<PAGE>
Rule 424(b)(3)
File No. 33-31711
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
MAY 3, 1999
PROFILE
COMPASS G
COMBINATION FIXED/VARIABLE
GROUP ANNUITY
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS THAT YOU
SHOULD KNOW AND CONSIDER BEFORE PURCHASING A CERTIFICATE UNDER THE CONTRACT. THE
CONTRACT AND CERTIFICATE ARE MORE FULLY DESCRIBED IN THE FULL PROSPECTUS WHICH
ACCOMPANIES THIS PROFILE. PLEASE READ THE PROSPECTUS CAREFULLY.
1. THE COMPASS G ANNUITY
The Compass G Combination Fixed/Variable Group Annuity is a master group
flexible payment deferred annuity contract ("Contract") designed for use in
connection with retirement and deferred compensation plans, some of which may
qualify for favorable federal income tax treatment. We issue the Contract to the
employer or other group that establishes the plan, which we call the "Owner." We
issue a certificate to each participant under the Contract (a "Certificate").
The Contract and Certificate are intended to help you achieve your retirement
savings or other long-term investment goals.
The Certificate has two phases: an Accumulation Phase and an Income Phase.
During the Accumulation Phase payments are made under the Certificate; any
investment earnings under your Certificate accumulate on a tax-deferred basis
and are taxed as income only when withdrawn. The Owner (or you, if permitted by
your plan) determine the length of the Accumulation Phase. During the Income
Phase, we make annuity payments in amounts determined in part by the amount of
money you have accumulated under your Certificate during the Accumulation Phase.
The Owner (or you, if permitted by your plan) may choose among a range of
variable investment options and fixed interest options. For a variable
investment return, the Owner (or you, if permitted by your plan) choose one or
more Sub-Accounts in our Variable Account, each of which invests in shares of a
corresponding series of the MFS/Sun Life Series Trust (collectively, the
"Series") or one of the mutual funds (the "Mutual Funds") listed in Section 4.
However, if you participate under a Contract that is not tax-qualified or that
is not held by a trustee or custodian on behalf of the Owner, only Sub-Accounts
that invest in the Series may be chosen. The value of any portion of your
Certificate allocated to the Sub-Accounts will fluctuate up or down depending on
the performance of the Series or Mutual Funds selected, and you may experience
losses. For a fixed interest rate, the Owner (or you, if permitted by your plan)
may choose one or more of the 1, 3, 5 or 7 year Guarantee Periods offered in our
Fixed Account, each of which earns its own Guaranteed Interest Rate if you keep
your money in that Guarantee Period for the specified length of time.
The Contract and Certificate are designed to meet your need for investment
flexibility. Until we begin making annuity payments under your Certificate, the
Owner (or you, if permitted by your plan) can, subject to certain limitations,
transfer money between options up to 12 times each year without a transfer
charge or adverse tax consequences.
2. ANNUITY PAYMENTS (THE INCOME PHASE)
Just as the Owner (or you, if permitted by your plan) can elect to have
your Certificate's value accumulate on either a variable or fixed basis, or a
combination of both, the Owner (or you, if permitted by your plan) can elect to
receive annuity payments on either a variable or fixed basis or both. Annuity
payment methods (1), (2) and (3) described below are available to provide either
a fixed or variable annuity (or a combination of both) and annuity payment
methods (4) and (5) are available only to provide a fixed annuity. If any part
of your annuity payments come from the Sub-Accounts, the dollar amount of your
annuity payments may fluctuate.
The Contract offers a variety of annuity options. The Owner (or you, if
permitted by your plan) can select from among the following methods of receiving
either variable or fixed annuity payments
<PAGE>
under your Certificate: (1) monthly payments continuing for your lifetime; (2)
monthly payments for your lifetime, but with payments continuing to your chosen
beneficiary for 5, 10, 15 or 20 years if you die before the end of the period
selected; (3) monthly payments for your lifetime and the life of another
designated person (usually your spouse); (4) fixed monthly payments for a
specified number of years; and (5) a fixed payment option where we will hold the
amount applied to provide fixed annuity payments, with interest accrued at the
rate we determine from time to time, which will be at least 4% per year. We may
also agree to other annuity options in our discretion.
Once the Income Phase begins, you cannot change your choice of annuity
payment method.
3. PURCHASING A CERTIFICATE
The amount of purchase payments made under a Certificate may vary;
however, we will not accept purchase payments that, on an annualized basis, are
less than $300 in the first year of the Certificate, and each purchase payment
must be at least $25. We will not accept a purchase payment if your Account
Value is over $1 million, or if the purchase payment would cause your Account
Value to exceed $1 million, unless we have approved the payment in advance.
4. ALLOCATION OPTIONS
The Owner (or you, if permitted by your plan) may allocate money among
Sub-Accounts investing in the following Mutual Funds and the following Series of
the MFS/Sun Life Series Trust:
<TABLE>
<S> <C>
MUTUAL FUNDS SERIES
MFS Global Governments Fund Money Market Series
MFS Bond Fund High Yield Series
MFS Total Return Fund Capital Appreciation Series
Massachusetts Investors Trust Government Securities Series
Massachusetts Investors Growth Stock Fund
MFS Growth Opportunities Fund
</TABLE>
Market conditions will determine the value of an investment in any Mutual
Fund or Series. Each Mutual Fund is described in the prospectus of that Mutual
Fund and each Series is described in the prospectus of the MFS/Sun Life Series
Trust.
In addition to these variable options, the Owner (or you, if permitted by
your plan) may allocate money to one or more of the 1, 3, 5 or 7 year Guarantee
Periods we make available. For each Guarantee Period, we offer a Guaranteed
Interest Rate for the specified length of time.
5. EXPENSES
The charges under the Contracts are as follows:
We impose an annual Account Fee on your Account that ranges from $12 to
$25, depending on the total amount of purchase payments made to all Certificates
under the Contract. We also deduct insurance charges ranging from 0.95% to 1.30%
per year of the average daily value of the Certificate allocated among the
Sub-Accounts, depending on the total amount of Purchase Payments made to all
Certificates under the Contract.
There are no sales charges when you purchase your Compass G Annuity.
However, if money is withdrawn from your Account, we will, with certain
exceptions, impose a withdrawal charge. Your Certificate allows a "free
withdrawal amount," which you may withdraw before you incur the withdrawal
charge. The rest of the withdrawal is subject to a withdrawal charge equal to a
percentage of
2
<PAGE>
each purchase payment withdrawn and is determined in accordance with the table
below. The percentage varies according to the number of Account Years the
purchase payment has been held in your account, including the year in which you
made the payment, but not the year in which you withdraw it.
<TABLE>
<CAPTION>
NUMBER OF
ACCOUNT YEARS PERCENTAGE
- ---------------- ---------------
<S> <C>
0-2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
8 0%
</TABLE>
If the Owner withdraws, borrows, transfers, or annuitizes (for a payout
period of less than five years) money allocated to a 3, 5 or 7 year Guarantee
Period, the amount will be subject to a Market Value Adjustment. This adjustment
reflects the relationship between the Guaranteed Interest Rate we currently
declare for Guarantee Periods equal to your Guarantee Period, and the Guaranteed
Interest Rate applicable to the amount being withdrawn. Generally, if your
Guaranteed Interest Rate is lower than the rate currently declared, then the
adjustment will decrease your Account value. Conversely, if your Guaranteed
Interest Rate is higher than the current rate, the adjustment will increase your
Account value.
In addition to the charges we impose under the Contracts, there are
charges (which include management fees and operating expenses) imposed by each
Series and each Mutual Fund, which range from 0.56% to 1.32% of the average net
assets of the Series or Mutual Fund, depending upon the Series or Mutual Fund
selected.
The following chart is designed to help you understand the expenses you
will incur under your Certificate, if you invest in one or more of the
Sub-Accounts. The column "Total Annual Expenses" shows the sum of the "Total
Annual Insurance Charges," as defined just above the chart, and the total
expenses for each Series or Mutual Fund. The next two columns show two examples
of the expenses, in dollars, you would pay under a Certificate. The examples
assume that you invested $1,000 in a Certificate that earns 5% annually and that
you withdraw your money (1) at the end of one year or (2) at the end of 10
years. For the first year, the Total Annual Expenses are deducted, as well as
withdrawal charges. For year 10, the example shows the aggregate of all of the
annual expenses deducted for the 10 years, but there is no withdrawal charge.
"Total Annual Insurance Charges" include the insurance charges of 1.30%,
plus an additional 0.30%, which is used to represent the annual Account Fee,
each of which is based on an assumed $8,333 of Purchase Payments made to all
Certificates under the Contract. The actual impact of the Account Fee may be
greater or less than 0.30%, depending upon the Contract.
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL ANNUAL TOTAL ANNUAL TOTAL -----------------
INSURANCE SERIES ANNUAL 1 10
SUB-ACCOUNT CHARGES EXPENSES EXPENSES YEAR YEARS
---------------------------------------- --------------- ------------ -------- ------- --------
<S> <C> <C> <C> <C> <C>
MFS Global Governments Fund............. 1.60% 1.32% 2.92% $ 85 $ 324
(1.30% + 0.30%)
MFS Bond Fund........................... 1.60% 0.94% 2.54% $ 81 $ 288
(1.30% + 0.30%)
MFS Total Return Fund................... 1.60% 0.90% 2.50% $ 81 $ 284
(1.30% + 0.30%)
Massachusetts Investors Trust........... 1.60% 0.87% 2.47% $ 81 $ 281
(1.30% + 0.30%)
Massachusetts Investors Growth Stock 1.60% 0.89% 2.49% $ 81 $ 283
Fund................................... (1.30% + 0.30%)
MFS Growth Opportunities Fund........... 1.60% 0.78% 2.38% $ 80 $ 272
(1.30% + 0.30%)
MFS/Sun Life Money Market Series........ 1.60% 0.56% 2.16% $ 78 $ 249
(1.30% + 0.30%)
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL ANNUAL TOTAL ANNUAL TOTAL -----------------
INSURANCE SERIES ANNUAL 1 10
SUB-ACCOUNT CHARGES EXPENSES EXPENSES YEAR YEARS
---------------------------------------- --------------- ------------ -------- ------- --------
<S> <C> <C> <C> <C> <C>
MFS/Sun Life High Yield Series.......... 1.60% 0.82% 2.42% $ 80 $ 276
(1.30% + 0.30%)
MFS/Sun Life Capital Appreciation 1.60% 0.77% 2.37% $ 80 $ 271
Series................................. (1.30% + 0.30%)
MFS/Sun Life Government Securities 1.60% 0.62% 2.22% $ 78 $ 255
Series................................. (1.30% + 0.30%)
</TABLE>
For more detailed information about Contract fees and expenses, please
refer to the fee table and discussion of Contract charges contained in the full
Prospectus which accompanies this Profile.
6. TAXES
Your earnings are not taxed until you take them out of your Certificate.
If you take money out, earnings come out first and are taxed as income. If you
are younger than 59 1/2 when you take money out, you may be charged a 10%
federal penalty tax on the earnings. Annuity payments during the Income Phase
are considered in part a return of your original investment. That portion of
each payment is not taxable as income, unless your Certificate is funded with
pre-tax or tax deductible dollars (such as with a pension or IRA contribution),
in which case the entire payment will be taxable. In all cases, you should
consult with your tax adviser for specific tax information.
7. ACCESS TO YOUR MONEY
The Owner (or you, if permitted by your plan) can withdraw money from your
Certificate at any time during the Accumulation Phase. A portion of the value of
your Certificate may be withdrawn in each year without the imposition of the
withdrawal charge -- 10% of all Payments made in the last 7 years, plus any
Payment we have held for at least 7 years. We do not apply any withdrawal charge
to withdrawals made from a Certificate that has been established for at least 12
years, regardless of the amount or when any Purchase Payments were made. All
other Purchase Payments you withdraw will be subject to a withdrawal charge
ranging from 6% to 0%. You may also be required to pay income tax and possible
tax penalties on any money you withdraw.
