurance Company in 1963 and to Insuramerica Corporation prior
to changing to our current name in February 1982. In September
1990, we redomesticated under the laws of Colorado.
We are authorized to do business in forty-nine states, the
District of Columbia, Puerto Rico and Guam. We issue individual
and group life insurance policies and annuity contracts and
accident and health insurance policies.
Great-West 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 of
IMSA means that Great-West has chosen to participate in IMSA's
Life Insurance Ethical Market Conduct Program.
Great-West is an indirect wholly-owned subsidiary of The
Great-West Life Assurance Company. The Great-West Life Assurance
Company is a subsidiary of Great-West Lifeco Inc., a holding
company. Great-West Lifeco Inc. is in turn a subsidiary of Power
Financial Corporation of Canada, a financial services company.
Power Corporation of Canada, a holding and management company,
has voting control of Power Financial Corporation of Canada. Mr.
Paul Desmarais, through a group of private holding companies,
which he controls, has voting control of Power Corporation of
Canada.
Great-West also acts as a sponsor for six other of its
separate accounts that are registered with the SEC as investment
companies: FutureFunds Series Account, Maxim Series Account,
Pinnacle Series Account, Retirement Plan Series Account, Variable
Annuity-1 Series Account, and Variable Annuity Account A.
The officers and employees of Great-West are covered by a
joint fidelity bond. The fidelity bond coverage is $(Canadian)
100,000,000 in the aggregate with a single loss limit of
$(Canadian) 50,000,000. In addition to covering officers and
employees of Great-West, the joint fidelity bond also covers
certain affiliates of Great-West.
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The Series Account
We established "COLI VUL-2 Series Account" (the "Series
Account") in accordance with Colorado law on November 25, 1997.
The Series Account may also be used to fund benefits payable
under other life insurance policies issued by us.
We own the assets of the Series Account. The income, gains
or losses, realized or unrealized, from assets allocated to the
Series Account are credited to or charged against the Series
Account without regard to our other income, gains or losses.
The assets of We will at all times maintain assets in the Series Account
the Series with a total market value at least equal to the reserves and
Account are other liabilities relating to the variable benefits under all
insulated policies participating in the Series Account. Those assets may
from our not be charged with our liabilities from our other business. Our
general obligations under those policies are, however, our general
liabilities. corporate obligations.
The Series Account is registered with the Securities and
The Series Exchange Commission (the "SEC") under the Investment Company Act
Account is of 1940 ("1940 Act") as a unit investment trust. Registration
registered under the 1940 Act does not involve any supervision by the SEC of
with the SEC. the management or investment practices or policies of the Series
Account.
The Series Account is divided into 33 Divisions. Each
The Series Division invests exclusively in shares of a corresponding
Account has investment portfolio of a registered investment company (commonly
33 Divisions. known as a mutual fund). We may in the future add new or delete
Each Divi- existing Divisions. The income, gains or losses, realized or
sion invests unrealized, from assets allocated to each Division are credited
exclusively to or charged against that Division without regard to the other
in shares of income, gains or losses of the other Divisions. All amounts
a single allocated to a Division will be used to purchase shares of the
mutual fund corresponding Fund. The Divisions will at all times be fully
portfolio. invested in Fund shares.
We hold the assets of the Series 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 Funds.
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The Investment Options
The Fund The Policy offers a number of investment options,
Prospectuses corresponding to the Divisions. Each Division invests in a single
have more Fund. Each Fund is a mutual fund registered under the 1940 Act,
information or a separate series of shares of such a mutual fund. More
about the comprehensive information, including a discussion of potential
Funds, and risks, is found in the current prospectuses for the Funds (the
may be ob- "Fund Prospectuses"). The Fund Prospectuses should be read in
tained from connection with this Prospectus. You may obtain a copy of each
us without Fund Prospectus without charge by Request.
charge.
Each Fund holds its assets separate from the assets of the
other Funds, and each Fund has its own distinct investment
objective and policies. Each Fund operates as a separate
investment fund, and the income, gains and losses of one Fund
generally have no effect on the investment performance of any
other Fund.
The Funds are NOT available to the general public directly.
The Funds are available as investment options in variable life
insurance policies or variable annuity contracts issued by life
insurance companies or, in some cases, through participation in
certain qualified pension or retirement plans.
Some of the Funds have been established by investment
advisers which manage publicly traded mutual funds having similar
names and investment objectives. While some of the Funds may be
similar to, and may in fact be modeled after publicly traded
mutual funds, the Funds are not otherwise directly related to any
publicly traded mutual fund. Consequently, the investment
performance of publicly traded mutual funds and any similarly
named Fund may differ substantially.
The investment objectives of the current Funds are briefly
described below:
American Century Variable Portfolios, Inc. (advised by American
Century Investment Management, Inc.)
American Century VP Income & Growth seeks dividend growth,
current income and capital appreciation by investing in common
stocks.
American Century VP International seeks capital growth by
investing primarily in an internationally diversified portfolio
of common stocks that are considered by the adviser to have
prospects for appreciation.
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American Century VP Value seeks long-term capital growth by
investing in securities that the adviser believes to be
undervalued at the time of purchase. Income is a secondary
objective.
Dreyfus Stock Index Fund (advised by The Dreyfus Corporation and
its affiliate Mellon Equity Associates)
Dreyfus Stock Index Fund seeks to provide 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.
Dreyfus Variable Investment Fund (advised by The Dreyfus
Corporation)
Dreyfus Capital Appreciation Portfolio seeks to provide
long-term capital growth consistent with the preservation of
capital by investing primarily in the common stocks of domestic
and foreign issuers. Current income is a secondary investment
objective. Fayez Sarofim & Co. is the sub-adviser to this Fund
and, as such, provides day-to-day management.
Dreyfus Growth and Income Portfolio seeks to provide
long-term capital growth, current income and growth of income,
consistent with reasonable investment risk by investing primarily
in equity securities, debt securities and money market
instruments of domestic and foreign issuers.
Federated Insurance Series (advised by Federated Advisers)
Federated American Leaders Fund II seeks to achieve
long-term growth of capital by investing, under normal
circumstances, at least 65% of its total assets in common stock
of "blue-chip" companies. The Fund's secondary objective is to
provide income.
Federated Growth Strategies Fund II seeks capital
appreciation by investing at least 65% of its assets in equity
securities of companies with prospects for above-average growth
in earnings and dividends or companies where significant
fundamental changes are taking place.
Federated High Income Bond Fund II seeks high current income
by investing primarily in a professionally managed, diversified
portfolio of fixed-income securities, including lower-rated
corporate debt obligations commonly referred to as "junk bonds."
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Federated International Equity Fund II seeks to obtain a
total return on its assets by investing at least 65% of its
assets in equity securities of issuers located in at least three
different countries outside the United States.
INVESCO Variable Investments Fund, Inc. (advised by INVESCO Funds
Group, Inc.)
INVESCO VIF - High Yield Portfolio seeks a high level of
current income by investing substantially all of its assets in
lower-rated bonds and other debt securities and in preferred
stock.
INVESCO VIF - Equity Income Portfolio seeks the best
possible current income while following sound investment
practices by investing at least 65% of its total assets in
dividend-paying common stocks, with up to 10% of its total assets
invested in equity securities that do not pay regular dividends
and the remainder invested in other income-producing securities
such as corporate bonds. Capital growth potential is an
additional consideration in the selection of portfolio
securities.
INVESCO VIF - Total Return Portfolio seeks a high total
return on investment through capital appreciation and current
income by investing in a combination of equity and fixed-income
securities. INVESCO Capital Management, Inc. serves as the
sub-adviser to this Fund and, as such, provides day-to-day
management.
Janus Aspen Series (advised by Janus Capital Corporation)
Balanced Portfolio seeks long-term growth of capital,
balanced by current income by investing up to 40-60% of its
assets in securities selected primarily for their growth
potential and 40-60% of its assets in securities selected
primarily for their income potential.
Flexible Income Portfolio seeks to maximize total return
from a combination of income and capital appreciation by
investing primarily in income-producing securities.
High-Yield Portfolio seeks high current income as its
primary objective by investing primarily in high yield/high risk
fixed-income securities, commonly referred to as "junk bonds."
Capital appreciation is a secondary objective when consistent
with the primary objective.
Worldwide Growth Portfolio seeks long-term growth of capital
by investing primarily in common stocks of foreign and domestic
issuers.
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Maxim Series Fund, Inc. (advised by GW Capital Management, LLC, a
wholly-owned subsidiary of Great-West)
Maxim Loomis Sayles Corporate Bond Portfolio seeks high
total investment return by investing primarily in debt securities
(including convertibles), although up to 20% of its total assets
may be invested in preferred stocks. Loomis, Sayles & Company,
L.P. serves as sub-adviser to this Fund and, as such, provides
day-to-day management.
Maxim INVESCO ADR Portfolio seeks to achieve a high total
return on investment through capital appreciation and current
income, while reducing risk through diversification, by investing
in foreign securities that are issued in the form of American
Depository Receipts or foreign stocks that are registered with
the SEC and traded in the United States. Institutional Trust
Company serves as the sub-adviser to this Fund and, as such,
provides day-to-day management.
Maxim INVESCO Balanced Portfolio seeks to achieve a high
total return on investment through capital appreciation and
current income by investing in a combination of common stocks and
fixed-income securities. Institutional Trust Company serves as
the sub-adviser to this Fund and, as such, provides day-to-day
management.
Maxim INVESCO Small-Cap Growth Portfolio seeks long-term
capital growth by investing its assets principally in a
diversified group of equity securities of emerging growth
companies with market capitalization of $1 billion or less at the
time of initial purchase. Institutional Trust Company serves as
the sub-adviser to this Fund and, as such, provides day-to-day
management.
Maxim Ariel MidCap Value Portfolio seeks long-term growth of
capital by normally investing at least 65% of its assets in
securities issued by medium-sized companies. Ariel Capital
Management serves as the sub-adviser to this Fund and, as such,
provides day-to-day management.
Maxim Money Market Portfolio seeks preservation of capital,
liquidity and the highest possible current income through
investments in short-term money market securities. An investment
in this Fund is not insured by the Federal Deposit Insurance
Corporation or any other government agency. Although the Fund
seeks to preserve the value of an investment at $1.00 per share,
it is possible to lose money.
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Maxim U.S. Government Securities Portfolio seeks the highest
level of return consistent with preservation of capital and
substantial credit protection by investing primarily in
mortgage-related securities issued or guaranteed by an agency or
instrumentality of the U.S. Government, other U.S. agency and
instrumentality obligations and in U.S. Treasury obligations.
Maxim Profile Portfolios
Maxim Aggressive Profile Portfolio seeks to achieve a high
total return on investment through long-term capital appreciation
by investing in other Maxim Funds with an emphasis on equity
investments.
Maxim Moderately Aggressive Profile Portfolio seeks to
achieve a high total return on investment through long-term
capital appreciation by investing in other Maxim Funds with an
emphasis on equity investments, though income is a secondary
consideration.
Maxim Moderate Profile Portfolio seeks to achieve a high
total return on investment through long-term capital appreciation
by investing in other Maxim Funds with a relatively equal
emphasis on equity and fixed-income investments.
Maxim Moderately Conservative Profile Portfolio seeks to
achieve the highest possible total return consistent with
reasonable risk through a combination of income and capital
appreciation by investing in other Maxim Funds with primary
emphasis on fixed-income investments, and, to a lesser degree, in
other Maxim Funds with an emphasis on equity investments.
Maxim Conservative Profile Portfolio seeks to achieve total
return consistent with preservation of capital primarily through
fixed-income investments by investing in other Maxim Funds with
an emphasis on fixed-income investments.
Neuberger&Berman Advisers Management Trust
The portfolios listed below invest their assets in a
corresponding portfolio of Neuberger&Berman Advisers Managers
Trust, an open-end investment company registered under the 1940
Act. This type of arrangement is commonly referred to as a
"master/feeder" structure and is different from that of many
other investment companies which directly acquire and manage
their own assets. The investment objectives of the portfolios
listed below are identical to the corresponding portfolios in
which they invest and their investment performance will directly
correspond with the investment performance of those corresponding
portfolios. Neuberger&Berman Management Incorporated serves as
the investment adviser to Advisers Managers Trust and
Neuberger&Berman, LLC acts as sub-adviser.
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<PAGE>
Guardian Portfolio seeks capital appreciation, and,
secondarily, current income by investing primarily in common
stocks of long-established, high- quality companies. A
value-oriented investment approach is used in selecting
securities.
Mid-Cap Growth Portfolio seeks capital appreciation by
investing, under normal market conditions, in equity securities
of medium-sized companies. A growth-oriented investment approach
is used in selecting securities.
Partners Portfolio seeks capital growth by investing in
common stocks and other equity securities of medium to large
capitalization established companies. A value-oriented investment
approach is used in selecting securities.
Socially Responsive Portfolio seeks long-term capital
appreciation by investing in stocks of medium to large
capitalization companies that meet both financial and social
criteria. A value-oriented investment approach is used in
selecting securities.
You should contact your representative for further
information on the availability of the Divisions.
Each Fund is subject to certain investment restrictions and
policies which may not be changed without the approval of a
majority of the shareholders of the Fund. See the accompanying
Fund Prospectuses for further information.
We automatically reinvest all dividends and capital gains
distributions from the Funds in shares of the distributing Fund
at their net asset value. The income and realized and unrealized
gains or losses on the assets of each Division are separate and
are credited to or charged against the particular Division
without regard to income, gains or losses from any other Division
or from any other part of our business. We will use amounts you
allocate to a Division to purchase shares in the corresponding
Fund and will redeem shares in the Funds to meet Policy
obligations or make adjustments in reserves. The Funds are
required to redeem their shares at net asset value and to make
payment within seven days.
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The Funds may also be available to separate accounts
offering variable annuity and variable life products of other
affiliated and unaffiliated insurance companies, as well as our
other separate accounts. Although we do not anticipate any
disadvantages to this, there is a possibility that a material
conflict may arise between the interests of the Series Account
and one or more of the other separate accounts participating in
the Funds. A conflict may occur due to a change in law affecting
the operations of variable life and variable annuity separate
accounts, differences in the voting instructions of policyowners
and those of other companies, or some other reason. In the event
of conflict, we will take any steps necessary to protect
policyowners, including withdrawal of the Series Account from
participation in the Funds which are involved in the conflict or
substitution of shares of other Funds.
Expenses of the Funds
Fund shares are purchased at net asset value, which reflects
the deduction of investment management fees and certain other
expenses. These expenses, therefore, are not direct charges
against Series Account assets or reductions from your Policy's
Account Value. You do, however, indirectly bear the expenses of
the Funds because those expenses are taken into consideration in
computing each Fund's net asset value, which is the share price
used to calculate the Unit Values of the Series Account. Fund
expenses are shown at "Summary of the Policy -- Fees and expenses
of the Funds beginning on page 57 of this Prospectus.
The management fees and other expenses of the Funds are more
fully described in the Fund Prospectuses. The information
relating to the Fund expenses was provided by each Fund and was
not independently verified by us.
About the Policy
Policy Application, Issuance and Initial Premium
To purchase a Policy, you must submit an application to our
Principal Office. We will then follow our underwriting procedures
designed to determine the insurability of the proposed Insured.
We may require a full underwriting, which includes a medical
examination and further information, before your application is
approved. We also may offer the Policy on a simplified
underwriting or guaranteed issue basis. Proposed Insureds must be
acceptable risks based on our applicable underwriting limits and
standards. We will not issue a Policy until the underwriting
process has been completed to our satisfaction. We reserve the
right to reject an application for any lawful reason or to "rate"
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<PAGE>
an Insured as a substandard risk, which will result in increased
Monthly Risk Charges. The Monthly Risk Charge also may vary
depending on the type of underwriting we use.
You must specify certain information in the application,
including the Total Face Amount, the death benefit option and
supplemental benefits, if any. The Total Face Amount generally
may not be decreased below $100,000.
Upon approval of the application, we will issue to you a
Policy on the life of the Insured. A specified Initial Premium
must be paid before we issue the Policy. The effective date of
coverage for your Policy (which we call the "Policy Date") will
be the date we receive a premium equal to or in excess of the
specified Initial Premium after we have approved your
application. If your premium payment is received on the 29th,
30th or 31st of a month, the Policy will be dated the 28th of
that month.
We generally do not accept premium payments before approval
of an application. However, at our discretion, we may elect to do
so. While your application is in underwriting, if we accept your
premium payment before approval of your application, we will
provide you with temporary insurance coverage in accordance with
the terms of our temporary insurance agreement. In our
discretion, we may limit the amount of premium we accept and the
amount of temporary coverage we provide. If we approve your
application, we will allocate your premium to the Series Account
on the Policy Date, as described below. Otherwise, we will
promptly return your payment to you. We will not credit interest
to your premium payment for the period while your application is
in underwriting.
We reserve the right to change the terms or conditions of
your Policy 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
Policy, as appropriate.
Free Look Period
If you are not satisfied with your Policy, it may be
returned by delivering or mailing it to our Principal Office or
to the representative from whom the Policy was purchased within
10 days from the date you receive it (unless a longer period is
required under applicable state insurance law) (the "Free Look
Period").
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A Policy returned under this provision will be deemed void.
You will receive a refund equal to the greater of --
o the sum of all premium payments made (less any withdrawals);
or
o the Policy's Account Value.
During the Free Look Period, we will allocate your net
premium payments to the Division of the Series Account that
invests in the Maxim Money Market Portfolio. We will transfer the
Account Value in that Division to the other Divisions of the
Series Account in accordance with your allocation instructions
five days after the end of the Free Look Period.
Premium Payments
Premium. All premium payments must be made payable to "Great-West
Life & Annuity Insurance Company" and mailed to our Principal
Office. The Initial Premium will be due and payable on or before
your Policy's Issue Date. You may pay additional premium payments
to us in the amounts and at the times you choose, subject to the
limitations described below.
We reserve the right to limit the number of premium payments
we accept on an annual basis. No premium payment may be less than
$100 without our consent, although we will accept a smaller
premium payment if necessary to keep your Policy in force. We
reserve the right to restrict or refuse any premium payments that
exceed the Initial Premium amount shown on your Policy. We also
reserve the right not to accept a premium payment that causes the
death benefit to increase by an amount that exceeds the premium
received. Evidence of insurability satisfactory to us may be
required before we accept any such premium.
We will not accept premium payments that would, in our
opinion, cause your Policy to fail to qualify as life insurance
under applicable federal tax law. If a premium payment is made in
excess of these limits, we will accept only that portion of the
premium within those limits, and will refund the remainder to
you.
Net Premiums. The net premium is the amount you pay as the
premium less any Expense Charges Applied to Premium. See "Charges
and Deductions - - Expense Charges Applied to Premium," beginning
on page 34 of this Prospectus.
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Allocation of Net Premium. Except as otherwise described herein,
your net premium will be allocated in accordance with the
allocation percentages you select. Percentages must be in whole
numbers.
Premiums received prior to the end of the Free Look Period
will initially be credited to the Maxim Money Market Portfolio
Division. Your initial allocation percentages will take effect
five days after the end of your state's Free Look Period.
You may change your allocation percentages at any time by
Request. Telephone Requests will be honored only if we have a
properly completed telephone authorization form for you on file.
An allocation change will be effective as of the date we receive
the Request for that change. We, our affiliates and the
representative from whom you purchased your Policy will not be
responsible for losses resulting from acting upon telephone
Requests reasonably believed to be genuine. We will use
reasonable procedures to confirm that instructions communicated
by telephone are genuine. You will be required to identify
yourself by name and a personal identification number for
transactions initiated by telephone. However, if we do not take
reasonable steps to ensure that a telephone authorization is
valid, we may be liable for such losses. We may suspend, modify
or terminate this telephone privilege at any time without notice.
Planned Periodic Premiums. While you are not required to make
additional premium payments according to a fixed schedule, you
may select a planned periodic premium schedule and corresponding
billing period, subject to our limits. We will send you reminder
notices for the planned periodic premium, unless you request to
have reminder notices suspended. You are not required, however,
to pay the planned periodic premium; you may increase or decrease
the planned periodic premium subject to our limits, and you may
skip a planned payment or make unscheduled payments. Depending on
the investment performance of the Divisions you select, the
planned periodic premium may not be sufficient to keep your
Policy in force, and you may need to change your planned payment
schedule or make additional payments in order to prevent
termination of your Policy.
Death Benefit
You may If your Policy is in force at the time of the Insured's
choose from death, we will pay the beneficiary an amount based on the death
three death benefit option you select once we have received Due Proof of the
benefit op- Insured's death. The amount payable will be:
tions. Your
choice will o the amount of the selected death benefit option, plus
affect the
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insurance o any amounts payable under any supplemental benefit riders
charges we added to your Policy, less
deduct from
your Account o the value of any Policy Debt on the date of the Insured's
Value and the death, less
amount of the
death benefit. o any accrued and unpaid Policy charges.
We will pay this amount to the beneficiary in one lump sum,
unless we and the beneficiary agree on another form of
settlement. We will pay interest, at a rate not less than that
required by law, on the amount of Policy Proceeds, if payable in
one lump sum, from the date of the Insured's death to the date of
payment.
In order to meet the definition of life insurance under the
Internal Revenue Code of 1986, as amended (the "Code"), Section
7702 of the Code defines alternative testing procedures for the
minimum death benefit under a Policy: the guideline premium test
("GPT") and the cash value accumulation test ("CVAT"). See
"Federal Income Tax Considerations - Tax Status of the Policy,"
at page . The Policy must qualify under either the GPT or the
CVAT. When you purchase a Policy, you must choose the procedure
under which your Policy will qualify. You may not change your
choice while the Policy is in force.
Under both testing procedures, there is a minimum death
benefit required at all times equal to your Policy's Account
Value multiplied by some pre-determined factor. The factors used
to determined the minimum death benefit depend on the testing
procedure chosen and vary by age. The factors used for GPT are
shown in Appendix C and those used for CVAT are set forth in your
Policy.
