As filed with the Securities and Exchange Commission on April 27, 2000
Registration No. 333-70963
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1 TO FORM S-6
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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COLI VUL-2 SERIES ACCOUNT
(Exact Name of Trust)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(Name of Depositor)
8515 East Orchard Road
Englewood, Colorado 80111
(Complete Address of Depositor's Principal Executive Offices)
William T. McCallum
President and Chief Executive Officer
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
8515 East Orchard Road
Englewood, Colorado 80111
(Name and Complete Address of Agent for Service)
Copies to:
James F. Jorden, Esq. Beverly A. Byrne, Esq.
Jorden Burt Boros Cicchetti Counsel
Berenson & Johnson LLP Great-West Life & Annuity Insurance
Company
1025 Thomas Jefferson Street, N.W. 8515 East Orchard Road
Washignton, D.C. 20007-5201 Englewood, Colorado 80111
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It is proposed that this filing will become effective (check appropriate
box):
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485.
[X] on May 1, 2000 pursuant to paragraph (b) of Rule 485.
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485.
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
-----------
Title of securities being offered - variable portion of individual flexible
premium variable universal life insurance policies.
----------
Approximate date of proposed public offering: continuous.
[ ] Check this box if it is proposed that this filing will become effective on
(date) at (time) pursuant to Rule 487.
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS
<TABLE>
<S> <C>
Item Number in Form N-8B-2 Caption in Prospectus
ORGANIZATION AND GENERAL INFORMATION
1. (a) Name of trust............................................................Cover, The Series Account,
Appendix A -
Glossary of
Terms
(b) Title of each class of securities issued............................... Cover, About the Policy
2. Name & address of each depositor............................................ Cover, Great-West Life &
Annuity Insurance
Company
3. Name & address of custodian .................................................. The Series Account
4. Name & address of principal underwriter.................................... Distribution of the Policy
5. State in which organized......................................................... The Series Account
6. Date of organization ..............................................................The Series Account
9. Material litigation .................................................................Other Information - - Legal
Proceedings
GENERAL DESCRIPTION OF THE TRUST AND SECURITIES OF THE TRUST
General Information Concerning Securities and Rights of Holders
10. (a), (b) Type of Securities........................................................ Cover, About the Policy
(c) Rights of security holders................................................Cover, About the Policy - -
re: withdrawal or redemption Termination of
Policy,
Surrenders, Policy
Loans
(d) Rights of security holders............................................... Cover, About the Policy - -
re: conversion, transfer or partial withdrawal Termination
of Policy, Partial
Withdrawals,
Surrenders,
Premium Payments,
Transfers
Between Divisions, Dollar
Cost Averaging, The
Rebalancer Option
(e) Rights of security holders............................................... About the Policy - -
re: lapses, default & reinstatement..................................... Termination of Policy, Grace
Period, Reinstatement
(f) Provisions re: voting rights............................................. Voting Rights
(g) Notice to security holders............................................... Report to Owners
(h) Consent of security holders.............................................Addition, Deletion, or
Substitution of
Investments,
Allocation of Net
Premium
(i) Other principal features..................................................About the Policy
Information Concerning Securities underlying Trust's Securities
11. Unit of specified securities in which security holders have an interest Cover, The Investment
Options
12. (a)-(d) Name of company, name & address of its custodian................Cover, The Investment Options
Information Concerning Loads, Fees, Charges & Expenses
13. (a) With respect to each load, fee, charge & expense..................About the Policy - - Charges
and Deductions
(b) Deductions for sales charges............................................ About the Policy - - Charges
and Deductions - -
Expense
Charges Applied to
Premium,
Supplemental Benefits
- - Term
Life Insurance Rider
(c) Sales load as percentage of amount invested........................ About the Policy - - Charges
and Deductions
(d)-(g)Other loads, fees & expenses........................................... About the Policy - - Charges
and Deductions
Information Concerning Operation of Trust
14. Procedure for applications for & issuance of trust's securities............. About the Policy - -
Policy
Application, Issuance
and
Initial Premium, About
the
Policy - - Premium
Payments -
- Allocation of Net
Premiums,
Distribution of the
Policy
15. Procedure for receipt of payments from purchase of trust's securities...... About the
Policy - - Policy
Application, Issuance
and
Initial Premium, About
the
Policy - - Premium
Payments,
About the Policy - -
Transfers
Between Divisions
16. Acquisition and disposition of underlying securities.......................... Cover, The Series Account,
The Investment Options
17. (a) Procedure for withdrawal................................................Cover, About the Policy - -
Termination of Policy,
Surrenders, Policy
Loans,
Partial Withdrawals,
Premium
Payments, Transfers
Between
Divisions, Dollar Cost
Averaging, The
Rebalancer
Option
(b) Redemption or repurchase.............................................. Cover, About the Policy - -
Termination of Policy,
Surrenders, Policy
Loans,
Partial Withdrawals,
Premium
Payments, Transfer
Between
Divisions, Dollar Cost
Averaging, The
Rebalancer
Option
(c) Cancellation or resale ................................................... Not Applicable
18. (a) Income of the Trust...................................................... The Investment Options, About
the Policy - - Premium
Payments - -
Allocation of Net
Premiums
19. Procedure for keeping records & furnishing information to security
holders ............................................................................. Report to Owner
21. (a) & (b) Loans to security holders............................................. About the Policy - - Policy
Loans
23. Bonding arrangements for depositor............................................ Great-West Life & Annuity
Insurance Company
24. Other material provisions...................................................... About the Policy - - Death
Benefit, Changes in Death
Benefit Option, Changes
in
Total Face Amount,
Paid-Up
Life Insurance, Deferral
of
Payment, Other Policy
Provisions
ORGANIZATION, PERSONNEL & AFFILIATED PERSON OF DEPOSITORS
Organization & Operations of Depositor
25. Form, state & date of organization of depositor.............................. Great-West Life & Annuity
Insurance Company
27. General character of business of depositor....................................Great-West Life & Annuity
Insurance Company
28. (a) Officials and affiliates of the depositor................................ Great-West Life & Annuity
Insurance Company, Our
Directors and Executive
Officers
(b) Business experience of officers and directors of the depositor..... Our Directors and
Executive
Officers
Companies Owning Securities of Depositor
29. Each company owning 5% of voting securities of depositor...............Great-West Life & Annuity
Insurance Company
Controlling Persons
30. Control of depositor..............................................................Great-West Life & Annuity
Insurance Company
DISTRIBUTION & REDEMPTIONS OF SECURITIES
Distribution of Securities
35. Distribution....................................................................... Great-West Life & Annuity
Insurance Company,
Distribution of the
Policy
38. (a) General description of method of distribution of securities...... Distribution of the
Policy
(b) Selling agreement between trust or depositor & underwriter..... Distribution of the
Policy
(c) Substance of current agreements...................................... Distribution of the Policy
Principal Underwriter
39. (a) & (b) Principal Underwriter................................................Distribution of the Policy
41. Character of Underwriter's business........................................... Distribution of the Policy
Offering Price or Acquisition Value of Securities of Trust
44. Information concerning offering price or acquisition valuation of The Investment
securities of trust. (All underlying securities are shares in registered About the Policy
- - -
investment companies).......................................................... Account Value
Redemption Valuation of Securities of Trust
46. Information concerning redemption valuation of securities of trust. (All The Investment
Options,
underlying securities are shares in a registered investment company)....About the Policy, - -
Account Value
Purchase & Sale of Interests in Underlying Securities
47. Maintenance of Position.......................................................... Cover, The Series Account,
The Investment Options,
About the Policy - -
Premium
Payments - - Allocation of
Net
Premium
INFORMATION CONCERNING TRUSTEE OR CUSTODIAN
48. Custodian of trust................................................................. The Series Account
50. Lien on trust assets...............................................................The Series Account
INFORMATION CONCERNING INSURANCE OF HOLDERS OF SECURITIES
51. (a) Name & address of insurer.............................................. Cover, Great-West Life &
Annuity Insurance Company
(b) Types of Contracts........................................................ Cover, About the Policy - -
Policy Application,
Issuance
and Initial Premium
Federal
Income Tax Consideration
(c) Risks insured & excluded............................................... About the Policy - - Death
Benefit, Paid-Up
Insurance,
Supplemental Benefits,
Other
Policy Provisions - -
Misstatement of Age or
Sex,
Suicide
(d) Coverage................................................................ Cover, About the Policy - -
Death Benefit, Changes in
Death Benefit Option,
Changes
in Total Face Amount
(e) Beneficiaries.............................................................. About the Policy - - Death
Benefits of Beneficiary
(f) Terms of cancellations & reinstatement................................ About the Policy - -
Termination of Policy
(g) Method of determining amount of premium paid by holder......... About the Policy - -
Policy
Application, Issuance and
Initial Premium
Payments
POLICY OF REGISTRANT
52. (a) & (c) Selection of Portfolio securities...................................... Addition, Deletion or
Substitution of
Investments
Regulated Investment Company
53. (a) Taxable status of trust.....................................................Our Taxes
FINANCIAL AND STATISTICAL INFORMATION
59. Financial Statements...............................................................Financial Statements
</TABLE>
* Items not listed are not applicable to this Registration Statement.
Great-West Life & Annuity Insurance Company
A Stock Company
8515 East Orchard Road
Englewood, Colorado 80111
(303) 689-3000
Key Business VUL -- 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.
The Securities and Exchange Commission has not approved or disapproved the
adequacy of this Prospectus. Any representation to the contrary is a criminal
offense.
The Date of this Prospectus is May 1, 2000
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
Appreciation Portfolio
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 Investment Funds, Inc.
INVESCO VIF - High Yield Fund
INVESCO VIF - Equity Income Fund
INVESCO VIF - Total Return Fund
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.
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.
Table of Contents
Summary of Policy......................1
Great-West Life & Annuity Insurance
Company6
The Series Account.....................7
The Investment Options ................7
Expenses of the Funds.................11
About the Policy .....................12
Policy Application, Issuance and Initial
Premium .........................12
Free Look Period ...................12
Premium Payments....................13
Premium..........................13
Net Premiums.....................13
Allocation of Net Premium........13
Planned Periodic Premiums........13
Death Benefit ......................14
Changes in Death Benefit Option.....15
Changes in Total Face Amount .......15
Minimum Changes..................15
Increases........................15
Decreases........................15
Surrenders..........................15
Partial Withdrawal..................16
Policy Loans........................16
Transfers Among Divisions...........17
Dollar Cost Averaging...............17
The Rebalancer Option...............18
Account Value ......................18
Net Investment Factor............19
Splitting Units..................19
Charges and Deductions..............20
Expense Charges Applied
to Premium.......................20
Mortality and Expense Risk Charge20
Monthly Deduction................21
Monthly Risk Rates...........21
Service Charge...............21
Transfer Fee .......................21
Partial Withdrawal Fee .............22
Change of Death Benefit Option
Fee................................22
Fund Expenses......................22
Paid-Up Life Insurance.............22
Supplemental Benefits..............22
Term Life Insurance Rider..........22
Change of Insured Rider............23
Continuation of Coverage...........23
Grace Period ......................23
Termination of Policy..............24
Reinstatement......................24
Deferral of Payment................24
Rights of Owner ...................25
Rights of Beneficiary..............25
Other Policy Provisions............25
Exchange of Policy..............25
Addition, Deletion or Substitution of
Investments..................25
Entire Contract.................26
Alteration......................26
Modification....................26
Assignments.....................26
Non-Participating...............26
Misstatement of Age or Sex (Non-
Unisex Policy)...............26
Suicide.........................26
Incontestability................27
Report to Owner.................27
Illustrations...................27
Notice and Elections............27
Performance Information and Illustrations 27
Fund Performance...................27
Adjusted Fund Performance..........28
Other Information. ................28
Policy Illustrations...............28
Federal Income Tax Considerations.....28
Tax Status of the Policy...........29
Diversification of Investments..29
Policy Owner Control............29
Tax Treatment of Policy Benefits29
Life Insurance Death Benefit
Proceeds...................29
Tax Deferred Accumulation....29
Distributions....................29
Modified Endowment Contracts.....30
Distributions Under Modified Endowment
Contracts....................30
Distributions Under a Policy That Is Not
a MEC........................31
Multiple Policies................31
Treatment When Insured Reaches
Attained Age 100.............31
Federal Income Tax Withholding...31
Actions to Ensure Compliance with the
Tax Law......................31
Trade or Business Entity Owns or is Directly
or Indirectly a Beneficiary of the
Policy.......................31
Other Employee Benefit Programs..32
Policy Loan Interest.............32
Our Taxes........................32
Distribution of the Policy ...........32
Voting Rights ........................33
Our Directors and Executive Officers..34
Other Information.....................36
State Regulation.................36
Legal Proceedings................36
Legal Matters....................36
Experts..........................36
Registration Statements..........36
Financial Statements..................38
Appendix A -- Glossary of Terms......A-1
Appendix B -- Table of Death Benefit ...
Percentages.....................B-1
Appendix C -- Sample Hypothetical
Illustrations ..................C-1
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.
9
The Total Face Amount is the minimum amount of life insurance coverage specified
in your Policy.
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.
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 -
1. a fixed benefit equal to the Total Face Amount of your Policy;
2. a variable benefit equal to the sum of the Total Face Amount and your
Policy's Account Value; or
3. 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.
Cash Surrender Value is Account Value minus any accrued and unpaid policy
charges and any Policy Debt.
Account Value is the sum of the amounts in each Division and the amount of the
Loan Account.
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.
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 --
1. term life insurance; and
2. 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 tax purposes and you have had positive net investment
performance.
o You may surrender your Policy for its Cash Surrender Value. There are no
surrender charges associated with your Policy.
o You may withdraw a portion of your Policy's Account Value at any time while
your Policy is in force.
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 --
3. the premiums you pay;
4. the investment performance of the Divisions you select;
5. any Policy loans or partial withdrawals;
6. your Loan Account balance; and
7. 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 -
1. a Monthly Risk Charge, to cover our anticipated costs of providing
insurance under the Policy;
2. the cost of any supplemental benefit riders you choose to add to your
Policy;
3. 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
4. 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 20.
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. Set forth below
is a table of current estimates of these costs. The prospectuses for the Funds
describe their respective charges and expenses in more detail. 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.
Table of Fees and Expenses of the Funds
(as a percentage of net assets for the period ended December 31, 1999)
<TABLE>
Management Other Gross Less Fee Net
Fees Expenses Total Waivers & Total
Annual Expense Annual
Operating Reimbursement Operating
Fund Expenses Expenses
---------------------------------------- ------------- -------- ---------- -----------------------
American Century Variable Portfolios, Inc.