We do not assess a withdrawal charge upon transfers or annuitization if
the payout period is at least five years.
In addition to the withdrawal charge, amounts withdraw, borrowed, transfer
or annuitized (for payout periods of less than five years) from the Fixed
Account before your Guarantee Period has ended may be subject to a Market Value
Adjustment.
We also make loans under tax-qualified Contracts.
8. PERFORMANCE
If you invest in one or more Sub-Accounts, the value of your Certificate
will increase or decrease depending upon the investment performance of the
Series or Mutual Funds chosen.
The following chart shows total returns for investment in the Sub-Accounts
where the corresponding Mutual Fund or Series has at least one full calendar
year of operations. The returns reflect all charges and deductions of the Mutual
Funds, Series and Sub-Accounts and deduction of the annual Account Fee. They do
not reflect deduction of any withdrawal charges or premium taxes. These
4
<PAGE>
charges, if included, would reduce the performance numbers shown. Past
performance is not a guarantee of future results.
<TABLE>
<CAPTION>
CALENDAR YEAR
----------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994
---------------------------------------- -------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
MFS Bond Fund........................... 3.12% 8.88% 2.55% 19.83% (6.26)%
Capital Appreciation Series............. 27.02% 21.51% 19.88% 32.71% (4.89)%
MFS Global Governments Fund............. 2.72% (0.98)% 3.98% 13.94% (7.78)%
Government Securities Series............ 7.29% 7.31% 0.26% 16.10% (3.47)%
MFS Growth Opportunities Fund........... 27.49% 21.70% 20.20% 32.73% (5.40)%
High Yield Series....................... (0.73)% 11.71% 10.62% 15.50% (3.54)%
Massachusetts Investors Growth Stock
Fund.................................. 38.15% 46.31% 21.14% 26.76% (7.97)%
Massachusetts Investors Trust........... 21.34% 29.92% 24.30% 37.46% (2.34)%
Money Market Series..................... 3.63% 3.68% 3.52% 4.05% 2.32%
MFS Total Return Fund................... 10.47% 19.05% 13.22% 25.31% (3.99)%
<CAPTION>
SUB-ACCOUNT 1993 1992 1991 1990 1989
---------------------------------------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
MFS Bond Fund........................... 12.32% 4.86% 17.44% 4.99% 11.99%
Capital Appreciation Series............. 16.44% 12.05% 39.08% 10.90% 45.26%
MFS Global Governments Fund............. 16.78% 0.01% 12.21% 16.29% 6.04%
Government Securities Series............ 7.26% 5.37% 14.29% 7.40% 11.34%
MFS Growth Opportunities Fund........... 14.30% 6.14% 20.91% (5.85)% 26.83%
High Yield Series....................... 16.18% 13.45% 45.79% (15.56)% 2.25%
Massachusetts Investors Growth Stock
Fund.................................. 12.97% 5.08% 45.91% (5.97)% 34.00%
Massachusetts Investors Trust........... 8.56% 5.98% 26.12% 1.40% 34.35%
Money Market Series..................... 1.27% 1.97% 4.43% 6.42% 7.46%
MFS Total Return Fund................... 13.64% 9.17% 20.14% (3.57)% 21.42%
</TABLE>
9. DEATH BENEFIT
If you die before your Certificate reaches the Income Phase, the
beneficiary will receive a death benefit. To calculate the death benefit, we use
a "Death Benefit Date", which is the earliest date we have both due proof of
death and a written request specifying the manner of payment.
The death benefit is equal to the greater of (1) the value of your Account
on the Death Benefit Date and (2) the total of the purchase payments made to
your Account, minus all withdrawals and loans. The death benefit also will be
reduced by any unpaid net loan interest.
10. OTHER INFORMATION
NO PROBATE. In most cases, when you die, the beneficiary will receive the
death benefit without going through probate. However, avoiding probate does not
mean that the beneficiary will not have tax liability as a result of receiving
the death benefit.
WHO SHOULD PURCHASE A CERTIFICATE? The Contract and the Certificates
issued under the Contract are designed for those seeking long-term tax deferred
accumulation of assets, generally for retirement or other long-term purposes.
The tax-deferred feature is most attractive to purchasers in high federal and
state income tax brackets. You should not buy a Certificate if you are looking
for a short-term investment or if you cannot risk a decrease in the value of
your investment.
CONFIRMATIONS AND QUARTERLY STATEMENTS. You will receive a confirmation of
each transaction within your Certificate. On an annual basis, you will receive a
complete statement of your transactions over the past year and a summary of your
Account values during that period.
11. INQUIRIES
If you would like more information about buying a Certificate, please
contact your plan administrator. If you have any other questions, please contact
us at:
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ANNUITY SERVICE MAILING ADDRESS:
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
TELEPHONE: TOLL FREE (800) 752-7215
IN MASSACHUSETTS (617) 348-9600
5
<PAGE>
Rule 424(b)(3)
File No. 33-31711
PROSPECTUS
MAY 3, 1999
COMPASS G
COMBINATION FIXED/VARIABLE
GROUP ANNUITY
Sun Life Assurance Company of Canada (U.S.) and Sun Life of Canada (U.S.)
Variable Account D offer the master group flexible payment deferred annuity
contracts described in this Prospectus to groups for use in connection with
employer, association and other group retirement plans.
Contract owners may choose among a range of variable investment options
and fixed options. The variable options are Sub-Accounts in the Variable
Account. Each Sub-Account invests in one of following the mutual funds (the
"Mutual Funds") advised by our affiliate Massachusetts Financial Services
Company ("MFS"), or one of the following series of the MFS/Sun Life Series Trust
(the "Series Fund"), which also is a mutual fund advised by MFS:
<TABLE>
<S> <C>
MUTUAL FUNDS SERIES OF SERIES FUND
MFS Global Governments Fund Money Market Series
MFS Bond Fund High Yield Series
MFS Total Return Fund Capital Appreciation Series
Massachusetts Investors Trust Government Securities Series
Massachusetts Investors Growth Stock Fund
MFS Growth Opportunities Fund
</TABLE>
If a Contract is not tax qualified or is not held by a trustee or
custodian on behalf of the group or entity, the Contract owner may only choose
among the Sub-Accounts that invest in the Series Fund.
The fixed account options are available for time periods of 1, 3, 5, or 7
years, called Guarantee Periods, and pay interest at a guaranteed rate for each
period. The Guarantee Periods are available for all Contracts.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE SERIES
FUND. FOR TAX QUALIFIED CONTRACTS HELD BY A TRUSTEE OR CUSTODIAN, THIS
PROSPECTUS ALSO MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR EACH OF THE
MUTUAL FUNDS. PLEASE READ THIS PROSPECTUS, THE SERIES FUND PROSPECTUS, AND, IF
APPLICABLE, THE MUTUAL FUND PROSPECTUSES CAREFULLY BEFORE INVESTING AND KEEP
THEM FOR FUTURE REFERENCE. THEY CONTAIN IMPORTANT INFORMATION ABOUT THE COMPASS
G ANNUITY, THE SERIES FUND AND THE MUTUAL FUNDS.
We have filed a Statement of Additional Information dated May 3, 1999 (the
"SAI") with the Securities and Exchange Commission (the "SEC"), which is
incorporated by reference in this Prospectus. The table of contents for the SAI
is on page 58 of this Prospectus. You may obtain a copy without charge by
writing to our Annuity Service Mailing Address or by telephoning (800) 752-7215
or (617) 348-9600. In addition, the SEC maintains a website (http://www.sec.gov)
that contains the SAI, material incorporated by reference, and other information
regarding companies that file with the SEC.
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY US MEANS RECEIPT AT THE
FOLLOWING ADDRESS:
ANNUITY SERVICE MAILING ADDRESS:
C/O SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
RETIREMENT PRODUCTS AND SERVICES
1
<PAGE>
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Special Terms 4
Expense Summary 4
Summary of Contract Expenses 4
Condensed Financial Information 7
The Compass G Combination Fixed/Variable Group Annuity 7
Communicating to Us About the Contract 7
Sun Life Assurance Company of Canada (U.S.) 8
The Variable Account 8
Variable Account Options: The MFS/Sun Life Series Trust 8
The Mutual Funds 9
MFS 10
The Fixed Account 10
The Fixed Account Options: The Guarantee Periods 11
The Accumulation Phase 11
Issuing Your Certificate 11
Amount and Frequency of Purchase Payments 11
Allocation of Net Purchase Payments 11
Your Account 12
Your Account Value 12
Variable Account Value 12
Fixed Account Value 13
Transfer Privilege 14
Withdrawals, Withdrawal Charge, Market Value Adjustment and Loan Provision 14
Cash Withdrawals 14
Withdrawal Charge 15
Market Value Adjustment 17
Loans (Qualified Contracts Only) 17
Contract Charges 18
Account Fee 18
Mortality and Expense Risk Charge 19
Premium Taxes 19
Mutual Fund and Series Fund Expenses 19
Modification of Charges 19
Death Benefit 19
Amount of Death Benefit 20
Method of Paying Death Benefit 20
Non-Qualified Contracts 20
Selection and Change of Beneficiary 21
Payment of Death Benefit 21
Due Proof of Death 21
The Income Phase -- Annuity Provisions 21
Selection of the Annuity Commencement Date 21
Annuity Options 22
Selection of Annuity Option 22
Amount of Annuity Payments 23
Annuity Options as Method of Payment for Death Benefit 24
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Other Contract Provisions 24
Exercise of Contract Rights 24
Change of Ownership 25
Voting of Mutual Fund and Series Fund Shares 25
Periodic Reports 26
Substitution of Securities 26
Change in Operation of Variable Account 26
Splitting Units 27
Modification 27
Discontinuance of New Participants 27
Custodian 27
Right to Return (IRAs Only) 27
Federal Tax Status 28
Texas Optional Retirement Program 32
Administration of the Contracts 32
Distribution of the Contracts 32
Available Information 33
Incorporation of Certain Documents by Reference 33
Legal Proceedings 33
Accountants 33
Financial Statements 33
Table of Contents of Statement of Additional Information 58
Appendix A -- Glossary 60
Appendix B -- Condensed Financial Information -- Accumulation Unit Values 63
Appendix C -- Withdrawals, Withdrawal Charges and the Market Value Adjustment 64
</TABLE>
3
<PAGE>
SPECIAL TERMS
The Contract is a legal document that uses a number of specially defined
terms. We explain most of the terms that we use in this Prospectus in the
context where they arise, and some are self-explanatory. In addition, for
convenient reference, we have compiled a list of these terms in the Glossary
included at the back of this Prospectus as Appendix A. If, while you are reading
this Prospectus, you come across a term that you do not understand, please refer
to the Glossary for an explanation.
EXPENSE SUMMARY
The purpose of the following table is to help you understand the costs and
expenses that you will bear directly and indirectly under a Contract WHEN YOU
ALLOCATE MONEY TO THE VARIABLE ACCOUNT. The table reflects expenses of the
Variable Account as well as of each Series Fund and Mutual Fund. The table
should be considered together with the narrative provided under the heading
"Contract Fees" in this Prospectus, and with the Series Fund prospectus and the
Mutual Fund prospectuses. In addition to the expenses listed below, we may
deduct premium taxes.
SUMMARY OF CONTRACT EXPENSES
The purpose of the following table is to help Owners, Participants and
prospective purchasers to understand the costs and expenses that are borne,
directly and indirectly, by Owners and/or Participants WHEN PAYMENTS ARE
ALLOCATED TO THE VARIABLE ACCOUNT. The table reflects expenses of the Variable
Account as well as of the Funds. The expense information for certain Funds has
been restated to reflect current fees. The information set forth should be
considered together with the narrative provided under the heading "How the
Contract Charges Are Assessed" in this Prospectus, and with the Funds'
prospectuses. In addition to the expenses listed below, premium taxes may be
applicable.