Under the GPT, there is also a maximum amount of premium
which may be paid with respect to your Policy.
Use of the CVAT can be advantageous if you intend to
maximize the total amount of premiums paid. An offsetting
consideration, however, is that the factors used to determine the
minimum death benefit are higher under the CVAT, which can result
in a higher death benefit over time and, thus, a higher total
cost of insurance.
You may select The Policy has three death benefit options.
from among
three death Option 1. The "Level Death" Option. Under this option, the death
benefit benefit is --
options.
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o the Policy's Total Face Amount on the date of the Insured's
death less any partial withdrawals; or, if greater,
o the Policy's Account Value on the date of death multiplied
by the applicable factor shown in the table set forth in
Appendix C or in your Policy.
This death benefit option should be selected if you want to
minimize your cost of insurance.
Option 2. The "Coverage Plus" Option. Under this option, the
death benefit is --
o the sum of the Total Face Amount and Account Value of the
Policy on the date of the Insured's death; or, if greater,
o the Policy's Account Value on the date of death multiplied
by the applicable factor shown in the table set forth in
Appendix C or in your Policy.
This death benefit option should be selected if you want
your death benefit to increase with your Policy's Account Value.
Option 3. The "Premium Accumulation" Option. Under this option,
the death benefit is --
o the sum of the Total Face Amount and premiums paid under the
Policy plus interest at the rate specified in your Policy
less any partial withdrawals; or, if greater,
o the Policy's Account Value on the date of death multiplied
by the applicable factor shown in the table set forth in
Appendix C or in your Policy.
This death benefit option should be selected if you want a
specified amount of death benefit plus a return of the premiums
you paid with guaranteed interest.
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Changes in Death Benefit Option
After the first Policy Year, but not more than once each
Policy Year, you may change the death benefit option by Request.
Any change will be effective on the first day of the Policy Month
following the date we approve your Request. A maximum
administrative fee of $100 will be deducted from your Account
Value each time you change your death benefit option.
A change in the death benefit option will not change the
amount payable upon the death of the Insured. Any change is
subject to the following conditions:
o If the change is from Option 1 to Option 2, the new Total
Face Amount, at the time of the change, will equal the prior
Total Face Amount less the Policy's Account Value. Evidence
of insurability may be required.
o If the change is from Option 1 to Option 3, the new Total
Face Amount, at the time of the change, will equal the prior
Total Face Amount less the accumulated value of all premiums
at the interest rate shown in your Policy. Evidence of
insurability may be required.
o If the change is from Option 2 to Option 1, the new Total
Face Amount, at the time of the change, will equal the prior
Total Face Amount plus the Policy's Account Value.
o If the change is from Option 2 to Option 3, the new Total
Face Amount, at the time of the change, will equal the prior
Total Face Amount plus the Policy's Account Value less the
accumulated value of all premiums at the interest rate shown
in your Policy.
o If the change is from Option 3 to Option 1, the new Total
Face Amount, at the time of the change, will equal the prior
Total Face Amount plus the accumulated value of all premiums
at the interest rate shown in your Policy.
o If the change is from Option 3 to Option 2, the new Total
Face Amount, at the time of the change, will equal the prior
Total Face Amount less the Policy's Account Value plus the
accumulated value of all premiums at the interest rate shown
in your Policy.
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Changes in Total Face Amount
You may in- You may increase or decrease the Total Face Amount of your
crease or Policy at any time within certain limits.
decrease the
Total Face Minimum Changes. Each increase or decrease in the Total Face
Amount with- Amount must be at least $25,000. We reserve the right to change
in certain the minimum amount by which you may change the Total Face Amount.
limits.
Increases. To Request an increase, you must provide satisfactory
evidence of the Insured's insurability. Once approved by us, an
increase will become effective on the Policy Anniversary
following our approval of your Request, subject to the deduction
of the first Policy Month's Monthly Risk Charge, Service Charge,
any extra risk charge if the Insured is in a rated class and the
cost of any riders.
Decreases. A decrease will become effective at the beginning of
the next Policy Month following our approval of your request. The
Total Face Amount after the decrease must be at least $100,000.
For purposes of the Incontestability Provision of your
Policy, any decrease in Total Face Amount will be applied in the
following order:
o first, to the most recent increase;
o second, to the next most recent increases, in reverse
chronological order; and
o finally, to the initial Total Face Amount.
Surrenders
If you sur- You may surrender your Policy for its Cash Surrender Value
render your at any time while the Insured is living. If you do, the insurance
Policy and coverage and all other benefits under the Policy will terminate.
receive its
Cash Sur- Cash Surrender Value is your Policy's Account Value less the sum
render Value, of:
you may
incur taxes o the outstanding balance of any Policy Debt; and
and tax
penalties. o any other accrued and unpaid Policy charges.
We will determine your Cash Surrender Value as of the end of
the first Valuation Date after we receive your Request for
surrender.
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Partial Withdrawal
If you with- You may Request a partial withdrawal of Account Value at any
draw part of time while the Policy is in force. The amount of any partial
the Cash withdrawal must be at least $500 and may not exceed 90% of your
Surrender Policy's Account Value less the value of the Loan Account. An
Value, your administrative fee will be deducted from your Account Value for
Policy's all partial withdrawals after the first made during the same
death benefit Policy Year. This administrative fee is guaranteed to be no
will be re- greater than $25.
duced and
you may incur If you have chosen either Death Benefit Option 1 or Death
taxes and Benefit Option 3, then the death benefit payable will be reduced
tax penal- by the amount of any partial withdrawals.
ties.
Your Policy's Account Value will be reduced by the amount of
a partial withdrawal. The amount of a partial withdrawal will be
withdrawn from the Divisions in the proportion the amounts in the
Divisions bear to your Policy's Account Value. You cannot repay
amounts taken as a partial withdrawal. Any subsequent payments
received by us will be treated as additional premium payments and
will be subject to our limitations on premiums.
A partial withdrawal may have tax consequences. See "Federal
Income Tax Considerations - - Tax Treatment of Policy Benefits,"
beginning on page 49 of this Prospectus.
Policy Loans
You may You may request a Policy loan of up to 90% of your Policy's
borrow from Account Value, decreased by the amount of any outstanding Policy
us using Debt on the date the Policy loan is made. When a Policy loan is
your Account made, a portion of your Account Value equal to the amount of the
Value as Policy loan will be allocated to the Loan Account as collateral
collateral. for the loan. This amount will not be affected by the investment
experience of the Series Account while the loan is outstanding
and will be subtracted from the Divisions in the proportion the
amounts in the Divisions bear to your Account Value. The minimum
Policy loan amount is $500.
The interest rate on the Policy loan will be determined
annually at the beginning of each Policy Year. That interest rate
will be guaranteed for that Policy Year and will apply to all
Policy loans outstanding during that Policy Year. Interest is due
and payable on each Policy Anniversary. Interest not paid when
due will be added to the principal amount of the loan and will
bear interest at the loan interest rate.
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Presently, the maximum interest rate for Policy loans is The
Moody's Corporate Bond Yield Average - Monthly Average
Corporates, which is published by Moody's Investor Service, Inc.
If that Average ceases to be published, the maximum interest rate
for Policy loans will be derived from a substantially similar
average adopted by your state's Insurance Commissioner.
We must reduce our Policy loan interest rate if the maximum
loan interest rate is lower than the loan interest rate for the
previous Policy Year by one-half of one percent or more.
We may increase the Policy loan interest rate but such
increase must be at least one-half of one percent. No increase
may be made if the Policy loan interest rate would exceed the
maximum loan interest rate. We will send you advance notice of
any increase in the Policy loan rate.
Interest will be credited to amounts held in the Loan
Account. The rate will be no less than the Policy loan interest
rate then in effect less a maximum of 0.9%.
All payments we receive from you will be treated as premium
payments unless we have received notice, in form satisfactory to
us, that the funds are for loan repayment. If you have a Policy
loan, it is generally advantageous to repay the loan rather than
make a premium payment because premium payments incur expense
charges whereas loan repayments do not. Loan repayments will
first reduce the outstanding balance of the Policy loan and then
accrued but unpaid interest on such loans. We will accept
repayment of any Policy loan at any time while the Policy is in
force. Amounts paid to repay a Policy loan will be allocated to
the Divisions in accordance with your allocation instructions
then in effect at the time of repayment.
A Policy loan, whether or not repaid, will affect the Policy
Proceeds payable upon the Insured's death and the Account Value
because the investment results of the Divisions do not apply to
amounts held in the Loan Account. The longer a loan is
outstanding, the greater the effect is likely to be, depending on
the investment results of the Divisions while the loan is
outstanding. The effect could be favorable or unfavorable.
Transfers Between Sub-Accounts
Subject to our rules as they may exist from time to time,
you may at any time transfer to another Division all or a portion
of the Account Value allocated to a Division. We will make
transfers pursuant to a Request. Telephone Requests will be
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<PAGE>
honored only if we have a properly completed telephone
authorization form for you on file. We, our affiliates and the
representative from whom you purchased your Policy will not be
responsible for losses resulting from acting upon telephone
Requests reasonably believed to be genuine. We will use
reasonable procedures to confirm that instructions communicated
by telephone are genuine. For transactions initiated by
telephone, you will be required to identify yourself by name and
a personal identification number. 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.
Transfers may be Requested by indicating the transfer of
either a specified dollar amount or a specified percentage of the
Division's value from which the transfer will be made.
Transfer privileges are subject to our consent. We reserve
the right to impose limitations on transfers, including, but not
limited to: (1) the minimum amount that may be transferred; and
(2) the minimum amount that may remain in a Division following a
transfer from that Division.
An administrative charge of $10 per transfer will apply for
all transfers in excess of 12 made in a calendar year. We may
increase or decrease the transfer charge; however, it is
guaranteed to never exceed $10 per transfer. All transfers made
in a single day will count as only one transfer toward the 12
free transfers. The transfer of your Initial Premium from the
Maxim Money Market Portfolio Division to your selected Divisions
does not count toward the twelve free transfers. Likewise, any
transfers under Dollar Cost Averaging or periodic rebalancing of
your Account Value under the Rebalancer Option do not count
toward the twelve free transfers (a one time rebalancing,
however, will be counted as one transfer).
Dollar Cost Averaging
By Request, you may elect Dollar Cost Averaging in order to
purchase Units of the Divisions over a period of time. There is
no charge for this service.
Dollar Cost Averaging permits you to automatically transfer
a predetermined dollar amount, subject to our minimum, at regular
Dollar Cost intervals from any one or more designated Divisions to one or
Averaging more of the remaining, then available Divisions. The Unit Value
permits you will be determined on the dates of the transfers. You must
to transfer specify the percentage to be transferred into each designated
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<PAGE>
your Account Division. Transfers may be set up on any one of the following
Value at frequency periods: monthly, quarterly, semiannually, or annually.
regular The transfer will be initiated one frequency period following the
intervals date of your request. We will provide a list of Divisions
from one or eligible for Dollar Cost Averaging which may be modified from
more Divi- time to time. Amounts transferred through Dollar Cost Averaging
sions to are not counted against the twelve free transfers allowed in a
other calendar year. You may not participate in Dollar Cost Averaging
Divisions. and the Rebalancer Option (described below) at the same time.
Participation in Dollar Cost Averaging does not assure a greater
profit, or any profit, nor will it prevent or necessarily
alleviate losses in a declining market. We reserve the right to
modify, suspend, or terminate Dollar Cost Averaging at any time.
The Rebalancer Option
The Reba- By Request, you may elect the Rebalancer Option in order to
lancer Option automatically transfer Account Value among the Divisions on a
permits you periodic basis. There is no charge for this service, real-
to reba- locates your Account Value so as to maintain a particular
lance your percentage allocation among Divisions chosen by you. The amount
Account Value allocated to each Division will grow or decline at different
so that you rates depending on the investment experience of the Divisions.
may main-
tain your You may Request that rebalancing occur one time only, in
chosen which case the transfer will take place on the date of the
percentage Request. This transfer will count as one transfer towards the
allocation twelve free transfers allowed in a calendar year.
among
Divisions. You may also choose to rebalance your Account Value on a
quarterly, semiannual, or annual basis, in which case the first
transfer will be initiated one frequency period following the
date of your request. On that date, your Account Value will be
automatically reallocated to the selected Divisions. Thereafter,
your Account Value will be rebalanced once each frequency period.
In order to participate in the Rebalancer Option, your entire
Account Value must be included. Transfers made with these
frequencies will not count against the twelve free transfers
allowed in a calendar year.
You must specify the percentage of Account Value to be
allocated to each Division and the frequency of rebalancing. You
may terminate the Rebalancer Option at any time by Request.
You may not participate in the Rebalancer Option and Dollar
Cost Averaging at the same time. Participation in the Rebalancer
Option does not assure a greater profit, or any profit, nor will
it prevent or necessarily alleviate losses in a declining market.
The Company reserves the right to modify, suspend, or terminate
the Rebalancer Option at any time.
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<PAGE>
Account Value
Your Account Value is the sum of your interests in each
Division you have chosen plus the amount in your Loan Account.
The Account Value varies depending upon the premiums paid,
Expense Charges Applied to Premium, Mortality and Expense Risk
Charge, Service Charges, Monthly Risk Charges, partial
withdrawals, fees, Policy loans and the net investment factor
(described below) for the Divisions to which your Account Value
is allocated.
A Valuation We measure the amounts in the Divisions in terms of Units
Date is any and Unit Values. On any given date, your interest in a Division
day on which is equal to the Unit Value multiplied by the number of Units
we, the appli- credited to you in that Division. Amounts allocated to a Division
cable Fund, will be used to purchase Units of that Division. Units are
and the NYSE redeemed when you make partial withdrawals, undertake Policy
are open for loans or transfer amounts from a Division, and for the payment of
business. Service Charges, Monthly Risk Charges and other fees. The number
of Units of each Division purchased or redeemed is determined by
The Valuation dividing the dollar amount of the transaction by the Unit Value
Period is the for the Division. The Unit Value for each Division was
period of established at $10.00 for the first Valuation Date of the
time from one Division. The Unit Value for any subsequent Valuation Date is
determination equal to the Unit Value for the preceding Valuation Date
of Unit multiplied by the net investment factor (determined as provided
Values to below). The Unit Value of a Division for any Valuation Date is
the next. determined as of the close of the Valuation Period ending on that
Valuation Date.
Transactions are processed on the date we receive a premium
at our Principal Office or upon approval of a Request. If your
premium or Request is received on a date that is not a Valuation
Date, or after the close of the New York Stock Exchange on a
Valuation Date, the transaction will be processed on the next
Valuation Date.
We apply your The Account Value attributable to each Division of the
Initial Pre- Series Account on the Policy Date equals:
mium on the
Policy Date, o that portion of net premium received and allocated to the
which will Division, less
be the Issue
Date (if we o the Service Charges due on the Policy Date, less
have already
received o the Monthly Risk Charge due on the Policy Date, less
your Initial
Premium) or o the Monthly Risk Charge for any riders due on the Policy
the Business Date.
Day we receive
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<PAGE>
a premium The Account Value attributable to each Division of the
equal to or Series Account on subsequent Valuation Dates is equal to:
in excess of
the Initial o the Account Value attributable to the Division on the
Premium after preceding Valuation Date multiplied by that Division's net
we have investment factor, plus
approved your
Policy o that portion of net premium received and allocated to the
application. Division during the current Valuation Period, plus
o that portion of the value of the Loan Account transferred to
the Division upon repayment of a Policy loan during the
current Valuation Period; plus
o any amounts transferred by you to the Division from another
Division during the current Valuation Period, less
o any amounts transferred by you from the Division to another
Division during the current Valuation Period, less
o that portion of any partial withdrawals deducted from the
Division during the current Valuation Period, less
o that portion of any Account Value transferred from the
Division to the Loan Account during the current Valuation
Period, less
o that portion of fees due in connection with a partial
surrender charged to the Division, less
o if the first day of a Policy Month occurs during the current
Valuation Period, that portion of the Service Charge for the
Policy Month just beginning charged to the Division, less
o if the first day of a Policy Month occurs during the current
Valuation Period, that portion of the Monthly Risk Charge
for the Policy Month just beginning charged to the Division,
less
o if the first day of a Policy Month occurs during the current
Valuation Period, that Division's portion of the cost for
any riders and any extra risk charge if the Insured is in a
rated class as specified in your Policy, for the Policy
Month just beginning.
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<PAGE>
Net Investment Factor. The net investment factor for each
Division for any Valuation Period is determined by deducting the
Mortality and Expense Risk Charge for each day in the Valuation
Period from the quotient of (1) and (2) where: (1) is the net
result of:
o the net asset value of a Fund share held in the Division
determined as of the end of the current Valuation Period,
plus
o the per share amount of any dividend or other distribution
declared on Fund shares held in the Division if the
"ex-dividend" date occurs during the current Valuation
Period, plus or minus
o a per share credit or charge with respect to any taxes
incurred by or reserved for, or paid by us if not previously
reserved for, during the current Valuation Period which are
determined by us to be attributable to the operation of the
Division; and
(2) is the net result of:
o the net asset value of a Fund share held in the Division
determined as of the end of the preceding Valuation Period;
plus or minus
o a per share credit or charge with respect to any taxes
incurred by or reserved for, or paid by us if not previously
reserved for, during the preceding Valuation Period which
are determined by us to be attributable to the operation of
the Division.
The Mortality and Expense Risk Charge for the Valuation Period is
the annual Mortality and Expense Risk Charge divided by 365
multiplied by the number of days in the Valuation Period.
The net investment factor may be greater or less than or equal to
one.
Splitting Units. We reserve the right to split or combine the
value of Units. In effecting any such change, strict equity will
be preserved and no such change will have a material effect on
the benefits or other provisions of your Policy.
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<PAGE>
Charges and Deductions
Expense Charges Applied to Premium. We will deduct a maximum
charge of 10% from each premium payment. A maximum of 6.5% of
this charge will be deducted as sales load to compensate us in
part for sales and promotional expenses in connection with
selling the Policies, such as commissions, the cost of preparing
sales literature, other promotional activities and other direct
and indirect expenses. A maximum of 3.5% of this charge will be
used to cover premium taxes and certain federal income tax
obligations resulting from the receipt of premiums. All states
and a few cities and municipalities impose taxes on premiums paid
for life insurance, which generally range from 2% to 4% of
premium but may exceed 4% in some states (for example, Kentucky).
The amount of your state's premium tax may be higher or lower
than the amount attributable to premium taxes that we deduct from
your premium payments.
The current Expense Charge Applied to Premium for sales load
is 5.5% of premium up to target and 3.0% of premium in excess of
target for Policy Years 1 through 10. Your target premium will
depend on the initial Total Face Amount of your Policy, your
Issue Age, your sex (except in unisex states), and rating class
(if any). [Others?] Thereafter, there is no charge for sales
load. The current Expense Charge Applied to Premium to cover our
premium taxes and the federal tax obligation described above is
3.5% in all Policy Years.
As described in "Term Life Insurance Rider", we may offer a
Term Life Insurance Rider that may have the effect of reducing
the sales charge you pay on purchasing an equivalent amount of
insurance. We offer this rider in circumstances which result in
the savings of sales and distribution expenses and administrative
costs. To qualify, a corporation, employer, or other purchaser
must satisfy certain criteria such as, for example, the number of
Policies it expects to purchase, and the expected Total Face
Amount under all such Policies. Generally, the sales contacts and
effort and administrative costs per Policy depend on factors such
as the number of Policies purchased by a single owner, the
purpose for which the Policies are purchased, and the
characteristics of the proposed Insureds. The amount of reduction
and the criteria for qualification are related to the sales
effort and administrative costs resulting from sales to a
qualifying owner. Great-West from time to time 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 owners
funded by the Series Account.
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<PAGE>
Mortality and Expense Risk Charge. This charge is for the
mortality and expense risks we assume with respect to the Policy.
It is based on an annual rate that we apply against each Division
of the Series Account on a daily basis. We convert the Mortality
and Expense Risk Charge into a daily rate by dividing the annual
rate by 365. The Mortality and Expense Risk Charge will be
determined by us from time to time based on our expectations of
future interest, mortality experience, persistency, expenses and
taxes, but will not exceed 0.90% annually. Currently, the charge
is 0.40% for Policy Years 1 through 5, 0.25% for Policy Years 6
through 20 and 0.10% thereafter.
The mortality risk we assume is that the group of lives
insured under the Policies may, on average, live for shorter
periods of time than we estimated. The expense risk we assume is
that the costs of issuing and administering Policies may be more
than we estimated.
Monthly Deduction. We make a monthly deduction from your Account
Value on the Policy Date and the first day of each Policy Month.
This monthly deduction will be charged proportionally to the
amounts in the Divisions.
The monthly deduction equals the sum of (1), (2), (3) and
(4) where:
(1) is the cost of insurance charge (the Monthly Risk Charge)
equal to the current Monthly Risk Rate (described below)
multiplied by the net amount at risk divided by 1,000;
(2) is the Service Charge;
(3) is the monthly cost of any additional benefits provided by
riders which are a part of your Policy; and
(4) is any extra risk charge if the Insured is in a rated class
as specified in your Policy.
The net amount at risk equals:
o the death benefit divided by 1.00327374; less
o your Policy's Account Value on the first day of a Policy
Month prior to assessing the monthly deduction.
If there are increases in the Total Face Amount other than
increases caused by changes in the death benefit option, the
monthly deduction described above is determined separately for
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<PAGE>
the initial Total Face Amount and each increase in the Total Face
Amount. In calculating the net amount at risk, your Account Value
will first be allocated to the most recent increase in the death
benefit and then to each increase in the Total Face Amount in the
reverse order in which the increases were made.
Monthly Risk Rates. The Monthly Risk Rate is used to
determine the cost of insurance charge for providing insurance
coverage under the Policy. The Monthly Risk Rates (except for any
such rate applicable to an increase in the Total Face Amount) are
based on the length of time your Policy has been in force and the
Insured's sex (in the case of non-unisex Policies) and Issue Age.