<S> <C> <C> <C> <C> <C> <C>
o American Century VP Income & 0.70%1 0.00% 0.70% 0.00% 0.70%
Growth 1.34%1 0.00% 1.34% 0.00% 1.34%
o American Century VP International 1.00%1 0.00% 1.00% 0.00% 1.00%
o American Century VP Value
Dreyfus Stock Index Fund 0.25% 0.01% 0.26% 0.00% 0.26%
Dreyfus Variable Investment Fund
Appreciation Portfolio 0.75% 0.03% 0.78% 0.00% 0.78%
Growth and Income Portfolio 0.75% 0.04% 0.79% 0.00% 0.79%
Federated Insurance Series
o Federated American Leaders Fund 0.75% 0.13% .88% 0.00% 0.88%2
II 0.55% 0.19% .85% 0.00% 0.85%3
o Federated Growth Strategies Fund 0.60% 0.44% 0.79% 0.00% 0.79%4
II .54% 0.71% 1.25% 0.00% 1.25%5
o Federated High Income Bond Fund II
o Federated International Equity
Fund II
INVESCO Variable Investment Funds, Inc.
o INVESCO VIF - High Yield Fund 0.60% 0.48% 1.08% 0.00%6 1.08%
o INVESCO VIF - Equity Income Fund 0.75% 0.44% 1.19% 0.00%7 1.19%
o INVESCO VIF - Total Return Fund 0.75% 0.55% 1.30% 0.00%8 1.30%
Janus Aspen Series
o Balanced Portfolio 0.65% 0.02% 0.67% 0.00%9 0.67%
o Flexible Income Portfolio 0.65% 0.07% 0.72% 0.00% 0.72%
o High-Yield Portfolio 0.75% 4.17% 4.92% 3.92%10 1.00%
o Worldwide Growth Portfolio 0.65% 0.05% 0.70% 0.00%9 0.70%
Maxim Series Fund, Inc.
o Maxim Loomis Sayles Corporate 0.90% 0.00% 0.90% 0.00% 0.90%
Bond Portfolio 1.00% 0.16% 1.16% 0.02% 1.14%
o Maxim INVESCO ADR Portfolio 1.00% 0.00% 1.00% 0.00% 1.00%
o Maxim INVESCO Balanced Portfolio 0.95% 0.14% 1.09% 0.02% 1.07%
o Maxim INVESCO Small-Cap Growth 0.95% 0.09% 1.04% 0.00% 1.04%
Portfolio 0.46% 0.00% 0.46% 0.00% 0.46%
o Maxim Ariel MidCap Value Portfolio 0.60% 0.00% 0.60% 0.00% 0.60%
o Maxim Money Market Portfolio
o Maxim U.S. Government Securities
Portfolio
Maxim Profile Portfolios:
o Maxim Aggressive Profile Portfolio 0.25% 0.00% 0.25% 0.00% 0.25%
o Maxim Moderately Aggressive 0.25% 0.00% 0.25% 0.00% 0.25%
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 0.25% 0.00% 0.25% 0.00% 0.25%
Profile Portfolio
o Maxim Conservative Profile
Portfolio
Neuberger Berman Advisers Management Trust
o Guardian Portfolio 0.85% 0.15% 1.00% 0.00% 1.00%
o Mid-Cap Growth Portfolio 0.85% 0.23% 1.08% 0.08%11 1.00%
o Partners Portfolio 0.80% 0.07% 0.87% 0.00% 0.87%
o Socially Responsive Portfolio 0.85% 8.19% 9.04% 7.51%12 1.53%
</TABLE>
1 American Century Variable Portfolios, Inc. The funds have a stepped fee
schedule. As a result, the funds management fee rate generally decreases as
the fund assets increase. 2Federated Insurance Series - American Leaders Fund
II The Fund did not pay or accrue the shareholder services fee during the
fiscal year ended December 31 1999. The Fund has no present intention of
paying or accruing the shareholder services fee during the fiscal year ending
December 31 2000.
3Federated Insurance Series - Growth Strategies Fund II The Fund did not pay
or accrue the shareholder services fee during the fiscal year ended December
31 1999. The Fund has no present intention of paying or accruing the
shareholder services fee during the fiscal year ending December 31 2000. The
total operating expenses would have been 1.05% absent the voluntary waiver of
a portion of the management fee.
4Federated Insurance Series - High Income Bond Fund II The Fund did not pay or
accrue the shareholder services fee during the fiscal year ended December 31,
1999. The Fund has no present intention of paying or accruing the shareholder
services fee during the fiscal year ending December 31, 2000.
5 Federated Insurance Series - International Equity Fund II The Fund did not
pay or accrue the shareholder services fee during the fiscal year ended
December 31 1999. The Fund has no present intention of paying or accruing the
shareholder services fee during the fiscal year ending December 3, 2000. The
maximum shareholder services fee is 0.25%. The total operating expenses would
have been 1.46% absent the voluntary waiver of a portion of the management
fee.
6 INVESCO Variable Investment Funds, Inc. - High Yield Fund The information in
the table has been restated from the financials to reflect a change in the
administrative services fee. Certain expenses of the Fund were absorbed
voluntarily by INVESCO in order to ensure that expenses for the Fund did not
exceed 1.05% of the Fund's average net assets pursuant to a commitment letter
between the Fund and INVESCO. The commitment may be changed at any time
following consultation with the board of directors. After absorption, but
excluding any expense offset arrangements, the Fund's Other Expenses and Total
Annual Fund Operating Expenses for the fiscal year ended December 31, 1999
were 0.47% and 1.07%, respectively, of the Fund's average net assets.
7INVESCO Variable Investment Funds, Inc. - Equity Income Fund The information
in the table has been restated from the financials to reflect a change in the
administrative services fee. Certain expenses of the Fund were absorbed
voluntarily by INVESCO in order to ensure that expenses for the Fund did not
exceed 1.15% of the Fund's average net assets pursuant to a commitment letter
between the Fund and INVESCO. The commitment may be changed at any time
following consultation with the board of directors. After absorption, but
excluding any expense offset arrangements, the Fund's Other Expenses and Total
Annual Fund Operating Expenses for the fiscal year ended December 31, 1999
were 0.42% and 1.17%, respectively, of the Fund's average net assets.
8INVESCO Variable Investments Fund, Inc. - Total Return Fund The information
in the table has been restated from the financials to reflect a change in the
administrative services fee. Certain expenses of the Fund were absorbed
voluntarily by INVESCO in order to ensure that expenses for the Fund did not
exceed 1.15% of the Fund's average net assets pursuant to a commitment letter
between the Fund and INVESCO. The commitment may be changed at any time
following consultation with the board of directors. After absorption, but
excluding any expense offset arrangements, the Fund's Other Expenses and Total
Annual Fund Operating Expenses for the fiscal year ended December 31, 1999
were 0.42% and 1.17%, respectively, of the Fund's average net assets.
9Janus Aspen Series Expenses are based upon expenses for the fiscal year ended
December 31, 1999, restated to reflect a reduction in the management fee for
Worldwide Growth and Balanced Income Portfolios. Expenses are stated both with
and without contractual waivers by Janus Capital. Waivers, if applicable, are
first applied against the management fee and then against other expenses, and
will continue until at least the next annual renewal of the advisory
agreement. All expenses are shown without the effect of expense offset
arrangements.
10 Janus Aspen Series - High-Yield Portfolio Janus Capital may modify or
terminate the fee waiver at any time upon at least 90 days notice to the
Trustee. 11Neuberger 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. 12Neuberger Berman Advisers Management Trust -
Socially Responsive Portfolio Management has voluntarily undertaken to limit
the Portfolio's operating expenses which exceed in aggregate 1.53% per annum
of the Portfolio's average daily net assets.
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.
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 generally 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 28 and consult your
tax adviser.
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 ("Great-West Life"). 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.
The assets of the Series Account are insulated from our general liabilities.
The Series Account is registered with the SEC
The Series Account has 33 Divisions. Each Division invests exclusively in shares
of a single mutual fund portfolio.
The Fund Prospectuses have more information about the Funds, and may be obtained
from us without charge.
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.
We will at all times maintain assets in the Series Account with a total market
value at least equal to the reserves and other liabilities relating to the
variable benefits under all policies participating in the Series Account. Those
assets may not be charged with our liabilities from our other business. Our
obligations under those policies are, however, our general corporate
obligations.
The Series Account is divided into 33 Divisions. Each Division invests
exclusively in shares of a corresponding investment portfolio of a registered
investment company (commonly known as a mutual fund). We may in the future add
new or delete existing Divisions. The income, gains or losses, realized or
unrealized, from assets allocated to each Division are credited to or charged
against that Division without regard to the other income, gains or losses of the
other Divisions. All amounts allocated to a Division will be used to purchase
shares of the corresponding Fund. The Divisions will at all times be fully
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.
The Investment Options
The Policy offers a number of investment options, corresponding to the
Divisions. Each Division invests in a single Fund. Each Fund is a mutual fund
registered under the 1940 Act, or a separate series of shares of such a mutual
fund. More comprehensive information, including a discussion of potential risks,
is found in the current prospectuses for the Funds (the "Fund Prospectuses").
The Fund Prospectuses should be read in connection with this Prospectus. You may
obtain a copy of each Fund Prospectus without charge by Request.
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.
Some of the Funds' investment advisers or distributors compensate us for
providing the administrative, recordkeeping and reporting services they would
normally be required to provide for individual shareholders. Such compensation
is paid out of the investment adviser's or the distributor's assets.
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.
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)
Appreciation Portfolio seeks to provide long-term capital growth
consistent with the preservation of capital by investing primarily in
common stocks focusing on "blue-chip" companies with total market values
of more than $5 billion at the time of purchase. Current income is a
secondary goal. Fayez Sarofim & Co. is the sub-adviser to this Fund and,
as such, provides day-to-day management.
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 stocks, bonds 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."
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 Investment Funds, Inc. (advised by INVESCO Funds Group, Inc.)
INVESCO VIF - High Yield Fund 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 Fund 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 Fund seeks a high total return on investment
through capital appreciation and current income by investing primarily in
dividend paying common stocks and fixed income securities, with a focus on
obligations of the U.S. Government and its agencies and instrumentalities.
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.
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, Inc. 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 the Money Market Portfolio 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.
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.
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.
The Funds may also be available to separate accounts offering variable annuity,
variable life products and qualified plans 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 3 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" 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 payment
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
During the free look period (ten days or longer where required by law), you may
cancel your Policy. If you exercise the free look privilege, you must return the
Policy to our Principal Office or to the representative from whom you purchased
the Policy.
Generally, premium payments will be allocated to the Divisions you selected on
the application. During the free look period, you may change your Division
allocations as well as your allocation percentages.
Policies returned during the free look period will be void from the date we
issued the Policy. In most states, we will refund your current Policy Account
Value. In those states, this amount may be higher or lower than your premium
payments, which means you bear the investment risk during the free look period.
Certain states require that we return the greater of your Policy Account Value
(less any surrenders, withdrawals and distributions already received) or the
amount of the premiums received. In those states, 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 20 of this Prospectus.
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.
We will credit premium payments received prior to the end of the Free Look
Period as described in the Free Look Period section of this Prospectus.
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.
You may choose from three death benefit options. Your choice will affect the
insurance charges we deduct from your Account Value and the amount of the death
benefit.
You may select from among three death benefit options.
Death Benefit
If your Policy is in force at the time of the Insured's death, we will pay the
beneficiary an amount based on the death benefit option you select once we have
received Due Proof of the Insured's death. The amount payable will be:
o the amount of the selected death benefit option, plus
o any amounts payable under any supplemental benefit riders added to your
Policy, less o the value of any Policy Debt on the date of the Insured's death,
less 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 29.
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 determine the minimum death benefit depend on the
testing procedure chosen and vary by age. The factors (expressed as percentages)
used for GPT are shown in Appendix B and those used for CVAT are set forth in
your Policy.
Under the GPT, there is also a maximum amount of premium that 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.
The Policy has three death benefit options.
Option 1. The "Level Death" Option. Under this option, the death benefit is --
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.
You may increase or decrease the Total Face Amount within certain limits.
If you surrender your Policy and receive its Cash Surrender Value, you may incur
taxes and tax penalties.
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.
Changes in Total Face Amount
You may increase or decrease the Total Face Amount of your Policy at any time
within certain limits.
Minimum Changes. Each increase or decrease in the Total Face Amount must be at
least $25,000. We reserve the right to change the minimum amount by which you
may change the Total Face Amount.
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
You may surrender your Policy for its Cash Surrender Value at any time while the
Insured is living. If you do, the insurance coverage and all other benefits
under the Policy will terminate.
Cash Surrender Value is your Policy's Account Value less the sum of:
o the outstanding balance of any Policy Debt; and
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.
If you withdraw part of the Cash Surrender Value, your Policy's death benefit
will be reduced and you may incur taxes and tax penalties.
You may borrow from us using your Policy's Account Value as collateral.
Partial Withdrawal
You may Request a partial withdrawal of Account Value at any time while the
Policy is in force. The amount of any partial withdrawal must be at least $500
and may not exceed 90% of your Policy's Account Value less the value of the Loan
Account. An administrative fee will be deducted from your Account Value for all
partial withdrawals after the first made during the same Policy Year. This
administrative fee is guaranteed to be no greater than $25.
If you have chosen either Death Benefit Option 1 or Death Benefit Option 3, then
the death benefit payable will be reduced by the amount of any partial
withdrawals.
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 29 of
this Prospectus.
Policy Loans
You may request a Policy loan of up to 90% of your Policy's Account Value,
decreased by the amount of any outstanding Policy Debt on the date the Policy
loan is made. When a Policy loan is made, a portion of your Account Value equal
to the amount of the Policy loan will be allocated to the Loan Account as
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.
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.
Dollar Cost Averaging permits you to transfer your Account Value at regular
intervals from one or more Divisions to other Divisions.
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 Among Divisions
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 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 intervals from any one or more
designated Divisions to one or more of the remaining, then available Divisions.
The Unit Value will be determined on the dates of the transfers. You must
specify the percentage to be transferred into each designated Division.
Transfers may be set up on any one of the following frequency periods: monthly,
quarterly, semiannually, or annually. The transfer will be initiated one
frequency period following the date of your request. We will provide a list of
Divisions eligible for Dollar Cost Averaging which may be modified from time to
time. Amounts transferred through Dollar Cost Averaging are not counted against
the twelve free transfers allowed in a calendar year. You may not participate in
Dollar Cost Averaging 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 permits your to rebalance your Account Value so that you
may maintain your chosen percentage allocation among Divisions.
A Valuation Date is any day on which we, the applicable Fund, and the NYSE are
open for business.
The Valuation Period is the period of time from one determination of Unit Values
to the next.
The Rebalancer Option
By Request, you may elect the Rebalancer Option in order to automatically
transfer Account Value among the Divisions on a periodic basis. There is no
charge for this service. This type of transfer program automatically reallocates
your Account Value so as to maintain a particular percentage allocation among
Divisions chosen by you. The amount allocated to each Division will grow or
decline at different rates depending on the investment experience of the
Divisions.
You may Request that rebalancing occur one time only, in which case the transfer
will take place on the date of the Request. This transfer will count as one
transfer towards the twelve free transfers allowed in a calendar year.
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.
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.
We measure the amounts in the Divisions in terms of Units and Unit Values. On
any given date, your interest in a Division is equal to the Unit Value
multiplied by the number of Units credited to you in that Division. Amounts
allocated to a Division will be used to purchase Units of that Division. Units
are redeemed when you make partial withdrawals, undertake Policy loans or
transfer amounts from a Division, and for the payment of Service Charges,
Monthly Risk Charges and other fees. The number of Units of each Division
purchased or redeemed is determined by dividing the dollar amount of the
transaction by the Unit Value for the Division. The Unit Value for each Division
was established at $10.00 for the first Valuation Date of the Division. The Unit
Value for any subsequent Valuation Date is equal to the Unit Value for the
preceding Valuation Date multiplied by the net investment factor (determined as
provided below). The Unit Value of a Division for any Valuation Date is
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.
The Account Value attributable to each Division of the Series Account on the
Policy Date equals: o that portion of net premium received and allocated to the
Division ,less o the Service Charges due on the Policy Date, less o the Monthly
Risk Charge due on the Policy Date, less o the Monthly Risk Charge for any
riders due on the Policy Date.