<TABLE>
<CAPTION>
MONEY HIGH CAPITAL GOVERNMENT
MARKET YIELD APPRECIATION SECURITIES
OWNER TRANSACTION EXPENSES SERIES SERIES SERIES SERIES
- ------------------------------------------------ --------- --------- --------------- -------------
<S> <C> <C> <C> <C>
Sales Load Imposed on Purchases................. 0 0 0 0
Deferred Sales Load (as a percentage of Purchase
Payments withdrawn) (1)
Years Payment in Participant's Account
0-2......................................... 6% 6% 6% 6%
3........................................... 5% 5% 5% 5%
4........................................... 4% 4% 4% 4%
5........................................... 3% 3% 3% 3%
6........................................... 2% 2% 2% 2%
7........................................... 1% 1% 1% 1%
8........................................... 0% 0% 0% 0%
Exchange Fee.................................... 0 0 0 0
ANNUAL CONTRACT FEE (2) $25 per Contract
- ------------------------------------------------
SEPARATE ACCOUNT ANNUAL EXPENSES
- ------------------------------------------------
(as a percentage of average separate account assets)
Mortality and Expense Risk Fees (2)............. 1.30% 1.30% 1.30% 1.30%
Other Fees and Expenses of the Separate
Account....................................... 0.00% 0.00% 0.00% 0.00%
Total Separate Account Annual Expenses.......... 1.30% 1.30% 1.30% 1.30%
FUND ANNUAL EXPENSES
- ------------------------------------------------
(as a percentage of Fund average net assets)
Management Fees................................. 0.50% 0.75% 0.73% 0.55%
Other Expenses.................................. 0.06% 0.07% 0.04% 0.07%
Total Fund Annual Expenses...................... 0.56% 0.82% 0.77% 0.62%
(SEE FOOTNOTES ON NEXT PAGE)
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
OWNER TRANSACTION EXPENSES MWG MFB MTR MIT MIG MGO
- ------------------------------------------------ -------- -------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on Purchases................. 0 0 0 0 0 0
Deferred Sales Load (as a percentage of Purchase
Payments withdrawn) (1)
Years Payment in Participant's Account
0-2......................................... 6% 6% 6% 6% 6% 6%
3........................................... 5% 5% 5% 5% 5% 5%
4........................................... 4% 4% 4% 4% 4% 4%
5........................................... 3% 3% 3% 3% 3% 3%
6........................................... 2% 2% 2% 2% 2% 2%
7........................................... 1% 1% 1% 1% 1% 1%
8........................................... 0% 0% 0% 0% 0% 0%
Exchange Fee.................................... 0 0 0 0 0 0
ANNUAL CONTRACT FEE (2) $25 per Contract
- ------------------------------------------------
SEPARATE ACCOUNT ANNUAL EXPENSES
- ------------------------------------------------
(as a percentage of average separate account assets)
Mortality and Expense Risk Fees (2)............. 1.30% 1.30% 1.30% 1.30% 1.30% 1.30%
Other Fees and Expenses of the Separate
Account....................................... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Separate Account Annual Expenses.......... 1.30% 1.30% 1.30% 1.30% 1.30% 1.30%
FUND ANNUAL EXPENSES
- ------------------------------------------------
(as a percentage of Fund average net assets)
Management Fees................................. 0.75% 0.38% 0.34% 0.33% 0.33% 0.42%
12b-1 Fees(3)................................... 0.25%(4) 0.30%(6) 0.35% 0.35% 0.35% 0.18%(4)(5)
Other Expenses(7)............................... 0.32% 0.26% 0.21% 0.19% 0.21% 0.18%
Total Fund Annual Expenses...................... 1.32% 0.94% 0.90% 0.87% 0.89% 0.78%
</TABLE>
- ------------
(1) A portion of the Participant's Account may be withdrawn each year without
imposition of any withdrawal charge, and after a Purchase Payment has been
held by the Company for seven years it may be withdrawn free of any
withdrawal charge.
(2) The Annual Contract Fee ("Account Fee") and Mortality and Expense Risk Fees
("Asset Charge") decline based on total Purchase Payments credited to all
Participant's Accounts under a Contract in accordance with the following
schedule:
<TABLE>
<CAPTION>
PURCHASE PAYMENTS ACCOUNT FEE ASSET CHARGE
- ------------------------------------------------- ----------- ------------
<C> <S> <C> <C>
up to $250,000 ......................... $25 1.30%
$250,000 to $1,499,999 ......................... $18 1.25%
$1,500,000 to $4,999,999 ......................... $15 1.10%
$5,000,000 and over ......................... $12 0.95%
</TABLE>
(3) Each of the Funds has adopted a distribution plan for its shares in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as
amended, which provides that it will pay distribution/service fees
aggregating up to (but not necessarily all of) 0.35% per annum of the
average daily net assets attributable to the Class A shares. See
"Information Concerning Shares of the Fund -- Distribution Plan" in the
Fund's Prospectus.
(4) Payment of the 0.10% per annum Class A distribution fee will be imposed on
such date as the Trustees of the Fund may determine.
(5) The 0.35% per annum distribution/service fee is reduced to 0.25% for shares
purchased prior to March 1, 1991.
(6) 0.05% of the Class A distribution fee is currently being paid by the Fund.
Payment of the remaining portion of the Class A distribution fee will become
payable upon such date as the Trustees of the Trust may determine.
(7) Each Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such reductions are reflected
under "Other Expenses."
5
<PAGE>
EXAMPLES
If you surrender your Contract at the end of the applicable time period,
you would pay the following expenses on a $1,000 investment, assuming a 5%
annual return:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- ---------
<S> <C> <C> <C> <C>
MFS Global Governments Fund................................. $85 $139 $184 $324
MFS Bond Fund............................................... $81 $128 $166 $288
MFS Total Return Fund....................................... $81 $127 $164 $284
Massachusetts Investors Trust............................... $81 $126 $163 $281
Massachusetts Investors Growth Stock Fund................... $81 $126 $164 $283
MFS Growth Opportunities Fund............................... $80 $123 $156 $272
Money Market Series......................................... $78 $117 $147 $249
High Yield Series........................................... $80 $124 $160 $276
Capital Appreciation Series................................. $80 $123 $158 $271
Government Securities Series................................ $78 $119 $150 $255
</TABLE>
If you do NOT surrender your Contract, or if you annuitize at the end of
the applicable time period, you would pay the following expenses on a $1,000
investment, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- ---------
<S> <C> <C> <C> <C>
MFS Global Governments Fund................................. $30 $90 $154 $324
MFS Bond Fund............................................... $26 $79 $135 $288
MFS Total Return Fund....................................... $25 $78 $133 $284
Massachusetts Investors Trust............................... $25 $77 $132 $281
Massachusetts Investors Growth Stock Fund................... $25 $78 $133 $283
MFS Growth Opportunities Fund............................... $24 $74 $127 $272
Money Market Series......................................... $22 $68 $116 $249
High Yield Series........................................... $25 $75 $129 $276
Capital Appreciation Series................................. $24 $74 $127 $271
Government Securities Series................................ $23 $69 $119 $255
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED TO BE REPRESENTATIONS OF PAST OR
FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN.
6
<PAGE>
CONDENSED FINANCIAL INFORMATION
Ten-year historical information about the value of the units we use to
measure the variable portion of Contracts ("Variable Accumulation Units") is
included in the back of this Prospectus as Appendix B.
THE COMPASS G COMBINATION FIXED/VARIABLE GROUP ANNUITY
Sun Life Assurance Company of Canada (U.S.) (the "Company", "we" or "us")
and Sun Life of Canada (U.S.) Variable Account D (the "Variable Account") offer
the Compass G Combination Fixed/ Variable Group Annuity to employers,
associations and other groups for use in connection with their retirement plans.
We issue the Contract to the Owner. The Contract covers all individuals
participating under the Contract. Each individual receives a Certificate that
evidences his or her participation under the Contract.
In this Prospectus, unless we state otherwise, we refer to the employer,
association or other group establishing the Contract as the "Owner" even though
the legal owner of the Contract may be a trustee or custodian. We refer to
participating individuals under Contracts as "Participants" and we refer to
Participants as "you." For the purpose of determining benefits under a Contract,
we establish an Account for each Participant, which we will refer to as "your"
Account or a "Participant Account." We will only accept instructions and
elections regarding Participant Accounts from the Owner. However, under the
terms of your particular plan, you may be entitled to make certain decisions and
elections which the Owner will communicate to us on your behalf.
The Contract provides a number of important benefits for your retirement
planning. It has an Accumulation Phase, during which payments are made under the
Contract and allocated to one or more Variable Account or Fixed Account options,
and an Income Phase, during which we make payments based on the amount
accumulated. The Contract provides tax deferral, so that you do not pay taxes on
your earnings under the Contract until they are withdrawn. It provides a death
benefit if you die during the Accumulation Phase. Finally, if the Owner (or you,
if permitted by your plan) so elects, during the Income Phase we will make
payments to you for life or for another period that the Owner (or you, if
permitted by your plan) chooses.
The Owner (or you, if permitted by your plan) chooses these benefits on a
variable or fixed basis or a combination of both. When a variable investment
option or a Variable Annuity option is chosen, your benefits will be responsive
to changes in the economic environment, including inflationary forces and
changes in rates of return available from different types of investments. With
these options, you assume all investment risk under the Contract. When a
Guarantee Period in our Fixed Account or a Fixed Annuity option is chosen, we
assume the investment risk, except in the case of early withdrawals, where you
bear the risk of unfavorable interest rate changes. You also bear the risk that
the interest rates we will offer in the future and the rates we will use in
determining your Fixed Annuity may not exceed our minimum guaranteed rate, which
is 4% per year, compounded annually.
The Contracts are designed for use in connection with retirement and
deferred compensation plans, some of which qualify for favorable federal income
tax treatment under Sections 401, 403, 408(c), 408(k) or 408(p) of the Internal
Revenue Code. After May 1, 1990 we will not issue Contracts for use with
deferred compensation plans established under Section 457 of the Code. The
Contracts are also designed so that they may be used in connection with certain
non-tax-qualified retirement plans, such as payroll savings plans and such other
groups (trusteed or nontrusteed) as may be eligible under applicable law. We
refer to Contracts used with plans that receive favorable tax treatment as
"Qualified Contracts," and all others as "Non-Qualified Contracts."
COMMUNICATING TO US ABOUT THE CONTRACT
All materials sent to us, including Purchase Payments, must be sent to our
Annuity Service Mailing Address set forth on the first page of this Prospectus.
For all telephone communications, you must call (800) 752-7215 or (617)
348-9600.
7
<PAGE>
Unless this Prospectus states differently, we will consider all materials
sent to us and all telephone communications to be received on the date we
actually receive them at the Annuity Service Mailing Address. However, we will
consider Purchase Payments, withdrawal requests and transfer instructions to be
received on the next Business Day if we receive them (1) on a day that is not a
Business Day or (2) after 4:00 p.m., Eastern Time.
When we specify that notice to us must be in writing, we reserve the
right, in our sole discretion, to accept notice in another form.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
We are a stock life insurance company incorporated under the laws of
Delaware on January 12, 1970. We do business in 48 states, the District of
Columbia, and Puerto Rico, and we have an insurance company subsidiary that does
business in New York. Our Executive Office mailing address is One Sun Life
Executive Park, Wellesley Hills, Massachusetts 02481.
We are an indirect wholly-owned subsidiary of Sun Life Assurance Company
of Canada ("Sun Life (Canada)"). Sun Life (Canada) is a mutual life insurance
company incorporated pursuant to Act of Parliament of Canada in 1865 and
currently transacts business in all of the Canadian provinces and territories,
all U.S. states (except New York), the District of Columbia, Puerto Rico, the
Virgin Islands, Great Britain, Ireland, Hong Kong, Bermuda and the Philippines.