If the Insured is in a rated class as specified in your Policy,
we will deduct an extra risk charge that reflects that class
rating. The Monthly Risk Rates applicable to each increase in the
Total Face Amount are based on the length of time the increase
has been in force and the Insured's sex (in the case of
non-unisex Policies), Issue Age, and class rating, if any. The
Monthly Risk Rates will be determined by us from time to time
based on our expectations of future experience with respect to
mortality, persistency, interest rates, expenses and taxes, but
will not exceed the Guaranteed Maximum Monthly Risk Rates based
on the 1980 Commissioner's Standard Ordinary, Age Nearest
Birthday, Male/Female, Unismoke Ultimate Mortality Table ("1980
CSO"). Our Monthly Risk Rates for unisex Policies will never
exceed a maximum based on the 1980 CSO using male lives.
The Guaranteed Maximum Monthly Risk Rates reflect any class
rating applicable to the Policy. We have filed a detailed
statement of our methods for computing Account Values with the
insurance department in each jurisdiction where the Policy was
delivered. These values are equal to or exceed the minimum
required by law.
Service Charge. We will deduct a maximum of $15.00 from your
Policy's Account Value on the first day of each Policy Month to
cover our administrative costs, such as salaries, postage,
telephone, office equipment and periodic reports. This charge may
be increased or decreased by us from time to time based on our
expectations of future expenses, but will never exceed $15.00 per
Policy Month. The Service Charge will be deducted proportionally
from the Divisions. The current Service Charge is $10.00 per
Policy Month for Policy Years 1 through 3 and $7.50 per Policy
Month thereafter.
Transfer Fee. A maximum administrative charge of $10 per transfer
of Account Value from one Division to other Divisions will be
deducted from your Policy's Account Value for all transfers in
excess of 12 made in the same calendar year. The allocation of
your Initial Premium from the Maxim Money Market Portfolio
Division to your selected Divisions will not count toward the 12
free transfers. Similarly, transfers made under Dollar Cost
Averaging and periodic rebalancing under the Rebalancer Option do
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<PAGE>
not count as transfers for this purpose (although, a one-time
rebalancing under the Rebalancer Option will count as one
transfer). All transfers requested on the same Business Day will
be aggregated and counted as one transfer. The current charge is
$10 per transfer.
Partial Withdrawal Fee. A maximum administrative fee of $25 will
be deducted from your Policy's Account Value for all partial
withdrawals after the first made in the same Policy Year.
Change of Death Benefit Option Fee. A maximum administrative fee
of $100 will be deducted from your Policy's Account Value each
time you change your death benefit option.
Fund Expenses. You indirectly bear the charges and expenses of
the Funds whose shares are held by the Divisions to which you
allocate your Account Value. The Series Account purchases shares
of the Funds at net asset value. Each Fund's net asset value
reflects investment advisory fees and administrative expenses
already deducted from the Fund's assets. A table containing
current estimates of these charges and expenses can be found
starting on page 6. For more information concerning the
investment advisory fees and other charges against the Funds, see
the Fund Prospectuses and the statements of additional
information for the Funds, which are available upon Request.
We may receive compensation from the investment advisers or
administrators of the Funds. Such compensation will be consistent
with the services we provide or the cost savings resulting from
the arrangement and, therefore, may differ between Funds.
Paid-Up Life Insurance
When the Insured reaches Attained Age 100 (if your Policy is
in force at that time), the entire Account Value of your Policy
(less outstanding Policy Debt) will be applied as a single
premium to purchase "paid-up" insurance. Outstanding Policy Debt
will be repaid at this time. This repayment may be treated as a
taxable distribution to you if your Policy is not a MEC. The net
single premium for this insurance will be based on the 1980
Commissioner's Standard Ordinary, Sex Distinct, Non-Smoker
Mortality Table. The cash value of your paid-up insurance, which
initially is equal to the net single premium, will remain in the
Divisions of the Series Account in accordance with your then
current allocation. While the paid-up life insurance is in effect
your assets will remain in the Series Account. You may change
your Division allocation instructions and you may transfer your
cash value among the Divisions. All charges under your Policy, to
the extent applicable, will continue to be assessed, except we
will no longer make a deduction each Policy Month for the Monthly
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<PAGE>
Risk Charge. Your death benefit will be equal to the cash value
of the paid-up policy and, thus, as your cash value changes based
on the investment experience of the Divisions, the death benefit
will increase or decrease accordingly. You may surrender the
paid-up insurance policy at any time and, if surrendered within
30 days of a Policy Anniversary, its cash value will not be less
than it was on that Policy Anniversary. See "Federal Income Tax
Considerations -- Treatment When Insured Reached Attained Age
100 at page 52."
Supplemental Benefits
The following supplemental benefit riders are available,
subject to certain limitations. An additional Monthly Risk Charge
will be assessed for each rider which is in force as part of the
monthly deduction from your Account Value.
Term Life Insurance Rider
This Rider provides term life insurance on the Insured.
Coverage is renewable annually to the Insured's Attained Age 100.
The amount of coverage provided under this Rider varies from
month to month as described below. We will pay the Rider's death
benefit to the beneficiary when we receive Due Proof of death of
the Insured while this Rider is in force.
This Rider provides the same three death benefit options as
your Policy. The option you choose under the Rider must at all
times be the same as the option you have chosen for your Policy.
The Rider's death benefit will be determined at the beginning of
each Policy Month in accordance with one of those options. For
each of the options, your death benefit will be reduced by any
outstanding Policy Debt.
If you purchase this Rider, the Total Face Amount shown on
your Policy's Specifications Page will be equal to the minimum
amount of coverage provided by this Rider plus the Base Face
Amount (which is the minimum death benefit under your Policy
without the Rider's death benefit). The minimum allocation of
Total Face Amount between your Policy and the Rider is 10% and
90% at inception, respectively. The total death benefit payable
under the Rider and the Policy will be determined as described in
"Death Benefit" above, using the Total Face Amount shown on your
Policy's Specifications page.
Coverage under this Rider will take effect on the later of:
o the Policy Date of the Policy to which this Rider is
attached; or
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<PAGE>
o the Policy Anniversary following our approval of your
Request to add this Rider to your Policy, subject to the
deduction of the first Monthly Risk Charge for the Rider.
The Monthly Risk Rate for this Rider will be the same as
that used for the Policy and the Monthly Risk Charge for the
Rider will be determined by multiplying the Monthly Risk Rate by
the Rider's death benefit. This charge will be calculated on the
first day of each Policy Month and added to the Policy's Monthly
Risk Charge.
If you purchase this Rider, the target premium amount, to
which the sales charge applies, will be proportionately lower. As
a result, the sales charge deducted from your premium payments
will be less than you would pay on a single Policy providing the
same Total Face Amount of coverage as your Policy and Rider.
We will offer this Rider only in circumstances which result
in the savings of sales and distribution expenses. As a result,
in our discretion, we may decline to offer the Term Rider or
refuse to consent to a proposed allocation of coverage between a
Base Policy and Term Rider. In exercising this discretion, we
will not discriminate unfairly against any person, including the
affected owners funded by the Series Account. For more
information see "Expense Charges Applied to Premium" at page
above.
You may terminate this Rider by Request. This Rider also
will terminate on the earliest of the following dates:
o the date the Policy is surrendered or terminated;
o the expiration of the Grace Period of the Policy; or
o the death of the Insured.
Change of Insured Rider
This Rider permits you to change the Insured under your
Policy or any Insured that has been named by virtue of this
Rider. Before we change the Insured you must provide us with (1)
a Request for the change signed by you and approved by us; (2)
evidence of insurability for the new Insured; (3) evidence that
there is an insurable interest between you and the new Insured;
(4) evidence that the new Insured's age, nearest birthday, is
under 70 years; and (5) evidence that the new Insured was born
prior to the Policy Date. We may charge a maximum fee of $25 for
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<PAGE>
administrative expenses when you changed the Insured. When a
change of Insured takes effect, Policy premiums will be based on
the new Insured's age, sex, mortality class and the premium rate
in effect on the Policy Date.
Continuation of Coverage
If you cease making premium payments, coverage under your
Policy and any Riders to the Policy will continue until your
Policy's Account Value, less any Policy Debt, is insufficient to
cover the monthly deduction. When that occurs, the Grace Period
will go into effect.
Grace Period
If the first day of a Policy Month occurs during the
Valuation Period and your Policy's Account Value, less any Policy
Debt, is not sufficient to cover the monthly deduction for that
Policy month, then your Policy will enter the Grace Period
described below. If you do not pay sufficient additional premiums
during the Grace Period, your Policy will terminate without
value.
The Grace Period will allow 61 days for the payment of
premium sufficient to keep the Policy in force. Any such premium
must be in an amount sufficient to cover deductions for the
Monthly Risk Charge, the Service Charge, the cost for any riders
and any extra risk charge if the Insured is in a rated class for
the next two Policy Months. Notice of premium due will be mailed
to your last known address or the last known address of any
assignee of record at least 31 days before the date coverage
under your Policy will cease. If the premium due is not paid
within the Grace Period, then the Policy and all rights to
benefits will terminate without value at the end of the 61 day
period. The Policy will continue to remain in force during this
Grace Period. If the Policy Proceeds become payable by us during
the Grace Period, then any due and unpaid Policy charges will be
deducted from the amount payable by us.
Termination of Policy
Your Policy will terminate on the earlier of the date we
receive your Request to surrender, the expiration date of the
Grace Period due to insufficient value or the date of death of
the Insured.
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Reinstatement
Before the Insured's death, we will reinstate your Policy,
provided that the Policy has not been surrendered, and provided
further that:
o you make your reinstatement Request within three years from
the date of termination;
o you submit satisfactory evidence of insurability to us;
o you pay an amount equal to the Policy charges which were due
and unpaid at the end of the Grace Period;
o you pay a premium equal to four times the monthly deduction
applicable on the date of reinstatement; and
o you repay or reinstate any Policy loan that was outstanding
on the date coverage ceased, including interest at 6.00% per
year compounded annually from the date coverage ceased to
the date of reinstatement of your Policy.
A reinstated Policy's Total Face Amount may not exceed the
Total Face Amount at the time of termination. Your Account Value
on the reinstatement date will reflect:
o the Account Value at the time of termination; plus
o net premiums attributable to premiums paid to reinstate the
Policy; less
o the Monthly Expense Charge; less
o the Monthly Cost of Insurance charge applicable on the date
of reinstatement.
The effective date of reinstatement will be the date the
application for reinstatement is approved by us.
Deferral of Payment
We will usually pay any amount due from the Series Account
within seven days after the Valuation Date following your Request
giving rise to such payment or, in the case of death of the
Insured, Due Proof of such death. Payment of any amount payable
from the Series Account on death, surrender, partial surrender,
or Policy loan may be postponed whenever:
o the New York Stock Exchange is closed other than customary
weekend and holiday closing, or trading on the NYSE is
otherwise restricted;
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o the Securities and Exchange Commission, by order, permits
postponement for the protection of policyowners; or
o an emergency exists as determined by the Securities and
Exchange Commission, as a result of which disposal of
securities is not reasonably practicable, or it is not
reasonably practicable to determine the value of the assets
of the Series Account.
Rights of Owner
While the Insured is alive, unless you have assigned any of
these rights, you may:
o transfer ownership to a new owner;
o name a contingent owner who will automatically become the
owner of the Policy if you die before the Insured;
o change or revoke a contingent owner;
o change or revoke a beneficiary (unless a previous
beneficiary designation was irrevocable); o exercise all
other rights in the Policy;
o increase or decrease the Total Face Amount, subject to the
other provisions of the Policy; and o change the death
benefit option, subject to the other provisions of the
Policy.
When you transfer your rights to a new owner, you
automatically revoke any prior contingent owner designation. When
you want to change or revoke a prior beneficiary designation, you
have to specify that action. You do not affect a prior
beneficiary when you merely transfer ownership, or change or
revoke a contingent owner designation.
You do not need the consent of a beneficiary or a contingent
owner in order to exercise any of your rights. However, you must
give us written notice satisfactory to us of the Requested
action. Your Request will then, except as otherwise specified
herein, be effective as of the date you signed the form, subject
to any action taken before it was received by us.
Rights of Beneficiary
The beneficiary has no rights in the Policy until the death
of the Insured, except an irrevocable beneficiary cannot be
changed without the consent of that beneficiary. If a beneficiary
is alive at that time, the beneficiary will be entitled to
payment of the Policy Proceeds as they become due.
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Other Policy Provisions
Exchange of Policy. You may exchange your Policy for a new policy
issued by Great-West that does not provide for variable benefits.
The new policy will have the same Policy Date, Issue Age, and
Insured as your Policy on the date of the exchange. The exchange
must be made within 24 Policy Months after the Issue Date of your
Policy and all Policy Debt must be repaid.
Addition, Deletion or Substitution of Investments. Shares of any
or all of the Funds may not always be available for purchase by
the Divisions of the Series Account, or we may decide that
further investment in any such shares is no longer appropriate.
In either event, shares of other registered open-end investment
companies or unit investment trusts may be substituted both for
Fund shares already purchased by the Series Account and/or as the
security to be purchased in the future, provided that these
substitutions have been approved by the Securities and Exchange
Commission, to the extent necessary. We also may close a Division
to future premium allocations and transfers of Account Value. If
we do so, we will notify you and ask you to change your premium
allocation instructions. If you do not change those instructions
by the Division's closing date, premiums allocated to that
Division automatically will be allocated to the Maxim Money
Market Portfolio Division until you instruct us otherwise. A
Division closing may affect Dollar Cost Averaging and the
Rebalancer Option. We reserve the right to operate the Series
Account in any form permitted by law, to take any action
necessary to comply with applicable law or obtain and continue
any exemption from applicable laws, to assess a charge for taxes
attributable to the operation of the Series Account or for other
taxes, as described in "Charges and Deductions" beginning on page
34 of this Prospectus, and to change the way in which we assess
other charges, as long as the total other charges do not exceed
the maximum guaranteed changes under the Policies. We also
reserve the right to add Divisions, or to eliminate or combine
existing Divisions or to transfer assets between Divisions, or
from any Division to our general account. In the event of any
substitution or other act described in this paragraph, we may
make appropriate amendment to the Policy to reflect the change.
Entire Contract. Your entire contract with us consists of the
Policy, including the attached copy of your Policy application
and any attached copies of supplemental applications for
increases in the Total Face Amount, any endorsements and any
riders. Any illustrations prepared in connection with the Policy
do not form a part of our contract with you and are intended
solely to provide information about how values under the Policy,
such as Cash Surrender Value, death benefit and Account Value,
will change with the investment experience of the Divisions, and
such information is based solely upon data available at the time
such illustrations are prepared.
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Alteration. Sales representatives do not have any authority to
either alter or modify your Policy or to waive any of its
provisions. The only persons with this authority are our
president, secretary, or one of our vice presidents.
Modification. Upon notice to you, we may modify the Policy if
such a modification --
o is necessary to make the Policy or the Series Account comply
with any law or regulation issued by a governmental agency
to which we are or the Series Account is subject;
o is necessary to assure continued qualification of the Policy
under the Internal Revenue Code or other federal or state
laws as a life insurance policy;
o is necessary to reflect a change in the operation of the
Series Account or the Divisions; or
o adds, deletes or otherwise changes Division options.
We also reserve the right to modify certain provisions of the
Policy as stated in those provisions. In the event of any such
modification, we may make appropriate amendment to the Policy to
reflect such modification.
Assignments. During the lifetime of the Insured, you may assign
all or some of your rights under the Policy. All assignments must
be filed at our Principal Office and must be in written form
satisfactory to us. The assignment will then be effective as of
the date you signed the form, subject to any action taken before
it was received by us. We are not responsible for the validity or
legal effect of any assignment.
Non-Participating. The Policy does not pay dividends.
Misstatement of Age or Sex (Non-Unisex Policy). If the age or (in
the case of a non-unisex Policy) sex of the Insured is stated
incorrectly in your Policy application or rider application, we
will adjust the amount payable appropriately as described in the
Policy.
If we determine that the Insured was not eligible for coverage
under the Policy after we discover a misstatement of the
Insured's age, our liability will be limited to a return of
premiums paid, less any partial withdrawals, any Policy Debt, and
the cost for riders.
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Suicide. If the Insured, whether sane or insane, commits suicide
within two years after your Policy's Issue Date (one year if your
Policy is issued in Colorado or North Dakota), we will not pay
any part of the Policy Proceeds. We will pay the beneficiary
premiums paid, less the amount of any Policy Debt, any partial
withdrawals and the cost for riders.
If the Insured, whether sane or insane, commits suicide
within two years after the effective date of an increase in the
Total Face Amount (one year if your Policy is issued in Colorado
or North Dakota), then our liability as to that increase will be
the cost of insurance for that increase and that portion of the
Account Value attributable to that increase. The Total Face
Amount of the Policy will be reduced to the Total Face Amount
that was in effect prior to the increase.
Incontestability. All statements made in the application or in a
supplemental application are representations and not warranties.
We relied and will rely on those statements when approving the
issuance, increase in face amount, increase in death benefit over
premium paid, or change in death benefit option of the Policy. In
the absence of fraud, no statement can be used by us in defense
of a claim or to cancel the Policy for misrepresentation unless
the statement was made in the application or in a supplemental
application. In the absence of fraud, after the Policy has been
in force during the lifetime of the Insured for a period of two
years from its Issue Date, we cannot contest it except for
non-payment of premiums. However, any increase in the Total Face
Amount which is effective after the Issue Date will be
incontestable only after such increase has been in force during
the lifetime of the Insured for two years from the effective date
of coverage of such increase.
Report to Owner. We will maintain all records relating to the
Series Account and the Divisions. We will send you a report at
least once each Policy Year within 30 days after a Policy
Anniversary. The report will show current Account Value, current
allocation in each Division, death benefit, premiums paid,
investment experience since your last report, deductions made
since the last report, and any further information that may be
required by laws of the state in which your Policy was issued. It
will also show the balance of any outstanding Policy loans and
accrued interest on such loans. There is no charge for this
report.
In addition, we will send you the financial statements of the
Funds 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 Policy transactions
quarterly or more frequently within the time periods specified by
law. Please give us prompt written notice of any address change.
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Please read your statements and confirmations carefully and
verify their accuracy and contact us promptly with any question.
Illustrations. Upon request, we will provide you with an
illustration of how Cash Surrender Value, Account Value and death
benefits change with the investment experience of your Policy.
This illustration will be furnished to you for a nominal fee not
to exceed $50.
Notice and Elections. To be effective, all notices and elections
under the Policy must be in writing, signed by you, and received
by us at our Principal Office. Certain exceptions may apply.
Unless otherwise provided in the Policy, all notices, requests
and elections will be effective when received at our Principal
Office complete with all necessary information.
Performance Information and Illustrations
We may pre- We may sometimes publish performance information related to
sent mutual the Fund, the Series Account or the Policy in advertising, sales
fund port- literature and other promotional materials. This information is
folio per- based on past investment results and is not an indication of
formance in future performance.
sales
literature. Fund Performance. We may publish a mutual fund portfolio's total
return or average annual total return. Total return is the change
in value of an investment over a given period, assuming
reinvestment of any dividends and capital gains. Average annual
total return is a hypothetical rate of return that, if achieved
annually, would have produced the same total return over a stated
period if performance had been constant over the entire period.
Average annual total returns smooth variations in performance,
and are not the same as actual year-by-year results.
We may also publish a mutual fund portfolio's yield. Yield
refers to the income generated by an investment in a portfolio
over a given period of time, expressed as an annual percentage
rate. When a yield assumes that income earned is reinvested, it
is called an effective yield. Seven-day yield illustrates the
income earned by an investment in a money market fund over a
recent seven-day period.
Total returns and yields quoted for a mutual fund portfolio
include the investment management fees and other expenses of the
portfolio, but do not include charges and deductions attributable
to your Policy. These expenses would reduce the performance
quoted.
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Adjusted Fund Performance. We may publish a mutual fund
portfolio's total return and yields adjusted for charges against
the assets of the Series Account.
We may publish total return and yield quotations based on
the period of time that a mutual fund portfolio has been in
existence. The results for any period prior to any Policy being
offered will be calculated as if the Policy had been offered
during that period of time, with all charges assumed to be those
applicable to the Policy.
Other Information. Performance information may be compared, in
reports and promotional literature, to:
o the S&P 500, Dow Jones Industrial Average, Lehman Brothers
Aggregate Bond Index or other unmanaged indices so that
investors may compare the Division results with those of a
group of unmanaged securities widely regarded by investors
as representative of the securities markets in general;
o other groups of variable life variable accounts or other
investment products tracked by Lipper Analytical Services, a
widely used independent research firm which ranks mutual
funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other
services, companies, publications, or persons, such as
Morningstar, Inc., who rank such investment products on
overall performance or other criteria; or
o the Consumer Price Index (a measure for inflation) to assess
the real rate of return from an investment in the Division.
Unmanaged indices may assume the reinvestment of dividends
but generally do not reflect deductions for administrative
and management expenses.
We may provide policy information on various topics of
interest to you and other prospective policyowners. These topics
may include:
o the relationship between sectors of the economy and the
economy as a whole and its effect on various securities
markets;
o investment strategies and techniques (such as value
investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer and account
rebalancing);
o the advantages and disadvantages of investing in
tax-deferred and taxable investments;
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<PAGE>
o customer profiles and hypothetical purchase and investment
scenarios;
o financial management and tax and retirement planning; and
o investment alternatives to certificates of deposit and other
financial instruments, including comparisons between a
Policy and the characteristics of, and market for, such
financial instruments.
Policy Illustrations. Upon request we will provide you with an
illustration of Cash Surrender Value, Account Value and death
benefits. The first illustration you Request during a Policy Year
will be provided to you free of charge. Thereafter, each
additional illustration Requested during the same Policy Year
will be provided to you for a nominal fee not to exceed $50.