We apply your Initial Premium on the Policy Date, which will be the Issue Date
(if we have already received your Initial Premium) or the Business Day we
receive a premium equal to or in excess of the Initial Premium after we have
approved your Policy application.
The Account Value attributable to each Division of the Series Account on
subsequent Valuation Dates is equal to:
o the Account Value attributable to the Division on the preceding Valuation
Date multiplied by that Division's net investment factor, plus
o that portion of net premium received and allocated to the 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.
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.
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). 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.
Where permitted by applicable state insurance law, if your Policy is surrendered
for the Surrender Benefit within the first four Policy Years, we will return a
percentage of the Expense Charge. This percentage will be based on the Premium
that had been paid within 12 months prior to the date the surrender Request was
received by us at our Corporate Headquarters. This amount will be in addition to
the Surrender Benefit.
The Return of Expense Charge is based on the follwing:
Policy Year Premium Returned
Year 1 4%
Year 2 3%
Year 3 2%
Year 4 1%
Year 5+ 0%
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 that 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.
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 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 are not subject to the transfer fee and do not count
as transfers for this purpose (except 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 4. 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 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 31.
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 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 20 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 administrative expenses when you change 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.
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;
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.
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 20 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.
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.
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.
We may present mutual fund portfolio performance in sales literature.
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. 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 sometimes publish performance information related to the Fund, the Series
Account or the Policy in advertising, sales literature and other promotional
materials. This information is based on past investment results and is not an
indication of future performance.
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.
We do not make any guarantees about the Policy's tax status.
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; 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 counsel or other competent tax advisers for more complete
information. This discussion is based upon our understanding of the current
federal income tax laws as they are currently interpreted by the Internal
Revenue Service (the "IRS"). We make no representation as to the likelihood of
continuation of the 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.
We believe the Policy will be treated as a life insurance contract under federal
tax laws.
Death benefits generally are not subject to federal income tax.
Investment gains are normally not taxed unless distributed to you before the
Insured dies.
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
A Policy has certain tax advantages when treated as a life insurance contract
within the meaning of Section 7702 of the Internal Revenue Code of 1986, as
amended (the "Code"). We believe that the Policy meets the Section 7702
definition of a life insurance contract and will take whatever steps are
appropriate and reasonable to attempt to cause the Policy to comply with Section
7702. We reserve the right to amend the Policies to comply with any future
changes in the Code, any 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
Life Insurance Death Benefit Proceeds. In general, the amount of the death
benefit payable under your Policy is excludible from your gross income under the
Code.
If the death benefit is not received in a lump sum and is, 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 excludible from the beneficiary's income, and amounts attributable to
interest (occurring after the insured's death), which will be includible in the
beneficiary's income.
Tax Deferred Accumulation. Any increase in your Account Value is generally not
taxable to you unless you receive or are deemed to receive amounts from the
Policy before the Insured dies.
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.
If you pay more premiums than permitted under the seven-pay test, your Policy
will be a MEC.
If your Policy becomes a MEC, partial withdrawals, Policy loans and surrenders
may incur taxes and tax penalties.
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."
Modified Endowment Contracts. Section 7702A of the Code treats certain life
insurance contracts as "modified endowment contracts" ("MECs"). In general, a
Policy will be treated as a MEC if total premiums paid at any time during the
first seven Policy Years exceed the sum of the net level premiums which would
have been paid on or before that time if the Policy provided for paid-up future
benefits after the payment of seven level annual premiums ("seven-pay test"). In
addition, a Policy may be treated 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.
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 subject to tax up
to the amount equal to the excess (if any) of your Account Value
immediately before the distribution over the "investment in the contract"
at the time of the distribution.
o Second, policy loans and loans secured by a Policy are 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 to a taxpayer that is a natural person, and:
1. made when the taxpayer is age 59 1/2or older;
2. attributable to the taxpayer becoming disabled; or
3. is part of a series of substantially equal periodic payments for the
duration of the taxpayer's life (or life expectancy) or for the duration of
the longer of the taxpayer's or the beneficiary's life (or life
expectancies).
o
If your Policy is not a MEC, partial withdrawals or surrenders are taxed only if
they exceed your investment in your Policy and Policy loans are generally not
taxed. Distributions Under a Policy That Is Not a MEC. If your Policy is not a
MEC, a distribution is generally treated first as a tax-free recovery of the
"investment in the contract," and then as a distribution of taxable income to
the extent the distribution exceeds the "investment in the contract." An
exception is made for cash distributions that occur in the first 15 Policy Years
as a result of a decrease in the death benefit or other change which reduces
benefits under the Policy which are made for purposes of maintaining compliance
with Section 7702. Such distributions are taxed in whole or part as ordinary
income (to the extent of any gain in the Policy) under rules prescribed in
Section 7702.
If your Policy is not a MEC, policy loans and loans secured 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 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.
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.
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 and Beverly A. Byrne, 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. Beverly A.
Byrne's principal business address is 8525 East Orchard Road, Englewood,
Colorado 80111.
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.
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
Great-West's 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).
Directors
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Name (Age) (Date Elected to Board) Principal Occupation(s) For Last Five Years
James Balog (71) (1993) Director; Company Director
James W. Burns, O.C. (70) (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
Orest T. Dackow (63) (1991) President and Chief Executive Officer, Great-West Lifeco
Andre Desmarais (43) (1997) President and Co-Chief Executive Officer, Power
Corporation; Deputy Chairman, Power Financial
Paul Desmarais, Jr. (45) (1991) Chairman and Co-Chief Executive Officer, Power Corp;
Chairman, Power Financial
Robert G. Graham (68) (1991) Director since January 1996; previously Chairman and
Chief Executive Officer, Inter-City Products Corporation
Robert Gratton (56) (1991) Chairman of the Board of Great-West; President and Chief
Financial Officer, Power Financial
N. Berne Hart (70) (1991) Director; Company Director
Kevin P. Kavanagh (67) (1986) Director; Company Director
William Mackness (61) (1991) Director; previously, Dean, Faculty of Management,
University of Manitoba
William T. McCallum (57) (1990) President and Chief Executive Officer of Great-West
Jerry Edgar Alan Nickerson (63) (1994) Chairman of the Board, H.B. Nickerson & Sons Limited
The Honourable P. Michael Pittfield, Vice-Chairman, Power Corporation; Member of the Senate of
P.C., Q.C. (62) (1991) Canada
Michel Plessis-Belair, F.C.A. (57) Vice-Chairman and Chief Financial Officer, Power
(1991) Corporation; Executive Vice-President and Chief Financial
Officer, Power Financial
Brian E. Walsh (46) (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
Executive Officers
Name (Age) (Date Appointed Executive Principal Business Occupation For Last Five Years
- ------------------------------------- -------------------------------------------------
Officer)
- --------
Michael R. Bracco (32) (1999) Senior Vice President, Employee Benefits of Great-West
and Great-West Life; Vice President, Employee Benefits of
Great-West and Great-West Life; Vice President,
Corporate, Great-West and Great-West Life; Manager, Bain
& Company
John A. Brown (52) (1992) Senior Vice President, Healthcare Markets of Great-West
and Great-West Life
Donna A. Goldin (52) (1996) 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 Officer, Private Healthcare
Systems, Inc.
Mitchell T. G. Graye (44) (1997) Senior Vice President and Chief Financial Officer,
Great-West; Executive Vice President and Chief Financial
Officer, United States, Great-West Life
Mark S. Hollen (41) (2000) Senior Vice President, FASCorp, Great-West and Great-West
Life; Vice President, FASCorp, Great-West and Great-West
Life.
John T. Hughes (63) (1989) Senior Vice President, Chief Investment Officer of
Great-West and Great-West Life
D. Craig Lennox (52) (1984) Senior Vice President, General Counsel and Secretary of
Great-West; Senior Vice President and Chief U.S. Legal
Officer, Great-West Life
William T. McCallum (57) (1984) President and Chief Executive Officer of Great-West;
President and Chief Executive Officer, United States
Operations, Great-West Life
Steve H. Miller (47) (1997) Senior Vice President, Employee Benefits Sales of
Great-West and Great-West Life
James D. Motz (50) (1992) Executive Vice President, Employee Benefits of
Great-West and Great-West Life
Charles P. Nelson (39) (1998) Senior Vice President, Public/Non-Profit Markets of
Great-West and Great-West Life
Martin Rosenbaum (47) (1997) Senior Vice President, Employee Benefits of Great-West
and Great-West Life
Robert K. Shaw (44) (1998) Senior Vice President, Individual Markets of Great-West
and Great-West Life
George D. Webb II (56) (1999) Senior Vice President Public/Non-Profit Operations,
Financial Services of Great-West and Great-West Life;
Principal, William M. Mercer Investment Consulting, Inc.
Douglas L. Wooden (43) (1991) Executive Vice President, Financial Services of
Great-West and Great-West Life
</TABLE>
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, Vice President, 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, 1999 and 1998 and for each of the three years in the
period ended December 31, 1999 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report. We have included those
financial statements in reliance upon the report of such firm, given upon their
authority as experts in accounting and auditing.
Actuarial matters included in this Prospectus and the registration statement of
which it is a part, including the hypothetical 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.
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.
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, 1999, 1998, and 1997 and
Independent Auditors' Report
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,
1999 and 1998, 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, 1999. 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, 1999 and 1998, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1999, the Company adopted Statement of Position No. 98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use" and, accordingly, changed its method of accounting for
software development costs.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
January 31, 2000
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
===================================================================================================================================
1999 1998
---------------------- -----------------------
ASSETS
INVESTMENTS:
Fixed Maturities:
Held-to-maturity, at amortized cost (fair value
$2,238,581 and $2,298,936) $ 2,260,581 $ 2,199,818
Available-for-sale, at fair value (amortized cost
$6,953,383 and $6,752,532) 6,727,922 6,936,726
Common stock, at fair value (cost $43,978 and 69,240 48,640
$41,932)
Mortgage loans on real estate, net 974,645 1,133,468
Real estate, net 103,731 73,042
Policy loans 2,681,132 2,858,673
Short-term investments, available-for-sale (cost
approximates fair value) 240,804 420,169
---------------------- -----------------------
Total Investments 13,058,055 13,670,536
Cash 257,840 176,119
Reinsurance receivable
Related party 5,015 5,006
Other 168,307 187,952
Deferred policy acquisition costs 282,295 238,901
Investment income due and accrued 137,810 157,587
Other assets 308,419 311,078
Premiums in course of collection 142,199 84,940
Deferred income taxes 253,323 191,483
Separate account assets 12,780,016 10,099,543
---------------------- -----------------------
TOTAL ASSETS $ 27,393,279 $ 25,123,145
====================== =======================
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
====================================================================================================================================
1999 1998
----------------- -----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves
Related party $ 555,783 $ 555,300
Other 11,181,900 11,347,548
Policy and contract claims 391,968 428,798
Policyholders' funds 185,623 181,779
Provision for policyholders' dividends 70,726 69,530
GENERAL LIABILITIES:
Due to Parent Corporation 35,979 52,877
Due to GWL&A Financial 175,035
Repurchase agreements 80,579 244,258
Commercial paper 39,731
Other liabilities 638,469 761,505
Undistributed earnings on participating business 130,638 143,717
Separate account liabilities 12,780,016 10,099,543
----------------- -----------------
Total Liabilities 26,226,716 23,924,586
----------------- -----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Preferred stock, $1 par value, 50,000,000 shares authorized,
0 shares issued and outstanding
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 700,316 699,556
Accumulated other comprehensive income (loss) (84,861) 61,560
Retained earnings 544,076 430,411
----------------- -----------------
Total Stockholder's Equity 1,166,563 1,198,559
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 27,393,279 $ 25,123,145
================= =================
</TABLE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
===================================================================================================================================
1999 1998 1997
---------------- ---------------- ----------------
REVENUES:
Premiums
Related party (including premiums
recaptured totaling $0,
$0, and $155,798) $ $ 46,191 $ 155,798
Other (net of premiums ceded totaling
$85,803, $86,511 and $61,194) 1,163,183 948,672 677,381
Fee income 635,147 516,052 420,730
Net investment income
Related party (10,923) (9,416) (8,957)
Other 886,869 906,776 890,630
Net realized gains on investments 1,084 38,173 9,800
---------------- ---------------- ----------------
2,675,360 2,446,448 2,145,382
---------------- ---------------- ----------------
BENEFITS AND EXPENSES:
Life and other policy benefits (net of
reinsurance recoveries totaling $80,681,
$81,205, and $44,871) 970,250 768,474 543,903
Increase in reserves
Related party 46,191 155,798
Other 33,631 78,851 90,013
Interest paid or credited to contractholders 494,081 491,616 527,784
Provision for policyholders' share of earnings
on participating business 13,716 5,908 3,753
Dividends to policyholders 70,161 71,429 63,799
---------------- ---------------- ----------------
1,581,839 1,462,469 1,385,050
Commissions 173,405 144,246 102,150
Operating expenses (income):
Related party (768) (5,094) (6,292)
Other 593,575 518,228 431,714
Premium taxes 38,329 30,848 24,153
---------------- ---------------- ----------------
2,386,380 2,150,697 1,936,775
INCOME BEFORE INCOME TAXES 288,980 295,751 208,607
---------------- ---------------- ----------------
PROVISION FOR INCOME TAXES:
Current 72,039 81,770 61,644
Deferred 11,223 17,066 (11,797)
---------------- ---------------- ----------------
83,262 98,836 49,847
---------------- ---------------- ----------------
NET INCOME $ 205,718 $ 196,915 $ 158,760
================ ================ ================
</TABLE>
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(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 (Loss) Earnings Total
------------------------ -------------------- --------- ------------------------ ------------
BALANCE, JANUARY 1, 1997 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
Net income 205,718 205,718
Other comprehensive loss (146,421) (146,421)
------------
Total comprehensive loss 59,297
------------
Capital contributions
Dividends (92,053) (92,053)
Income tax benefit on stock
Compensation 760 760
------------------------ -------------------- --------- ------------------------ ------------
BALANCE, DECEMBER 31, 1999 0 0 7,032,000 7,032 $ 700,316 (84,861) 544,076 $ 1,166,563
======================== ==================== ========= ======================== ============
</TABLE>
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
===================================================================================================================================
1999 1998 1997
---------------- ---------------- ----------------
OPERATING ACTIVITIES:
Net income $ 205,718 $ 196,915 $ 158,760
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain allocated to participating
policyholders 13,716 5,908 3,753
Amortization of investments (22,514) (15,068) 409
Net realized gains on investments (1,084) (38,173) (9,800)
Depreciation and amortization 47,339 55,550 46,929
Deferred income taxes 11,223 17,066 (11,824)
Changes in assets and liabilities:
Policy benefit liabilities 650,959 938,444 498,114
Reinsurance receivable 19,636 (43,643) 112,594
Accrued interest and other receivables (37,482) 28,467 30,299
Other, net (146,150) (184,536) 64,465
---------------- ---------------- ----------------
Net cash provided by operating activities 741,361 960,930 893,699
---------------- ---------------- ----------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to maturity
Sales 9,920
Maturities and redemptions 520,511 471,432 359,021
Available-for-sale
Sales 3,176,802 6,169,678 3,174,246
Maturities and redemptions 822,606 1,268,323 771,737
Mortgage loans 165,104 211,026 248,170
Real estate 5,098 16,456 36,624
Common stock 18,116 3,814 17,211
Purchases of investments:
Fixed maturities
Held-to-maturity (563,285) (584,092) (439,269)
Available-for-sale (4,019,465) (7,410,485) (4,314,722)
Mortgage loans (2,720) (100,240) (2,532)
Real estate (41,482) (4,581) (64,205)
Common stock (19,698) (10,020) (29,608)
---------------- ---------------- ----------------
Net cash provided by (used in)
investing activities $ 61,587 $ 41,231 $ (243,327)
================ ================ ================
</TABLE>
(Continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
==================================================================================================================================
1999 1998 1997
---------------- ---------------- ----------------
FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (583,900) $ (507,237) $ (577,538)
Due to Parent Corporation (16,898) (73,779) (19,522)
Due to GWL&A Financial 175,035
Dividends paid (92,053) (80,036) (71,394)
Net commercial paper repayments (39,731) (14,327) (30,624)
Net repurchase agreements (repayments)
borrowings (163,680) (81,280) 38,802
Capital contributions 8,808 11,000
Purchase of preferred shares (121,800)
Acquisition of subsidiary (82,669)
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Net cash used in financing activities (721,227) (952,320) (649,276)
---------------- ---------------- ----------------
NET INCREASE IN CASH 81,721 49,841 1,096
CASH, BEGINNING OF YEAR 176,119 126,278 125,182
---------------- ---------------- ----------------
CASH, END OF YEAR $ 257,840 $ 176,119 $ 126,278
================ ================ ================
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 76,150 $ 111,493 $ 86,829
Interest 14,125 13,849 15,124
</TABLE>
See notes to consolidated financial statements. (Concluded)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Amounts in Thousands, except Share Amounts)
===============================================================================
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Great-West Life & Annuity Insurance Company (the Company) is
a wholly-owned subsidiary of GWL&A Financial Inc., a holding company formed
in 1998 (GWL&A Financial) and 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 inter-company transactions and balances have been eliminated in
consolidation.