THE VARIABLE ACCOUNT
We established the Variable Account as a separate account on August 20,
1985, pursuant to a resolution of our Board of Directors. Under Delaware
insurance law and the Contract, the income, gains or losses of the Variable
Account are credited to or charged against the assets of the Variable Account
without regard to the other income, gains, or losses of the Company. These
assets are held in relation to the Contracts described in this Prospectus and
other variable annuity contracts that provide benefits that vary in accordance
with the investment performance of the Variable Account. Although the assets
maintained in the Variable Account will not be charged with any liabilities
arising out of any other business we conduct, all obligations arising under the
Contracts, including the promise to make annuity payments, are general corporate
obligations of the Company.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account invests exclusively in (1) shares of one of the four Series of the
MFS/Sun Life Series Trust (the "Series Fund") that we offer for the Contracts
and (2) for Qualified Contracts held by a trustee or custodian on behalf of the
entity or group, Class A shares of one of the Mutual Funds. All amounts
allocated to the Variable Account will be used to purchase Mutual Fund or Series
Fund shares as designated by the Owner (or you, if permitted by your plan) at
their net asset value. Any and all distributions made by the Mutual Funds or
Series Fund with respect to the shares held by the Variable Account will be
reinvested to purchase additional shares at their net asset value. Deductions
from the Variable Account for cash withdrawals, loans, annuity payments, death
benefits, Account Fees, contract charges against the assets of the Variable
Account for the assumption of mortality and expense risks, administrative
expenses and any applicable taxes will, in effect, be made by redeeming the
number of Mutual Fund or Series Fund shares at their net asset value equal in
total value to the amount to be deducted. The Variable Account will be fully
invested in Series Fund and Mutual Fund shares at all times.
VARIABLE ACCOUNT OPTIONS:
THE MFS/SUN LIFE SERIES TRUST
The MFS/Sun Life Series Trust (the "Series Fund") is an open-end
management investment company registered under the Investment Company Act of
1940. Our affiliate Massachusetts Financial Services Company ("MFS") serves as
the investment adviser to the Series Fund.
The Series Fund is composed of 26 independent portfolios of securities,
each of which has separate investment objectives and policies. Shares of the
Series Fund are issued in 26 Series, each corresponding to one of the
portfolios. The Contracts provide for investment by the Sub-Accounts in
8
<PAGE>
shares of the 4 Series of the Series Fund described below. Additional portfolios
may be added to the Series Fund which may or may not be available for investment
by the Variable Account.
CAPITAL APPRECIATION SERIES will seek to maximize capital appreciation by
investing in securities of all types, with major emphasis on common stocks.
GOVERNMENT SECURITIES SERIES will seek current income and preservation of
capital by investing in U.S. Government and U.S. Government-related
securities.
HIGH YIELD SERIES will seek high current income and capital appreciation by
investing primarily in certain lower rated categories or unrated securities
(possibly with equity features) of U.S. and foreign issuers (also known as
"junk bonds").
MONEY MARKET SERIES will seek maximum current income to the extent
consistent with stability of principal by investing exclusively in money
market instruments maturing in less than 13 months.
A more detailed description of the Series Fund, its management, its
investment objectives, policies and restrictions and its expenses may be found
in the accompanying current prospectus of the Series Fund, and in the Series
Fund's Statement of Additional Information, which is available by calling
1-800-752-7215.
The Series Fund also offers its shares to other separate accounts
established by the Company and our New York subsidiary in connection with
variable annuity and variable life insurance contracts. Although we do not
anticipate any disadvantages to this arrangement, there is a possibility that a
material conflict may arise between the interests of the Variable Account and
one or more of the other separate accounts investing in the Series Fund. A
conflict may occur due to differences in tax laws affecting the operations of
variable life and variable annuity separate accounts, or some other reason. We
and the Series Fund's Board of Trustees will monitor events for such conflicts,
and, in the event of a conflict, we will take steps necessary to remedy the
conflict, including withdrawal of the Variable Account from participation in the
Series which is involved in the conflict or substitution of shares of other
Series or other mutual funds.
For Non-Qualified Contracts used for deferred compensation and payroll
savings plans and Qualified Contracts that are not held by trustees or
custodians, the Series of the Series Fund described above are the only variable
investment options available.
THE MUTUAL FUNDS
For Qualified Contracts that are held by a trustee or custodian on behalf
of the entity or group, the following Mutual Funds also are available as
variable investment options:
MFS-REGISTERED TRADEMARK- GLOBAL GOVERNMENTS FUND ("MWG") (formerly,
MFS-Registered Trademark- World Governments Fund) will seek income and
capital appreciation. MWG invests, under normal conditions, at least 65% of
its total assets in U.S. Government securities and foreign government
securities (including emerging market securities). MWG may also invest in
corporate bonds, including lower rated bonds (junk bonds), and
mortgage-backed and asset-backed securities.
MFS-REGISTERED TRADEMARK- BOND FUND ("MFB") will primarily seek to provide
as high a level of current income as is believed to be consistent with
prudent risk. MFB's secondary objective is to protect shareholders'
capital. MFB invests, under normal market conditions, at least 65% of its
total assets in corporate bonds, U.S. Government securities and
mortgage-backed and asset-backed securities.
MFS-REGISTERED TRADEMARK- TOTAL RETURN FUND ("MTR") will seek to obtain
above-average income (compared to a portfolio invested entirely in equity
securities) consistent with the prudent employment of capital. Its
secondary objective is to seek reasonable opportunity for growth of capital
and income. MTR is a "balanced fund" and invests in a combination of equity
and fixed income securities. Under normal market conditions, MTR invests:
(i) at least 40%, but not more than 75%, of its net assets in common stocks
and related securities (referred to as equity securities), such as
9
<PAGE>
preferred stock, bonds, warrants or tights convertible into stock, and
depositary receipts for those securities, and (ii) at least 25% of its net
assets in non-convertible fixed income securities.
MASSACHUSETTS INVESTORS TRUST ("MIT") will seek reasonable current income
and long-term growth of capital and income. MIT invests, under normal
market conditions, at least 65% of its total assets in common stocks and
related securities, such as preferred stock, convertible securities, and
depositary receipts. While MIT may invest in companies of any size, it
generally focuses on companies with larger market capitalizations that its
investment adviser believes have sustainable growth prospects and
attractive valuations based on current and expected earnings or cash flow.
MASSACHUSETTS INVESTORS GROWTH STOCK FUND ("MIG") will seek long-term
growth of capital and future income rather than current income. MIG invests
its assets (except for working cash balances) in the common stocks, or
securities convertible into common stocks, of companies which its
investment adviser believes offer better-than-average prospects for
long-term growth.
MFS-REGISTERED TRADEMARK- GROWTH OPPORTUNITIES FUND ("MGO") will seek
growth of capital. MGO invests, under normal market conditions, at least
65% of its total assets in common stocks and related securities (such as
preferred stock, convertible securities, and depositary receipts) of
companies with MGO's investment adviser believes possess above-average
growth opportunities. MGO also invests in fixed income securities when
relative values or economic conditions make these securities attractive.
A more detailed description of each Mutual Fund, its management, its
investment objectives, policies and restrictions and its expenses may be found
in the accompanying current prospectus of that Mutual Fund, and in that Mutual
Fund's Statement of Additional Information, which are available by calling
1-800-752-7215.
MFS
Each of the Mutual Funds and the Series Fund pays fees to MFS for its
services pursuant to investment advisory agreements. MFS also serves as
investment adviser to the other funds in the MFS Family of Funds, and to certain
other investment companies established by MFS and/or us. MFS Institutional
Advisers, Inc., a wholly-owned subsidiary of MFS, provides investment advice to
substantial private clients. MFS and its predecessor organizations have a
history of money management dating from 1924. MFS operates as an autonomous
organization and the obligation of performance with respect to the investment
advisory agreements is solely that of MFS. We undertake no obligation in this
regard.
THE FIXED ACCOUNT
The Fixed Account is made up of all the general assets of the Company
other than those allocated to any separate account. Amounts allocated to
Guarantee Periods become part of the Fixed Account, and are available to fund
the claims of all classes of our customers, including claims for benefits under
the Contracts.
We will invest the assets of the Fixed Account in those assets we choose
that are allowed by applicable state insurance laws. In general, these laws
permit investments, within specified limits and subject to certain
qualifications, in federal, state and municipal obligations, corporate bonds,
preferred and common stocks, real estate mortgages, real estate and certain
other investments. We intend to invest primarily in investment-grade fixed
income securities (i.e. rated by a nationally recognized rating service within
the four highest grades) or instruments we believe are of comparable quality. We
are not obligated to invest amounts allocated to the Fixed Account according to
any particular strategy, except as may be required by applicable state insurance
laws. You will not have a direct or indirect interest in the Fixed Account
investments.
10
<PAGE>
THE FIXED ACCOUNT OPTIONS:
THE GUARANTEE PERIODS
The Owner (or you, if permitted by your plan) may elect one or more of the
1, 3, 5 or 7 year Guarantee Periods we make available for the Contracts. We
publish Guaranteed Interest Rates for each Initial Guarantee Period and
Subsequent Guarantee Period offered. We may change the Guaranteed Interest Rates
we offer from time to time, but no Guaranteed Interest Rate will ever be less
than 4% per year, compounded annually. Also, once we have accepted an allocation
to a particular Guarantee Period, we promise that the Guaranteed Interest Rate
applicable to that allocation will not change for the duration of the Guarantee
Period.
We determine Guaranteed Interest Rates in our discretion. We do not have a
specific formula for establishing the rates for different Guarantee Periods. Our
determination will be influenced by the interest rates on fixed income
investments in which we may invest with amounts allocated to the Guarantee
Periods. We will also consider other factors in determining these rates,
including regulatory and tax requirements, sales commissions and administrative
expenses borne by us, general economic trends and competitive factors. We cannot
predict the level of future interest rates.
Early withdrawals from allocations to a 3, 5 or 7 year Initial Guarantee
Period or Subsequent Guarantee Period, including cash withdrawals, transfers,
loans and commencement of an annuity with a payout period of less than five
years, may be subject to a Market Value Adjustment, which could decrease or
increase the value of your Account. See "Cash Withdrawals, Withdrawal Charge,
Market Value Adjustment and Loan Provision."
THE ACCUMULATION PHASE
During the Accumulation Phase, payments are made into your Account, and
your earnings accumulate on a tax-deferred basis. The Accumulation Phase begins
with our acceptance of your first Purchase Payment and ends the Business Day
before your Annuity Commencement Date. The Accumulation Phase will end sooner if
the Contract is surrendered, your Account is withdrawn in full or you die before
the Annuity Commencement Date.
ISSUING YOUR CERTIFICATE
To purchase a Compass G Annuity, a completed Participant Enrollment Form
and your initial Purchase Payment are sent to us for acceptance. We issue a
Certificate to you as a Participant under a Contract when we accept your
Participant Enrollment Form.
We will credit your initial Purchase Payment to your Account within two
business days of receiving your completed Participant Enrollment Form. If your
Participant Enrollment Form is not complete, we will notify you. If we do not
have the necessary information to complete the Participant Enrollment Form
within 5 business days, we will send your money back to you or ask your
permission to retain your Purchase Payment until the Participant Enrollment Form
is made complete. Then we will apply the Purchase Payment within 2 business days
of when the Participant Enrollment Form is complete.
AMOUNT AND FREQUENCY OF PURCHASE PAYMENTS
The amount of Purchase Payments may vary; however, we will not accept
Purchase Payments that, on an annualized basis, are less than $300 for the first
Account Year, and each Purchase Payment must be at least $25. In addition, we
will not accept a Purchase Payment if your Account Value is over $1 million, or
if the Purchase Payment would cause your Account Value to exceed $1 million,
unless we have approved the Payment in advance. Within these limits, you may
make Purchase Payments at any time during the Accumulation Phase.