Federal Income Tax Considerations
The following summary provides a general description of the
federal income tax considerations associated with the Policy and
does not purport to be complete or to cover all situations. This
discussion is not intended as tax advice. You should consult
We do not counsel or other competent tax advisers for more complete
make any information. This discussion is based upon our understanding of
guarantees the current federal income tax laws as they are currently
about the interpreted by the Internal Revenue Service (the "IRS"). We make
Policy's no representation as to the likelihood of continuation of the
tax status. current federal income tax laws or of the current interpretations
by the IRS. We do not make any guarantee regarding the tax status
of any policy or any transaction regarding the Policy.
The Policy may be used in various arrangements, including
non-qualified deferred compensation or salary continuance plans,
split dollar insurance plans, executive bonus plans, retiree
medical benefit plans and others. The tax consequences of such
plans may vary depending on the particular facts and
circumstances of each individual arrangement. Therefore, if the
use of the Policy in any such arrangement is contemplated, you
should consult a qualified tax adviser for advice on the tax
attributes and consequences of the particular arrangement.
Tax Status of the Policy
We believe A Policy has certain tax advantages when treated as a life
the Policy insurance contract within the meaning of Section 7702 of the
will be Internal Revenue Code of 1986, as amended (the "Code"). We
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<PAGE>
treated as believe that the Policy meets the Section 7702 definition of a
a life in- life insurance contract and will take whatever steps are
surance appropriate and reasonable to attempt to cause the Policy to
contract comply with Section 7702. We reserve the right to amend the
under federal Policies to comply with any future changes in the Code, any
tax laws. regulations or rulings under the Code and any other requirements
imposed by the IRS.
Diversification of Investments
Section 817(h) of the Code requires that the investments of
each Division of the Series Account be "adequately diversified"
in accordance with certain Treasury regulations. We believe that
the Divisions will be adequately diversified.
Policy Owner Control
In certain circumstances, the owner of a variable life
insurance policy may be considered, for federal income tax
purposes, the owner of the assets of the variable account used to
support the policy. In those circumstances, income and gains from
the variable account assets would be includible in the
policyowner's gross income. We do not know what standards will be
established, if any, in the regulations or rulings which the
Treasury has stated it expects to issue on this question. We
therefore reserve the right to modify the Policy as necessary to
attempt to prevent a policyowner from being considered the owner
of a pro-rata share of the assets of the Series Account.
The following discussion assumes that your Policy will
qualify as a life insurance contract for federal income tax
purposes.
Tax Treatment of Policy Benefits
Death bene- Life Insurance Death Benefit Proceeds. In general, the amount of
fits general- the death benefit payable under your Policy is excludible from
ly are not your gross income under the Code.
subject to
federal in- If the death benefit is not received in a lump sum and is,
come tax. instead, applied under a proceeds option agreed to by us and the
beneficiary, 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.
Investment Tax Deferred Accumulation. Any increase in your Account Value is
gains are generally not taxable to you unless you receive or are deemed to
normally not receive amounts from the Policy before the Insured dies.
taxed unless
distributed
to you be-
fore the
Insured dies. 49
<PAGE>
Distributions. If you surrender your Policy, the amount you will
receive as a result will be subject to tax as ordinary income to
the extent that amount exceeds the "investment in the contract,"
which is generally the total of premiums and other consideration
paid for the Policy, less all amounts previously received under
the Policy to the extent those amounts were excludible from gross
income.
Depending on the circumstances, any of the following
transactions may have federal income tax consequences:
o the exchange of a Policy for a life insurance, endowment or
annuity contract;
o a change in the death benefit option;
o a policy loan;
o a partial surrender;
o a surrender;
o a change in the ownership of a Policy;
o a change of the named Insured; or
o an assignment of a Policy.
In addition, federal, state and local transfer and other tax
consequences of ownership or receipt of Policy Proceeds will
depend on your circumstances and those of the named beneficiary.
Whether partial withdrawals (or other amounts deemed to be
distributed) constitute income subject to federal income tax
depends, in part, upon whether your Policy is considered a
"modified endowment contract."
If you pay Modified Endowment Contracts. Section 7702A of the Code treats
more pre- certain life insurance contracts as "modified endowment
miums than contracts" ("MECs"). In general, a Policy will be treated as a
permitted MEC if total premiums paid at any time during the first seven
under the Policy Years exceed the sum of the net level premiums which would
seven-pay have been paid on or before that time if the Policy provided for
test, your paid-up future benefits after the payment of seven level annual
Policy will premiums ("seven-pay test"). In addition, a Policy may be treated
be a MEC. as a MEC if there is a "material change" of the Policy.
We will monitor your premium payments and other Policy
transactions and notify you if a payment or other transaction
might cause your Policy to become a MEC. We will not invest any
premium or portion of a premium that would cause your Policy to
become a MEC. We will promptly refund that money to you and, if
you elect to have a MEC contract, you can return the money to us
with a signed form of acceptance.
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Further, if a transaction occurs which decreases the Total
Face Amount of your Policy during the first seven years, we will
retest your Policy, as of the date of its purchase, based on the
lower Total Face Amount to determine compliance with the
seven-pay test. Also, if a decrease in Total Face Amount occurs
within seven years of a "material change," we will retest your
Policy for compliance as of the date of the "material change."
Failure to comply in either case would result in the Policy's
classification as a MEC regardless of our efforts to provide a
payment schedule that would not otherwise violate the seven-pay
test.
The rules relating to whether a Policy will be treated as a
MEC are complex and cannot be fully described in the limited
confines of this summary. Therefore, you should consult with a
competent tax adviser to determine whether a particular
transaction will cause your Policy to be treated as a MEC.
Distributions Under Modified Endowment Contracts. If treated as a
MEC, your Policy will be subject to the following tax rules:
o First, partial withdrawals are treated as ordinary income
If your Policy subject to tax up to the amount equal to the excess (if any)
becomes a MEC, of your Account Value immediately before the distribution
Policy loans over the "investment in the contract" at the time of the
and surrenders distribution.
may incur
taxes and tax o Second, policy loans and loans secured by a Policy are
penalties. treated as partial withdrawals and taxed accordingly. Any
past-due loan interest that is added to the amount of the
loan is treated as a loan.
o Third, a 10 percent additional penalty tax is imposed on
that portion of any distribution (including distributions
upon surrender), policy loan, or loan secured by a Policy,
that is included in income, except where the distribution or
loan is:
o made when you are age 59 1/2 or older;
o attributable to your becoming disabled; or
o is part of a series of substantially equal periodic
payments for the duration of your life (or life
expectancy) or for the duration of the longer of your
or the beneficiary's life (or life expectancies).
If your Distributions Under a Policy That Is Not a MEC. If your Policy is
Policy is not a MEC, a distribution is generally treated first as a
not a MEC, tax-free recovery of the "investment in the contract," and then
partial with- as a distribution of taxable income to the extent the
drawals or distribution exceeds the "investment in the contract." An
surrenders exception is made for cash distributions that occur in the first
are taxed 15 Policy Years as a result of a decrease in the death benefit or
only if they other change which reduces benefits under the Policy which are
exceed your made for purposes of maintaining compliance with Section 7702.
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<PAGE>
investment Such distributions are taxed in whole or part as ordinary income
in your Policy (to the extent of any gain in the Policy) under rules prescribed
and Policy in Section 7702.
loans are
generally If your Policy is not a MEC, policy loans and loans secured
not taxed. by the Policy are generally not treated as distributions. Such
loans are instead generally treated as your indebtedness.
Finally, if your Policy is not a MEC, distributions
(including distributions upon surrender), policy loans and loans
secured by the Policy are not subject to the 10 percent
additional tax.
Multiple Policies. All modified endowment contracts issued by us
(or our affiliates) to you during any calendar year will be
treated as a single MEC for purposes of determining the amount of
a policy distribution which is taxable to you.
Treatment When Insured Reaches Attained Age 100. As described
above, when the Insured reaches Attained Age 100, we will issue
you a "paid-up" life insurance policy. We believe that the
paid-up life insurance policy will continue to qualify as a "life
insurance contract" under the Code. However, there is some
uncertainty regarding this treatment. It is possible, therefore,
that you would be viewed as constructively receiving the Cash
Surrender Value in the year in which the Insured attains age 100
and would realize taxable income at that time, even if the Policy
Proceeds were not distributed at that time. In addition, any
outstanding Policy Debt will be repaid at that time. This
repayment may be treated as a taxable distribution to you, if
your contract is not a MEC.
Federal Income Tax Withholding. We are not required to and,
hence, will not withhold the amount of any tax due on that
portion of a policy distribution which is taxable. However, as a
service to you, we will withhold and remit to the federal
government such amounts if you direct us to do so in writing at
or before the time of the policy distribution. As the policyowner
you are responsible for the payment of any taxes and early
distribution penalties that may be due on policy distributions.
Actions to Ensure Compliance with the Tax Law. We believe that
the maximum amount of premiums we intend to permit for the
Policies will comply with the Code definition of a "life
insurance contract." We will monitor the amount of your premiums,
and, if you pay a premium during a Policy Year that exceeds those
permitted by the Code, we will promptly refund the premium or a
portion of the premium before any allocation to the Funds. We
reserve the right to increase the death benefit (which may result
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<PAGE>
in larger charges under a Policy) or to take any other action
deemed necessary to ensure the compliance of the Policy with the
federal tax definition of a life insurance contract.
Trade or Business Entity Owns or Is Directly or Indirectly a
Beneficiary of the Policy
Where a Policy is owned by other than a natural person, the
owner's ability to deduct interest on business borrowing
unrelated to the Policy can be impacted as a result of its
ownership of cash value life insurance. No deduction will be
allowed for a portion of a taxpayer's otherwise deductible
interest expense unless the policy covers only one individual,
and such individual is, at the time first covered by the policy,
a 20 percent owner of the trade or business entity that owns the
policy, or an officer, director, or employee of such trade or
business. Although this limitation generally does not apply to
policies held by natural persons, if a trade or business (other
than one carried on as a sole proprietorship) is directly or
indirectly the beneficiary under a policy (e.g., pursuant to a
split-dollar agreement), the policy shall be treated as held by
such trade or business. The effect will be that a portion of the
trade or business entity's deduction for its interest expenses
will be disallowed unless the above exception for a 20 percent
owner, employee, officer or director applies.
The portion of the entity's interest deduction that is
disallowed will generally be a pro rata amount which bears the
same ratio to such interest expense as the taxpayer's average
unborrowed cash value bears to the sum of the taxpayer's average
unborrowed cash value and average adjusted bases of all other
assets. Any corporate or business use of the life insurance
should be carefully reviewed by your tax adviser with attention
to these rules as well as any other rules and possible tax law
changes that could occur with respect to business-owned life
insurance.
Other Employee Benefit Programs
Complex rules may apply when a Policy is held by an employer
or a trust, or acquired by an employee, in connection with the
provision of employee benefits. These Policy owners also must
consider whether the Policy was applied for by or issued to a
person having an insurable interest under applicable state law,
as the lack of insurable interest may, among other things, affect
the qualification of the Policy as life insurance for federal
income tax purposes and the right of the beneficiary to death
benefits. Employers and employer-created trusts may be subject to
reporting, disclosure and fiduciary obligations under the
Employee Retirement Income Security Act of 1974, as amended. You
should consult your legal adviser.
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Policy Loan Interest
Generally, no tax deduction is allowed for interest paid or
accrued on any indebtedness under a Policy.
Our Taxes
We are taxed as a life insurance company under Part I of
Subchapter L of the Code. The operations of the Series Account
are taxed as part of our operations. Investment income and
realized capital gains are not taxed to the extent that they are
applied under the Policies. As a result of the Omnibus Budget
Reconciliation Act of 1990, we are currently making, and are
generally required to capitalize and amortize certain policy
acquisition expenses over a 10- year period rather than currently
deducting such expenses. This so-called "deferred acquisition
cost" tax ("DAC tax") applies to the deferred acquisition
expenses of a Policy and results in a significantly higher
corporate income tax liability for Great-West. We reserve the
right to adjust the amount of a charge to premium to compensate
us for these anticipated higher corporate income taxes.
A portion of the Expense Charges Applied to Premium is used
to offset the federal, state or local taxes that we incur which
are attributable to the Series Account or the Policy. We reserve
the right to adjust the amount of this charge.
Distribution of the Policy
The Policy will be sold by licensed insurance agents in
those states where the Policy may be lawfully sold. Such agents
will be registered representatives of broker-dealers registered
under the Securities Exchange Act of 1934 who are members of the
National Association of Securities Dealers, Inc. and who have
entered into selling agreements with our general distributor,
BenefitsCorp Equities, Inc. ("BCE"). BCE, whose principal
business address is 8515 East Orchard Road, Englewood, Colorado
80111, is an indirect, wholly-owned subsidiary of Great-West and
is registered with the Securities and Exchange Commission under
the Securities Exchange Act of 1934 as broker-dealer and is a
member of the National Association of Securities Dealers, Inc.
BCE also acts as the general distributor of certain annuity
contracts issued by us. The maximum sales commissions payable to
our agents, independent registered insurance agents and other
registered broker-dealers is 40% of the first year target
premium. In addition, asset-based trail commissions may be paid.
A sales representative may be required to return all the
commissions paid if a Policy terminates prior to the second
Policy Anniversary.
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The directors and executive officers of BCE are: Charles P.
Nelson, Chairman of the Board and President, Robert K. Shaw,
Director, John A. Brown, Director, Dennis Low, Director, G.E.
Seller, Director and Vice President, Major Accounts, Douglas L.
Wooden, Director, J. Baker, Vice President, Licensing and
Contracts, Glen Ray Derback, Treasurer, Beverly A. Byrne,
Secretary and T. L. Buckley, Compliance Officer. The principal
business address of each director and executive officer, except
G.E. Seller, is 8515 East Orchard Road, Englewood, Colorado
80111. G.E. Seller's principal business address is 18101 Von
Karman Avenue, Suite 1460, Irvine, California 92612.
Voting Rights
We are the legal owner of all shares of the Funds held in
the Divisions of the Series Account, and as such have the right
to vote upon matters that are required by the 1940 Act to be
approved or ratified by the shareholders of the Funds and to vote
upon any other matters that may be voted upon at a shareholders'
meeting. We will, however, vote shares held in the Divisions in
accordance with instructions received from policyowners who have
an interest in the respective Divisions.
We will vote shares held in each Division for which no
timely instructions from policyowners are received, together with
shares not attributable to a Policy, in the same proportion as
those shares in that Division for which instructions are
received.
The number of shares in each Division for which instructions
may be given by a policyowner is determined by dividing the
portion of the Account Value derived from participation in that
Division, if any, by the value of one share of the corresponding
Fund. We will determine the number as of the record date chosen
by the Fund. Fractional votes are counted. Voting instructions
will be solicited in writing at least 14 days prior to the
shareholders' meeting.
We may, if required by state insurance regulators, disregard
voting instructions if those instructions would require shares to
be voted so as to cause a change in the sub-classification or
investment policies of one or more of the Funds, or to approve or
disapprove an investment management contract. In addition, we may
disregard voting instructions that would require changes in the
investment policies or investment adviser, provided that we
reasonably disapprove of those changes in accordance with
applicable federal regulations. If we disregard voting
instructions, we will advise you of that action and our reasons
for it in our next communication to policyowners.
55
This description reflects our current view of applicable
law. Should the applicable federal securities laws change so as
to permit us to vote shares held in the Series Account in our own
right, we may elect to do so.
Our Directors and Executive Officers
Our directors and executive officers are listed below,
together with information as to their ages, dates of election and
principal business occupations during the last five years (if
other than their present business occupations). The asterisks
below denote the year that the indicated director was elected to
our board of directors.
<TABLE>
<CAPTION>
<S> <C>
Name, Age and Position with Great-West Principal Occupation(s)
- -------------------------------------- -----------------------
Directors
James Balog (70) (1993*) Company Director since 1993
James W. Burns, O.C. (69) (1991*) Chairman of the Boards of Great-West Lifeco,
Great-West Life, London Insurance Group Inc.
and London Life Insurance Company; Deputy
Chairman, Power Corporation since 1991
Orest T. Dackow (62) (1991*) President and Chief Executive Officer, Great-
West Lifeco since 1991
Andre Desmarais (42) (1997*) President and Co-Chief Executive Officer,
Power Corporation; Deputy Chairman, Power
Financial since 1997
Paul Desmarais, Jr. (44) (1991*) Chairman and Co-Chief Executive Officer,
Power Corp; Chairman, Power Financial since
1991
Robert G. Graham (67) (1991*) Company Director since January 1996;
previously Chairman and Chief Executive
Officer, Inter-City Products Corporation since
1991
Robert Gratton (55) (1991*) Chairman of the Board of the Company;
President and Chief Financial Officer, Power
Financial since 1991
N. Berne Hart (69) (1991*) Company Director since 1991
Kevin P. Kavanagh (66) (1986*) Company Director since 1996
56
<PAGE>
Name, Age and Position with Great-West Principal Occupation(s)
- -------------------------------------- -----------------------
William Mackness (60) (1991*) Company Director since July 1995; previously
Dean, Faculty of Management, University of
Manitoba since 1991
William T. McCallum (56) (1990*) President and Chief Executive Officer of the
Company; President and Chief Executive
Officer, United States Operations, Great-West
since 1990
Jerry Edgar Alan Nickerson (62) (1994*) Chairman of the Board, H.B. Nickerson & Sons
Limited since 1994
The Honourable P. Michael Pittfield, P.C., Vice-Chairman, Power Corporation; Member of
Q.C. (61) (1991*) the Senate of Canada since 1991
Michel Plessis-Belair, F.C.A. (56) (1991*) Vice-Chairman and Chief Financial Officer,
Power Corporation; Executive Vice-President
and Chief Financial Officer, Power Financial
since 1991
Brian E. Walsh (45) (1995*) Co-Founder and Managing Partner, Veritas
Capital Management, LLC since September
1997; previously Partner, Trinity L.P. from
January 1996; previously Managing Director and
Co-Head, Global Investment Bank, Bankers
Trust Company since 1995
Executive Officers
John A. Brown (51) Senior Vice President, Sales, Financial Services
of the Company and Great-West Life since 1992
Donna A. Goldin (51) Executive Vice President and Chief Operating
Officer, One Corporation since June 1996;
previously Executive Vice President and Chief
Operating Officer, Harris Methodist Health
Plan since March 1995; previously Executive
Vice President and Chief Operating Officers,
Private Healthcare Systems, Inc. since 1996
57
<PAGE>
Name, Age and Position with Great-West Principal Occupation(s)
- -------------------------------------- -----------------------
Mitchell T. G. Graye (43) Senior Vice President, Chief Financial Officer of
the Company; Senior Vice President, Chief
Financial Officer, United States, Great-West Life
since 1997
John T. Hughes (62) Senior Vice President, Chief Investment Officer
of the Company; Senior Vice President, Chief
Investment Officer; United States, Great-West
Life since 1989
D. Craig Lennox (51) Senior Vice President, General Counsel and
Secretary of the Company; Senior Vice
President and Chief U.S. Legal Officer,
Great-West Life since 1984
William T. McCallum (56) President and Chief Executive Officer of the
Company; President and Chief Executive
Officer, United States Operations, Great-West
Life since 1984
Steve H. Miller (46) Senior Vice President, Employee Benefits Sales
of the Company and Great-West Life since 1997
James D. Motz (49) Executive Vice President, Employee Benefits of
the Company and Great-West Life since 1992
Charles P. Nelson (37) Senior Vice President, Public Non-Profit
Markets of the Company and Great-West life
since 1998
Martin Rosenbaum (46) Senior Vice President, Employee Benefits
Operations of the Company and Great-West
Life since 1997
Robert K. Shaw (43) Senior Vice President, Individual Markets of the
Company and Great-West Life since 1998
Douglas L. Wooden (42) Executive Vice President, Financial Services of
the Company and Great-West Life since 1991
</TABLE>
58
Other Information
State Regulation
We are subject to the laws of Colorado governing life
insurance companies and to regulation by Colorado's Commissioner
of Insurance, whose agents periodically conduct an examination of
our financial condition and business operations. We are also
subject to the insurance laws and regulations of the all
jurisdictions in which we are authorized to do business.
We are required to file an annual statement with the
insurance regulatory authority of those jurisdictions where we
are authorized to do business relating to our business operations
and financial condition as of December 31st of the preceding
year.
Legal Proceedings
There are no pending legal proceedings which would have an
adverse material effect on the Series Account. Great-West is
engaged in various kinds of routine litigation which, in our
judgment, is not material to its total assets or material with
respect to the Series Account.
Legal Matters
All matters of Colorado law pertaining to the Policy,
including the validity of the Policy and our right to issue the
Policy under Colorado law, have been passed upon by Beverly A.
Byrne, Assistant Vice President, Associate Counsel and Assistant
Secretary of Great-West. The law firm of Jorden Burt Boros
Cicchetti Berenson & Johnson LLP, 1025 Thomas Jefferson St.,
Suite 400, East Lobby, Washington, D.C. 20007-5201, serves as
special counsel to Great-West with regard to the federal
securities laws.
Experts
The consolidated financial statements for Great-West Life &
Annuity Insurance Company as of December 31, 1998 and 1997 and
for each of the three years in the period ended December 31, 1998
have been audited by Deloitte & Touch LLP, 555 17th Street, Suite
3600, Denver, Colorado 80202, independent auditors, as stated in
their report. We have included those financial statements in
reliance upon the reports of Deloitte & Touche LLP, given upon
their authority as experts in accounting and auditing.
59
<PAGE>
Actuarial matters included in this Prospectus and the
registration statement of which it is a part, including the
hypothetical Policy illustrations, have been examined by Ron
Laeyendecker, F.S.A., M.A.A.A., Actuary of the Company, and are
included in reliance upon his opinion as to their reasonableness.