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the 1999 presentation.
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 are carried at fair
value, with the net unrealized gains and losses reported as accumulated
other comprehensive income (loss) 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 (loss).
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 credit losses on its impaired
loans. Management's judgement 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.
Internal Use Software - Effective January 1, 1999, the Company adopted
Statement of Position (SOP) No. 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 provides
guidance on accounting for costs associated with computer software
developed or obtained for internal use. As a result of the adoption of SOP
98-1, the Company capitalized $18,373 in internal use software development
costs for the year ended December 31, 1999.
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 $43,512, $51,724, and $44,298 in 1999, 1998, and 1997,
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 $7,169,885 and $6,866,478 at December
31, 1999 and 1998, 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 $4,468,685 and $4,908,964
at December 31, 1999 and 1998, 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.
Participating Fund Account - Participating life and annuity policy reserves
are $4,297,823 and $4,108,314 at December 31, 1999 and 1998, respectively.
Participating business approximates 31.0%, 32.7%, and 50.5% of the
Company's ordinary life insurance in force and 94.0%, 71.9% and 91.1% of
ordinary life insurance premium income for the years ended December 31,
1999, 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 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 charges, are recognized
when due. Benefits and expenses on policies with life contingencies impact
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 6.2%, 6.3%,
and 6.6% in 1999, 1998, and 1997.
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 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.
Derivatives - The Company makes limited use of derivative financial
instruments to manage interest rate, market, and foreign exchange risk.
Such hedging activity consists primarily of interest rate swap agreements,
interest rate floors and caps, foreign currency exchange contracts, options
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 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. Written call
options are stock conversion protection agreements that require the
counter-party to automatically call the bond for cash when the issuer
elects to convert the bond to common stock. 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.
The Financial Accounting Standards Board has issued Statement No. 133,
"Accounting for Derivative Instruments and for Hedging Activities", which,
as amended, is required to be adopted in years beginning after June 15,
2000. This Statement provides a comprehensive and consistent standard for
the recognition and measurement of derivatives and hedging activities.
Although management has not completed its analysis of the impact of this
Statement, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial
position of the Company because of the Company's minimal use of
derivatives.
Stock Options - The Company applies the intrinsic value measurement
approach under APB Opinion No. 25 to stock-based compensation awards to
employees.
2. ACQUISITION
On July 8, 1998, the Company paid $82,669 in cash to acquire all of the
outstanding shares of Alta Health & Life Insurance Company (Alta), formerly
known as Anthem Health & Life Insurance Company. The purchase price was
based on Alta's adjusted book value, and was subject to further minor
adjustments. The results of Alta's operations, which had an insignificant
effect on net income in 1998, 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 goodwill representing the purchase price in excess of
fair value of net assets acquired is included in other assets and is being
amortized over 30 years on a straight-line basis.
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
increase in reserves, associated with certain policies, as a result of this
transaction. Of the $137,638 in reserves that was 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:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
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
============ ============
</TABLE>
===========================================================================
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
increase in reserves as a result of this transaction. Of the $428,152 in
reserves that was 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 amount, which approximates estimated fair
value, the following at September 30, 1998 as a result of this transaction:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Assets Liabilities and Stockholder's Equity
===========================================
===========================================
Bonds $ 147,475 Policy reserves $ 428,152
===========================================
Mortgages 82,637 Due to Parent Corporation 20,820
===========================================
Cash 134,900
===========================================
Deferred policy acquisition costs 9,724
===========================================
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 its 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 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:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
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
==================================== ================ ================
</TABLE>
In connection with this transaction, the Parent Corporation made a capital
contribution of $11,000 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.
The Company performs administrative services for the U.S. operations of the
Parent Corporation. The following represents revenue from 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.
<TABLE>
<S> <C>
Years Ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Investment management revenue $ 130 $ 475 $ 801
Administrative and underwriting revenue 768 5,094 6,292
</TABLE>
At December 31, 1999 and 1998, due to Parent Corporation includes $10,641
and $17,930 due on demand and $25,338 and $34,947 of notes payable which
bear interest and mature on October 1, 2006. 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 (6.7% and 6.1% at
December 31, 1999 and 1998, respectively) while the note payable bears
interest at 5.4%.
On May 4, 1999, the Company issued a $175,000 subordinated note to GWL&A
Financial, the proceeds of which were used for general corporate purposes.
The subordinated note bears interest at 7.25% and is due June 30, 2048.
Payments of principal and interest under this subordinated note shall be
made only with prior written approval of the Commissioner of Insurance of
the State of Colorado. Payments of principal and interest on this
subordinated note are payable only out of surplus funds of the Company and
only at such time as the financial condition of the Company is such that at
the time of payment of principal or interest, its surplus after the making
of any such payment would exceed the greater of $1,500 or 1.25 times the
company action level amount as required by the most recent risk based
capital calculations.
Interest expense attributable to these related party obligations was
$11,053, $9,891, and $9,758 for the years ended December 31, 1999, 1998 and
1997, 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, 1999 and 1998, the
reinsurance receivable had a carrying value of $173,322 and $192,958,
respectively.
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, 1999:
Life insurance in force:
Individual $ 35,362,934 $ 5,195,961 $ 8,467,877 $ 38,634,850 21.9%
Group 80,717,198 2,212,741 82,929,939 2.7%
--------------- ---------------- ---------------- ----------------
Total $ 116,080,132 $ 5,195,961 $ 10,680,618 $ 121,564,789
=============== ================ ================ ================
Premium Income:
Life insurance $ 306,101 $ 27,399 $ 46,715 $ 325,417 14.4%
Accident/health 801,755 58,247 79,753 823,261 9.7%
--------------- ---------------- ---------------- ----------------
Total $ 1,107,856 $ 85,646 $ 126,468 $ 1,148,678
=============== ================ ================ ================
December 31, 1998:
Life insurance in force:
Individual $ 34,017,379 $ 4,785,079 $ 8,948,442 $ 38,180,742 23.4%
Group 81,907,539 2,213,372 84,120,911 2.6%
--------------- ---------------- ---------------- ----------------
Total $ 115,924,918 $ 4,785,079 $ 11,161,814 $ 122,301,653
=============== ================ ================ ================
Premium Income:
Life insurance $ 352,710 $ 24,720 $ 65,452 $ 393,442 16.6%
Accident/health 571,992 61,689 74,284 584,587 12.7%
--------------- ---------------- ---------------- ----------------
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 insurance $ 320,456 $ (127,388) $ 19,923 $ 467,767 4.3%
Accident/health 341,837 32,645 34,994 344,186 10.2%
--------------- ---------------- ---------------- ----------------
Total $ 662,293 $ (94,743) $ 54,917 $ 811,953
=============== ================ ================ ================
</TABLE>
5. NET INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net investment income is summarized as follows:
Years Ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Investment income:
Fixed maturities and short-term investments $ 636,946 $ 638,079 $ 633,975
Mortgage loans on real estate 88,033 110,170 118,274
Real estate 19,618 20,019 20,990
Policy loans 167,109 180,933 194,826
Other 138 285 18
--------------- --------------- ---------------
911,844 949,486 968,083
Investment expenses, including interest on
amounts charged by the related parties
of $11,053, $9,891, and $9,758 35,898 52,126 86,410
--------------- --------------- ---------------
Net investment income $ 875,946 $ 897,360 $ 881,673
=============== =============== ===============
Net realized gains (losses) on investments are as follows:
Years Ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Realized gains (losses):
Fixed maturities $ (7,858) $ 38,391 $ 15,966
Mortgage loans on real estate 1,429 424 1,081
Real estate 513 363
Provisions 7,000 (642) (7,610)
--------------- --------------- ---------------
Net realized gains on investments $ 1,084 $ 38,173 $ 9,800
=============== =============== ===============
6. SUMMARY OF INVESTMENTS
Fixed maturities owned at December 31, 1999 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 $ 63,444 $ 448 $ 687 $ 63,205 $ 63,444
Collateralized mortgage
obligations 115,357 9,360 105,997 115,357
Public utilities 223,705 2,773 3,011 223,467 223,705
Corporate bonds 1,724,915 19,179 30,753 1,713,341 1,724,915
Foreign governments 10,000 213 10,213 10,000
State and municipalities 123,160 738 1,540 122,358 123,160
------------ -------------- ------------- ------------ ------------
$ 2,260,581 $ 23,351 $ 45,351 $ 2,238,581 $ 2,260,581
============ ============== ============= ============ ============
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 $ 752,130 $ 2,342 $ 21,459 $ 733,013 $ 733,013
Direct mortgage pass-
through certificates 304,099 1,419 11,704 293,814 293,814
Other 178,142 77 1,431 176,788 176,788
Collateralized mortgage
obligations 909,105 1,183 39,980 870,308 870,308
Public utilities 468,087 1,106 14,242 454,951 454,951
Corporate bonds 3,929,160 24,287 148,923 3,804,524 3,804,524
Foreign governments 41,224 654 1,256 40,622 40,622
State and municipalities 371,436 108 17,642 353,902 353,902
------------ -------------- ------------- ------------ ------------
$ 6,953,383 $ 31,176 $ 256,637 $ 6,727,922 $ 6,727,922
============ ============== ============= ============ ============
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 U.S.
Government Agencies $ 34,374 $ 1,822 $ $ 36,196 $ 34,374
Collateralized mortgage
obligations 10,135 194 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 10,133 782 10,915 10,133
State and municipalities 121,963 9,298 131,261 121,963
------------ -------------- ------------- ------------ ------------
$ 2,199,818 $ 103,755 $ 4,637 $ 2,298,936 $ 2,199,818
============ ============== ============= ============ ============
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 $ 863,479 $ 39,855 $ 1,704 $ 901,630 $ 901,630
Direct mortgage pass-
through certificates 467,100 4,344 692 470,752 470,752
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 56,505 2,732 59,237 59,237
State and municipalities 226,208 4,588 1,008 229,788 229,788
------------ -------------- ------------- ------------ ------------
$ 6,752,532 $ 207,791 $ 23,597 $ 6,936,726 $ 6,936,726
============ ============== ============= ============ ============
</TABLE>
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, 1999, 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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity Available-for-Sale
------------------------------------- ------------------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
----------------- ----------------- ----------------- ----------------
Due in one year or less $ 221,172 $ 220,644 $ 323,466 $ 334,701
Due after one year
through five years 945,199 941,685 1,286,402 1,251,690
Due after five years
through ten years 684,729 677,531 716,353 684,513
Due after ten years 118,170 121,921 690,073 650,432
Mortgage-backed
securities 115,357 105,997 1,965,334 1,897,135
Asset-backed securities 175,954 170,803 1,971,755 1,909,451
----------------- ----------------- ----------------- ----------------
$ 2,260,581 $ 2,238,581 $ 6,953,383 $ 6,727,922
================= ================= ================= ================
</TABLE>
Proceeds from sales of securities available-for-sale were $3,176,802,
$6,169,678, and $3,174,246 during 1999, 1998, and 1997, respectively. The
realized gains on such sales totaled $10,080, $41,136, and $20,543 for
1999, 1998, and 1997, respectively. The realized losses totaled $19,720,
$8,643, and $10,643 for 1999, 1998, and 1997, respectively. During the
years 1999, 1998, and 1997, held-to-maturity securities with and amortized
cost of $0, $9,920 and $0 were sold due to deterioration with insignificant
gains and losses.
At December 31, 1999 and 1998, pursuant to fully collateralized securities
lending arrangements, the Company had loaned $0 and $115,168 of fixed
maturities, respectively.
The Company engages in hedging activities to manage interest rate, market
and foreign exchange risk. The following table summarizes the 1999
financial hedge instruments:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Notional Strike/Swap
December 31, 1999 Amount Rate Maturity
----------------------------- --------------- ------------------------------ -------------------------
Interest Rate Caps $ 1,362,000 7.64% - 11.82% (CMT) 6/00 - 12/04
Interest Rate Swaps 217,528 4.94%-6.8% 02/00 - 12/06
Foreign Currency
Exchange Contracts 19,478 N/A 03/00 - 07/06
Equity Swap 104,152 5.15% - 5.93% 01/01
Options 54,100 Various 01/02 - 12/02
The following table summarizes the 1998 financial hedge instruments:
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
LIBOR - London Interbank Offered Rate
CMT - Constant Maturity Treasury Rate
</TABLE>
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, 1999, approximately 34% 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 mortgage loans:
<TABLE>
<S> <C> <C>
1999 1998
====================================================================== ---------------- ----------------
======================================================================
Loans with related allowance for credit losses of
======================================================================
$14,727 and $2,492 $ 25,877 $ 13,192
======================================================================
Loans with no related allowance for credit losses 17,880 10,420
======================================================================
Average balance of impaired loans during the year 43,866 31,193
======================================================================
Interest income recognized (while impaired) 1,877 2,308
======================================================================
Interest income received and recorded (while impaired)
======================================================================
using the cash basis method of recognition 1,911 2,309
======================================================================
</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, aggregated
$75,691 and $52,913 at December 31, 1999 and 1998, respectively.
The following table presents changes in allowance for credit losses:
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
--------------- --------------- ---------------
Balance, beginning of year $ 67,242 $ 67,242 $ 65,242
Provision for loan losses (7,000) 642 4,521
Chargeoffs - (787) (2,521)
Recoveries 1,000 145
--------------- --------------- ---------------
Balance, end of year $ 61,242 $ 67,242 $ 67,242
=============== =============== ===============
</TABLE>
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, 1999, no commercial paper
was outstanding. 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%.