ALLOCATION OF NET PURCHASE PAYMENTS
Each Purchase Payment may be allocated among the different Sub-Accounts
and Initial Guarantee Periods we offer. In your Participant Enrollment Form, you
specify the percentage of each Purchase Payment to be allocated to each
Sub-Account or Guarantee Period. These percentages are called your
11
<PAGE>
allocation factors. The Owner (or you, if permitted by your plan) may change the
allocation factors for future Payments by sending us written notice of the
change, on our required form. We will use the new allocation factors for the
first Purchase Payment we receive with or after we have received notice of the
change, and for all future Purchase Payments, until we receive another change
notice.
Although it is currently not our practice, we may deduct applicable
premium or similar taxes from Purchase Payments. See "Contract Charges --
Premium Taxes." In that case, we will credit the Net Purchase Payment, which is
the Purchase Payment minus the amount of those taxes.
YOUR ACCOUNT
When we accept your first Purchase Payment, we establish an Account for
you, which we maintain throughout the Accumulation Phase of your Certificate.
YOUR ACCOUNT VALUE
Your Account Value is the sum of the value of the two components of your
Certificate: the Variable Account portion of your Certificate ("Variable Account
Value") and the Fixed Account portion of your Certificate ("Fixed Account
Value"). These two components are calculated separately, as described below.
VARIABLE ACCOUNT VALUE
VARIABLE ACCUMULATION UNITS
In order to calculate your Variable Account Value, we use a measure called
a Variable Accumulation Unit for each Sub-Account. Your Variable Account Value
is the sum of your Account Value in each Sub-Account, which is the number of
your Variable Accumulation Units for that Sub-Account times the value of each
Unit.
VARIABLE ACCUMULATION UNIT VALUE
The value of each Variable Accumulation Unit in a Sub-Account reflects the
net investment performance of that Sub-Account. We determine that value once on
each day that the New York Stock Exchange is open for trading, at the close of
trading, which is currently 4:00 p.m., Eastern Time. We also may determine the
value of Variable Accumulation Units of a Sub-Account on days the Exchange is
closed if there is enough trading in securities held by that Sub-Account to
materially affect the value of the Variable Accumulation Units. Each day we make
a valuation is called a "Business Day." The period that begins at the time
Variable Accumulation Units are valued on a Business Day and ends at that time
on the next Business Day is called a Valuation Period. On days other than
Business Days, the value of a Variable Accumulation Unit does not change.
To measure these values, we use a factor -- which we call the "Net
Investment Factor" -- which represents the net return on the Sub-Account's
assets. At the end of any Valuation Period, the value of a Variable Accumulation
Unit for a Sub-Account is equal to the value of that Sub-Account's Variable
Accumulation Units at the end of the previous Valuation Period, multiplied by
the Net Investment Factor. The Net Investment Factor for any Sub-Account for any
Valuation Period is determined by dividing (a) by (b) and then subtracting (c)
from the result, where:
(a) is the net result of:
(1) the net asset value of a Mutual Fund share or Series share held in
the Sub-Account determined as of the end of the Valuation Period,
plus
(2) the per share amount of any dividend or other distribution declared
by the Mutual Fund or Series issuing the shares held in the
Sub-Account if the "ex-dividend" date occurs during the Valuation
Period, plus or minus
(3) a per share credit or charge with respect to any taxes paid, or
reserved for by us during the Valuation Period which are determined
to be attributable to the operation of the Sub-Account (no federal
income taxes are applicable under present law);
12
<PAGE>
(b) is the net asset value of a Mutual Fund share or Series share held in
the Sub-Account determined as of the end of the preceding Valuation
Period; and
(c) is the risk charge factor determined by us for the Valuation Period to
reflect the charge for assuming the mortality and expense risks.
For a hypothetical example of how we calculate the value of a Variable
Accumulation Unit, see the Statement of Additional Information.
CREDITING AND CANCELING VARIABLE ACCUMULATION UNITS
When we receive an allocation to a Sub-Account, either from a Net Purchase
Payment or a transfer of Account Value, we credit that amount to your Account in
Variable Accumulation Units. Similarly, we cancel Variable Accumulation Units
when amounts are transferred, withdrawn or borrowed from a Sub-Account, or when
we deduct certain charges under the Contract. We determine the number of Units
credited or canceled by dividing the dollar amount by the Variable Accumulation
Unit value for that Sub-Account at the end of the Valuation Period during which
the transaction or charge is effective.
FIXED ACCOUNT VALUE
INITIAL AND SUBSEQUENT GUARANTEE PERIODS
Net Purchase Payments may be allocated to any Initial Guarantee Period we
offer. Unless, within the 30 day period before the Expiration Date of an Initial
Guarantee Period, we receive written notice from the Owner electing a different
Subsequent Guarantee Period from among those we then offer, a Subsequent
Guarantee Period of the same duration as the Initial Guarantee Period will begin
automatically for the amount then allocated to the Initial Guarantee Period on
the first day following the Expiration Date of the Initial Guarantee Period.
Each Subsequent Guarantee Period also will automatically renew for another
Subsequent Guarantee Period of the same length unless the Owner elects a
different Subsequent Guarantee Period within the 30 day period prior to the
Expiration Date of the current Subsequent Guarantee Period.
FIXED ACCUMULATION UNITS
In order to calculate your Fixed Account Value, we use a measure called a
Fixed Accumulation Unit for each Guarantee Period. Your Fixed Account Value is
the sum of the values of all Fixed Accumulation Units credited to your Account.
We determine the number of Fixed Accumulation Units credited to your
Account by dividing the dollar amount of a Net Purchase Payment allocated to an
Initial Guarantee Period by the value of the Fixed Accumulation Unit related to
that Guarantee Period for the Valuation Period during which we receive the
Purchase Payment.
FIXED ACCUMULATION UNIT VALUE
We establish the value of each type of Fixed Accumulation Unit at $10.00
for the first Valuation Period of the calendar month in which a Purchase Payment
is credited to your Account. The value of the Fixed Accumulation Unit increases
for each successive Valuation Period as interest is accrued at the applicable
Guaranteed Interest Rate. At the end of any Initial Guarantee Period we will
exchange the Fixed Accumulation Units credited to your Account for a second type
of Fixed Accumulation Unit with an equal aggregate value. The value of this
second type of Fixed Accumulation Unit will increase for each Valuation Period
during each Subsequent Guarantee Period to which your Account is allocated as
interest is accrued at the applicable Guaranteed Interest Rate.
EARLY WITHDRAWALS
If, before its Expiration Date, an allocation to a 3, 5 or 7 year
Guarantee Period is withdrawn, transferred, borrowed or annuitized over a payout
period of less than five years, we will apply a Market Value Adjustment to the
transaction. This could result in an increase or decrease of your Account
13
<PAGE>
Value, depending on interest rates at the time. You bear the risk that you will
receive less than your principal if the Market Value Adjustment applies.
TRANSFER PRIVILEGE
PERMITTED TRANSFERS
During the Accumulation Phase, the Owner may transfer all or part of a
Participant's Account Value to one or more Sub-Accounts or Guarantee Periods
then available, subject to the following restrictions:
- no more than 12 transfers may be made in any Account Year;
- the amount transferred from a Sub-Account or Guarantee Period must be at
least $1,000 unless the entire balance in that Sub- Account or Guarantee
Period is being transferred;
- your Account Value remaining in a Sub-Account must be at least $1,000; and
- transfers to or from Sub-Accounts are subject to terms and conditions that
may be imposed by the Series Fund or the applicable Mutual Fund.
There is no charge for transfers; however, transfers out of a 3, 5, or 7
year Guarantee Period will be subject to the Market Value Adjustment. Under
current law there is no tax liability for transfers.
REQUESTS FOR TRANSFERS
Owners may request transfers in writing.
If we receive a transfer request before 4:00 p.m. Eastern Time on a
Business Day, it will be effective that day. Otherwise, it will be effective the
next Business Day.
WITHDRAWALS, WITHDRAWAL CHARGE, MARKET VALUE ADJUSTMENT
AND LOAN PROVISION
CASH WITHDRAWALS
REQUESTING A WITHDRAWAL
At any time during the Accumulation Phase the Owner may withdraw in cash
all or any portion of a Participant's Account Value. To make a withdrawal, the
Owner must send us a written request at our Annuity Service Mailing Address. We
may require a signature guarantee for withdrawals of more than $5000. In some
cases, such as withdrawals by a corporation, partnership, agent or fiduciary, we
may require additional documentation.
A request must specify whether the Owner wants to withdraw the entire
amount of a Participant Account or, if less, the amount the Owner wishes to
withdraw. Upon request we will notify the Owner of the amount we would pay in
the event of a full or partial withdrawal.
All withdrawals may be subject to a withdrawal charge (see "Withdrawal
Charge" below) and withdrawals from a Participant's Fixed Account Value also may
be subject to a Market Value Adjustment (see "Market Value Adjustment" below).
Withdrawals also may have adverse federal income tax consequences, including a
10% penalty tax. See "Federal Tax Status." You should carefully consider these
tax consequences before requesting a cash withdrawal.
FULL WITHDRAWALS
If the Owner requests a full withdrawal, we calculate the amount we will
pay as follows. We start with the total value of the Participant Account at the
end of the Valuation Period during which we receive the withdrawal request; we
deduct the Account Fee for the Account Year in which the withdrawal is made; we
deduct any applicable withdrawal charge; we deduct the amount, if any, of unpaid
Net Loan Interest; and finally, we add or subtract the amount of any Market
Value Adjustment applicable to withdrawn Fixed Account Value.
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<PAGE>
A full withdrawal results in the surrender of the Participant's
Certificate, and cancellation of all of the Participant's rights and privileges
under the Contract.
PARTIAL WITHDRAWALS
If the Owner requests a partial withdrawal from a Participant Account, we
calculate the amount we will pay as follows. We start with the amount specified
in the request; we deduct any applicable withdrawal charge; we deduct the
amount, if any, of unpaid Net Loan Interest; and finally, we add or subtract the
amount of any Market Value Adjustment applicable to amounts withdrawn from the
Fixed Account. We reduce the value of the Participant Account by deducting the
amount specified in the request. Partial withdrawals may be limited by the
maximum loan limitation.
The Owner may specify the amount to be withdrawn from each Sub-Account and
Guarantee Period to which the Participant Account is allocated. If the Owner
does not so specify, we will deduct the total amount requested pro rata, based
on allocations at the end of the Valuation Period during which we receive the
withdrawal request.
If the Owner requests a partial withdrawal that would result in the
Participant's Account Value being reduced to an amount less than the Account Fee
for the Account Year in which the withdrawal is made, we will treat it as a
request for a full withdrawal.
TIME OF PAYMENT
We will pay the applicable amount of any full or partial withdrawal within
7 days after we receive the withdrawal request, except in cases where we are
permitted to defer payment under the Investment Company Act of 1940 and
applicable state insurance law. Currently, we may defer payment of amounts
withdrawn from the Variable Account only for following periods:
- when the New York Stock Exchange is closed except weekends and holidays or
when trading on the New York Stock Exchange is restricted;
- when it is not reasonably practical to dispose of securities held by the
Mutual Funds or Series Fund or to determine the value of the net assets of
the Mutual Funds or Series Fund, because an emergency exists; or
- when an SEC order permits us to defer payment for the protection of
Participants.
We also may defer payment of amounts withdrawn from the Fixed Account for
up to 6 months from the date we receive a withdrawal request. We do not pay
interest on the amount of any payments we defer.
WITHDRAWAL RESTRICTIONS FOR QUALIFIED PLANS
If you participate under a Qualified Contract, you should carefully check
the terms of the plan for limitations and restrictions on cash withdrawals.
Special restrictions apply to withdrawals from Contracts used for Section
403(b) annuities. See "Federal Tax Status -- Tax-Sheltered Annuities."
WITHDRAWAL CHARGE
We do not deduct any sales charge from Purchase Payments when they are
made. However, we may impose a withdrawal charge (known as a "contingent
deferred sales charge") on certain amounts withdrawn from a Participant Account.