Registration Statements
This Prospectus is part of a registration statement that has
been filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, with respect to the Policy.
It does not contain all of 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 for further information concerning the Series Account,
Great-West, the mutual fund investment options, and the Policy.
The descriptions in this Prospectus of the Policies and other
legal instruments are summaries. You should refer to those
instruments as filed for their precise terms.
Year 2000 Compliance
The year 2000 ("Y2K") problem arises when a computer
performing date-based computations or operations produces
erroneous results due to the historical practice of using two
digit years within computer hardware and software. This causes
errors or misinterpretations of the century in date calculations.
Virtually all businesses, including Great-West, are required to
determine the extent of their Y2K problems. Systems that have a
Y2K problem must then be converted or replaced by systems that
will operate correctly with respect to the year 2000 and beyond.
Great-West has a written plan that encompasses all computer
hardware, software, networks, facilities (embedded systems) and
telephone systems. The plan also includes provisions for
identifying and verifying that major vendors and business
partners are Y2K compliant. Great-West is developing contingency
plans to address the possibility of both internal and external
failures as well. The plan calls for full Y2K compliance for core
systems by June 30, 1999 and full Y2K compliance for all
Great-West systems by October 31, 1999.
Great-West's plan establishes five phases for becoming Y2K
compliant. Phase 1 is "impact analysis" which includes initial
inventory and preliminary assessment of Y2K impact. Phase 2 is
"solution planning" which includes system by system planning to
outline the approach and timing for reaching compliance. Phase 3
60
<PAGE>
is "conversion/renovation" which means the actual process of
replacing or repairing non-compliant systems. Phase 4 is
"testing" to ensure that the systems function correctly under a
variety of different date scenarios including current dates, year
2000 and leap year dates. Phase 5 is "implementation" which means
putting Y2K compliant systems back into production.
As of March 31, 1999, Great-West had completed impact
analysis (phase 1) and solution planning (phase 2) for all of its
core systems and was more than 99% complete for phase 1 and 2
with respect to its systems as a whole. In addition, Great-West
was approximately 95% complete with respect to conversion and
renovation (phase 3), 88% complete with respect to testing (phase
4) and 86% complete with respect to implementation (phase 5).
In addition to ensuring that Great-West's own systems are
Y2K compliant, Great-West has identified third parties with which
Great-West has significant business relationships in order to
assess the potential impact on Great-West of the third parties'
Y2K issues and plans. As of March 31, 1999, Great-West had
completed most of this assessment process. Great-West will
continue investigating third party readiness and will conduct
system testing with selected third parties throughout 1999.
Great-West does not have control over these third parties and
cannot make any representations as to what extent Great-West's
future operating results may be adversely affected by the failure
of any third party to address successfully its own Y2K issues.
On the basis of currently available information, the expense
incurred by Great-West, including anticipated future expenses,
related to the Y2K issue has not and is not expected to be
material to Great-West's financial condition or results of
operations. Great-West has spent approximately $11.3 million on
its Y2K project through the end of March 1999 and expects to
spend up to approximately $15.3 million on its Y2K project. All
of these funds will come from Great-West's cash flow from
operations. Great-West has continued other scheduled non-Y2K
information systems changes and upgrades. Although work on Y2K
issues may have resulted in minor delays on the other projects,
the delays are not expected to have a material adverse effect on
Great-West's consolidated financial condition or results of
operations.
The most reasonably likely worst case Y2K scenario is that
Great-West will experience isolated internal or third party
computer failures and will be temporarily unable to process
insurance and annuity benefit transactions. All of Great-West's
Y2K efforts have been designed to prevent such an occurrence.
However, if Great-West identifies internal or third party Y2K
issues which cannot be timely corrected, there can be no
61
<PAGE>
assurance that Great-West can avoid Y2K problems or that the cost
of curing the problem will not be material.
In an effort to mitigate risks associated with Y2K failures,
Great-West is in the process of developing contingency plans to
address its core functions, including relations with third
parties. It is Great-West's expectation that contingency plans
will address possible failures generated internally, by vendors
or business partners, and by customers. Possible general
approaches include manual processing, payments on an estimated
basis and use of disaster recovery facilities.
Financial Statements
Great-West's consolidated financial statements, which are
included in this prospectus, should be considered only as bearing
on our ability to meet our obligations with respect to the death
benefit and our assumption of the mortality and expense risks.
They should not be considered as bearing on the investment
performance of the Fund shares held in the Series Account.
There are no financial statements for the Series Account
because it had not commenced operations as of the date of this
Prospectus, has no assets or liabilities, and has received no
income or incurred any expense.
62
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY (An indirect
wholly-owned subsidiary of The Great-West Life Assurance Company)
Consolidated Financial Statements for the Years Ended December 31,
1998, 1997, and 1996 and Independent Auditors' Report
63
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
of Great-West Life & Annuity Insurance Company:
We have audited the accompanying consolidated balance sheets of Great-West Life
& Annuity Insurance Company (an indirect wholly-owned subsidiary of The
Great-West Life Assurance Company) and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, stockholder's 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Great-West Life & Annuity Insurance
Company and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
January 25, 1999
64
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(Dollars in Thousands)
<TABLE>
<S> <C> <C>
1998 1997
-------------------- ------------------
ASSETS
INVESTMENTS:
Fixed Maturities:
Held-to-maturity, at amortized cost (fair value
$2,298,936 and $2,151,476) $ 2,199,818 $ 2,082,716
Available-for-sale, at fair value (amortized
cost
$6,752,532 and $6,541,422) 6,936,726 6,698,629
Common stock, at fair value (cost $41,932 and 48,640 39,021
$34,414)
Mortgage loans on real estate, net 1,133,468 1,235,594
Real estate, net 73,042 93,775
Policy loans 2,858,673 2,657,116
Short-term investments, available-for-sale (cost
approximates fair value) 420,169 399,131
-------------------- ------------------
Total Investments 13,670,536 13,205,982
Cash 176,119 126,278
Reinsurance receivable
Related party 5,006 1,950
Other 187,952 82,414
Deferred policy acquisition costs 238,901 255,442
Investment income due and accrued 157,587 165,827
Other assets 311,078 121,543
Premiums in course of collection 84,940 77,008
Deferred income taxes 191,483 193,820
Separate account assets 10,099,543 7,847,451
-------------------- ------------------
TOTAL ASSETS $ 25,123,145 $ 22,077,715
==================== ==================
</TABLE>
See notes to consolidated financial statements.
65
<PAGE>
1998 1997
------------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves
Related party 555,300 17,774
Other 11,284,414 11,084,945
Policy and contract claims 491,932 375,499
Policyholders' funds 181,779 165,106
Provision for policyholders' dividends 69,530 62,937
GENERAL LIABILITIES:
Due to Parent Corporation 52,877 126,656
Repurchase agreements 244,258 325,538
Commercial paper 39,731 54,058
Other liabilities 761,505 689,967
Undistributed earnings on participating business 143,717 141,865
Separate account liabilities 10,099,543 7,847,451
------------- ------------
Total Liabilities 23,924,586 20,891,796
------------- ------------
COMMITMENTS AND CONTINGENCIES
<TABLE>
<S> <C> <C>
1998 1997
STOCKHOLDER'S EQUITY: ------------- ------------
Preferred stock, $1 par value, 50,000,000 shares authorized
Series A, cumulative, 1,500 shares authorized,
liquidation value of $100,000 per share,
0 and 600 shares issued and outstanding 60,000
Series B, cumulative, 1,500 shares authorized,
liquidation value of $100,000 per share,
0 and 200 shares issued and outstanding 20,000
Series C, cumulative, 1,500 shares authorized,
none outstanding
Series D, cumulative, 1,500 shares authorized,
none outstanding
Series E, non-cumulative, 2,000,000 shares
authorized, liquidation value of $20.90 per share,
0 and 2,000,000 shares issued and outstanding 41,800
Common stock, $1 par value; 50,000,000 shares
authorized; 7,032,000 shares issued and outstanding 7,032 7,032
Additional paid-in capital 699,556 690,748
Accumulated other comprehensive income 61,560 52,807
Retained earnings 430,411 313,532
------------- --------------
Total Stockholder's Equity 1,198,559 1,185,919
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY 25,123,145 $ 22,077,715
============= ==============
</TABLE>
66
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
------------- ------------- -------------
REVENUES:
Premiums
Related party (net of premiums
recaptured totaling $0,
$155,798, and $164,839) $ 46,191 $ 155,798 $ 164,839
Other (net of premiums ceded
totaling $86,409, $61,152, and $60,589) 948,672 677,381 664,610
Fee income 516,052 420,730 347,519
Net investment income
Related party (9,416) (8,957) (26,082)
Other 906,776 890,630 860,719
Net realized gains (losses) on investments 38,173 9,800 (21,078)
------------- ------------- -------------
2,446,448 2,145,382 1,990,527
------------- ------------- -------------
BENEFITS AND EXPENSES:
Life and other policy benefits (net of
reinsurance recoveries totaling $81,205,
$44,871 and $52,675) 768,474 543,903 515,750
Increase in reserves
Related party 46,191 155,798 164,839
Other 78,851 90,013 64,359
Interest paid or credited to contractholders 491,616 527,784 561,786
Provision for policyholders' share of earnings
(losses) on participating business 5,908 3,753 (7)
Dividends to policyholders 71,429 63,799 49,237
------------- ------------- -------------
1,462,469 1,385,050 1,355,964
Commissions 144,246 102,150 106,561
Operating expenses (income):
Related party (4,542) (6,292) 304,599
Other 517,676 431,714 33,435
Premium taxes 30,848 24,153 25,021
------------- ------------- -------------
2,150,697 1,936,775 1,825,580
INCOME BEFORE INCOME TAXES 295,751 208,607 164,947
------------- ------------- -------------
PROVISION FOR INCOME TAXES:
Current 81,770 61,644 45,934
Deferred 17,066 (11,797) (15,562)
------------- ------------- -------------
98,836 49,847 30,372
------------- ------------- -------------
NET INCOME $ 196,915 $ 158,760 $ 134,575
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
67
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Additional Other
Preferred Stock Common Stock Paid-in Comprehensive Retained
-------------------------- -----------------------
Shares Amount Shares Amount Capital Income Earnings Total
------------ ----------- ----------- --------- ------------- ------------- ---------- ------------
BALANCE, JANUARY 1, 1996 2,000,800 121,800 7,032,000 7,032 657,265 58,763 148,261 993,121
Net income 134,575 134,575
Other comprehensive loss (43,812) (43,812)
------------
Total comprehensive income 90,763
------------
Capital contributions 7,000 7,000
Dividends (56,670) (56,670)
------------ ----------- ----------- --------- -------------------------------------- ------------
BALANCE, DECEMBER 31, 1996 2,000,800 121,800 7,032,000 7,032 664,265 14,951 226,166 1,034,214
Net income 158,760 158,760
Other comprehensive income 37,856 37,856
------------
Total comprehensive income 196,616
------------
Capital contributions 26,483 26,483
Dividends (71,394) (71,394)
------------ ----------- ----------- --------- ------------- ------------- ---------- ------------
BALANCE, DECEMBER 31, 1997 2,000,800 121,800 7,032,000 7,032 690,748 52,807 313,532 1,185,919
Net income 196,915 196,915
Other comprehensive income 8,753 8,753
------------
Total comprehensive income 205,668
------------
Capital contributions 8,808 8,808
Dividends (80,036) (80,036)
Purchase of preferred shares (2,000,800) (121,800) (121,800)
------------ ----------- ----------- --------- ------------ -------------- ---------- ------------
BALANCE, DECEMBER 31, 1998 0 0 7,032,000 7,032 699,556 61,560 430,411 1,198,559
============ =========== =========== ========= =========== =============== ========== ============
</TABLE>
See notes to consolidated financial statements.
68
<PAGE>
87
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
------------- ------------- ------------
OPERATING ACTIVITIES:
Net income $ 196,915 $ 158,760 $ 134,575
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain (loss) allocated to participating
policyholders 5,908 3,753 (7)
Amortization of investments (15,068) 409 15,518
Realized losses (gains) on disposal of
investments and provisions for mortgage
loans and real estate (38,173) (9,800) 21,078
Amortization 55,550 46,929 49,454
Deferred income taxes 17,066 (11,824) (14,658)
Changes in assets and liabilities:
Policy benefit liabilities 938,444 498,114 358,393
Reinsurance receivable (43,643) 112,594 136,966
Accrued interest and other receivables 28,467 30,299 24,778
Other, net (184,536) 64,465 (13,676)
------------- ------------- ------------
Net cash provided by operating activities 960,930 893,699 712,421
------------- ------------- ------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to maturity
Sales 9,920
Maturities and redemptions 471,432 359,021 516,838
Available-for-sale
Sales 6,169,678 3,174,246 3,569,608
Maturities and redemptions 1,268,323 771,737 803,369
Mortgage loans 211,026 248,170 235,907
Real estate 16,456 36,624 2,607
Common stock 3,814 17,211 1,888
Purchases of investments:
Fixed maturities
Held-to-maturity (584,092) (439,269) (453,787)
Available-for-sale (7,410,485) (4,314,722) (4,753,154)
Mortgage loans (100,240) (2,532) (23,237)
Real estate (4,581) (64,205) (15,588)
Common stock (10,020) (29,608) (12,113)
------------- ------------- ------------
Net cash provided by (used in)
investing activities $ 41,231 $ (243,327) $ (127,662)
============= ============= ============
</TABLE>
(Continued)
69
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
-------------- -------------- -------------
FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (507,237) $ (577,538) $ (413,568)
Due to Parent Corporation (73,779) (19,522) 1,457
Dividends paid (80,036) (71,394) (56,670)
Net commercial paper repayments (14,327) (30,624) (172)
Net repurchase agreements (repayments)
borrowings (81,280) 38,802 (88,563)
Capital contributions 8,808 11,000 7,000
Purchase of preferred shares (121,800)
Acquisition of subsidiary (82,669)
-------------- -------------- -------------
-------------- -------------- -------------
Net cash used in financing activities (952,320) (649,276) (550,516)
-------------- -------------- -------------
NET INCREASE IN CASH 49,841 1,096 34,243
CASH, BEGINNING OF YEAR 126,278 125,182 90,939
-------------- -------------- -------------
CASH, END OF YEAR $ 176,119 $ 126,278 $ 125,182
============== ============== =============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 111,493 $ 86,829 $ 103,700
Interest 13,849 15,124 15,414
</TABLE>
See notes to consolidated financial statements. (Concluded)
70
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997,
AND 1996 (Amounts in Thousands, except Share Amounts)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Great-West Life & Annuity Insurance Company (the Company)
is an indirect wholly-owned subsidiary of The Great-West Life Assurance
Company (the Parent Corporation). The Company is an insurance company
domiciled in the State of Colorado. The Company offers a wide range of
life insurance, health insurance, and retirement and investment products
to individuals, businesses, and other private and public organizations
throughout the United States.
Basis of Presentation - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The consolidated financial
statements include the accounts of the Company and its subsidiaries. All
material intercompany transactions and balances have been eliminated in
consolidation.
Certain reclassifications, primarily related to the presentation of
related party transactions and the classification of the release of a
contingent liability (see Note 10) have been made to the 1997 and 1996
financial statements.
Investments - Investments are reported as follows:
1. Management determines the classification of fixed maturities at
the time of purchase. Fixed maturities are classified as
held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost unless fair value is less
than cost and the decline is deemed to be other than temporary,
in which case they are written down to fair value and a new cost
basis is established.
Fixed maturities not classified as held-to-maturity are
classified as available-for-sale. Available-for-sale securities
71
<PAGE>
are carried at fair value, with the net unrealized gains and
losses reported as accumulated other comprehensive income in
stockholder's equity. The net unrealized gains and losses on
derivative financial instruments used to hedge available-for-sale
securities are also included in other comprehensive income.
The amortized cost of fixed maturities classified as
held-to-maturity or available-for-sale is adjusted for
amortization of premiums and accretion of discounts using the
effective interest method over the estimated life of the related
bonds. Such amortization is included in net investment income.
Realized gains and losses, and declines in value judged to be
other-than-temporary are included in net realized gains (losses)
on investments.
2. Mortgage loans on real estate are carried at their unpaid
balances adjusted for any unamortized premiums or discounts and
any valuation reserves. Interest income is accrued on the unpaid
principal balance. Discounts and premiums are amortized to net
investment income using the effective interest method. Accrual of
interest is discontinued on any impaired loans where collection
of interest is doubtful.
The Company maintains an allowance for credit losses at a level
that, in management's opinion, is sufficient to absorb possible
credit losses on its impaired loans and to provide adequate
provision for any possible losses inherent in the loan portfolio.
Management's judgment is based on past loss experience, current
and projected economic conditions, and extensive situational
analysis of each individual loan. The measurement of impaired
loans is based on the fair value of the collateral.
3. Real estate is carried at cost. The carrying value of real estate
is subject to periodic evaluation of recoverability.
4. Investments in common stock are carried at fair value.
5. Policy loans are carried at their unpaid balances.
6. Short-term investments include securities purchased with initial
maturities of one year or less and are carried at amortized cost.
The Company considers short-term investments to be
available-for-sale and amortized cost approximates fair value.
7. Gains and losses realized on disposal of investments are
determined on a specific identification basis.
Cash - Cash includes only amounts in demand deposit accounts.
72
<PAGE>
Deferred Policy Acquisition Costs - Policy acquisition costs, which
primarily consist of sales commissions related to the production of new
and renewal business, have been deferred to the extent recoverable.
Other costs capitalized include expenses associated with the Company's
group sales representatives. These costs are variable in nature and are
dependent upon sales volume. Deferred costs associated with the annuity
products are being amortized over the life of the contracts in
proportion to the emergence of gross profits. Retrospective adjustments
of these amounts are made when the Company revises its estimates of
current or future gross profits. Deferred costs associated with
traditional life insurance are amortized over the premium paying period
of the related policies in proportion to premium revenues recognized.
Amortization of deferred policy acquisition costs totaled $51,724,
$44,298, and $47,089 in 1998, 1997, and 1996, respectively.
Separate Accounts - Separate account assets and related liabilities are
carried at fair value. The Company's separate accounts invest in shares
of Maxim Series Fund, Inc. and Orchard Series Fund, Inc., both
diversified, open-end management investment companies which are
affiliates of the Company, shares of other external mutual funds, or
government or corporate bonds. Investment income and realized capital
gains and losses of the separate accounts accrue directly to the
contractholders and, therefore, are not included in the Company's
statements of income. Revenues to the Company from the separate accounts
consist of contract maintenance fees, administrative fees, and mortality
and expense risk charges.
Life Insurance and Annuity Reserves - Life insurance and annuity policy
reserves with life contingencies of $6,866,478 and $5,741,596 at
December 31, 1998 and 1997, respectively, are computed on the basis of
estimated mortality, investment yield, withdrawals, future maintenance
and settlement expenses, and retrospective experience rating premium
refunds. Annuity contract reserves without life contingencies of
$4,908,964 and $5,346,516 at December 31, 1998 and 1997, respectively,
are established at the contractholder's account value.
Reinsurance - Policy reserves ceded to other insurance companies are
carried as a reinsurance receivable on the balance sheet (see Note 3).
The cost of reinsurance related to long-duration contracts is accounted
for over the life of the underlying reinsured policies using assumptions
consistent with those used to account for the underlying policies.
Policy and Contract Claims - Policy and contract claims include
provisions for reported life and health claims in process of settlement,
valued in accordance with the terms of the related policies and
contracts, as well as provisions for claims incurred and unreported
based primarily on prior experience of the Company.
73
<PAGE>
Participating Fund Account - Participating life and annuity policy
reserves are $4,108,314 and $3,901,297 at December 31, 1998 and 1997,
respectively. Participating business approximates 32.7% and 50.5% of the
Company's ordinary life insurance in force and 71.9% and 91.1% of
ordinary life insurance premium income at December 31, 1998 and 1997,
respectively.
The amount of dividends to be paid from undistributed earnings on
participating business is determined annually by the Board of Directors.
Amounts allocable to participating policyholders are consistent with
established Company practice.
The Company has established a Participating Policyholder Experience
Account (PPEA) for the benefit of all participating policyholders which
is included in the accompanying consolidated balance sheet. Earnings
associated with the operation of the PPEA are credited to the benefit of
all participating policyholders. In the event that the assets of the
PPEA are insufficient to provide contractually guaranteed benefits, the
Company must provide such benefits from its general assets.
The Company has also established a Participation Fund Account (PFA) for
the benefit of the participating policyholders previously transferred to
the Company from the Parent under an assumption reinsurance transaction.
The PFA is part of the PPEA. Earnings derived from the operation of the
PFA net of a management fee paid to the Company accrue solely for the
benefit of the acquired participating policyholders.
Recognition of Premium and Fee Income and Benefits and Expenses - Life
insurance premiums are recognized when due. Annuity premiums with life
contingencies are recognized as received. Accident and health premiums
are earned on a monthly pro rata basis. Revenues for annuity and other
contracts without significant life contingencies consist of contract
charges for the cost of insurance, contract administration, and
surrender fees that have been assessed against the contract account
balance during the period. Fee income is derived primarily from
contracts for claim processing or other administrative services and from
assets under management. Fees from contracts for claim processing or
other administrative services are recorded as the services are provided.
Fees from assets under management, which consist of contract maintenance
fees, administration fees and mortality and expense risk changes, are
recognized when due. Benefits and expenses on policies with life
contingencies impact premium income by means of the provision for future
policy benefit reserves, resulting in recognition of profits over the
life of the contracts. The average crediting rate on annuity products
was approximately 6.3%, 6.6%, and 6.8% in 1998, 1997, and 1996.
Income Taxes - Income taxes are recorded using the asset and liability
approach, which requires, among other provisions, the recognition of
deferred tax assets and liabilities for expected future tax consequences
of events that have been recognized in the Company's financial
74
<PAGE>
statements or tax returns. In estimating future tax consequences, all
expected future events (other than the enactments or changes in the tax
laws or rules) are considered. Although realization is not assured,
management believes it is more likely than not that the deferred tax
asset, net of a valuation allowance, will be realized.