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<S> <C>
December 31,
---------------------------------------------------------------------
1999 1998
--------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- -------------- -------------- --------------
ASSETS:
Fixed maturities and
short-term investments $ 9,229,307 $ 9,207,307 $ 9,556,713 $ 9,655,831
Mortgage loans on real
Estate 974,645 968,964 1,133,468 1,160,568
Policy loans 2,681,132 2,681,132 2,858,673 2,858,673
Common stock 69,240 69,240 48,640 48,640
LIABILITIES:
Annuity contract reserves
without life contingencies 4,468,685 4,451,465 4,908,964 4,928,800
Policyholders' funds 185,623 185,623 181,779 181,779
Due to Parent Corporation 35,979 33,590 52,877 52,877
Due to GWL&A Financial 175,035 137,445 - - - -
Repurchase agreements 80,579 80,579 244,258 244,258
Commercial paper - - - - 39,731 39,731
</TABLE>
<TABLE>
<S> <C>
December 31,
---------------------------------------------------------------------
1999 1998
--------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- -------------- -------------- --------------
HEDGE CONTRACTS:
Interest rate floor - - - - 17 17
Interest rate caps 4,140 4,140 971 971
Interest rate swaps (1,494) (1,494) 6,125 6,125
Foreign currency exchange
contracts (10) (10) 689 689
Equity swap (7,686) (7,686) (8,150) (8,150)
Options (6,220) (6,220) - - - -
</TABLE>
The estimated fair values of financial instruments have been determined
using available information and appropriate valuation methodologies.
However, considerable judgement is 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 discounted cash
flows. 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 rates on high quality investments.
The fair value of due to GWL&A Financial reflects the price determined in
the public market at December 31, 1999.
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 loss position for interest rates swaps are $772 and $0
of unrealized losses in 1999 and 1998, respectively. Included in the net
gain position for foreign currency exchange contracts are $518 and $932 of
loss exposures in 1999 and 1998, respectively.
The carrying amounts for receivables and liabilities reported in the
balance sheet approximate fair value due to their short term nature.
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:
<TABLE>
<S> <C> <C>
Prepaid pension cost $ 19,091 Undistributed earnings on $ 3,608
====================================
Participating business
====================================
Stockholder's equity 15,483
====================================
---------------- ----------------
$ 19,091 $ 19,091
==================================== ================ ================
</TABLE>
The following table summarizes changes for the three years December 31,
1999, 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 Alta.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Post-Retirement
Pension Benefits Medical Plan
-------------------------------------- --------------------------------------
1999 1998 1997 1999 1998 1997
----------- ---------- ----------- ----------- ---------- ----------
Change in benefit obligation
Benefit obligation at beginning
of year $ 131,305 $ 115,057 $ 96,417 $ 19,944 $ 19,454 $ 16,160
Service cost 7,853 6,834 5,491 2,186 1,365 1,158
Interest cost 8,359 7,927 7,103 1,652 1,341 1,191
Addition of former Alta employees 4,155
Actuarial (gain) loss (22,363) 5,117 9,470 3,616 (1,613) 1,500
Prior service for former Alta
employees 2,471
Benefits paid (3,179) (3,630) (3,424) (641) (603) (555)
----------- ---------- ----------- ----------- ---------- ----------
Benefit obligation at end of year 126,130 131,305 115,057 29,228 19,944 19,454
----------- ---------- ----------- ----------- ---------- ----------
Change in plan assets
Fair value of plan assets at
beginning of year $ 183,136 $ 162,879 $ 138,221 $ $ $
Actual return on plan assets 12,055 23,887 28,082
Addition of former Alta employees
and other adjustments 81
Benefits paid (3,179) (3,630) (3,424)
----------- ---------- ----------- ----------- ---------- ----------
Fair value of plan assets at
end of year 192,093 183,136 162,879
----------- ---------- ----------- ----------- ---------- ----------
Funded status 65,963 51,831 47,822 (29,228) (19,944) (19,454)
Unrecognized net actuarial
(gain) loss (30,161) (11,405) (6,326) 3,464 (113) 1,500
Unrecognized prior service cost 3,614 2,310
Unrecognized net obligation or
(asset) at transition (18,170) (19,684) (21,198) 13,736 14,544 15,352
----------- ---------- ----------- ----------- ---------- ----------
Prepaid (accrued) benefit cost $ 21,246 $ 20,742 $ 20,298 $ (9,718) $ (5,513) $ (2,602)
=========== ========== =========== =========== ========== ==========
Weighted-average
assumptions as of
December 31
Discount rate 7.50% 6.50% 7.00% 7.50% 6.50% 7.00%
Expected return on plan assets 8.50% 8.50% 8.50% 8.50% 8.50% 8.50%
Rate of compensation increase 5.00% 4.00% 4.50% 5.00% 4.00% 4.50%
Components of net
periodic benefit
Cost
Service cost $ 7,853 $ 6,834 $ 5,491 $ 2,186 $ 1,365 $ 1,158
Interest cost 8,360 7,927 7,103 1,652 1,341 1,191
Expected return on plan assets (15,664) (13,691) (12,286)
Amortization of transition (1,514) (1,514) (1,514) 808 808 808
obligation
Amortization of unrecognized prior
service cost 541 162
Amortization of gain from earlier
periods (80) 38
----------- ---------- ----------- ---------- ----------
----------- ---------- ----------- ----------- ---------- ----------
Net periodic (benefit) cost $ (504) $ (444) $ (1,206) $ 4,846 $ 3,514 $ 3,157
=========== ========== =========== =========== ========== ==========
</TABLE>
The Company-sponsored post-retirement medical plan (medical plan) provides
health benefits to retired 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. The Company made no contributions to this plan in
1999, 1998, or 1997.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the medical plan. For measurement purposes, a 7.5%
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:
<TABLE>
<S> <C> <C>
1-Percentage 1-Percentage
Point Point
Increase Decrease
-------------------- --------------------
Increase (decrease) on total of service and interest cost
on components $ 1,678 $ (1,285)
Increase (decrease) on post-retirement benefit obligation 7,897 (6,186)
</TABLE>
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. For employees hired after January 1, 1999, the
Company matches 50% of the first 8% of participant pre-tax contributions.
Company contributions for the years ended December 31, 1999, 1998, and 1997
totaled $5,504, $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
$17,367, $16,102, and $13,952 for years ending December 31, 1999, 1998, and
1997, respectively. The participant deferrals earn interest at a rate based
on the average ten-year composite government securities rate plus 1.5%. The
interest expense related to the plan for the years ending December 31,
1999, 1998, and 1997 were $1,231, $1,185, and $1,019, 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 1999, 1998, and 1997 was $3,002, $2,840, and $2,531,
respectively. The total liability of $14,608, $11,323, and $8,828 as of
December 31, 1999, 1998, and 1997 is included in other liabilities.
10. FEDERAL INCOME TAXES
The following is a reconciliation between the federal income tax rate and
the Company's effective rate:
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
------------ ------------- ------------
Federal tax rate 35.0 % 35.0 % 35.0 %
Change in tax rate resulting from:
Settlement of Parent tax exposures (5.9) (20.2)
Provision for contingencies (0.5) 7.7
Policyholder share of earnings 1.7 0.7 0.6
Other, net (1.5) (2.3) 0.8
------------ ------------- ------------
Total 28.8 % 33.4 % 23.9 %
============ ============= ============
</TABLE>
The Company's income tax provision was favorably impacted in 1999 and 1997
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 release recorded
in 1999 reflected the resolution of certain tax issues with the Internal
Revenue Service (IRS) relating to the 1992 - 1993 audit years. The release
recorded in 1997 reflected the resolution of certain tax issues with the
IRS relating to the 1990-1991 audit years. The release totaled $17,150 for
1999 and $42,150 for 1997; however, $8,900 of the 1999 release and $15,100
of the 1997 release 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).
In addition to this release of contingent tax liabilities, the Company's
income tax provision for 1997 also reflects 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. This increase in contingent tax liabilities
has been reflected as a component of the deferred income tax provisions as
the Company does not expect near term resolution of these contingencies.
Excluding the effect of the 1999 and 1997 tax items discussed above, the
effective tax rate for 1999 and 1997 was 35.2% and 36.4%.
Temporary differences which give rise to the deferred tax assets and
liabilities as of December 31, 1999 and 1998 are as follows:
<TABLE>
<S> <C> <C>
1999 1998
--------------------------------- ------------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Asset Liability Asset Liability
--------------- --------------- -------------- -------------
Policyholder reserves $ 131,587 $ $ 143,244 $
Deferred policy acquisition costs 49,455 39,933
Deferred acquisition cost proxy
tax 103,529 100,387
Investment assets 69,561 19,870
Net operating loss carryforwards 444 2,867
Other 582 6,566
--------------- --------------- -------------- -------------
Subtotal 305,121 50,037 253,064 59,803
Valuation allowance (1,761) (1,778)
--------------- --------------- -------------- -------------
Total Deferred Taxes $ 303,360 $ 50,037 $ 251,286 $ 59,803
=============== =============== ============== =============
</TABLE>
Amounts included in investment assets above include $58,711 and $(34,556)
related to the unrealized gains/(losses) on the Company's fixed maturities
available-for-sale at December 31, 1999 and 1998, respectively.
The Company will file a consolidated tax return for 1999. Losses incurred
by subsidiaries in prior years cannot be offset against operating income of
the Company. At December 31, 1999, the Company's subsidiaries had
approximately $1,271 of net operating loss carryforwards, expiring through
the year 2014. The tax benefit of subsidiaries' net operating loss
carryforwards are included in the deferred tax assets at December 31, 1999
and 1998, respectively.
The Company's valuation allowance was increased (decreased) in 1999, 1998,
and 1997 by $(17), $(1,792), and $34, 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.
11. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income". This
Statement established 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 stockholder's 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. The 1997 financial
statements have been reclassified to conform to the requirements of
Statement No. 130.
Other comprehensive loss at December 31, 1999 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 (losses) arising
==================================================
during the period $ (303,033) $ 106,061 $ (196,972)
==================================================
Less: reclassification adjustment for
==================================================
(gains) losses realized in net income (9,958) 3,485 (6,473)
==================================================
---------------- ---------------- -----------------
Net unrealized gains (losses) (312,991) 109,546 (203,445)
==================================================
==================================================
Reserve and DAC adjustment 87,729 (30,705) 57,024
---------------- ---------------- -----------------
---------------- ---------------- -----------------
Other comprehensive loss $ (225,262) $ 78,841 $ (146,421)
================================================== ================ ================ =================
</TABLE>
<TABLE>
<S> <C> <C>
Other comprehensive income at December 31, 1998 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 $ 39,430 $ (13,800) $ 25,630
Less: reclassification adjustment for
(gains) losses realized in net income (14,350) 5,022 (9,328)
---------------- ---------------- -----------------
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 (losses) arising
==================================================
during the period $ 80,821 $ (28,313) $ 52,508
==================================================
Less: reclassification adjustment for
==================================================
(gains) losses realized in net income 2,012 (704) 1,308
==================================================
---------------- ---------------- -----------------
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
================================================== ================ ================ =================
</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. At December 31, 1999 and 1998, the Company has 1,500 authorized
shares each of Series A, Series B, Series C and Series D cumulative
preferred stock; and 2,000,000 authorized shares of non-cumulative
preferred stock.
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:
1999 1998 1997
-------------- --------------- ---------------
(Unaudited)
Net income 253,123 $ 225,863 $ 181,312
Capital and surplus 1,007,245 727,124 759,429
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,
1999 were $1,007,245 and $245,148 (unaudited), respectively. The Company
should be able to pay up to $245,148 (unaudited) of dividends in 2000.
Dividends of $0, $6,692, and $8,854 were paid on preferred stock in 1999,
1998, and 1997, respectively. In addition, dividends of $92,053, $73,344,
and $62,540 were paid on common stock in 1999, 1998, and 1997,
respectively. Dividends are paid as determined by the Board of Directors.
13. STOCK OPTIONS
Great-West Lifeco Inc. (Lifeco) is the parent of the Parent Corporation.
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, 1999, 1998, and 1997, stock available for
award to Company employees under the Lifeco plan aggregated 885,150,
1,424,400, and 3,440,000 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 1998 and
1997 to Company employees totaling 278,000 and 1,832,000, 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 1999
and 1998, 11,250 and 30,000 of these options vested and accordingly, the
Company recognized compensation expense of $23 and $116, respectively. 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 granted to Company employees which are 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>
1999 1998 1997
-------------------------- -------------------------- -------------------------
Options WAEP Options WAEP Options WAEP
------------- ---------- ------------- ---------- ------------- ---------
Outstanding, Jan. 1, 6,544,824 $ 8.07 5,736,000 $ 7.71 4,104,000 $ 6.22
Granted 575,500 16.48 988,000 13.90 1,932,000 11.56
Exercised 234,476 5.69 99,176 5.93 16,000 5.95
Expired or canceled 318,750 13.81 80,000 13.05 284,000 6.17
------------- ---------- ------------- ---------- ------------- ---------
Outstanding, Dec. 31, 6,567,098 9.04 6,544,824 8.07 5,736,000 7.71
============= ========== ============= ========== ============= =========
Options exercisable
at year-end 2,215,998 $ 6.31 1,652,424 $ 5.72 760,800 $ 5.96
============= ========== ============= ========== ============= =========
Weighted average fair
value of options
granted during year $ 5.23 $ 4.46 $ 2.83
============= ============= =============
The following table summarizes the range of exercise prices for outstanding
Lifeco common stock options granted to Company employees at December 31,
1999:
Outstanding Exercisable
======================== ------------------------------------------------ ---------------------------------
Average Average
========================
Exercise Average Exercise Exercise
========================
Price Range Options Life Price Options Price
------------------------ ---------------- ------------ ------------- ---------------- --------------
$ 5.87 - 7.80 3,554,348 6.63 $ 5.95 2,108,748 $ 5.92
========================
$11.25 - 15.81 2,842,000 7.86 $ 12.37 107,250 $ 14.03
========================
$16.53 - 18.65 170,500 9.18 17.93 - -
========================
</TABLE>
Of the exercisable Lifeco options, 2,174,748 relate to basic option grants
and 41,250 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 in Canada.
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, 1999, 1998 and
1997, stock available for award under the PFC plan aggregated 4,340,800,
4,400,800, and 4,400,800 shares.
Options granted to officers of the Company under the PFC plan became
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
granted to Company officers which remain 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>
1999 1998 1997
-------------------------- -------------------------- -------------------------
Options WAEP Options WAEP Options WAEP
------------- ---------- ------------- ---------- ------------- ---------
Outstanding, Jan. 1, 355,054 $ 2.89 1,076,000 $ 3.05 1,329,200 $ 3.14
Exercised 70,000 2.28 720,946 2.98 253,200 2.93
------------- ---------- ------------- ---------- ------------- ---------
Outstanding, Dec. 31, 285,054 3.23 355,054 2.89 1,076,000 3.05
============= ========== ============= ========== ============= =========
Options exercisable
at year-end 285,054 $ 3.23 355,054 $ 2.89 1,076,000 $ 3.05
============= ========== ============= ========== ============= =========
</TABLE>
As of December 31, 1999, the PFC options outstanding have exercise prices
between $2.38 and $3.65 and a weighted-average remaining contractual life
of 1.7 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 $1,039,
$727, and $608, in 1999, 1998, and 1997, 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
assumptions used for those options granted in 1999, 1998, and 1997,
respectively: dividend yields of 3.63%, 3.0% and 3.0%, expected volatility
of 32.4%, 34.05%, and 24.04%, risk-free interest rates of 6.65%, 4.79%, and
4.72%, and expected lives of 7.5 years.