We impose this charge to defray some of our expenses related to the sale of the
Contracts, such as commissions we pay to agents, the cost of sales literature,
and other promotional costs and transaction expenses.
ORDER OF WITHDRAWAL
We consider all amounts withdrawn from a Participant Account to be
withdrawn first from Purchase Payments that have not previously been withdrawn,
starting with the earliest Payment and
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continuing until all Payments have been withdrawn. Once all Purchase Payments
have been withdrawn, we attribute additional amounts withdrawn to "accumulated
value"; that is, the portion of a Participant's Account Value that exceeds the
total of all Purchase Payments made to the Account.
For convenience, in this Prospectus we refer to Purchase Payments made
during the last 7 Account Years (including the current Account Year) as "New
Payments," and all Purchase Payments made before the last 7 Account Years as
"Old Payments."
FREE WITHDRAWAL AMOUNT
In each Account Year the Owner may withdraw the following amounts from a
Participant's Account Value before incurring the withdrawal charge: (1) all Old
Payments not previously withdrawn, plus (2) a "free withdrawal amount" equal to
10% of the amount of all New Payments. We will apply the free withdrawal amount
to reduce the amount of New Payments withdrawn that is subject to the withdrawal
charge, starting with the earliest New Payment. All New Payments withdrawn in
excess of the free withdrawal amount will be subject to the withdrawal charge.
Accumulated value may be withdrawn without the imposition of the
withdrawal charge. In addition, we do not apply any withdrawal charge to
withdrawals made from a Participant Account that has been established for at
least 12 years, regardless of the amount or when any Purchase Payments were
made.
CALCULATION OF WITHDRAWAL CHARGE
We calculate the amount of the withdrawal charge by multiplying the
portion of any New Payments withdrawn, less any applicable free withdrawal
amount, by a percentage. The percentage varies according to the number of
Account Years the New Payment has been held in the Participant Account,
including the Account Year in which the Payment was made but not the Account
Year in which it was withdrawn (Payments made and withdrawn in the same year are
considered to be held for 0 years). The applicable percentages are as follows:
<TABLE>
<CAPTION>
NUMBER OF
ACCOUNT YEARS PERCENTAGE
- -------------- ---------------
<S> <C>
0-2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
8 0%
</TABLE>
The withdrawal charge will never be greater than 6% of the aggregate
amount of Purchase Payments made to the Participant's Account.
We may modify the withdrawal charges and limits, upon notice to the Owner.
However, any modification will only apply to Accounts established after the date
of the modification.
EXAMPLE OF WITHDRAWAL CHARGE CALCULATION
Assume the Owner wishes to make a $25,000 withdrawal from a Participant
Account in Account Year 10. An initial Purchase Payment of $10,000 was made in
Account Year 1, an additional Purchase Payment of $8,000 was made in Account
Year 8, and no previous withdrawals have been made. The Participant's Account
Value in Account Year 10 is $35,000.
We attribute the withdrawal first to the oldest Purchase Payment made, the
$10,000 Payment made in Account Year 1. Because that Payment has been held in
the Participant Account for more than 7 Account Years, it is an Old Payment and
is not subject to the withdrawal charge.
We attribute the next $8,000 of the withdrawal to the Purchase Payment
made in Account Year 8, which is a New Payment. The free withdrawal amount in
Account Year 10 is $800 (10% of the $8000
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Payment made in Account Year 8, the only New Payment). We apply the free
withdrawal amount to reduce the amount of the New Payment withdrawn, so only
$7,200 of the $8000 New Payment is subject to the withdrawal charge. Because the
New Payment has been held in the Participant Account for only two Account Years,
the withdrawal charge will be 5% of $7,200, or $360.
The remaining $7,000 of the withdrawal is attributed to accumulated value
and is not subject to the withdrawal charge.
For additional examples of how we calculate withdrawal charges, please see
Appendix C.
We do not impose the withdrawal charge on amounts applied to provide an
annuity with a payout period of at least five years, amounts we pay as a death
benefit, or amounts transferred among the Sub-Accounts, between the Sub-Accounts
and the Fixed Account, or within the Fixed Account.
MARKET VALUE ADJUSTMENT
We will apply a Market Value Adjustment if the Owner withdraws, borrows or
transfers amounts from Guarantee Periods of 3, 5 or 7 years. For this purpose,
using Fixed Account Value to provide an annuity with a payout period of less
than five years is considered a withdrawal, and the Market Value Adjustment will
apply. We apply the Market Value Adjustment to each separate allocation made to
a Guarantee Period together with interest credited on that allocation.
A Market Value Adjustment may decrease, increase or have no effect on your
Account Value. This will depend on changes in interest rates since the last
allocation to the Guarantee Period and the length of time remaining in the
Guarantee Period. In general, if the Current Rate for Guarantee Periods equal to
your Guarantee Period is higher than your Guaranteed Interest Rate, the Market
Value Adjustment will decrease your Account Value. If our current Guaranteed
Interest Rate is lower, the Market Value Adjustment will increase your Account
Value.
We determine the amount of the Market Value Adjustment by multiplying the
amount that is subject to the adjustment by the following formula:
.75 (A-B) X C/12
where:
A is the Guaranteed Interest Rate applicable to the amount withdrawn,
borrowed, transferred or annuitized;
B is the Current Rate we declare at the time of the withdrawal, loan,
transfer or annuitization for the Guarantee Period equal to the length of time
of your Guarantee Period; and
C is the number of complete months remaining in your Guarantee Period.
We will apply the Market Value Adjustment to the amount being withdrawn
after deduction of any applicable Account Fee, withdrawal charge and unpaid Net
Loan Interest.
For examples of how we calculate the Market Value Adjustment, see Appendix
C.
LOANS (QUALIFIED CONTRACTS ONLY)
At any time during the Accumulation Phase, the Owner of a Qualified
Contract may request a loan from a Participant Account. The maximum amount that
may be borrowed is 80% of the Participant Account Value, less any loans
outstanding and interest on those loans. The minimum amount is $1,000. All loans
under a particular Contract are secured by a security interest we take in the
Contract.
Loans may be subject to restrictions in a particular retirement plan and
applicable legislation. You should also carefully consider the tax consequences
of a loan. See "Federal Tax Status."
The Owner requests a loan by sending us a written request in the form we
specify. For loan requests of over $5,000, the Owner's signature must be
guaranteed. In some cases, such as loan requests by a corporation, partnership,
agent or fiduciary, we may require additional documentation.
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<PAGE>
When we make a loan, we deduct from the Participant Account an amount
equal to the loan amount requested plus or minus any Market Value Adjustment.
The Owner may specify the amount to be deducted from each Sub-Account and/or
Guarantee Period to which the Participant Account is allocated. If the Owner
does not so specify, we will deduct the total amount requested pro rata, based
on allocations at the end of the Valuation Period during which we receive the
loan request. We deposit an amount equal to the loan proceeds into a special
loan account, which is part of the Fixed Account. We credit interest to the
amount in the loan account at rate we specify at the time of the loan that is
lower than the interest rate we charge on the loan itself.
Interest on the loan accrues daily at the rate we set at the time of the
loan. Interest is payable on each anniversary of the date the loan is made and
whenever a loan principal payment is made. If interest is not paid when due, we
will deduct the amount of the interest from the Participant Account and add it
to the principal amount of the loan. The difference between the interest on the
loan payable to us and the interest we credit on the amount in the loan account
is called "Net Loan Interest."
The principal of the loan may be repaid in whole or in part at any time
during the Accumulation Phase. We will treat any amounts repaid as Purchase
Payments to the Participant Account that will be allocated to Guarantee Periods
and/or Sub-Accounts in accordance with the allocation factors for the Account in
effect at the time.
A loan must be repaid within five years of the date it is made, unless the
loan is used to buy, construct, reconstruct or substantially rehabilitate a
dwelling that is used as the principal residence of the Participant or a member
of the Participant's immediate family. In that case, the loan must be repaid
within ten years.
CONTRACT CHARGES
ACCOUNT FEE
Each year during the Accumulation Phase of your Account we will deduct
from your Account an Account Fee to help cover the administrative expenses we
incur related to the issuance of Contracts and the maintenance of Accounts. We
deduct the Account Fee on each Account Anniversary, which is the anniversary of
the first day of the month after we issue your Contract. We deduct the Account
Fee pro rata from each Sub-Account and each Guarantee Period, based on the
allocation of your Account Value on your Account Anniversary. The deduction of
the Account Fee from amounts allocated to the Fixed Account will never cause
your Fixed Account Value (adjusted for withdrawals and loans) to increase by
less than 4% per year.
If your Account is withdrawn in full, we will deduct the full amount of
the Account Fee at the time of the withdrawal. In addition, on the Annuity
Commencement Date we will deduct a pro rata portion of the Account Fee to
reflect the time elapsed between the last Account Anniversary and the day before
the Annuity Commencement Date. After the Annuity Commencement Date, we will
deduct the Account Fee in equal amounts from each annuity payment we make during
the year.
The Account Fee deducted from your Account is based on the total Purchase
Payments credited to all Participant Accounts under the Contract, as follows:
<TABLE>
<CAPTION>
TOTAL PURCHASE PAYMENTS ACCOUNT FEE
- --------------------------- -----------------
<S> <C>
up to $250,000 $ 25
$250,000 to $1,499,000 $ 18
$1,500,000 to $4,999,999 $ 15
$5,000,000 and over $ 12
</TABLE>
We review the total Purchase Payments made under a Contract and
semi-annually determine the applicable Account Fee for the next six months. Once
total Purchase Payments under a Contract reach an amount that produces a lower
Account Fee, the Account Fee for existing Accounts will not be increased even if
subsequent withdrawals reduce the amount of total Purchase Payments.
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<PAGE>
MORTALITY AND EXPENSE RISK CHARGE
We deduct a mortality and expense charge from the assets of the Variable
Account during both the Accumulation Phase and the Income Phase. The mortality
risk we assume arises from our contractual obligation to continue to make
annuity payments to each Annuitant, regardless of how long the Annuitant lives
and regardless of how long all Annuitants as a group live. This obligation
assures each Annuitant that neither the longevity of fellow Annuitants nor an
improvement in life expectancy generally will have an adverse effect on the
amount of any annuity payment received under the Contract. The expense risk we
assume is the risk that the Account Fee we assess under the Contracts may be
insufficient to cover the actual total administrative expenses we incur. If the
amount of the charge is insufficient to cover the mortality and expense risks,
we will bear the loss. If the amount of the charge is more than sufficient to
cover the risks, we will make a profit on the charge. We may use this profit for
any proper corporate purpose, including the payment of marketing and
distribution expenses for the Contracts.
The mortality and expense risk charge is based on the total Purchase
Payments credited to all Participant Accounts under the Contract, and is
deducted from the assets of the Variable Account at the following effective
annual rate:
<TABLE>
<CAPTION>
TOTAL PURCHASE PAYMENTS ANNUAL RATE OF CHARGE
- --------------------------- -----------------------
<S> <C>
up to $250,000 1.30%
$250,000 to $1,499,000 1.25%
$1,500,000 to $4,999,999 1.10%
$5,000,000 and over 0.95%
</TABLE>
We review the total Purchase Payments made under a Contract and
semi-annually determine the applicable mortality and expense risk charge for the
next six months. Once total Purchase Payments under a Contract reach an amount
that produces a lower charge, the charge for existing Accounts will not be
increased even if subsequent withdrawals reduce the amount of total Purchase
Payments.
PREMIUM TAXES
Some states and local jurisdictions impose a premium tax on us that is
equal to a specified percentage of the Purchase Payments made under the
Contract. In many states there is no premium tax. We believe that the amounts of
applicable premium taxes currently range from 0% to 3.5%. You should consult a
tax adviser to find out if your state imposes a premium tax and the amount of
any tax.