Repurchase Agreements and Securities Lending - The Company enters into
repurchase agreements with third-party broker/dealers in which the
Company sells securities and agrees to repurchase substantially similar
securities at a specified date and price. Such agreements are accounted
for as collateralized borrowings. Interest expense on repurchase
agreements is recorded at the coupon interest rate on the underlying
securities. The repurchase fee received or paid is amortized over the
term of the related agreement and recognized as an adjustment to
investment income.
The Company requires collateral in an amount greater than or equal to
102% of the borrowing for all securities lending transactions.
The Company implemented Statement of Financial Accounting Standards
(SFAS) No. 125 "Accounting for Transfer and Servicing of Financial
Assets and Extinguishments of Liabilities" in 1998 as it relates to
repurchase agreements and securities lending arrangements. The
implementation of this statement had no material effect on the Company's
financial statements.
Derivatives - The Company makes limited use of derivative financial
instruments to manage interest rate, market, and foreign exchange risk.
Such hedging activity consists of interest rate swap agreements,
interest rate floors and caps, foreign currency exchange contracts and
equity swaps. The differential paid or received under the terms of these
contracts is recognized as an adjustment to net investment income on the
accrual method. Gains and losses on foreign exchange contracts are
deferred and recognized in net investment income when the hedged
transactions are realized.
Interest rate swap agreements are used to convert the interest rate on
certain fixed maturities from a floating rate to a fixed rate. Interest
rate swap transactions generally involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the
underlying principal amount. Interest rate floors and caps are interest
75
<PAGE>
rate protection instruments that require the payment by a counter-party
to the Company of an interest rate differential. The differential
represents the difference between current interest rates and an
agreed-upon rate, the strike rate, applied to a notional principal
amount. Foreign currency exchange contracts are used to hedge the
foreign exchange rate risk associated with bonds denominated in other
than U.S. dollars. Equity swap transactions generally involve the
exchange of variable market performance of a basket of securities for a
fixed interest rate.
Although derivative financial instruments taken alone may expose the
Company to varying degrees of market and credit risk when used solely
for hedging purposes, these instruments typically reduce overall market
and interest rate risk. The Company controls the credit risk of its
financial contracts through credit approvals, limits, and monitoring
procedures. As the Company generally enters into transactions only with
high quality institutions, no losses associated with non-performance on
derivative financial instruments have occurred or are expected to occur.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting
for Derivative Instruments and for Hedging Activities". This Statement
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. This Statement is
effective for the Company beginning January 1, 2000, and earlier
adoption is encouraged. The Company has not adopted this Statement as of
December 31, 1998. Management has not determined the impact of the
Statement on the Company's financial position or results of operations.
Stock Options - In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation", which was effective for the
Company beginning January 1, 1996. This Statement requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured based
on the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company has continued to apply APB Opinion No.
25 to stock-based compensation awards to employees and has disclosed the
required pro forma effect on net income (see Note 13).
2. ACQUISITION
On July 8, 1998, the Company paid $82,669 in cash to acquire all of the
outstanding shares of Anthem Health & Life Insurance Company (AH&L). The
purchase price was based on AH&L's adjusted book value, and is subject
to further minor adjustments. The results of AH&L's operations, which
had an insignificant effect on net income, have been combined with those
of the Company since the date of acquisition.
The acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to the net
assets acquired based on their estimated fair values. The fair value of
tangible assets acquired and liabilities assumed was $379,934 and
$317,440, respectively. The balance of the purchase price, $20,175, was
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<PAGE>
recorded as excess cost over net assets acquired (goodwill) and is being
amortized over 30 years on a straight-line basis. Management intends to
finalize its allocation of the purchase price within a year of the
transaction, which will likely result in a reallocation of the purchase
price, which is not expected to be material.
3. RELATED-PARTY TRANSACTIONS
On December 31, 1998, the Company and the Parent Corporation entered
into an Indemnity Reinsurance Agreement pursuant to which the Company
reinsured by coinsurance certain Parent Corporation individual
non-participating life insurance policies. The Company recorded $859 in
premium income and an increase in reserves, associated with certain
policies, as a result of this transaction. Of the $137,638 in reserves
that were recorded as a result of this transaction, $136,779 was
recorded under SFAS No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains
and Losses from the Sale of Investments" ("SFAS No. 97"), accounting
principles. The Company recorded, at the Parent Corporation's carrying
amount, which approximates estimated fair value, the following at
December 31, 1998 as a result of this transaction:
Assets Liabilities and Stockholder's Equity
Cash 24,600 Policy reserves 137,638
Deferred income taxes 3,816
Policy loans 82,649
Due from Parent Corporation 19,753
Other 6,820
----------- -----------
137,638 137,638
In connection with this transaction, the Parent Corporation made a
capital contribution of $5,608 to the Company.
On September 30, 1998, the Company and the Parent Corporation entered
into an Indemnity Reinsurance Agreement pursuant to which the Company
reinsured by coinsurance certain Parent Corporation individual
non-participating life insurance policies. The Company recorded $45,332
in premium income and an increase in reserves as a result of this
transaction. Of the $428,152 in reserves that were recorded as a result
of this transaction, $382,820 was recorded under SFAS No. 97 accounting
principles. The Company recorded, at the Parent Corporation's carrying
77
<PAGE>
amount, which approximates estimated fair value, the following at
September 30, 1998 as a result of this transaction:
Assets Liabilities and Stockholder's Equity
<TABLE>
<S> <C> <C>
Bonds $ 147,475 Policy reserves $ 428,152
Mortgages 82,637 Due to Parent Corporation 20,820
Cash 134,900
Deferred policy acquisition 9,724
costs
Deferred income taxes 15,762
Policy loans 56,209
Other 2,265
---------- -----------
$ 448,972 $ 448,972
</TABLE>
In connection with this transaction, the Parent Corporation made a
capital contribution of $3,200 to the Company.
On September 30, 1998, the Company purchased furniture, fixtures and
equipment from the Parent Corporation for $25,184. In February 1997, the
Company purchased the corporate headquarters properties from the Parent
Corporation for $63,700.
On June 30, 1997, the Company recaptured all remaining pieces of an
individual participating insurance block of business previously
reinsured to the Parent Corporation on December 31, 1992. The Company
recorded $155,798 in premium income and an increase in reserves as a
result of this transaction. The Company recorded, at the Parent
Corporation's carrying amount, which approximates estimated fair value,
the following at June 30, 1997 as a result of this transaction:
Assets Liabilities and Stockholder's Equity
Cash 160,000 Policy reserves 155,798
Bonds 17,975 Due to Parent Corporation 20,373
Other 60 Deferred income taxes 2,719
Undistributed earnings on
participating business (855)
----------- ---------------
178,035 178,035
In connection with this transaction, the Parent Corporation made a
capital contribution of $11,000 to the Company.
On October 31, 1996, the Company recaptured certain pieces of an
individual participating insurance block of business previously
reinsured to the Parent Corporation on December 31, 1992. The Company
recorded $164,839 in premium income and an increase in reserves as a
result of this transaction. The Company recorded, at the Parent
78
<PAGE>
Corporation's carrying amount, which approximates estimated fair value,
the following at October 31, 1996 as a result of this transaction:
Assets Liabilities and Stockholder's Equity
Cash 162,000 Policy reserves 164,839
Mortgages 19,753 Due to Parent Corporation 16,180
Other 118 Deferred income taxes 1,283
Undistributed earnings on
participating business (431)
------------ --------------
181,871 181,871
In connection with this transaction, the Parent Corporation made a
capital contribution of $7,000 to the Company.
Effective January 1, 1997, all employees of the U.S. operations of the
Parent Corporation and the related benefit plans were transferred to the
Company. All related employee benefit plan assets and liabilities were
also transferred to the Company (see Note 9). The transfer did not have
a material effect on the Company's operating expenses as the actual
costs associated with the employees and the benefit plans were charged
previously to the Company under administrative service agreements
between the Company and the Parent Corporation.
Prior to January 1997, the Parent Corporation administered, distributed,
and underwrote business for the Company and administered the Company's
investment portfolio under various administrative agreements. Since
January 1, 1997, the Company has performed these services for the U.S.
operations of the Parent Corporation. The following represents revenue
from or payments made to the Parent Corporation for services provided
pursuant to these service agreements. The amounts recorded are based
upon management's best estimate of actual costs incurred and resources
expended based upon number of policies and/or certificates in force.
79
<PAGE>
<TABLE>
Years Ended December 31,
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------
1998 1997 1996
------------ ------------ ------------
Investment management revenue (expense) $ 475 $ 801 $ (14,800)
Administrative and underwriting revenue
(payments) 4,542 6,292 (304,599)
</TABLE>
At December 31, 1998 and 1997, due to Parent Corporation includes
$17,930 and $8,957 due on demand and $34,947 and $117,699 of notes
payable which bear interest and mature at various dates through June 15,
2008. These notes may be prepaid in whole or in part at any time without
penalty; the issuer may not demand payment before the maturity date. The
amounts due on demand to the Parent Corporation bear interest at the
public bond rate (6.1% and 7.1% at December 31, 1998 and 1997,
respectively) while the remainder bear interest at various rates ranging
from 5.4% to 6.6%. Interest expense attributable to these payables was
$9,891, $9,758, and $11,282 for the years ended December 31, 1998, 1997
and 1996, respectively.
4. REINSURANCE
In the normal course of business, the Company seeks to limit its
exposure to loss on any single insured and to recover a portion of
benefits paid by ceding risks to other insurance enterprises under
excess coverage and co-insurance contracts. The Company retains a
maximum of $1.5 million of coverage per individual life.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk
arising from similar geographic regions, activities, or economic
characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. At December 31, 1998 and
1997, the reinsurance receivable had a carrying value of $192,958 and
$84,364, respectively.
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<PAGE>
The following schedule details life insurance in force and life and
accident/health premiums:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ceded Assumed Percentage
Primarily to Primarily of Amount
Gross the Parent from Other Net Assumed
Amount Corporation Companies Amount to Net
------------- ------------- ------------- ------------- ------------
December 31, 1998:
Life insurance in force:
Individual $ 34,017,379 $ 4,785,079 $ 8,948,442 $ 38,180,742 23.44%
Group 81,907,539 2,213,372 84,120,911 2.63%
============= ============= ============= =============
Total $ 115,924,918 $ 4,785,079 $ 11,161,814 $ 122,301,653
============= ============= ============= =============
Premium Income:
Life $ 352,710 $ 24,720 $ 65,452 $ 393,442 16.6%
insurance
571,992 61,689 74,284 584,587 12.7%
Accident/health
============= ============= ============= =============
Total $ 924,702 $ 86,409 $ 139,736 $ 978,029
============= ============= ============= =============
December 31, 1997:
Life insurance in force:
Individual $ 24,598,679 $ 4,040,398 $ 3,667,235 $ 24,225,516 15.1%
Group 51,179,343 2,031,477 53,210,820 3.8%
============= ============= ============= =============
Total $ 75,778,022 $ 4,040,398 $ 5,698,712 $ 77,436,336
============= ============= ============= =============
Premium Income:
Life $ 320,456 $ (127,388) $ 19,923 $ 467,767 4.1%
insurance
341,837 32,645 34,994 344,186 10.0%
Accident/health
============= ============= ============= =============
Total $ 662,293 $ (94,743) $ 54,917 $ 811,953
============= ============= ============= =============
December 31, 1996:
Life insurance in force:
Individual $ 23,409,823 $ 5,246,079 $ 3,482,118 $ 21,645,862 16.1%
Group 47,682,237 1,817,511 49,499,748 3.7%
============= ============= ============= =============
Total $ 71,092,060 $ 5,246,079 $ 5,299,629 $ 71,145,610
============= ============= ============= =============
Premium Income:
Life $ 307,516 $ (111,743) $ 19,633 $ 438,892 4.2%
insurance
339,284 7,493 34,242 366,033 9.4%
Accident/health
============= ============= ============= =============
Total $ 646,800 $ (104,250) $ 53,875 $ 804,925
============= ============= ============= =============
</TABLE>
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<PAGE>
5. NET INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTS
Net investment income is summarized as follows:
<TABLE>
Years Ended December 31,
<S> <C> <C> <C> <C> <C> <C>
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
Investment income:
Fixed maturities and short-term $ 638,079 $ 633,975 $ 601,913
investments
Mortgage loans on real estate 110,170 118,274 140,823
Real estate 20,019 20,990 5,292
Policy loans 180,933 194,826 175,746
Other 285 18 1,316
------------- ------------- -------------
949,486 968,083 925,090
Investment expenses, including interest
on
amounts charged by the Parent 52,126 86,410 90,453
Corporation
of $9,891, $9,758, and $11,282
------------- ------------- -------------
Net investment income $ 897,360 $ 881,673 $ 834,637
============= ============= =============
Net realized gains (losses) on investments are as follows:
Years Ended December 31,
-------------------------------------------
1998 1997 1996
------------- ------------ --------------
Realized gains (losses):
Fixed maturities $ 38,391 $ 15,966 $ (11,624)
Mortgage loans on real estate 424 1,081 1,143
Real estate 363
Provisions (642) (7,610) (10,597)
============= ============ ==============
Net realized gains (losses) on investment $ 38,173 $ 9,800 $ (21,078)
============= ============ ==============
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<PAGE>
6. SUMMARY OF INVESTMENTS
Fixed maturities owned at December 31, 1998 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ------------ ----------- ----------- -----------
Held-to-Maturity:
U.S. Treasury
Securities
and obligations of $ 34,374 $ 1,822 $ $ 36,196 $ 34,374
U.S.
Government Agencies
Collateralized mortgage
obligations 194
10,135 9,941 10,135
Public utilities 213,256 12,999 460 225,795 213,256
Corporate bonds 1,809,957 78,854 3,983 1,884,828 1,809,957
Foreign governments 782
10,133 10,915 10,133
State and 121,963 9,298 131,261 121,963
municipalities
----------- ------------ ----------- ----------- -----------
$ 2,199,818 $ 103,755 $ 4,637 $ 2,298,936 $ 2,199,818
=========== ============ ========= =========== ===========
Available-for-Sale:
U.S. Treasury
Securities
and obligations of
U.S.
Government Agencies:
Collateralized
mortgage
obligations $ 863,479 $ 39,855 $ 1,704 $ 901,630 $ 901,630
Direct mortgage
pass-
through 467,100 4,344 692 470,752 470,752
certificates
Other 191,138 1,765 788 192,115 192,115
Collateralized mortgage
obligations 926,797 16,260 1,949 941,108 941,108
Public utilities 464,096 14,929 36 478,989 478,989
Corporate bonds 3,557,209 123,318 17,420 3,663,107 3,663,107
Foreign governments 2,732
56,505 59,237 59,237
State and 226,208 4,588 1,008 229,788 229,788
municipalities
----------- ------------ ----------- ----------- -----------
$ 6,752,532 $ 207,791 $ 23,597 $ 6,936,726 $ 6,936,726
=========== ============ =========== =========== ===========
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<PAGE>
Fixed maturities owned at December 31, 1997 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ------------ ------------ ----------- -----------
Held-to-Maturity:
U.S. Treasury
Securities
and obligations of
U.S.
Government Agencies $ $ 1,186 $ 25 $ $
25,883 27,044 25,883
Collateralized
mortgage
obligations 174
5,006 5,180 5,006
Public utilities 11,214 3 256,605 245,394
245,394
Corporate bonds 1,668,710 57,036 3,069 1,722,677 1,668,710
Foreign governments 659
10,268 10,927 10,268
State and 1,588 129,043 127,455
municipalities 127,455
----------- ------------ ------------ ----------- -----------
$ 2,082,716 $ 71,857 $ 3,097 $ 2,151,476 $ 2,082,716
=========== ============ ============ =========== ===========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
------------ ----------- ----------- ----------- -----------
Available-for-Sale:
U.S. Treasury Securities
and obligations of
U.S.
Government Agencies:
Collateralized
mortgage
obligations $ 652,975 $ 17,339 $ 310 $ 670,004 $ 670,004
Direct mortgage
pass-
through 7,911 2,668 922,459 922,459
certificates 917,216
Other 1,794 244 298,887 298,887
297,337
Collateralized mortgage
obligations 19,494 1,453 700,199 700,199
682,158
Public utilities 8,716 1,320 556,831 556,831
549,435
Corporate bonds 3,265,039 107,740 4,350 3,368,429 3,368,429
Foreign governments 4,115 60 135,641 135,641
131,586
State and municipalities 503 46,179 46,179
45,676
------------ ----------- ----------- ----------- -----------
$ 6,541,422 $ 167,612 $ 10,405 $ 6,698,629 $ 6,698,629
============ =========== =========== =========== ===========
</TABLE>
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<PAGE>
The collateralized mortgage obligations consist primarily of sequential
and planned amortization classes with final stated maturities of two to
thirty years and average lives of less than one to fifteen years.
Prepayments on all mortgage-backed securities are monitored monthly and
amortization of the premium and/or the accretion of the discount
associated with the purchase of such securities is adjusted by such
prepayments.
See Note 8 for additional information on policies regarding estimated fair
value of fixed maturities.
The amortized cost and estimated fair value of fixed maturity investments
at December 31, 1998, by projected maturity, are shown below. Actual
maturities will likely differ from these projections because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Held-to-Maturity Available-for-Sale
------------------------------ --------- --------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
------------- -------------- ------------ --------------
Due in one year or less 316,174 321,228 235,842 252,067
Due after one year
through five years 925,016 961,592 1,279,123 1,309,202
Due after five years
through ten years 675,444 722,685 769,278 803,498
Due after ten years 130,480 138,119 449,273 457,785
Mortgage-backed
securities 10,135 9,941 2,257,376 2,313,490
Asset-backed securities 142,569 145,371 1,761,640 1,800,684
============= ============== ============= =============
2,199,818 2,298,936 6,752,532 6,936,726
============= ============== ============= =============
Proceeds from sales of securities available-for-sale were $6,169,678,
$3,174,246, and $3,569,608 during 1998, 1997, and 1996, respectively. The
realized gains on such sales totaled $41,136, $20,543, and $24,919 for
1998, 1997, and 1996, respectively. The realized losses totaled $8,643,
$10,643, and $40,748 for 1998, 1997, and 1996, respectively. During the
years 1998, 1997, and 1996 held-to-maturity securities with an amortized
cost of $9,920, $0, and $0 were sold due to credit deterioration with
insignificant gains and losses.
At December 31, 1998 and 1997, pursuant to fully collateralized securities
lending arrangements, the Company had loaned $115,168 and $162,817 of
fixed maturities, respectively.
The Company engages in hedging activities to manage interest rate and
exchange risk. The following table summarizes the 1998 financial hedge
instruments:
85
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Notional Strike/Swap
December 31, 1998 Amount Rate Maturity
------------------------ -------------- ------------------------- ---------------------
Interest Rate Floor $ 100,000 4.50% (LIBOR) 11/99
Interest Rate Caps 1,070,000 6.75% - 11.82% (CMT) 12/99 - 10/03
Interest Rate Swaps 242,451 4.95% - 9.35% 08/99 - 02/03
Foreign Currency
Exchange Contracts 34,123 N/A 05/99 - 07/06
Equity Swap 95,652 4.00% 12/99
The following table summarizes the 1997 financial hedge instruments:
Notional Strike/Swap
December 31, 1997 Amount Rate Maturity
------------------------ -------------- -------------------------- ---------------------
Interest Rate Floor $ 100,000 4.5% (LIBOR) 1999
Interest Rate Caps 565,000 6.75% - 11.82% (CMT) 1999 - 2002
Interest Rate Swaps 212,139 6.20% - 9.35% 01/98 - 02/03
Foreign Currency
Exchange Contracts 57,168 N/A 09/98 - 07/06
Equity Swap 100,000 5.64% 12/98
</TABLE>
LIBOR - London Interbank Offered Rate
CMT - Constant Maturity Treasury Rate
The Company has established specific investment guidelines designed to
emphasize a diversified and geographically dispersed portfolio of
mortgages collateralized by commercial and industrial properties located
in the United States. The Company's policy is to obtain collateral
sufficient to provide loan-to-value ratios of not greater than 75% at the
inception of the mortgages. At December 31, 1998, approximately 33% of the
Company's mortgage loans were collateralized by real estate located in
California.
The following represents impairments and other information with respect to
impaired loans:
<TABLE>
<S> <C> <C>
1998 1997
--------------- -------------
Loans with related allowance for credit losses of
$2,492 and $2,493 $ 13,192 $ 13,193
Loans with no related allowance for credit losses 10,420 20,013
Average balance of impaired loans during the year 31,193 37,890
Interest income recognized (while impaired) 2,308 2,428
Interest income received and recorded (while impaired)
using the cash basis method of recognition 2,309 2,484
</TABLE>
As part of an active loan management policy and in the interest of
maximizing the future return of each individual loan, the Company may from
time to time modify the original terms of certain loans. These
restructured loans, all performing in accordance with their modified terms
that are not impaired, aggregated $52,913 and $64,406 at December 31, 1998
and 1997, respectively.
86
<PAGE>
The following table presents changes in allowance for credit losses:
1998 1997 1996
------------- ------------- --------------
Balance, beginning of year 67,242 65,242 63,994
Provision for loan losses 642 4,521 4,470
Chargeoffs (787) (2,521) (3,468)
Recoveries 145 246
============= ============= ==============
Balance, end of year 67,242 67,242 65,242
============= ============= ==============
7. COMMERCIAL PAPER
The Company has a commercial paper program that is partially supported by
a $50,000 standby letter-of-credit. At December 31, 1998, commercial paper
outstanding had maturities ranging from 69 to 118 days and interest rates
ranging from 5.10% to 5.22%. At December 31, 1997, maturities ranged from
41 to 99 days and interest rates ranged from 5.6% to 5.8%.