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:
<TABLE>
Year ended December 31, 1999
Operations:
<S> <C> <C> <C> <C> <C> <C>
Employee Financial Total
================================================
Benefits Services U.S.
================================================ ----------------- ----------------- -----------------
Revenue:
================================================
Premium income $ 990,449 $ 172,734 $ 1,163,183
================================================
Fee income 548,580 86,567 635,147
================================================
Net investment income 80,039 795,907 875,946
================================================
Realized investment gains (losses) (1,224) 2,308 1,084
================================================ ----------------- ----------------- -----------------
Total revenue 1,617,844 1,057,516 2,675,360
================================================
Benefits and Expenses:
================================================
Benefits 789,084 792,755 1,581,839
================================================
Operating expenses 661,119 143,422 804,541
================================================ ----------------- ----------------- -----------------
Total benefits and expenses 1,450,203 936,177 2,386,380
================================================ ----------------- ----------------- -----------------
----------------- ----------------- -----------------
================================================
================================================
Net operating income before income 167,641 121,339 288,980
taxes
================================================
Income taxes 51,003 32,259 83,262
----------------- ----------------- -----------------
Net income $ 116,638 $ 89,080 $ 205,718
================================================ ================= ================= =================
Assets:
Employee Financial Total
================================================
Benefits Services U.S.
================================================ ----------------- ----------------- -----------------
Investment assets $ 1,467,464 $ 11,590,591 $ 13,058,055
================================================
Other assets 646,036 909,172 1,555,208
================================================
Separate account assets 7,244,145 5,535,871 12,780,016
================================================ ----------------- ----------------- -----------------
Total assets $ 9,357,645 $ 18,035,634 $ 27,393,279
================================================ ================= ================= =================
Year ended December 31, 1998
Operations:
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 157,793 137,958 295,751
taxes
================================================
Income taxes 50,678 48,158 98,836
----------------- ----------------- -----------------
Net income $ 107,115 $ 89,800 $ 196,915
================================================ ================= ================= =================
Assets:
Employee Financial Total
================================================
Benefits Services U.S.
================================================ ----------------- ----------------- -----------------
Investment assets $ 1,434,691 $ 12,235,845 $ 13,670,536
================================================
Other assets 567,126 785,940 1,353,066
================================================
Separate account assets 5,704,313 4,395,230 10,099,543
================================================ ----------------- ----------------- -----------------
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 126,972 81,635 208,607
taxes
================================================
Income taxes 28,726 21,121 49,847
----------------- ----------------- -----------------
Net income $ 98,246 $ 60,514 $ 158,760
================================================ ================= ================= =================
The following table, which summarizes premium and fee income by segment, represents supplemental information.
1999 1998 1997
====================================== ---------------- ---------------- -----------------
----------------
Premium Income:
======================================
======================================
Employee Benefits
======================================
Group Life & Health $ 990,449 $ 746,898 $ 465,143
====================================== ---------------- ---------------- -----------------
Total Employee Benefits 990,449 746,898 465,143
---------------- ---------------- -----------------
---------------- ---------------- -----------------
Financial Services
======================================
======================================
Savings 14,344 16,765 22,634
======================================
Individual Insurance 158,390 231,200 345,402
---------------- ---------------- -----------------
---------------- ---------------- -----------------
Total Financial Services 172,734 247,965 368,036
====================================== ---------------- ---------------- -----------------
Total premium income $ 1,163,183 $ 994,863 $ 833,179
====================================== ================ ================ =================
----------------
Fee Income:
======================================
======================================
Employee Benefits
======================================
Group Life & Health $ 454,071 $ 366,805 $ 305,302
======================================
(uninsured plans)
======================================
401(k) 94,509 77,844 52,703
---------------- ---------------- -----------------
---------------- ---------------- -----------------
Total Employee Benefits 548,580 444,649 358,005
====================================== ---------------- ---------------- -----------------
---------------- ---------------- -----------------
Financial Services
======================================
======================================
Savings 81,331 71,403 62,725
======================================
Individual Insurance 5,236
---------------- ---------------- -----------------
---------------- ---------------- -----------------
Total Financial Services 86,567 71,403 62,725
====================================== ---------------- ---------------- -----------------
Total fee income $ 635,147 $ 516,052 $ 420,730
====================================== ================ ================ =================
</TABLE>
15. COMMITMENTS AND CONTINGENCIES
On October 6, 1999, the Company entered into a purchase and sale agreement
(the Agreement) with Allmerica Financial Corporation (Allmerica) to acquire
Allmerica's group life and health insurance business on March 1, 2000. This
business primarily consists of administrative services only and stop loss
policies. The in-force business is expected to be underwritten and retained
by the Company upon each policy renewal date. The purchase price, as
defined in the Agreement, will be based on a percentage of the amount
in-force at March 1, 2000 contingent on the persistency of the block of
business through March 2001. Management does not expect the purchase price
to have a material impact on the Company's consolidated financial
statements.
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.
16. SUBSEQUENT EVENTS
Effective January 1, 2000, the Company coinsured the majority of General
American Life Insurance Company's (General American) group life and health
insurance business which primarily consists of administrative services only
and stop loss policies. The agreement is expected to convert to an
assumption reinsurance agreement by January 1, 2001, pending regulatory
approval. The Company assumed approximately $150,000 of policy reserves and
miscellaneous liabilities in exchange for an equal amount of cash and
miscellaneous assets from General American.
A-1
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.
Issue Age -- 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.
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.
Total Face 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.
B-1
Appendix B -- Table of Death Benefit Percentages
Applicable Age Percentage Applicable 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%
C-1
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,
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
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>
Hypothetical 0% Gross Hypothetical 6% Gross Hypothetical 12% Gross
Investment Return Net -1.22% Investment Return Net 4.76% Investment Return Net
10.74%
Premiums
Paid Plus
Policy interest ContractSurrender Death Contract Surrender Death Contract Surrender Death
-----
<S> <C>
Year At 5% Per Value Value Benefit Value Value Benefit Value Value Benefit
---- ------- ----- ----- ------- ----- ----- ------- ----- ----- -------
Year
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
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 1,462,0891,462,0892,054,938
:
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-3
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
<TABLE>
Guaranteed Policy Charges
Hypothetical 0% Gross Hypothetical 6% Gross Hypothetical 12% Gross
Investment Return Net Investment Return Net 4.24% Investment Return Net
-1.71% 10.18%
Premiums
Paid Plus
<S> <C> <C> <C> <C> <C> <C>
Policy interest ContractSurrender Death Contract Surrender Death Contract Surrender Death
-----
Year At 5% Per Value Value Benefit Value Value Benefit Value Value Benefit
---- ------- ----- ----- ------- ----- ----- ------- ----- ----- -------
Year
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
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 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.
PART II - OTHER INFORMATION
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, as amended, the undersigned Registrant hereby undertakes to file
with the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
REPRESENTATION AS TO FEES AND CHARGES
Great-West Life & Annuity Insurance Company hereby represents that the fees and
charges deducted under the policies hereby registered by this Registration
Statement in the aggregate are reasonable in relation to the services rendered,
the expenses expected to be incurred, and the risks assumed by Great-West Life &
Annuity Insurance Company.
REPRESENTATION PURSUANT TO RULE 6e-3(T)
This filing is made pursuant to Rule 6e-3(T) under the Investment Company Act of
1940, as amended.
UNDERTAKING AS TO INDEMNIFICATION
Insofar as indemnification for liability arising under the Securities Act of
1933, as amended (the "Securities Act"), may be permitted to directors, officers
and controlling persons of the Registrant, the Registrant has been advised that,
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
CONTENTS OF THIS REGISTRATION STATEMENT
This Registration Statement consists of the following papers and documents:
Facing Page
Reconciliation and Tie
Prospectus consisting of 92 pages (including appendices)
Undertaking to File Reports
Undertaking As To Indemnification
Representation as to Fees and Charges
Representation Pursuant to Rule 6e-3(T)
Signature Pages
Exhibits
EXHIBIT LIST
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1. Exhibits required by Paragraph A of the instructions as to Exhibits of Form N-8B-2
(1) Resolution of the Board of Directors of Great-West Life & Annuity Insurance Company Authorizing
establishment of COLI VUL-2 Series Account(1)
(2) Custodian Agreement (not applicable)
(3) (a) Form of Distribution Agreement(1)
(b) Form of Broker-Dealer and General Agent Sales Agreement(1)
(c) Schedule of Sales Commissions(1)
(4) Other Agreements between the depositor, principal underwriter, and custodian with respect to
Registrant or its securities (not applicable)
(5) (a) Specimen Policy(1)
(b) Specimen Term Life Insurance Rider(1)
(c) Specimen Policy Free-Look Endorsement (filed herewith)
(6) (a) Articles of Incorporation of Great-West Life & Annuity Insurance Company,
as amended(2)
(b) By-Laws of Great-West Life & Annuity Insurance Company(3)
(7) Not applicable
(8) Form of Participation Agreement(1)
(9) Other Material Contracts (not applicable)
(10) Specimen Application(4)
(11) Codes of Ethics adopted under Rule 17j-1 under the Investment Company
Act of 1940 (not applicable)
2. Opinion and consent of counsel as to legality of securities being offered(4)
3. Not applicable
4. Not applicable
5. Amended and Restated Procedures memorandum pursuant to Rule 6e-3(T)(b)(12)(iii) (filed herewith)
6. Actuarial Opinion and Consent (filed herewith)
7. Consent of Independent Accountants (filed herewith)
8. Consent of Jorden Burt Boros Cicchetti Berenson & Johnson LLP (filed herewith)
9. Consent of Beverly A. Bryne, Esq. (filed herewith)
10. Powers of Attorney(4)
- ------------------------
(1) Incorporated by reference to Registrant's Registration Statement filed on Form S-6 with the
Securities and Exchange Commission on January 21, 1999 (File No. 333-70963).
(2) Incorporated by reference to Pre-Effective Amendment No. 2 to Form S-1 of Great-West Life & Annuity
Insurance Company (File No. 333-1173, filed on October 29, 1996).
(3) Incorporated by reference to Amendment No. 1 to Form 10-K of Great-West Life & Annuity Insurance
Company (File No. 333-1173, filed on March 31, 1998).
(4) Incorporated by reference to Registrant's Pre-Effective Amendment No. 1 to Form S-6, filed with the
Securities and Exchange Commission on June 23, 1999 (File No. 333-70963).
</TABLE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the registrant certifies that it meets the requirements of effectiveness
of this Amendments to Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Registration Statement to be
signed on its behalf in the City of Englewood, State of Colorado, on the 27th
day of April, 2000.
COLI VUL-2 SERIES ACCOUNT
(Registrant)
BY: GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(Depositor)
BY: /s/ W.T. McCallum
W.T. McCallum
President and Chief Executive Officer
As required by the Securities Act of 1933, this Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated:
/s/ R. Gratton
R. Gratton* Chairman of the Board April 27, 2000
/s/ W.T. McCallum
W.T. McCallum President, Chief Executive April 27, 2000
Officer and Director
/s/ M.T.G. Graye
M.T.G. Graye Chief Financial Officer April 27, 2000
/s/ J. Balog
J. Balog* Director April 27, 2000
/s/ J.W. Burns
J.W. Burns* Director April 27, 2000
/s/ O.T. Dackow
O.T. Dackow* Director April 27, 2000
/s/ A. Desmarais
A. Desmarais* Director April 27, 2000
/s/ P/ Desmarais
P. Desmarais* Director April 27, 2000
/s/ R.G. Graham
R.G. Graham* Director April 27, 2000
/s/ N.B. Hart
N.B. Hart* Director April 27, 2000
/s/ K.P. Kavanaugh
K.P. Kavanaugh* Director April 27, 2000
/s/ W. Mackness
W. Mackness* Director April 27, 2000
/s/ J.E.A. Nickerson
J.E.A. Nickerson* Director April 27, 2000
/s/ P.M. Pitfield
P.M. Pitfield* Director April 27, 2000
/s/ M. Plessis-Belair
M. Plessis-Belair* Director April 27, 2000
/s/ B.E. Walsh
B.E. Walsh* Director April 27, 2000
*By: /s/ D.C. Lennox
D.C. Lennox, Attorney-in-Fact pursuant to Powers of Attorney filed under
Registrant's Pre-Effective Amendment No. 1 to Form S-6, filed with the
Securities and Exchange Commission on June 23, 1999.
EXHIBIT INDEX
1.(5)(c) Specimen Policy Free-Look Endorsement
5. Procedures Memorandum Pursuant to Rule 6e-3(T)(b)(12)(iii)
6. Actuarial Opinion and Consent
7. Consent of Independent Accountants
8. Consent of Jorden Burt Boros Cicchetti Berenson & Johnson LLP
9. Consent of Beverly A. Byrne, Esq.
Exhibit 1.(5)(c) Specimen Policy Free-Look Endorsement
POLICY ENDORSEMENT
- --------------------------------------------------------------------------------
ISSUED BY GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY AS PART OF THE POLICY TO
WHICH IT IS ATTACHED. THE PROVISIONS OF THE POLICY APPLY TO THIS ENDORSEMENT
UNLESS OTHERWISE STATED HEREIN.
- --------------------------------------------------------------------------------
I. This endorsement provides the Owner with a return of Expense Charge, as
described in the provision below, if the policy is surrendered within the first
4 policy years.
RETURN OF EXPENSE CHARGE
If the policy is surrendered for the Surrender Benefit within the first four
policy years, the Company will return a percentage of the Expense Charge. This
percentage will be based on the Premium that had been paid within 12 months
prior to the date the surrender Request was received at our Corporate
Headquarters. This amount will be in addition to the Surrender Benefit.
The Return of Expense Charge is based on the following:
Policy Year Premium Returned
----------- ----------------
Year 1 4%
Year 2 3%
Year 3 2%
Year 4 1%
Year 5 + 0%
II. This endorsement changes the Policy's Free Look Period such that the Owner
bears the investment risk during the Free Look Period.
The Free Look Period provision shown on the front cover of the policy is
replaced with the following language:
FREE LOOK PERIOD
10 DAY RIGHT TO EXAMINE POLICY: IF NOT SATISFIED WITH THE POLICY, RETURN IT TO
THE COMPANY OR AN AUTHORIZED REPRESENTATIVE WITHIN 10 DAYS OF RECEIVING IT. THE
POLICY WILL THEN BE DEEMED VOID FROM THE START, AND THE COMPANY WILL REFUND THE
POLICY VALUE ACCOUNT. DURING THE FREE LOOK PERIOD, THE CASH VALUE WILL BE
ALLOCATED IN THE INVESTMENT DIVISIONS AS SPECIFIED IN THE APPLICATION.
The Allocation of Premiums provision shown on policy page 8 is replaced with the
following language:
ALLOCATION OF PREMIUMS
During the Free Look Period, Premiums will be allocated effective upon the
Transaction Date to one or more of the Investment Division(s) selected on the
application. During the Free Look Period, the Owner may Transfer all or a
portion of the Policy Value Account among the Investment Divisions currently
offered by the Company.
Any returned policy will be void from the date we issued the policy and we will
refund your Policy Value Account. This amount may be higher or lower than the
Premiums paid, which means the Owner bears the investment risk during the Free
Look Period.