In order to reimburse us for the premium tax we may pay on Purchase
Payments, our policy is to deduct the amount of such taxes from the amount
applied to provide an annuity at the time of annuitization. However, we reserve
the right to deduct the amount of any applicable tax from your Account at any
time, including at the time a Purchase Payment or full or partial withdrawal is
made. We do not make any profit on the deductions we make to reimburse premium
taxes.
MUTUAL FUND AND SERIES FUND EXPENSES
There are fees and charges deducted from each Mutual Fund and each Series
of the Series Fund. These fees and expenses are described in the Prospectuses
and Statements of Additional Information of the Mutual Funds and the Series
Fund.
MODIFICATION OF CHARGES
We may modify the Account Fee and the mortality and expense risk charge
upon notice to Owners. However, such modification will apply only with respect
to Participant Accounts established after the effective date of the
modification.
DEATH BENEFIT
If you die during the Accumulation Phase, we will pay a death benefit to
your Beneficiary, using the payment method elected (a single cash payment or one
of our Annuity Options). If the Beneficiary is not living on the date of death,
we will pay the death benefit in one sum to your estate. We do not
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<PAGE>
pay a death benefit if you die during the Income Phase. However, the Beneficiary
will receive any payments provided under an Annuity Option that is in effect.
AMOUNT OF DEATH BENEFIT
To calculate the amount of the death benefit, we use a "Death Benefit
Date." If the Owner has elected a death benefit payment method before your death
and it remains effective, the Death Benefit Date is the date we receive proof of
your death in an acceptable form ("Due Proof of Death") (unless the Beneficiary
is not living on the date of death, in which case the Death Benefit Date is date
we receive Due Proof of Death of both you and your Beneficiary). Otherwise, the
Death Benefit Date is the later of the date we receive Due Proof of Death and
any required consent or release or the date we receive the Beneficiary's
election of either payment method. If we do not receive the Beneficiary's
election within 60 days after we receive Due Proof of Death, the Death Benefit
Date will be the last day of the 60 day period.
The amount of the death benefit determined as of the Death Benefit Date.
It is equal to greater of (1) your Account Value or (2) the total Purchase
Payments made to your Account less the sum of all withdrawals, loans and unpaid
Net Loan Interest.
METHOD OF PAYING DEATH BENEFIT
The death benefit may be paid in a single cash payment or as an annuity
(either fixed, variable or a combination) under one or more of our Annuity
Options. We describe the Annuity Options in this Prospectus under "Income Phase
- -- Annuity Provisions."
During the Accumulation Phase, the Owner (or you, if permitted by your
plan) may elect the method of payment for the death benefit. If no such election
is in effect on the date of your death, the Beneficiary may elect either a
single cash payment or an annuity. These elections are made by sending us a
completed election form, which we will provide. If we do not receive the
Beneficiary's election within 60 days after we receive Due Proof of Death, we
will pay the death benefit in a single cash payment.
If we pay the death benefit in the form of an Annuity Option, the
Beneficiary becomes the Annuitant under the terms of that Annuity Option.
NON-QUALIFIED CONTRACTS
If you participate under a Non-Qualified Contract, special distribution
rules apply to the payment of the death benefit. The amount of the death benefit
must be distributed either (1) as a lump sum within 5 years after your death or
(2) if in the form of an annuity, over a period not greater than the life or
expected life of the "designated beneficiary" within the meaning of Section
72(s) of the Internal Revenue Code, with payments beginning no later than one
year after your death.
The person named as the Beneficiary under your Certificate, if any, will
be the "designated beneficiary." If the named Beneficiary is not living, the
Annuitant automatically becomes the designated beneficiary.
If the designated beneficiary is your surviving spouse, your spouse may
continue the Certificate in his or her own name as Participant. To make this
election, your spouse must give us written notification within 60 days after we
receive Due Proof of Death. In that case, we will not pay a death benefit, and
the Account Value will be increased to reflect the death benefit calculation.
The special distribution rules will then apply on the death of your spouse.
During the Income Phase, if the Annuitant dies, the remaining value of the
Annuity Option in place must be distributed at least as rapidly as the method of
distribution under that option.
Payments made in contravention of these special rules would adversely
affect the treatment of the Contracts as annuity contracts under the Internal
Revenue Code. Neither you nor the Beneficiary may exercise rights that would
have that effect.
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<PAGE>
SELECTION AND CHANGE OF BENEFICIARY
You select your Beneficiary in your Participant Enrollment Form. The Owner
may change your Beneficiary at any time during the Accumulation Phase by sending
us written notice on our required form, unless an irrevocable Beneficiary
designation previously has been made. A new Beneficiary designation is not
effective until we record the change.
PAYMENT OF DEATH BENEFIT
Payment of the death benefit in cash will be made within 7 days of the
Death Benefit Date, except if we are permitted to defer payment in accordance
with the Investment Company Act of 1940. If an Annuity Option is elected, the
Annuity Commencement Date will be the first day of the second calendar month
following the Death Benefit Date, and your Account will remain in effect until
the Annuity Commencement Date.
DUE PROOF OF DEATH
We accept the following as proof of any person's death:
- an original certified copy of an official death certificate;
- an original certified copy of a decree of a court of competent
jurisdiction as to the finding of death; or
- any other proof we find satisfactory.
THE INCOME PHASE -- ANNUITY PROVISIONS
During the Income Phase, we make regular monthly payments to the
Annuitant. If you are alive on the Annuity Commencement Date, you will be the
Annuitant. When an Annuity Option has been selected as the method of paying the
death benefit, the Beneficiary is the Annuitant.
The Income Phase of your Certificate begins with the Annuity Commencement
Date. On that date, we apply your Account Value, adjusted as described below,
under the Annuity Option or Options selected, and we make the first payment.
Once the Income Phase begins, no lump sum settlement option or cash
withdrawals are permitted, and the Annuity Option selected cannot be changed.
The Owner may request a full withdrawal before the Annuity Commencement Date,
which will be subject to all charges applicable on withdrawals. See "Cash
Withdrawals, Withdrawal Charge, Market Value Adjustment and Loan Provision."
SELECTION OF THE ANNUITY COMMENCEMENT DATE
The Owner (or you, if permitted by your plan) selects the Annuity
Commencement Date at the time your Account is established. The Owner (or you, if
permitted by your plan) may change the Annuity Commencement Date from time to
time by sending us written notice, with the following limitations:
- The Annuity Commencement Date must always be the first day of a month.
- We must receive the notice at least 30 days before the current Annuity
Commencement Date.
- The new Annuity Commencement Date must be at least 30 days after we
receive the notice.
- The latest possible Annuity Commencement Date is the first day of the
month following your 85th birthday.
There may be other restrictions on the selection of the Annuity
Commencement Date imposed by your retirement plan or applicable law. For
example, in most situations, current law requires that the Annuity Commencement
Date for a Qualified Contract must be no later than April 1 following the year
the Annuitant reaches age 70 1/2 (or, for Qualified Contracts other than IRAs,
no later than April 1 following the year the Annuitant retires, if later than
the year the Annuitant reaches age 70 1/2).
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<PAGE>
ANNUITY OPTIONS
We offer the following Annuity Options for payments during the Income
Phase. Annuity Options A, B, and C may be selected for either a Variable
Annuity, a Fixed Annuity, or a combination of both. Annuity Options D and E may
be selected only to provide a Fixed Annuity. We may also agree to other
settlement options, in our discretion.
ANNUITY OPTION A -- LIFE ANNUITY
We provide monthly payments during the lifetime of the Annuitant. Annuity
payments stop when the Annuitant dies. There is no provision for continuation of
any payments to a Beneficiary.
ANNUITY OPTION B -- LIFE ANNUITY WITH 60, 120, 180 OR 240 MONTHLY PAYMENTS
CERTAIN
We make monthly payments during the lifetime of the Annuitant. In
addition, we guarantee that the Beneficiary will receive monthly payments for
the remainder of the period certain, if the Annuitant dies during that period.
The election of a longer period results in smaller monthly payments. If no
Beneficiary is designated, we pay the discounted value of the remaining payments
in one sum to the Annuitant's estate. The Beneficiary may also elect to receive
the discounted value of the remaining payments in one sum. The discount rate for
Variable Annuity payments will be 4%; the discount rate for a Fixed Annuity will
be based on the interest rate we used to determine the amount of each payment.
ANNUITY OPTION C -- JOINT AND SURVIVOR ANNUITY
We make monthly payments during the lifetime of the Annuitant and another
designated person and during the lifetime of the survivor of the two. We stop
making payments when the last survivor dies. There is no provision for
continuance of any payments to a Beneficiary.
ANNUITY OPTION D -- FIXED MONTHLY PAYMENTS FOR A SPECIFIED PERIOD CERTAIN
We make monthly payments for a specified period of time from 5 years to 30
years for Non-Qualified Contracts and 3 years to 30 years for Qualified
Contracts, as elected. In addition, we guarantee that the Beneficiary will
receive monthly payments for the remainder of the period certain, if the
Annuitant dies during that period. If no Beneficiary is designated, we pay the
discounted value of the remaining payments in one sum to the Annuitant's estate.
The Beneficiary may also elect to receive the discounted value of the remaining
payments in one sum. The discount rate for this purpose will be based on the
interest rate we used to determine the amount of each payment. The election of
this Annuity Option may result in the imposition of a penalty tax.
ANNUITY OPTION E -- FIXED PAYMENTS
We will hold the amount applied to provide fixed payments in accordance
with this option at interest. We will make fixed payments in such amounts and at
such times (at least over a period of five years for Non-Qualified Contracts) as
we have agreed upon and will continue until the amount we hold with interest is
exhausted. We will credit interest yearly on the amount remaining unpaid at a
rate which we will determine from time to time but which will not be less than
4% per year compounded annually. We may change the rate so determined at any
time; however, the rate may not be reduced more frequently than once during each
calendar year. In addition, we guarantee that the Beneficiary will receive any
remaining payments if the Annuitant dies before the amount we hold is exhausted.
If no Beneficiary is designated, we pay the amount remaining unpaid in one sum
to the Annuitant's estate. The Beneficiary may also elect to receive the amount
remaining unpaid in one sum. The election of this Annuity Option may result in
the imposition of a penalty tax.
SELECTION OF ANNUITY OPTION
The Owner (or you, if permitted by your plan) selects one or more of the
Annuity Options, which the Owner (or you, if permitted by your plan) may change
from time to time during the Accumulation Phase, as long as we receive the
selection or change in writing at least 30 days before the
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<PAGE>
Annuity Commencement Date. If we have not received a written selection on the
30th day before the Annuity Commencement Date, you will receive Annuity Option
B, for a life annuity with 120 monthly payments certain.
The Owner (or you, if permitted by your plan) may specify the proportion
of your Adjusted Account Value that will provide a Variable Annuity or a Fixed
Annuity. Under a Variable Annuity, the dollar amount of payments will vary,
while under a Fixed Annuity, the dollar amount of payments will remain the same.
If a Variable Annuity or a Fixed Annuity is not specified, your Adjusted Account
Value will be divided between Variable Annuities and Fixed Annuities in the same
proportions as your Account Value was divided between the Variable and Fixed
Accounts on the Annuity Commencement Date. Your Adjusted Account Value applied
to a Variable Annuity may be allocated among the Sub-Accounts, or we will use
the existing allocations.
There may be additional limitations on the options that may be elected
under your particular retirement plan or applicable law.
REMEMBER THAT THE ANNUITY OPTIONS MAY NOT BE CHANGED ONCE ANNUITY PAYMENTS
BEGIN.
AMOUNT OF ANNUITY PAYMENTS
ADJUSTED ACCOUNT VALUE
The Adjusted Account Value is the amount we apply to provide a Variable
Annuity and/or a Fixed Annuity. We calculate Adjusted Account Value by taking
your Account Value on the Business Day just before the Annuity Commencement Date
and making the following adjustments:
- We deduct a proportional amount of the Account Fee, based on the fraction
of the current Account Year that has elapsed;
- If applicable, we deduct the withdrawal charge and any unpaid Net Loan
Interest;
- If applicable, we apply the Market Value Adjustment to your Account Value
in the Fixed Account, which may result in a deduction, an addition, or no
change; and
- We deduct any applicable premium tax or similar tax if not previously
deducted.