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
December 31,
<S> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------
1998 1997
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------- ------------- -------------
ASSETS:
Fixed maturities and
short-term investments $ 9,556,713 $ 9,655,831 $ 9,180,476 $ 9,249,235
Mortgage loans on real
estate 1,133,468 1,160,568 1,235,594 1,261,949
Policy loans 2,858,673 2,858,673 2,657,116 2,657,116
Common stock 48,640 48,640 39,021 39,021
LIABILITIES:
Annuity contract reserves
without life contingencies 4,908,964 4,928,800 5,346,516 5,373,818
Policyholders' funds 181,779 181,779 165,106 165,106
Due to Parent Corporation 52,877 52,877 126,656 124,776
Repurchase agreements 244,258 244,258 325,538 325,538
Commercial paper 39,731 39,731 54,058 54,058
HEDGE CONTRACTS:
Interest rate floor 17 17 25 25
Interest rate caps 971 971 130 130
Interest rate swaps 6,125 6,125 4,265 4,265
Foreign currency exchange
contracts 689 689 3,381 3,381
Equity swap (8,150) (8,150) 856 856
</TABLE>
87
<PAGE>
The estimated fair value of financial instruments have been determined
using available information and appropriate valuation methodologies.
However, considerable judgement is necessarily required to interpret
market data to develop estimates of fair value. Accordingly, the estimates
presented are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
The estimated fair value of fixed maturities that are publicly traded are
obtained from an independent pricing service. To determine fair value for
fixed maturities not actively traded, the Company utilized discounted cash
flows calculated at current market rates on investments of similar quality
and term.
Mortgage loans fair value estimates generally are based on a discounted
cash flow basis. A discount rate "matrix" is incorporated whereby the
discount rate used in valuing a specific mortgage generally corresponds to
that mortgage's remaining term. The rates selected for inclusion in the
discount rate "matrix" reflect rates that the Company would quote if
placing loans representative in size and quality to those currently in the
portfolio.
Policy loans accrue interest generally at variable rates with no fixed
maturity dates and, therefore, estimated fair value approximates carrying
value.
The fair value of annuity contract reserves without life contingencies is
estimated by discounting the cash flows to maturity of the contracts,
utilizing current crediting rates for similar products.
The estimated fair value of policyholders' funds is the same as the
carrying amount as the Company can change the crediting rates with 30 days
notice.
The estimated fair value of due to Parent Corporation is based on
discounted cash flows at current market spread rates on high quality
investments.
88
<PAGE>
The carrying value of repurchase agreements and commercial paper is a
reasonable estimate of fair value due to the short-term nature of the
liabilities.
The estimated fair value of financial hedge instruments, all of which are
held for other than trading purposes, is the estimated amount the Company
would receive or pay to terminate the agreement at each year-end, taking
into consideration current interest rates and other relevant factors.
Included in the net gain position for interest rates swaps are $0 of
unrealized losses in 1998 and 1997. Included in the net gain position for
foreign currency exchange contracts are $932 and $0 of loss exposures in
1998 and 1997, respectively.
9. EMPLOYEE BENEFIT PLANS
Effective January 1, 1997, all employees of the U.S. operations of the
Parent Corporation and the related benefit plans were transferred to the
Company. See Note 3 for further discussion.
The Company's Parent had previously accounted for the pension plan under
the Canadian Institute of Chartered Accountants (CICA) guidelines and had
recorded a prepaid pension asset of $19,091. As U.S. generally accepted
accounting principles do not materially differ from these CICA guidelines
and the transfer was between related parties, the prepaid pension asset
was transferred at carrying value. As a result, the Company recorded the
following effective January 1, 1997:
Prepaid pension cost 19,091 Undistributed earnings on 3,608
participating business
Stockholder's equity 15,483
------------ -----------
19,091 19,091
The following table summarizes changes from 1997 to 1998 and from 1996 to
1997, in the benefit obligations and in plan assets for the Company's
defined benefit pension plan and post-retirement medical plan. There is no
additional minimum pension liability required to be recognized. There were
no amendments to the plans due to the acquisition of AH&L.
89
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Post-Retirement
Pension Benefits Medical Plan
------------------------- ------------------------
1998 1997 1998 1997
----------- ------------ ----------- -----------
Change in benefit obligation
Benefit obligation at beginning of $ 115,057 $ 96,417 $ 19,454 $ 16,160
year
Service cost 6,834 5,491 1,365 1,158
Interest cost 7,927 7,103 1,341 1,191
Actuarial gain (loss) 5,117 9,470 (1,613) 1,500
Benefits paid (3,630) (3,424) (603) (555)
----------- ------------ ----------- -----------
Benefit obligation at end of year 131,305 115,057 19,944 19,454
----------- ------------ ----------- -----------
Change in plan assets
Fair value of plan assets at
beginning of year 162,879 138,221
Actual return on plan assets 23,887 28,082
Benefits paid (3,630) (3,424)
----------- ------------ ----------- -----------
Fair value of plan assets at end of
year 183,136 162,879
----------- ------------ ----------- -----------
Funded status 51,831 47,822 (19,944) (19,454)
Unrecognized net actuarial loss (11,405) (6,326) (113) 1,500
Unrecognized net obligation or
(asset)
at transition (19,684) (21,198) 14,544 15,352
=========== ============ =========== ===========
Prepaid (accrued) benefit cost $ 20,742 $ 20,298 $ (5,513) $ (2,602)
=========== ============ =========== ===========
Weighted-average assumptions as of
December 31
Discount rate 6.50% 7.00% 6.50% 7.00%
Expected return on plan assets 8.50% 8.50% 8.50% 8.50%
Rate of compensation increase 4.00% 4.50% 4.00% 4.50%
Components of net periodic
benefit cost
Service cost $ 6,834 $ 5,491 $ 1,365 $ 1,158
Interest cost 7,927 7,103 1,341 1,191
Expected return on plan assets (13,691) (12,286)
Amortization of transition (1,514) (1,514) 808 808
obligation
----------- ----------- ---------- ----------
=========== =========== ========== ==========
Net periodic (benefit) cost $ (444) $ (1,206) $ 3,514 $ 3,157
=========== =========== ========== ==========
</TABLE>
The Company-sponsored post-retirement medical plan (medical plan) provides
health benefits to employees. The medical plan is contributory and
contains other cost sharing features, which may be adjusted annually for
the expected general inflation rate. The Company's policy will be to fund
the cost of the medical plan benefits in amounts determined at the
discretion of management.
90
<PAGE>
Assumed health care cost trend rates have a significant effect on the amounts
reported for the medical plan. For measurement purposes, a 6.5% annual
rate of increase in the per capita cost of covered health care benefits
was assumed. A one-percentage-point change in assumed health care cost
trend rates would have the following effects:
1-Percentage 1-Percentage
Point Point
Increase Decrease
-------------- ----------------
Effect on total of service and interest cost
on components 649 1,140
Effect on post-retirement benefit obligation 4,129 3,098
The Company sponsors a defined contribution 401(k) retirement plan which
provides eligible participants with the opportunity to defer up to 15% of
base compensation. The Company matches 50% of the first 5% of participant
pre-tax contributions. Company contributions for the years ended December
31, 1998 and 1997 totaled $3,915 and $3,475, respectively.
The Company has a deferred compensation plan providing key executives with
the opportunity to participate in an unfunded, deferred compensation
program. Under the program, participants may defer base compensation and
bonuses, and earn interest on their deferred amounts. The program is not
qualified under Section 401 of the Internal Revenue Code. The total of
participant deferrals, which is reflected in other liabilities, was
$16,102 and $13,952 at December 31, 1998 and 1997, respectively. The
participant deferrals earn interest at a rate based on the average 10-year
composite government securities rate plus 1.5%. The interest expense
related to this plan was $1,185 and $1,019 in 1998 and 1997, respectively.
The Company also provides a supplemental executive retirement plan (SERP)
to certain key executives. This plan provides key executives with certain
benefits upon retirement, disability, or death based upon total
compensation. The Company has purchased individual life insurance policies
with respect to each employee covered by this plan. The Company is the
owner and beneficiary of the insurance contracts. The incremental expense
for this plan for 1998 and 1997 was $2,840 and $2,531, respectively. The
total liability of $9,349 and $6,509 as of December 31, 1998 and 1997 is
included in other liabilities.
91
<PAGE>
10. FEDERAL INCOME TAXES
The following is a reconciliation between the federal income tax rate and
the Company's effective rate after giving effect to the reclassifications
discussed below:
1998 1997 1996
----------- ----------- ---------
Federal tax rate 35.0 % 35.0 % 35.0 %
Change in tax rate resulting from:
Settlement of Parent tax exposures (20.2) (18.9)
Provision for contingencies 7.7 3.4
Prior year tax adjustment (1.5) 0.5 (1.4)
Other, net (0.1) 0.9 0.3
=========== =========== =========
Total 33.4 % 23.9 % 18.4 %
=========== =========== =========
The Company's income tax provision was favorably impacted in 1997 and 1996
by releases of contingent liabilities relating to taxes of the Parent
Corporation's U.S. branch associated with blocks of business that were
transferred from the Parent Corporation's U.S. branch to the Company from
1989 to 1993; the Company had agreed to the transfer of these tax
liabilities as part of the transfer of this business. The releases
recorded in 1997 and 1996 reflected the resolution of certain tax issues
with the Internal Revenue Service (IRS) relating to the 1990-1991 and
1988-1989 audit years, respectively. The releases totaled $42,150 for 1997
and $31,200 for 1996; however, $15,100 of the release in 1997 was
attributable to participating policyholders and therefore had no effect on
the net income of the Company since that amount was credited to the
provision for policyholders' share of earnings (losses).
The 1997 and 1996 releases were recorded in revenues in the Company's
prior financial statements, but have been reclassified in the accompanying
consolidated financial statements as a component of the current income tax
provisions for those years.
In addition to these releases of contingent tax liabilities, the Company's
income tax provisions for 1997 and 1996 also reflect increases for other
contingent items relating to open tax years where the Company determined
it was probable that additional taxes could be owed based on changes in
facts and circumstances. The increase in 1997 was $16,000, of which
$10,100 was attributable to participating policyholders and therefore had
no effect on the net income of the Company. The increase in 1996 was
$5,600. These increases in contingent tax liabilities have been reflected
as a component of the deferred income tax provisions for 1997 and 1996 as
the Company does not expect near term resolution of these contingencies.
Excluding the effect of the 1997 and 1996 tax items discussed above, the
effective tax rates for 1997 and 1996 were 34.1% and 33.9%, respectively.
Temporary differences which give rise to the deferred tax assets and
liabilities as of December 31, 1998 and 1997 are as follows:
92
<PAGE>
<TABLE>
<S> <C> <C>
1998 1997
--------------------------- -------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Asset Liability Asset Liability
------------- ------------ ------------ -----------
Policyholder reserves 143,244 159,767
Deferred policy acquisition costs 39,933 47,463
Deferred acquisition cost proxy
tax 100,387 79,954
Investment assets 19,870 5,574
Net operating loss carryforwards 2,867 9,427
Other 6,566 1,279
------------- ------------ ------------ -----------
Subtotal 253,064 59,803 250,427 53,037
Valuation allowance (1,778) (3,570)
============= ============ ============ ===========
Total Deferred Taxes 251,286 59,803 246,857 53,037
============= ============ ============ ===========
</TABLE>
Amounts included in investment assets above include $34,556 and $30,085
related to the unrealized gains on the Company's fixed maturities
available-for-sale at December 31, 1998 and 1997, respectively.
The Company files a separate tax return and, therefore, losses incurred by
subsidiaries cannot be offset against operating income of the Company. At
December 31, 1998, the Company's subsidiaries had approximately $8,193 of
net operating loss carryforwards, expiring through the year 2011. The tax
benefit of subsidiaries' net operating loss carryforwards, net of a
valuation allowance of $0 and $1,809 are included in the deferred tax
assets at December 31, 1998 and 1997, respectively.
The Company's valuation allowance was increased (decreased) in 1998, 1997,
and 1996 by $(1,792), $34, and $1,463, respectively, as a result of the
re-evaluation by management of future estimated taxable income in its
subsidiaries.
Under pre-1984 life insurance company income tax laws, a portion of life
insurance company gain from operations was not subject to current income
taxation but was accumulated, for tax purposes, in a memorandum account
designated as "policyholders' surplus account." The aggregate accumulation
in the account is $7,742 and the Company does not anticipate any
transactions, which would cause any part of the amount to become taxable.
Accordingly, no provision has been made for possible future federal income
taxes on this accumulation.
93
<PAGE>
11. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income". This
Statement establishes new rules for reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no
impact on the Company's net income or stockholders' equity. This Statement
requires unrealized gains or losses on the Company's available-for-sale
securities and related offsets for reserves and deferred policy
acquisition costs, which prior to adoption were reported separately in
stockholder's equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the
requirements of Statement No. 130.
Other comprehensive income at December 31, 1998 is summarized as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
-------------- ------------------------------
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising
during
the period $ 39,430 $ (13,800) $ 25,630
Less: reclassification adjustment
for
(gains) losses realized in net (14,350) 5,022 (9,328)
income
-------------- ---------------- ------------
Net unrealized gains 25,080 (8,778) 16,302
Reserve and DAC adjustment (11,614) 4,065 (7,549)
-------------- ---------------- ------------
============== ================ ============
Other comprehensive income $ 13,466 $ (4,713) $ 8,753
============== ================ ============
Other comprehensive income at December 31, 1997 is summarized as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
-------------- ---------------- --------------
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising
during
the period $ 80,821 $ (28,313) $ 52,508
Less: reclassification adjustment
for
(gains) losses realized in net 2,012 (704) 1,308
income
-------------- ---------------- --------------
Net unrealized gains 82,833 (29,017) 53,816
Reserve and DAC adjustment (24,554) 8,594 (15,960)
============== ================ ==============
Other comprehensive income $ 58,279 $ (20,423) $ 37,856
============== ================ ==============
94
<PAGE>
Other comprehensive loss at December 31, 1996 is summarized as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
-------------- ---------------- --------------
Unrealized gains on available-for-sale securities:
Unrealized holding gains (losses)
arising during the period $ (125,559) $ 43,971 $ (81,588)
Less: reclassification adjustment
for
(gains) losses realized in net 19,381 (6,783) 12,598
income
-------------- ---------------- --------------
Net unrealized gains (losses) (106,178) 37,188 (68,990)
--------------
Reserve and DAC adjustment 38,736 (13,558) 25,178
============== ================ ==============
Other comprehensive loss $ (67,442) $ 23,630 $ (43,812)
============== ================ ==============
</TABLE>
12. STOCKHOLDER'S EQUITY, DIVIDEND RESTRICTIONS, AND OTHER MATTERS
Effective September 30, 1998, the Company purchased all of its outstanding
series of preferred stock, which were owned by the Parent Corporation, for
$121,800.
The Company's net income and capital and surplus, as determined in
accordance with statutory accounting principles and practices for December
31 are as follows:
1998 1997 1996
--------------- ------------- -------------
(Unaudited)
Net income 225,863 $ 181,312 $ 180,634
Capital and surplus 727,124 759,429 713,324
The maximum amount of dividends which can be paid to stockholders by
insurance companies domiciled in the State of Colorado are subject to
restrictions relating to statutory surplus and statutory net gain from
operations. Statutory surplus and net gains from operations at December
31, 1998 were $727,124 and $225,586 (unaudited), respectively. The Company
should be able to pay up to $225,586 (unaudited) of dividends in 1999.
Dividends of $6,692, $8,854, and $8,587 were paid on preferred stock in
1998, 1997, and 1996, respectively. In addition, dividends of $73,344,
$62,540, and $48,083 were paid on common stock in 1998, 1997, and 1996,
respectively. Dividends are paid as determined by the Board of Directors.
The Company is involved in various legal proceedings, which arise in the
ordinary course of its business. In the opinion of management, after
consultation with counsel, the resolution of these proceedings should not
have a material adverse effect on its financial position or results of
operations.
95
<PAGE>
13. STOCK OPTIONS
The Company is an indirect subsidiary of Great-West Lifeco Inc. (Lifeco).
Lifeco has a stock option plan (the Lifeco plan) that provides for the
granting of options for common shares of Lifeco to certain officers and
employees of Lifeco and its subsidiaries, including the Company. Options
may be awarded at no less than the market price on the date of the grant.
Termination of employment prior to vesting results in forfeiture of the
options, unless otherwise determined by a committee that administers the
Lifeco plan. As of December 31, 1998, 1997 and 1996, stock available for
award under the Lifeco plan aggregated 1,424,400, 3,440,000 and 6,244,000
shares.
The plan provides for the granting of options with varying terms and
vesting requirements. The basic options under the plan become exercisable
twenty percent per year commencing on the first anniversary of the grant
and expire ten years from the date of grant. Options granted in 1997 and
1998 totaling 1,832,000 and 278,000, respectively, become exercisable if
certain long-term cumulative financial targets are attained. If
exercisable, the exercise period runs from April 1, 2002 to June 26, 2007.
Additional options granted in 1998 totaling 380,000 become exercisable if
certain sales or financial targets are attained. During 1998, 30,000 of
these options vested and accordingly, the Company recognized compensation
expense of $116. If exercisable, the exercise period runs from the date
that the particular options become exercisable until January 27, 2008.
The following table summarizes the status of, and changes in, Lifeco
options outstanding and the weighted-average exercise price (WAEP) for the
years ended December 31. As the options granted relate to Canadian stock,
the values, which are presented in U.S. dollars, will fluctuate as a
result of exchange rate fluctuations:
96
<PAGE>
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---------------------- ---------------------- ----------------------
Options WAEP Options WAEP Options WAEP
------------ -------- ----------- -------- ----------- ---------
Outstanding, Jan. 1, 5,736,000 $ 7.71 4,104,000 $ 6.22 0 $ .00
Granted 988,000 13.90 1,932,000 10.82 4,104,000 6.62
Exercised 99,176 6.33 16,000 5.95 0 .00
Expired or canceled 80,000 13.05 284,000 6.12 0 .00
============ ======== =========== ======== =========== =========
Outstanding, Dec. 31, 6,544,824 8.07 5,736,000 7.71 4,104,000 6.22
============ ======== =========== ======== =========== =========
Options exercisable
at year-end 1,652,424 $ 5.72 760,800 $ 5.96 0 $ .00
============ ======== =========== ======== =========== =========
Weighted average fair
value of options
granted during year $ 1.18 $ 2.65 $ 4.46
============ =========== ===========
The following table summarizes the range of exercise prices for
outstanding Lifeco common stock options at December 31, 1998:
Outstanding Exercisable
---------------------------------------- ----------------------------
Average Average
Exercise Average Exercise Exercise
Price Range Options Life Price Options Price
------------------- -------------- ---------- ----------- ------------- ------------
$ 5.54 - $ 7.36 3,804,824 7.62 $ 5.61 1,622,424 $ 5.58
$10.61 - $13.23 2,740,000 8.70 $ 11.48 30,000 $ 13.23
</TABLE>
Of the exercisable Lifeco options, 1,622,424 relate to basic option grants
and 30,000 relate to variable grants.
Power Financial Corporation (PFC), which is the parent corporation of
Lifeco, has a stock option plan (the PFC plan) that provides for the
granting of options for common shares of PFC to key employees of PFC and
its affiliates. Prior to the creation of the Lifeco plan in April 1996,
certain officers of the Company participated in the PFC plan. Under the
PFC plan, options may be awarded at no less than the market price on the
date of the grant. Termination of employment prior to vesting results in
forfeiture of the options, unless otherwise determined by a committee that
administers the PFC plan. As of December 31, 1998, 1997 and 1996, stock
available for award under the PFC plan aggregated 4,400,800, 4,400,800 and
5,440,800 shares.
97
<PAGE>
Options granted to officers of the Company under the PFC plan become
exercisable twenty percent per year commencing on the date of the grant
and expire ten years from the date of grant.
The following table summarizes the status of, and changes in, PFC options
outstanding and the weighted-average exercise price (WAEP) for the years
ended December 31. As the options granted relate to Canadian stock, the
values, which are presented in U.S. dollars, will fluctuate as a result of
exchange rate fluctuations:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---------------------- ---------------------- ---------------------
Options WAEP Options WAEP Options WAEP
----------- --------- ----------- -------- ----------- --------
Outstanding, Jan. 1, 1,076,000 $ 3.05 1,329,200 $ 3.14 1,436,000 $ 3.17
Exercised 720,946 3.60 253,200 2.68 106,800 2.95
=========== ========= =========== ======== =========== ========
Outstanding, Dec. 31, 355,054 2.89 1,076,000 3.05 1,329,200 3.14
=========== ========= =========== ======== =========== ========
Options exercisable
at year-end 355,054 $ 2.89 1,076,000 $ 3.05 1,301,200 $ 3.15
=========== ========= =========== ======== =========== ========
</TABLE>
As of December 31, 1998, the PFC options outstanding have exercise prices
between $2.25 and $3.44 and a weighted-average remaining contractual life
of 2.99 years.
The Company accounts for stock-based compensation using the intrinsic
value method prescribed by APB No. 25, "Accounting for Stock Issued to
Employees", under which compensation expenses for stock options are
generally not recognized for stock option awards granted at or above fair
market value. Had compensation expense for the Company's stock option plan
been determined based upon fair values at the grant dates for awards under
the plan in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net income, would have been reduced by $727,
$608, and $257, in 1998, 1997, and 1996, respectively. The fair value of
each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumption used for those options granted in 1998, 1997, and 1996,
respectively: dividend yield of 3.00%, expected volatility of 34.05%,
24.04%, and 15.61%, risk-free interest rates of 4.79%, 4.72%, and 4.67%,
and expected lives of 7.5 years.
98
<PAGE>
14. SEGMENT INFORMATION
The Company has two reportable segments: Employee Benefits and Financial
Services. The Employee Benefits segment markets group life and health and
401(k) products to small and mid-sized corporate employers. The Financial
Services segment markets and administers savings products to public and
not-for-profit employers and individuals and offers life insurance
products to individuals and businesses.