17
Signed for Great-West Life & Annuity Insurance Company on the Issue Date of the
policy (unless a different Issue Date is shown here).
W.T. McCallum,
President and Chief Executive Officer
Exhibit 5. Amended and Restated Procedures Memorandum pursuant to Rule
6e-3T(b)(12)(iii) PROCEDURES MEMORANDUM
PURSUANT TO RULE 6e-3(T)(b)(12)(iii)
DESCRIPTION OF
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY'S
REDEMPTION AND TRANSFER PROCEDURES FOR FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE
INSURANCE POLICIES
This document sets forth the administrative procedures that will be followed by
Great-West Life & Annuity Insurance Company ("GWLA") in connection with the
issuance of its flexible premium variable universal life insurance policy
("Policy") described in this Registration Statement, the transfer of assets held
thereunder, and the redemption by Policyowners of their interest in the
Policies.
Set out below is a summary of the principal Policy provisions and administrative
procedures which might be deemed to constitute, either directly or indirectly,
issuance, transfer, and redemption procedures under flexible premium variable
life insurance policies to the extent necessary to comply with Rule 6e-3(T),
state administrative law or established administrative procedures of the life
insurance company. The summary shows that, because of the insurance nature of
the Policies, the procedures involved necessarily differ in certain significant
respects from the procedures for mutual funds and contractual plans. The
summary, while comprehensive, does not attempt to address each and every
procedure or variation which might occur. In certain states, the Policies may be
offered as group contracts with individual ownership represented by
certificates. The discussion of Policies in this document applies equally to
certificates under group contracts, unless the context specifies otherwise.
1. "PUBLIC OFFERING PRICE:" PURCHASE AND RELATED TRANSACTIONS
A. PREMIUM SCHEDULES AND UNDERWRITING STANDARDS
Premiums for the Policies will not be the same for all Policyowners. GWLA will
require the Policyowner to pay a required premium for the first Policy Year.
Policyowners may also select a planned periodic Premium payment schedule that
provides a level premium payable at a fixed interval for a specified period of
time. Payment of premium in accordance with this schedule is not, however,
mandatory and failure to make such payments will not of itself cause the Policy
to lapse. Instead, Policyowners may make premium payments in any amount in any
frequency, subject only to the maximum premium limitation. If at any time a
premium is paid which would result in total premiums exceeding the current
maximum premium limitation, GWLA will accept only that portion of the premium
which will make total premiums equal that amount. Any portion of the premium in
excess of that amount will be returned to the Policyowner and no further
premiums will be accepted until allowed by the current maximum premium
limitation or unless the Policyowner increases the face amount of the Policy.
The Policy will remain in force so long as the Policy's Account Value, less any
Policy Debt, is sufficient to pay the monthly deduction for that Policy Month.
The amount of a premium, if any, that must be paid to keep the Policy in force
depends upon the Cash Surrender Value, which in turn depends on such factors as
investment experience, cost of insurance charges, administrative charges, and
Policy Debt. The Monthly Risk Rate utilized in computing the cost of insurance
charge will not be the same for each Insured. The chief reason is that the
principle of pooling and distribution of mortality risks is based upon the
assumption that each Insured incurs an insurance rate commensurate with his or
her mortality risk which is actuarially determined based upon factors such as
issue age, sex, duration, risk classification and face amount of the Policy.
Accordingly, while not all Insured persons will be subject to the same Monthly
Risk Rate, there will be a single "rate" for all Insured persons in a given
actuarial category.
The Policies will be offered and sold pursuant to established underwriting
standards and in accordance with state insurance laws. State insurance laws
prohibit unfair discrimination among Policyowners, but recognize that premiums
and charges must be based upon factors such as age, sex, health, and occupation.
The Policy offered by GWLA contains an exchange of policy provision under which
the Policyowner can exchange the Policy for a policy that does not provide for
variable benefits. This exchange will be implemented by transferring the
Policy's Account Value to GWLA's general account and terminating the
Policyowner's future right to allocate funds to the Series Account.
The exchange shall be subject to the following rules:
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(1) The exchange must be made within 24 months after the issuance of the existing Policy.
(2) GWLA may require the Policyowner to return the Policy before the exchange will be processed.
(3) No transfer fee will be assessed to complete the exchange.
(4) Premiums for the new policy will be based on the same issue age and risk classification of the
Insured as the existing Policy.
(5) No evidence of insurability will be required at the time of the exchange.
(6) The conversion will be subject to an equitable adjustment as required by
Rule 6e-3(T) to reflect variances, if any, in the payments and values
under the new policy.
(7) All Policy Debt must be repaid before the exchange will be effected.
</TABLE>
B. APPLICATION AND INITIAL PREMIUM PROCESSING
To purchase a Policy, the Policyowner must submit an application to GWLA's
Principal Office. GWLA will then follow underwriting procedures designed to
determine the insurability of the proposed Insured. GWLA may require full
underwriting, which includes a medical examination and further information,
before the application is approved. GWLA also may offer the Policy on a
simplified underwriting or guaranteed issue basis. Proposed Insureds must be
acceptable risks based on GWLA's applicable underwriting limits and standards.
GWLA will not issue a Policy until the underwriting process has been completed
to GWLA's satisfaction. GWLA reserves the right to reject an application for any
lawful reason or to "rate" an Insured as a sub-standard risk, which will result
in increased Monthly Risk Charges. The Monthly Risk Charge also may vary
depending on the type of underwriting GWLA uses.
The applicant must specify certain information in the application, including the
Total Face Amount, the death benefit option and supplemental benefits, if any.
Upon approval of the application, GWLA will issue to the Policyowner a Policy on
the life of the Insured. A specified Initial Premium must be paid before GWLA
will issue the Policy. The effective date of coverage for the Policy (which GWLA
calls the "Policy Date") will be the date GWLA receives a premium equal to or in
excess of the specified Initial Premium after GWLA has approved the
Policyowner's application. If the Policyowner's premium payment is received on
the 29th, 30th or 31st of a month, the Policy will be dated the 28th of that
month.
GWLA generally does not accept premium payments before approval of an
application. However, GWLA may elect to do so in its sole discretion. If GWLA
accepts a premium payment before approval of an application, GWLA will provide
the applicant with temporary insurance coverage in accordance with the terms of
GWLA's temporary insurance agreement. In its sole discretion, GWLA may limit the
amount of premium GWLA will accept and the amount of temporary coverage GWLA
will provide. If GWLA approves the Policyowner's application, GWLA will allocate
the Policyowner's premium to the Series Account on the Policy Date, as described
below. Otherwise, GWLA will promptly return the payment to the Policyowner. GWLA
will not credit interest to the Policyowner's premium payment for the period
while the Policyowner's application is in underwriting, unless interest is
required to be credited under state law.
If the applicant is not satisfied with the Policy, it may be returned by
delivering or mailing it to GWLA's Principal Office or to the representative
from whom the Policy was purchased within 10 days from the date the applicant
received it (unless a longer period is required under applicable state insurance
law) (the "Free Look Period").
During the Free Look Period, premiums will be allocated to the investment
divisions (the "Divisions") the applicant selected on the application. During
the Free Look Period, the applicant may change the Division allocations as well
as the allocation percentages.
Policies returned during the Free Look Period will be void from the date GWLA
issued the Policy. In most states, GWLA will refund the then current Policy
Account Value. This amount may be higher or lower than the applicant's premium
payments, which means the applicant bears the investment risk during the Free
Look Period.
Certain states require that GWLA return the greater of your Policy Account Value
(less any surrenders, withdrawals and distributions already received) or the
amount of the premiums received. In those states, GWLA will allocate the
applicants net premium payments to the Division of the Series Account that
invests in the Maxim Money Market Portfolio. GWLA will transfer the Account
Value in that Division to the other Divisions of the Series Account in
accordance with the applicant's allocation instructions five days after the end
of the Free Look Period.
C. PREMIUM ALLOCATION
Premium payments are subject to a guaranteed maximum expense charge of 10%. This
charge compensates GWLA for sales and promotional expenses and covers premium
taxes and certain federal income tax obligations resulting from receipt of
premiums. The amount of premium remaining after the deduction of the expense
charge (i.e., the net premium) is allocated to the Divisions in accordance with
the Policyowner's instructions.
In the application for a Policy, the Policyowner must specify instructions for
the allocation of premiums among the Divisions of the Series Account.
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. The Policyowner's initial
allocation instructions will take effect five days after the end of the Free
Look Period.
The Policyowner may change allocation instructions at any time by Request.
Telephone Requests will be honored if GWLA has a properly completed telephone
authorization on file. An allocation will be effective as of the Business Day
GWLA receives the Request for that change if received before 4:00 p.m. E.T.
Otherwise, the Request will be effective on the next Business Day. GWLA, our
affiliates and the representatives from whom the Policyowner purchased the
Policy will not be responsible for losses resulting from acting upon telephone
Requests reasonably believed to be genuine.
D. REINSTATEMENT
A Policyowner may reinstate a lapsed Policy any time within three years after
the date of lapse by submitting the following items to GWLA:
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(1) A written request for reinstatement;
(2) Evidence of insurability satisfactory to GWLA;
(3) An amount equal to the Policy charges which were due and unpaid at the end of the
Grace Period;
(4) A premium equal to four times the monthly deduction applicable on the date of
reinstatement; and
(5) An amount to repay or a Request to 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 the Policy.
</TABLE>
A reinstated Policy's Total Face Amount may not exceed the Total Face Amount at
the time of termination. The Policy's Account Value on the reinstatement date
will reflect: the Account Value at the time of termination; plus net premiums
attributable to premiums paid to reinstate the Policy; less the Monthly Expense
Charge; less the Monthly Cost of Insurance charge applicable on the date of
reinstatement.
The effective date of reinstatement will be the date the reinstatement request
is approved by GWLA. The suicide and incontestability provisions will apply from
the effective date of the reinstatement.
E. REPAYMENT OF INDEBTEDNESS
All payments GWLA receives from the Policyowner will be treated as premium
payments unless GWLA has received satisfactory notice, as determined by GWLA,
that the funds are for Policy loan repayment. Loan repayments will first reduce
the outstanding balance of the Policy loan and then accrued but unpaid interest
on such loans. GWLA 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 in
accordance with then current premium allocation instructions.
F. CORRECTION OF MISSTATEMENT OF AGE OR SEX
If the Insured's age and/or sex on the Policy Date has been misstated, the
benefits payable under the Policy will be the amount of insurance that the cost
of insurance (deducted from the Policy's Account Value at the beginning of the
Policy Month in which death occurred) would have purchased for the correct age
and/or sex on the Policy Date.
If the age and/or sex of the Insured or any other person covered under a rider
has been misstated on the Policy Date, the benefits payable under the rider will
be the benefit that the amount charged would have purchased for the correct age
and/or sex on the Policy Date.
If the age is misstated in such a way that the Insured was not eligible for
coverage under the Policy, GWLA's liability will be limited to a return of the
premiums paid, less any partial withdrawals and outstanding loans and accrued
loan interest and the cost for riders.
2. REDEMPTION PROCEDURES: SURRENDER AND OTHER TRANSACTIONS
This section outlines those procedures which might be deemed to constitute
redemptions under the Policy. These procedures differ in certain significant
respects from the redemption procedures for mutual funds and contractual plans.
A. SURRENDER
The Policyowner may surrender the Policy for its Cash Surrender Value at any
time while the Insured is living. If the Policyowner surrenders the Policy, the
insurance coverage and all other benefits under the Policy will terminate. The
Cash Surrender Value is the Policy's Account Value less the sum of: the
outstanding balance of any Policy Debt and any other accrued and unpaid Policy
charges. GWLA will determine the Policyowner's Cash Surrender Value as of the
end of the first Valuation Date after GWLA receives the Policyowner's request
for surrender. Surrenders from the Series Account will generally be paid within
seven days of GWLA's receipt of a Policyowner's request to surrender. Payment of
any amount payable from the Series Account upon surrender may be postponed
whenever:
(i) the New York Stock Exchange is closed other than customary
weekend and holiday closing, or trading on the NYSE is
otherwise restricted;
(ii) the Securities and Exchange Commission, by order, permits
postponement for the protection of Policyowners; or
(iii) 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.
GWLA is not required to and, hence, will not withhold the amount of any tax due
on that portion of a surrender which is taxable. However, as a service to
Policyowners, GWLA will withhold and remit to the federal government such
amounts if directed to do so in writing at or before the time of surrender by
the Policyowner.
B. PARTIAL WITHDRAWAL
The Policyowner can request a portion of the Cash Surrender Value by making a
partial withdrawal from the Policy.
The amount of any partial withdrawal must be at least $500 and may not exceed
90% of the Policy's Account Value less the value of the Loan Account. An
administrative fee will be deducted from the Policyowner's Account Value for all
partial withdrawals after the first made during the same Policy Year. The
administrative fee is guaranteed to be no greater than $25.
If the Policyowner has chosen either Death Benefit Option 1 ("Option 1") or
Death Benefit Option 3 ("Option 3"), described below, then the death benefit
payable will be reduced by the amount of any partial withdrawals. The Total Face
Amount remaining after a partial withdrawal may not be less than $100,000. If
increases in the Total Face Amount previously have occurred, a partial
withdrawal will first reduce the amount of the most recent increase, then the
most recent increases successively, then the original Total Face Amount under
the Policy.
Under Death Benefit Option 2 ("Option 2"), described below, which provides for
life insurance proceeds equal to the Total Face Amount plus the Policy's Account
Value, a reduction in the Policy's Account Value as a result of a partial
withdrawal will typically result in a dollar per dollar reduction in the life
insurance proceeds payable under the Policy.
A 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 the Policy's Account Value. The
Policyowner cannot repay amounts taken as a partial withdrawal. Any subsequent
payments received by GWLA will be treated as additional premium payments and
will be subject to GWLA's limitations on premiums.
Partial withdrawals from the Series Account will generally be paid within seven
days of GWLA's receipt of a Policyowner's request for a partial withdrawal.
Payment of any amount payable from the Series Account upon a partial withdrawal
may be postponed whenever:
(i) the New York Stock Exchange is closed other than customary
weekend and holiday closing, or trading on the NYSE is
otherwise restricted;
(ii) the Securities and Exchange Commission, by order, permits
postponement for the protection of Policyowners; or
(iii) 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.
GWLA is not required to and, hence, will not withhold the amount of any tax due
on that portion of a partial withdrawal which is taxable. However, as a service
to Policyowners, GWLA will withhold and remit to the federal government such
amounts if directed to do so in writing at or before the time of the partial
withdrawal by the Policyowner.
C. DEATH BENEFITS
If the Policy is in force at the time of the Insured's death, GWLA will pay the
beneficiary an amount based on the death benefit option in effect at the
Insured's date of death, once GWLA has received Due Proof of the Insured's
death. The amount payable will be:
o the amount of the selected death benefit option, plus
o any amounts payable under any supplemental benefit riders added to the
Policy, less o the value of any Policy Debt on the date of the Insured's
death, less o any accrued and unpaid Policy charges.
GWLA will pay this amount to the beneficiary in one lump sum, unless GWLA and
the beneficiary agree on another form of settlement. GWLA 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.
Policy Proceeds from the Series Account will generally be paid within seven days
of GWLA's receipt of Due Proof of the Insured's death (if payable in a lump
sum). Due Proof of the Insured's death consists of such evidence of death GWLA
may reasonably require including, but not limited to, a certified death
certificate. Generally, death benefit proceeds are payable from GWLA's general
account. When GWLA receives Due Proof of the Insured's death, the death benefit
will be calculated as of the actual date of death. Units in the Series Account
attributable to the Policy will be redeemed on the date that Due Proof of the
Insured's death is received by GWLA and GWLA may use the proceeds thereof to pay
part or all of the death benefit. Payment of any amount from the Series Account
resulting from the death of the Insured may be postponed whenever:
(i) the New York Stock Exchange is closed other than customary
weekend and holiday closing, or trading on the NYSE is
otherwise restricted;
(ii) the Securities and Exchange Commission, by order, permits
postponement for the protection of Policyowners; or
(iii) 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.
In its sole discretion, GWLA may delay payment of a death benefit while it is
contesting or investigating a death claim.
1. DEATH BENEFIT OPTIONS
While the insured is alive, the Policyowner may choose between three death
benefit options:
If Option 1 ("Level Death") is selected, the Death Benefit is:
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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 as
described in the Policy.
If Option 2 ("Coverage Plus") is selected, 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 as
described in the Policy.
If Option 3 ("Premium Accumulation") is selected, 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 the Policy less any
partial withdrawals; or, if greater,
o the Policy's Account Value on the date of death multiplied by the applicable factor as
described in the Policy.
</TABLE>
2. INCREASES AND DECREASES IN TOTAL FACE AMOUNT
Subject to certain limitations, a Policyowner may increase or decrease the face
amount of a Policy. A change in face amount may affect the cost of insurance
rate and the net amount at risk, both of which may affect a Policyowner's cost
of insurance charge.
For a decrease in Total Face Amount:
o GWLA must receive a Request in writing.
o The decrease will become effective on the first Business Day of
the Policy Month following approval of the Request.
o The decrease will apply first to the most recent increase or
increases in Total Face Amount for purposes of the
Incontestability Provision.
o The minimum decrease amount will be $25,000 and the Total Face
Amount may not be decreased below $100,000 unless prior approval
is obtained from GWLA.
o If following the decrease in Total Face Amount, the Policy would
not comply with the maximum premium limitations required by
Federal tax law, the decrease may be limited (or, if the
Policyowner so elects, Account Value may be returned to the
Policyowner, subject to taxation) to the extent necessary to meet
these requirements. When GWLA returns Account Value to the
Policyowner under these circumstances, GWLA will redeem Units in
each Division of the Series Account to which the Policyowner has
allocated Account Value. The amount of Account Value to be
returned will be withdrawn from the Divisions in the proportion
the amounts in the Divisions bear to the Policyowner's Account
Value. Such return of Account Value will generally be paid within
seven days of GWLA's receipt of a Policyowner's request. Payment
of any amount from the Series Account under these circumstances
may be postponed whenever:
(i) the New York Stock Exchange is closed other than customary
weekend and holiday closing, or trading on the NYSE is
otherwise restricted;
(ii) the Securities and Exchange Commission, by order, permits
postponement for the protection of Policyowners; or
(iii) 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.
For an increase in Total Face Amount:
o GWLA must receive a written Request.
o The increase will be subject to evidence of insurability satisfactory
to GWLA.
o The increase will be effective on the Policy Anniversary
following the approval of the Request for the increase, 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.
o The minimum increase amount will be $25,000.
3. CHANGES IN DEATH BENEFIT OPTION
After the first Policy Year, but not more than once each Policy Year, the
Policyowner may change the death benefit option by Request. Any change will be
effective on the first day of the Policy Month following the date GWLA approves
the Policyowner's Request. A maximum administrative fee of $100 will be deducted
from the Policyowner's Account Value each time the Policyowner changes the 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 the 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 the 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 the 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 the Policy.
D. PREMIUM REFUNDS
GWLA will not normally refund premium payments unless one of the following
situations occurs:
1. The Policyowner exercises the Free Look privilege in accordance with state
regulations.
2. The premium payment would disqualify the Policy as life insurance coverage
as defined under the Internal Revenue Code.
3. The Policy would become a Modified Endowment Contract and the Policyowner
has not elected to accept the Policy as such.
4. A premium was paid before underwriting was completed and the underwriting
risk is not accepted by either GWLA or the Policyowner.
Amounts payable upon a Policyowner's exercise of the free look right will be
paid as described in this memorandum at section 1.B. "Application and Initial
Premium Processing." GWLA will not pay interest on amounts paid as a refund of
premium, except as required by state law. Premium refunds will be paid within
the time frame required by state law.
E. POLICY LOANS
The Policyowner may request a Policy loan of up to 90% of the Policy's Account
Value, decreased by the amount of any outstanding Policy Debt on the date the
Policy loan is made. When a Policy loan is made, a portion of the Policyowner's
Account Value equal to the amount of the Policy loan will be allocated to the
Loan Account as 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 the Policy's 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.
Currently, the maximum interest rate for Policy loans is The Moody's Corporate
Bond Yield Average - Monthly Average Corporates, which is published by Moody's
Investors Service, Inc. If that Average ceases to be published, the maximum
interest rate for Policy loans will be derived from a substantially similar
average established by state regulation.
GWLA must reduce the 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.
GWLA 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. GWLA will send the
Policyowner 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
0.90%. This rate may change at any time but will not change more frequently than
once annually.
All payments GWLA receives from the Policyowner will be treated as premium
payments unless GWLA has received notice, in form satisfactory to GWLA, that the
funds are for loan repayment. Loan repayments will first reduce the outstanding
balance of the Policy loan and then accrued but unpaid interest on such loans.
GWLA will accept repayment of any Policy loan at any time while the Policy is in
force. Amounts paid to repay a loan will be allocated in accordance with current
premium allocation instructions.
Policy Debt may not exceed the Cash Surrender Value. If Policy Debt would
otherwise exceed the Cash Surrender Value, the Policy will enter the Grace
Period and, if sufficient payment is not received within the Grace Period, the
Policy will lapse and terminate without value (see "Grace Period" below). The
Policy may, however, later be reinstated (see "Reinstatement" above).
GWLA permits loans at issue only in the case of an exchange under Section 1035
of the Internal Revenue Code of 1986, as amended. GWLA will accept outstanding
loans that are not greater than 80 percent of the total account value exchanged.
GWLA reserves the right to change the loan at issue limits at its discretion.
Changes will be applied uniformly to all applicants.
F. GRACE PERIOD- POLICY LAPSE
After the first premium is paid, if the Policy's Account Value, less any
outstanding Policy loans and less any accrued loan interest, on the last day of
a Policy Month is not sufficient to cover the monthly deduction for the next
Policy Month, a Grace Period of 61 days (commencing on the first day of that
next Policy Month) will be allowed for the payment of an amount sufficient to
cover the monthly deduction for 2 Policy Months.
Coverage will remain in force during the Grace Period. If the premium due is not
paid within the Grace Period, all coverage under the Policy will cease at the
end of the 61 day period.
Notice of such premium due will be mailed to the last known address of the
Policyowner and any assignee of record at least 31 days prior to the date
coverage will cease.
If the Insured dies during the Grace Period, any due and unpaid Policy charges
will be deducted from the Policy Proceeds.
3. TRANSFERS
The Policyowner may at any time transfer to another Division or Divisions all or
a portion of the Account Value allocated to a Division. GWLA will make transfers
pursuant to a Request. A Request to transfer will be effective on the Business
Day it is received by GWLA if received before 4:00 pm. E.T. Otherwise, the
Request to transfer will be effected on the next Business Day. Telephone
Requests will be honored only if GWLA has a properly completed telephone
authorization form for the Policyowner on file. GWLA, our affiliates and the
representative from whom the Policyowner purchased the Policy will not be
responsible for losses resulting from acting upon telephone Requests reasonably
believed to be genuine. GWLA will use reasonable procedures to confirm that
instructions communicated by telephone are genuine. For transactions initiated
by telephone, the Policyowner will be required to identify himself by name and a
personal identification number. However, if GWLA does not take reasonable steps
to help ensure that a telephone authorization is valid, GWLA may be liable for
such losses. GWLA 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 GWLA's consent. GWLA reserves 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.
Transfers may be postponed whenever:
(i) the New York Stock Exchange is closed other than customary weekend
and holiday closing, or trading on the NYSE is otherwise
restricted;
(ii)the Securities and Exchange Commission, by order, permits
postponement for the protection of Policyowners; or
(iii) 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.
In addition, a Transfer may be delayed for up to seven days if an underlying
portfolio delays the payment of redemption proceeds.
An administrative charge of $10 per transfer will apply for all transfers in
excess of 12 made in a calendar year. GWLA 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 the Policyowner's Initial Premium from the Maxim
Money Market Portfolio Division to the Policyowner's selected Divisions does not
count toward the twelve free transfers. Likewise, any transfers under Dollar
Cost Averaging or periodic rebalancing of the Policyowner's 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).
A. TRANSFERS - DOLLAR COST AVERAGING
By Request, a Policyowner 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 a Policyowner to automatically
transfer a predetermined dollar amount, subject to GWLA's minimum, currently set
at $1000, at regular intervals from any one or more designated Divisions to one
or more of the remaining, then available Divisions. The Unit Value will be
determined on the dates of the transfers. The Policyowner must specify the
percentage to be transferred into each designated Division. Transfers may be set
up on any one of the following frequency periods: monthly, quarterly,
semiannually, or annually. The transfer will be initiated one frequency period
following the date of the Policyowner's request. GWLA will provide a list of
Divisions eligible for Dollar Cost Averaging which may be modified from time to
time. Amounts transferred through Dollar Cost Averaging are not counted against
the twelve free transfers allowed in a calendar year. A Policyowner may not
participate in Dollar Cost Averaging and the Rebalancer Option (described below)
at the same time. GWLA reserves the right to modify, suspend, or terminate
Dollar Cost Averaging at any time.
B. TRANSFERS - THE REBALANCER OPTION
By Request, a Policyowner may elect the Rebalancer Option in order to
automatically transfer Account Value among the Divisions on a periodic basis.
There is no charge for this service. This type of transfer program automatically
reallocates a Policyowner's Account Value so as to maintain a particular
percentage allocation among Divisions chosen by the Policyowner. A Policyowner
may Request that rebalancing occur one time only, in which case the transfer
will take place on the date of the Request. This transfer will count as one
transfer towards the twelve free transfers allowed in a calendar year. A
Policyowner may also choose to rebalance 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 the request. On that date, the
Policy's Account Value will be automatically reallocated to the selected
Divisions. Thereafter, Account Value will be rebalanced once each frequency
period. In order to participate in the Rebalancer Option, the entire Account
Value must be included. Transfers made with these frequencies will not count
against the twelve free transfers allowed in a calendar year. The Policyowner
must specify the percentage of Account Value to be allocated to each Division
and the frequency of rebalancing. The Rebalancer Option may be terminated at any
time by Request. A Policyowner may not participate in the Rebalancer Option and
Dollar Cost Averaging at the same time. GWLA reserves the right to modify,
suspend, or terminate the Rebalancer Option at any time.
Wdc #47246-4
Exhibit 6. Actuarial Opinion and Consent
April 24, 2000
Great-West Life & Annuity Insurance Company
8515 East Orchard Road
Englewood, Colorado 80111
Re: COLI VUL-2 Series Account of
Great-West Life & Annuity Insurance Company
Pre-Effective Amendment No. 1 to the Registration Statement on Form S-6
File No. 333-70963
Ladies and Gentlemen:
This opinion is furnished in connection with the filing of Post-Effective
Amendment No. 1 to the Registration Statement on Form S-6 (file No. 333-70963)
(the "Registration Statement") which covers premiums expected to be received
under flexible premium variable universal life insurance policies (the
"Policies") to be offered by Great-West Life & Annuity Insurance Company (the
"Company"). The prospectus included in the Registration Statement describes the
Policy, which will be offered by the Company in each State where it has been
approved by appropriate State insurance authorities. I am familiar with the
Policy form and the Registration Statement and Exhibits thereto.
In my capacity as Vice President of the Company, I have provided actuarial
advice concerning:
The preparation of the Registration Statement to be filed by the Company and its
COLI VUL-2 Series Account with the Securities and Exchange Commission under the
Securities Act of 1933 with respect to the Policies: and
The preparation of the Policy forms for the Policy described in the Registration
Statement.
It is my professional opinion that:
1. The hypothetical illustrations of death benefits, account value, cash
surrender value and total premiums paid plus interest at 5 percent shown in
the prospectus, based on the assumptions stated in the illustration are
consistent with the provisions of the Policy. The rate structure of the
Policy has not been designed so as to make the relationship between premium
and benefits, as shown in the illustrations included, appear to be
correspondingly more favorable to prospective buyers than other
illustrations which could have been provided at other combinations of ages,
sex of the insured, death benefit option and amount, definition of life
insurance test, premium class, and premium amounts. Insured of other premium
classes may have higher costs of insurance charges.
2. All other numerical examples shown in the prospectus are consistent with the
Policy and our practices, and have not been designed to appear more
favorable to prospective buyers than other examples which could have been
provided.
I hereby consent to the filing of this opinion as an Exhibit to the Registration
Statement and the use of my name under the heading "Experts" in the prospectus.
Sincerely,
Ron Laeyendecker, F.S.A., M.A.A.A.
Vice President
Life Insurance Markets
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 1 to Registration
Statement No. 333-70963 of COLI VUL-2 Series Account of Great-West Life &
Annuity Insurance Company of our report dated January 31, 2000 on the financial
statements of Great-West Life & Annuity Insurance Company and to the reference
to us under the heading "Experts" in the Prospectus, which is part of such
Registration Statement.
Deloitte & Touche LLP
Denver, Colorado
April 27, 2000
Exhibit 8. Consent of Jorden Burt Boros Cicchetti Berenson & Johnson LLP
April 26, 2000
Great-West Life & Annuity Insurance Company
8515 East Orchard Road
Englewood, Colorado 80111
Re: COLI VUL-2 Series Account
Post-Effective Amendment No. 1 to the Registration Statement on Form S-6
File No. 333-70963
Ladies and Gentlemen:
We have acted as counsel to Great-West Life & Annuity Insurance Company,
a Colorado corporation, regarding the federal securities laws applicable to the
issuance and sale of the Contracts described in the above-referenced
registration statement. We hereby consent to the reference to us under the
caption "Legal Matters" in the prospectus filed today with the Securities and
Exchange Commission. In giving this consent, we do not admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933.
Very truly yours,
JORDEN BURT BOROS CICCHETTI BERENSON &
JOHNSON LLP
WDC #71476v1
Exhibit 9. Consent of Beverly A. Byrne, Esq.
April 26, 2000
Great-West Life & Annuity Insurance Company
8515 East Orchard Road
Englewood, Colorado 80111
Re: Post Effective Amendment No. 1 to the Registration Statement
of Great-West Life & Annuity Insurance Company
COLI VUL-2 Series Account on Form S-6, File No. 333-70963
Ladies and Gentlemen:
I hereby consent to the use of my name under the caption "Legal Matters" in the
Prospectus for the COLI VUL-2 Series Account contained in the Post Effective
Amendment No. 1 to the Registration Statement of Great-West Life & Annuity
Insurance Company COLI VUL-2 Series Account on Form S-6, File No. 333-70963,
filed by Great-West Life & Annuity Insurance Company and COLI VUL-2 Series
Account with the Securities and Exchange Commission under the Securities Act of
1933, the Investment Company Act of 1940 and the amendments thereto.
Sincerely,
Beverly A. Byrne
Vice President, Counsel
and Associate Secretary