The accounting policies of the segments are the same as those described in
Note 1. The Company evaluates performance based on profit or loss from
operations after income taxes.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately as each
segment has unique distribution channels.
The Company's operations are not materially dependent on one or a few
customers, brokers or agents.
Summarized segment financial information for the year ended and as of
December 31 was as follows:
Year ended December 31, 1998
Operations:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Employee Financial Total
Benefits Services U.S.
-------------- -------------- -------------
Revenue:
Premium income $ 746,898 $ 247,965 $ 994,863
Fee income 444,649 71,403 516,052
Net investment income 95,118 802,242 897,360
Realized investment gains (losses) 8,145 30,028 38,173
-------------- -------------- -------------
Total revenue 1,294,810 1,151,638 2,446,448
Benefits and Expenses:
Benefits 590,058 872,411 1,462,469
Operating expenses 546,959 141,269 688,228
-------------- -------------- -------------
Total benefits and expenses 1,137,017 1,013,680 2,150,697
Net operating income before income
taxes 157,793 137,958 295,751
Income taxes 50,678 48,158 98,836
============== ============== =============
Net income $ 107,115 $ 89,800 $ 196,915
============== ============== =============
</TABLE>
99
<PAGE>
Assets:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Employee Financial Total
Benefits Services U.S.
--------------- -------------- --------------
Investment assets $ 1,434,691 $ 12,235,845 $ 13,670,536
Separate account assets 5,704,313 4,395,230 10,099,543
Other assets 567,126 785,940 1,353,066
=============== ============== ==============
Total assets $ 7,706,130 $ 17,417,015 $ 25,123,145
=============== ============== ==============
Year ended December 31, 1997
Operations:
Employee Financial Total
Benefits Services U.S.
-------------- ------------- -------------
Revenue:
Premium income $ 465,143 $ 368,036 $ 833,179
Fee income 358,005 62,725 420,730
Net investment income 100,067 781,606 881,673
Realized investment gains (losses) 3,059 6,741 9,800
-------------- ------------- -------------
Total revenue 926,274 1,219,108 2,145,382
Benefits and Expenses:
Benefits 371,333 1,013,717 1,385,050
Operating expenses 427,969 123,756 551,725
-------------- ------------- -------------
Total benefits and expenses 799,302 1,137,473 1,936,775
Net operating income before income
taxes 126,972 81,635 208,607
Income taxes 28,726 21,121 49,847
-------------
============== =============
Net income $ 98,246 $ 60,514 $ 158,760
============== =============
===============================================================================================================
Assets:
Employee Financial Total
Benefits Services U.S.
--------------- -------------- --------------
Investment assets $ 1,346,944 $ 11,859,038 $ 13,205,982
Separate account assets 4,533,516 3,313,935 7,847,451
Other assets 355,764 668,518 1,024,282
=============== ============== ==============
Total assets $ 6,236,224 $ 15,841,491 $ 22,077,715
=============== ============== ==============
</TABLE>
100
<PAGE>
Year ended December 31, 1996
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Operations:
Employee Financial Total
Benefits Services U.S.
--------------- -------------- -------------
Revenue:
Premium income $ 486,565 $ 342,884 $ 829,449
Fee income 321,074 26,445 347,519
Net investment income 87,511 747,126 834,637
Realized investment gains (losses) (2,661) (18,417) (21,078)
--------------- -------------- -------------
Total revenue 892,489 1,098,038 1,990,527
Benefits and Expenses:
Benefits 406,143 949,821 1,355,964
Operating expenses 368,258 101,358 469,616
--------------- -------------- -------------
Total benefits and expenses 774,401 1,051,179 1,825,580
Net operating income before income
taxes 118,088 46,859 164,947
Income taxes 22,874 7,498 30,372
=============== ============== =============
Net income $ 95,214 $ 39,361 $ 134,575
=============== ============== =============
The following table, which summarizes premium and fee income by segment,
represents supplemental information:
1998 1997 1996
------------- ------------- -------------
Premium Income
Employee Benefits
Group Life & Health $ 746,898 $ 465,143 $ 486,565
------------- ------------- -------------
Total Employee Benefits 746,898 465,143 486,565
------------- ------------- -------------
Financial Services
Savings 16,765 22,634 26,655
Individual Insurance 231,200 345,402 316,229
------------- ------------- -------------
Total Financial Services 247,965 368,036 342,884
------------- ------------- -------------
Premium income $ 994,863 $ 833,179 $ 829,449
============= ============= =============
Fee Income
Employee Benefits
Group Life & Health $ 366,805 $ 305,302 $ 276,688
401(k) 77,844 52,703 44,386
------------- ------------- -------------
------------- ------------- -------------
Total Employee Benefits 444,649 358,005 321,074
------------- ------------- -------------
------------- ------------- -------------
Financial Services
Savings 71,403 62,725 26,445
------------- ------------- -------------
Total Financial Services 71,403 62,725 26,445
------------- ------------- -------------
============= ============= =============
Fee income $ 516,052 $ 420,730 $ 347,519
============= ============= =============
</TABLE>
101
101
<PAGE>
Appendix A -- Glossary of Terms
Account Value -- The sum of the value of your interests in the Divisions and the
Loan Account.
Attained Age -- The Insured's Issue Age plus the number of completed Policy
Years.
Business Day -- Any day that we are open for business. We are open for business
every day that the New York Stock Exchange is open for trading.
Cash Surrender Value -- The Account Value minus any outstanding Policy Debt.
Divisions -- Divisions into which the assets of the Series Account are divided,
each of which corresponds to an investment choice available to you.
Due Proof -- Such evidence as we may reasonably require in order to establish
that Policy Proceeds are due and payable.
Fund -- An underlying mutual fund in which a Division invests. Each Fund is an
investment company registered with the SEC or a separate investment series
of a registered investment company.
Initial Premium -- The initial premium amount specified in a Policy.
Insured -- The person whose life is insured under the Policy.
IssueAge -- The Insured's age as of the Insured's birthday nearest the Policy
Date.
Issue Date -- The date on which we issue a Policy.
Loan Account -- An account established for amounts transferred from the
Divisions as security for outstanding Policy Debt.
Policy Anniversary -- The same day in each succeeding year as the day of the
year corresponding to the Policy Date.
Policy Date -- The date coverage commences under your Policy and the date from
which Policy Months, Policy Years and Policy Anniversaries are measured.
Policy Debt -- The principal amount of any outstanding loan against the Policy,
plus accrued but unpaid interest on such loan.
Policy Month -- The one-month period commencing on the same day of the month as
the Policy Date.
A-1
<PAGE>
Policy Proceeds -- The amount determined in accordance with the terms of the
Policy which is payable at the death of the Insured. This amount is the
death benefit, decreased by the amount of any outstanding Policy Debt, and
increased by the amounts payable under any supplemental benefits.
Policy Year -- The one-year period commencing on the Policy Date or any Policy
Anniversary and ending on the next Policy Anniversary.
Principal Office -- Great-West Life & Annuity Insurance Company, 8515 East
Orchard Road, Englewood, Colorado 80111, or such other address as we may
hereafter specify to you by written notice.
Request -- Any instruction in a form, written, telephoned or computerized,
satisfactory to us and received at our Principal Office from you as
required by any provision of your Policy or as required by us. The Request
is subject to any action taken or payment made by us before it is
processed.
SEC -- The United States Securities and Exchange Commission.
Series Account -- COLI VUL-2 Series Account of Great-West Life & Annuity
Insurance Company.
TotalFace Amount -- The amount of life insurance coverage you request as
specified in your Policy.
Unit -- An accounting unit of measurement that we use to calculate the value of
each Division.
Unit Value -- The value of each Unit in a Division.
Valuation Date -- Any day that benefits vary and on which the New York Stock
Exchange is open for regular business, except as may otherwise be required
or permitted by the applicable rules and regulations of the SEC.
Valuation Period -- The period of time from one determination of Unit Values to
the next following determination of Unit Values. We will determine Unit
Values for each Valuation Date as of the close of the New York Stock
Exchange on that Valuation Date.
A-2
<PAGE>
Appendix B -- Table of Death Benefit Percentages
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Applicable Applicable
Age Percentage Age Percentage
20 250% 60 130%
21 250% 61 128%
22 250% 62 126%
23 250% 63 124%
24 250% 64 122%
25 250% 65 120%
26 250% 66 119%
27 250% 67 118%
28 250% 68 117%
29 250% 69 116%
30 250% 70 115%
31 250% 71 113%
32 250% 72 111%
33 250% 73 109%
34 250% 74 107%
35 250% 75 105%
36 250% 76 105%
37 250% 77 105%
38 250% 78 105%
39 250% 79 105%
40 250% 80 105%
41 243% 81 105%
42 236% 82 105%
43 229% 83 105%
44 222% 84 105%
45 215% 85 105%
46 209% 86 105%
47 203% 87 105%
48 197% 88 105%
49 191% 89 105%
50 185% 90 105%
51 178% 91 104%
52 171% 92 103%
53 164% 93 102%
54 157% 94 101%
55 150% 95 100%
56 146% 96 100%
57 142% 97 100%
58 138% 98 100%
59 134% 99 100%
</TABLE>
B-1
<PAGE>
Appendix C -- Sample Hypothetical Illustrations
Illustrations of Death Benefits, Surrender Values And Accumulated Premiums
The illustrations in this prospectus have been prepared to help show how values
under the Policy change with investment performance. The illustrations on the
following pages illustrate the way in which a Policy Year's death benefit,
Account Value and Cash Surrender Value could vary over an extended period of
time. They assume that all premiums are allocated to and remain in the Series
Account for the entire period shown and are based on hypothetical gross annual
investment returns for the Funds (i.e., investment income and capital gains and
losses, realized or unrealized) equivalent to constant gross annual rates of 0%,
6%, and 12% over the periods indicated.
The Account Values and death benefits would be different from those shown if the
gross annual investment rates of return averaged 0%, 6%, and 12% over a period
of years, but fluctuated above or below such averages for individual Policy
Years. The values would also be different depending on the allocation of a
Policy's total Account Value among the Divisions of the Series Account, if the
actual rates of return averaged 0%, 6% or 12%, but the rates of each Fund varied
above and below such averages.
The amounts shown for the death benefits and Account Values take into account
all charges and deductions imposed under the Policy based on the assumptions set
forth in the tables below. These include the Expense Charges Applied to Premium,
the Daily Risk Percentage charged against the Series Account for mortality and
expense risks, the Monthly Service Charge and the Monthly Cost of Insurance. The
Expense Charges Applied to Premium is equal to a guaranteed maximum of 6.5% for
sales load and a guaranteed maximum of 3.5% to cover our federal tax obligations
and the applicable local and state premium tax. The current level of these
charges is 5.5% (for Policy Years 1 through 10 only) and 3.5%, respectively. The
Daily Risk Percentage charged against the Series Account for mortality and
expense risks is an annual effective rate of 0.40% for the first five Policy
Years, 0.25% for Policy Years 6 through 20, and 0.10% thereafter and is
guaranteed not to exceed an annual effective rate of 0.90%. The Monthly Service
Charge is $10.00 per month for first three Policy Years and $7.50 per Policy
Month for all Policy Years thereafter. This Charge is guaranteed not to exceed
$15 per Policy Month.
The amounts shown in the tables also take into account the Funds' advisory fees
and operating expenses, which are assumed to be at an annual rate of 0.82% of
the average daily net assets of each Fund. This is based upon a simple average
of the advisory fees and expenses of all the Funds for the most recent fiscal
year taking into account any applicable expense caps or expense reimbursement
arrangements. Actual fees and expenses that you will incur may be more or less
than 0.82%, and will vary from year to year. See "Charges and Deductions -- Fund
Expenses" in this prospectus and the prospectuses for the Funds for more
information on Fund expenses. The gross annual rates of investment return of 0%,
6% and 12% correspond to net annual rates of -1.22%, 4.76%, and 10.74%,
respectively, during the first five Policy Years, -1.07%, 4.92%, and 10.90%,
respectively, for Policy Years 6 through 20, and -0.92%, 5.07% and 11.07%,
respectively, thereafter.
The hypothetical returns shown in the tables do not reflect any charges for
income taxes against the Series Account since no charges are currently made. If,
C-1
<PAGE>
in the future, such charges are made, in order to produce the illustrated death
benefits, Account Values and Cash Surrender Values, the gross annual investment
rate of return would have to exceed 0%, 6%, or 12% by a sufficient amount to
cover the tax charges.
The second column of each table shows the amount which would accumulate if an
amount equal to each premium were invested and earned interest, after taxes, at
5% per year, compounded annually.
We will furnish upon request a comparable table using any specific set of
circumstances. In addition to a table assuming Policy charges at their maximum,
we will furnish a table assuming current Policy charges.
C-2
<PAGE>
TABLE 1
Great-West Life & Annuity Insurance Company
COLI VUL-2 Series Account
Male, Age 45
$1,000,000 Total Face Amount
Annual Premium $12,524.03
Death Benefit Option 1
Current Policy Charges
<TABLE>
<CAPTION>
Hypothetical 0% Hypothetical 6% Hypothetical 12%
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
plus Net -1.22% Net 4.76% Net 10.74%
interest
Policy At 5% Contract Surrender Death Contract Surrender Death Contract Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
---- ------- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 13,150 9,611 9,611 1,000,000 10,239 10,239 1,000,000 10,868 10,868 1,000,000
2 26,958 16,904 16,904 1,000,000 18,697 18,697 1,000,000 20,569 20,569 1,000,000
3 41,456 24,136 24,136 1,000,000 27,592 27,592 1,000,000 31,353 31,353 1,000,000
4 56,679 30,877 30,877 1,000,000 36,504 36,504 1,000,000 42,888 42,888 1,000,000
5 72,663 36,994 36,994 1,000,000 45,295 45,295 1,000,000 55,117 55,117 1,000,000
6 89,447 42,793 42,793 1,000,000 54,287 54,287 1,000,000 68,478 68,478 1,000,000
7 107,069 48,108 48,108 1,000,000 63,311 63,311 1,000,000 82,909 82,909 1,000,000
8 125,573 52,834 52,834 1,000,000 72,262 72,262 1,000,000 98,431 98,431 1,000,000
9 145,002 56,980 56,980 1,000,000 81,150 81,150 1,000,000 115,192 115,192 1,000,000
10 165,402 60,553 60,553 1,000,000 89,980 89,980 1,000,000 133,359 133,359 1,000,000
11 186,823 66,022 66,022 1,000,000 101,259 101,259 1,000,000 155,615 155,615 1,000,000
12 209,314 71,356 71,356 1,000,000 113,058 113,058 1,000,000 180,347 180,347 1,000,000
13 232,930 76,557 76,557 1,000,000 125,409 125,409 1,000,000 207,849 207,849 1,000,000
14 257,727 81,190 81,190 1,000,000 137,921 137,921 1,000,000 238,058 238,058 1,000,000
15 283,763 85,264 85,264 1,000,000 150,618 150,618 1,000,000 271,330 271,330 1,000,000
16 311,101 88,677 88,677 1,000,000 163,424 163,424 1,000,000 307,975 307,975 1,000,000
17 339,807 91,326 91,326 1,000,000 176,262 176,262 1,000,000 348,366 348,366 1,000,000
18 369,947 93,111 93,111 1,000,000 189,057 189,057 1,000,000 392,942 392,942 1,000,000
19 401,595 93,928 93,928 1,000,000 201,733 201,733 1,000,000 442,224 442,224 1,000,000
C-3
<PAGE>
TABLE 1
20 434,825 93,455 93,455 1,000,000 214,019 214,019 1,000,000 496,696 496,696 1,000,000
Age 60 283,763 85,264 85,264 1,000,000 150,618 150,618 1,000,000 271,330 271,330 1,000,000
Age 65 434,825 93,455 93,455 1,000,000 214,019 214,019 1,000,000 496,696 496,696 1,000,000
Age 70 507,488 70,019 70,019 1,000,000 270,597 270,597 1,000,000 873,902 873,902 1,353,875
Age 75 580,152 0 0 0 300,110 300,110 1,000,000 1,462,089 1,462,089 2,054,938
Notes:
(1) "0" values in the "Contract Value," "Surrender Value" and "Death Benefit"
columns indicate Policy lapse.
(2) Assumes a $12,524.03 premium is paid at the beginning of each Policy Year.
Values will be different if premiums are are paid with a different
frequency or in different amounts.
(3) Assumes that no policy loans have been made. Excessive loans or partial
withdrawals may cause your Policy to lapse due to insufficient Account
Value.
</TABLE>
The hypothetical investment rates of return are illustrative only, and should
not be deemed a representation of past or future investment rates of return.
Actual investment results may be more or less than those shown, and will depend
on a number of factors, including the investment allocations by a policy owner,
and the different investment rates of return for the Funds. The Cash Surrender
Value and death benefit for a Policy would be different from those shown if the
actual rates of investment return averaged 0%, 6%, and 12% over a period of
years, but fluctuated above and below those averages for individual Policy
Years. They would also be different if any policy loans or partial withdrawals
were made. No representations can be made that these hypothetical investment
rates of return can be achieved for any one year or sustained over any period of
time.
C-4
<PAGE>
TABLE 2
Great-West Life & Annuity Insurance Company
COLI VUL-2 Series Account
Male, Age 45
$1,000,000 Total Face Amount
Annual Premium $12,524.03
Death Benefit Option 1
Guaranteed Policy Charges
<TABLE>
<CAPTION>
Hypothetical 0% Hypothetical 6% Hypothetical 12%
Premiums Gross Investment Return Gross Investment Return Gross Investment Return
plus Net -1.22% Net 4.76% Net 10.74%
interest
Policy At 5% Contract Surrender Death Contract Surrender Death Contract Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
---- ------- ----- ----- ------- ----- ----- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 13,150 6,556 6,556 1,000,000 7,081 7,081 1,000,000 7,609 7,609 1,000,000
2 26,958 12,562 12,562 1,000,000 14,013 14,013 1,000,000 15,533 15,533 1,000,000
3 41,456 18,145 18,145 1,000,000 20,915 20,915 1,000,000 23,938 23,938 1,000,000
4 56,679 23,315 23,315 1,000,000 27,791 27,791 1,000,000 32,882 32,882 1,000,000
5 72,663 27,965 27,965 1,000,000 34,527 34,527 1,000,000 42,309 42,309 1,000,000
6 89,447 32,105 32,105 1,000,000 41,122 41,122 1,000,000 52,280 52,280 1,000,000
7 107,069 35,632 35,632 1,000,000 47,459 47,459 1,000,000 62,748 62,748 1,000,000
8 125,573 38,440 38,440 1,000,000 53,417 53,417 1,000,000 73,661 73,661 1,000,000
9 145,002 40,541 40,541 1,000,000 58,987 58,987 1,000,000 85,087 85,087 1,000,000
10 165,402 41,831 41,831 1,000,000 64,041 64,041 1,000,000 96,986 96,986 1,000,000
11 186,823 42,205 42,205 1,000,000 68,448 68,448 1,000,000 109,318 109,318 1,000,000
12 209,314 41,670 41,670 1,000,000 72,182 72,182 1,000,000 122,158 122,158 1,000,000
13 232,930 40,117 40,117 1,000,000 75,100 75,100 1,000,000 135,481 135,481 1,000,000
14 257,727 37,546 37,546 1,000,000 77,164 77,164 1,000,000 149,373 149,373 1,000,000
15 283,763 33,843 33,843 1,000,000 78,218 78,218 1,000,000 163,825 163,825 1,000,000
16 311,101 28,887 28,887 1,000,000 78,092 78,092 1,000,000 178,837 178,837 1,000,000
17 339,807 22,550 22,550 1,000,000 76,604 76,604 1,000,000 194,415 194,415 1,000,000
18 369,947 14,697 14,697 1,000,000 73,553 73,553 1,000,000 210,574 210,574 1,000,000
C-5
<PAGE>
TABLE 2
19 401,595 4,949 4,949 1,000,000 68,490 68,490 1,000,000 227,143 227,143 1,000,000
20 434,825 0 0 0 61,152 61,152 1,000,000 244,146 244,146 1,000,000
Age 60 283,763 33,843 33,843 1,000,000 78,218 78,218 1,000,000 163,825 163,825 1,000,000
Age 65 434,825 0 0 0 61,152 61,152 1,000,000 244,146 244,146 1,000,000
Age 70 504,028 0 0 0 0 0 0 335,014 335,014 1,000,000
Age 75 573,231 0 0 0 0 0 0 433,386 433,386 1,000,000
Notes:
(1) "0" values in the "Contract Value," "Surrender Value" and "Death Benefit"
columns indicate Policy lapse.
(2) Assumes a $12,524.03 premium is paid at the beginning of each Policy Year.
Values will be different if premium are paid with a different frequency or
in different amounts.
(3) Assumes that no policy loans have been made. Excessive loans or partial
withdrawals may cause your Policy to lapse due to insufficient Account
Value.
</TABLE>
The hypothetical investment rates of return are illustrative only, and should
not be deemed a representation of past or future investment rates of return.
Actual investment results may be more or less than those shown, and will depend
on a number of factors, including the investment allocations by a policy owner,
and the different investment rates of return for the Funds. The Cash Surrender
Value and death benefit for a Policy would be different from those shown if the
actual rates of investment return averaged 0%, 6%, and 12% over a period of
years, but fluctuated above and below those averages for individual Policy
Years. They would also be different if any policy loans or partial withdrawals
were made. No representations can be made that these hypothetical investment
rates of return can be achieved for any one year or sustained over any period of
time.
C-6
<PAGE>
[ Back Cover ]
The Securities and Exchange Commission maintains an Internet Web site
(http//www.sec.gov) that contains additional information about Great-West Life &
Annuity Insurance Company, the Policy and the Series Account which may be of
interest to you. The Web site also contains additional information about the
Policy Year's mutual fund investment options.