VARIABLE ANNUITY PAYMENTS
Variable Annuity payments may vary each month. We determine the dollar
amount of the first payment using the portion of your Adjusted Account Value
applied to a Variable Annuity and the Annuity Payment Rates in your Contract,
which are based on an assumed interest rate of 4% per year, compounded annually.
See "Annuity Payment Rates."
To calculate the remaining payments, we convert the amount of the first
payment into Annuity Units for each Sub-Account; we determine the number of
those Annuity Units by dividing the portion of the first payment attributable to
the Sub-Account by the Annuity Unit Value of that Sub-Account for the Valuation
Period ending just before the Annuity Commencement Date. This number of Annuity
Units for each Sub-Account will remain constant (unless the Annuitant requests
an exchange of Annuity Units). However, the dollar amount of the next Variable
Annuity payment-- which is the sum of the number of Annuity Units for each
Sub-Account times its Annuity Unit Value for the Valuation Period ending just
before the date of the payment-- will increase, decrease, or remain the same,
depending on the net investment return of the Sub-Accounts.
If the net investment return of the Sub-Accounts selected is the same as
the assumed interest rate of 4%, compounded annually, the payments will remain
level. If the net investment return exceeds the assumed interest rate, payments
will increase and, conversely, if it is less than the assumed interest rate,
payments will decrease.
Please refer to the Statement of Additional Information for more
information about calculating Variable Annuity Units and Variable Annuity
payments, including examples of these calculations.
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FIXED ANNUITY PAYMENTS
Fixed Annuity payments are the same each month. We determine the dollar
amount of each Fixed Annuity payment using the fixed portion of your Adjusted
Account Value and the applicable Annuity Payment Rates. These will be either (1)
the rates in your Contract, which are based on a minimum guaranteed interest
rate of 4% per year, compounded annually, or (2) new rates we have published and
are using on the Annuity Commencement Date, if they are more favorable. See
"Annuity Payment Rates."
EXCHANGE OF VARIABLE ANNUITY UNITS
During the Income Phase, the Annuitant may exchange Annuity Units from one
Sub-Account to another, up to 12 times each Account Year. To make an exchange,
the Annuitant sends us, at our Annuity Service Mailing Address, a written
request stating the number of Annuity Units in the Sub-Account he or she wishes
to exchange and the new Sub-Account for which Annuity Units are requested. The
number of new Annuity Units will be calculated so the dollar amount of an
annuity payment on the date of the exchange would not be affected. To calculate
this number, we use Annuity Unit values for the Valuation Period during which we
receive the exchange request.
We permit only exchanges among Sub-Accounts. No exchanges to or from a
Fixed Annuity are permitted.
ACCOUNT FEE
During the Income Phase, we deduct the applicable Account Fee in equal
amounts from each annuity payment.
ANNUITY PAYMENT RATES
The Contract contains Annuity Payment Rates for each Annuity Option
described in this Prospectus. The rates show, for each $1,000 applied, the
dollar amount of: (a) the first monthly Variable Annuity payment based on the
assumed interest rate specified in the applicable Contract (at least 4% per
year, compounded annually); and (b) the monthly Fixed Annuity payment, when this
payment is based on the minimum guaranteed interest rate specified in the
Contract (at least 4% per year, compounded annually). We may change these rates
for Accounts established after the effective date of such change (See "Other
Contract Provisions -- Modification").
The Annuity Payment Rates may vary according to the Annuity Option elected
and the adjusted age of the Annuitant. The Contract also describes the method of
determining the adjusted age of the Annuitant. The mortality table used in
determining the Annuity Payment Rates for Options A, B and C is the 1971
Individual Annuitant Mortality Table with ages reduced by one year for Annuity
Commencement Dates occurring during the 1980s, two years for Annuity
Commencement Dates occurring during the 1990s, and so on.
ANNUITY OPTIONS AS METHOD OF PAYMENT FOR DEATH BENEFIT
The Owner or your Beneficiary may also select one or more Annuity Options
to be used in the event of your death before the Income Phase, as described
under the "Death Benefit" section of this Prospectus. In that case, your
Beneficiary will be the Annuitant. The Annuity Commencement Date will be the
first day of the second month beginning after the Death Benefit Date.
OTHER CONTRACT PROVISIONS
EXERCISE OF CONTRACT RIGHTS
The Contract belongs to the Owner. All Contract rights and privileges can
be exercised by the Owner without the consent of the Participant, the
Beneficiary or any other person, except as the Owner
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may provide under the plan or other applicable documents. Such rights and
privileges may be exercised, with respect to a particular Participant, only
during the lifetime of the Participant before the Annuity Commencement Date,
except as the Contract otherwise provides.
The Annuitant becomes the Payee on and after the Annuity Commencement
Date. The Beneficiary becomes the Payee on the death of the Participant prior to
the Annuity Commencement Date, or on the death of the Annuitant after the
Annuity Commencement Date. Such Payee may thereafter exercise such rights and
privileges, if any, of ownership which continue.
CHANGE OF OWNERSHIP
Ownership of a Qualified Contract may not be transferred except to: (1)
the Participant or Beneficiary; (2) a trustee or successor trustee of a pension
or profit sharing trust which is qualified under Section 401 of the Internal
Revenue Code; (3) the employer of the Annuitant, provided that the Qualified
Contract after transfer is maintained under the terms of a retirement plan
qualified under Section 403(a) of the Internal Revenue Code for the benefit of
the Annuitant; (4) the trustee of an individual retirement account plan
qualified under Section 408 of the Internal Revenue Code for the benefit of the
participants under a group contract; or (5) as otherwise permitted from time to
time by laws and regulations governing the retirement or deferred compensation
plans for which a Qualified Contract may be issued. Subject to the foregoing, a
Qualified Contract may not be sold, assigned, transferred, discounted or pledged
as collateral for a loan or as security for the performance of an obligation or
for any other purpose to any person other than the Company.
The Owner of a Non-Qualified Contract may change the ownership of the
Contract during the lifetime of any Participant and prior to the last remaining
Participant's Annuity Commencement Date. A change of ownership will not be
binding on us until we receive written notification. When we receive such
notification, the change will be effective as of the date on which the request
for change was signed by the Owner or Participant, as appropriate, but the
change will be without prejudice to us on account of any payment we make or any
action we take before receiving the change.
VOTING OF MUTUAL FUND AND SERIES FUND SHARES
We will vote Mutual Fund and Series Fund shares held by the Sub-Accounts
at meetings of shareholders of the Mutual Funds and Series Fund or in connection
with similar solicitations, but will follow voting instructions received from
persons having the right to give voting instructions. During the Accumulation
Phase, the Owner will have the right to give voting instructions. During the
Income Phase, the Payee -- that is the Annuitant or Beneficiary entitled to
receive benefits -- is the person having such voting rights. We will vote any
shares attributable to us and Mutual Fund and Series Fund shares for which no
timely voting instructions are received in the same proportion as the shares for
which we receive instructions from Owners and Payees, as applicable.
Owners of Qualified Contracts may be subject to other voting provisions of
the particular plan and of the Investment Company Act of 1940. Employees who
contribute to plans that are funded by the Contracts may be entitled to instruct
the Owners as to how to instruct us to vote the Mutual Fund and Series Fund
shares attributable to their contributions. Such plans may also provide the
additional extent, if any, to which the Owners shall follow voting instructions
of persons with rights under the plans. If no voting instructions are received
from any such person with respect to a particular Participant Account, the Owner
may instruct the Company as to how to vote the number of Series Fund shares for
which instructions may be given.
Neither the Variable Account nor the Company is under any duty to provide
information concerning the voting instruction rights of persons who may have
such rights under plans, other than rights afforded by the Investment Company
Act of 1940, or any duty to inquire as to the instructions received or the
authority of Owners, Participants or others, as applicable, to instruct the
voting of Mutual Fund or Series Fund shares. Except as the Variable Account or
the Company has actual knowledge to the contrary, the instructions given by
Owners and Payees will be valid as they affect the Variable Account, the Company
and any others having voting instruction rights with respect to the Variable
Account.
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All Mutual Fund and Series Fund proxy material, together with an
appropriate form to be used to give voting instructions, will be provided to
each person having the right to give voting instructions at least 10 days prior
to each meeting of the shareholders of the particular Mutual Fund or Series
Fund. We will determine the number of Mutual Fund or Series Fund shares as to
which each such person is entitled to give instructions as of a record not more
than 90 days prior to each such meeting. Prior to the Annuity Commencement Date,
the number of Mutual Fund or Series Fund shares as to which voting instructions
may be given to the Company is determined by dividing the value of all of the
Variable Accumulation Units of the particular Sub-Account credited to the
Participant Account by the net asset value of one of the shares of the
applicable Mutual Fund or Series Fund as of the same date. On or after the
Annuity Commencement Date, the number of Mutual Fund or Series Fund shares as to
which such instructions may be given by a Payee is determined by dividing the
reserve held by the Company in the Sub-Account with respect to the particular
Payee by the net asset value of one of the shares of the applicable Mutual Fund
or Series Fund as of the same date. After the Annuity Commencement Date, the
number of Mutual Fund or Series Fund shares as to which a Payee is entitled to
give voting instructions will generally decrease due to the decrease in the
reserve.
PERIODIC REPORTS
During the Accumulation Period we will send you and the Owner, at least
once during each Account Year, a statement showing the number, type and value of
Accumulation Units credited to your Account and the Fixed Accumulation Value of
your Account, which statement will be accurate as of a date not more than 2
months previous to the date of mailing. These periodic statements contain
important information concerning your transactions with respect to a Contract.
It is your obligation to review each such statement carefully and to report to
us, at the address or telephone number provided on the statement, any errors or
discrepancies in the information presented therein within 60 days of the date of
such statement. Unless we receive notice of any such error or discrepancy from
you within such period, we may not be responsible for correcting the error or
discrepancy.
In addition, every person having voting rights will receive such reports
or prospectuses concerning the Variable Account, the Mutual Funds and the Series
Fund as may be required by the Investment Company Act of 1940 and the Securities
Act of 1933. We will also send such statements reflecting transactions in your
Account as may be required by applicable laws, rules and regulations.
SUBSTITUTION OF SECURITIES
Shares of any or all Series of the Series Fund or any particular Mutual
Fund may not always be available for investment under the Contract. We may add
or delete Mutual Funds or Series of the Series Fund or other investment
companies as variable investment options under the Contracts. We may also
substitute for the shares held in any Sub-Account shares of another Mutual Fund
or Series of the Series Fund or shares of another registered open-end investment
company or unit investment trust, provided that the substitution has been
approved, if required, by the SEC. In the event of any substitution pursuant to
this provision, we may make appropriate endorsement to the Contract to reflect
the substitution.
CHANGE IN OPERATION OF VARIABLE ACCOUNT
At our election and subject to any necessary vote by persons having the
right to give instructions with respect to the voting of Mutual Fund and Series
Fund shares held by the Sub-Accounts, the Variable Account may be operated as a
management company under the Investment Company Act of 1940 or it may be
deregistered under the Investment Company Act of 1940 in the event registration
is no longer required. Deregistration of the Variable Account requires an order
by the SEC. In the event of any change in the operation of the Variable Account
pursuant to this provision, we may make appropriate endorsement to the Contract
to reflect the change and take such other action as may be necessary and
appropriate to effect the change.
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SPLITTING UNITS
We reserve the right to split or combine the value of Variable
Accumulation Units, Annuity Units or any of them. In effecting any such change
of unit values, strict equity will be preserved and no change will have a
material effect on the benefits or other provisions of the Contract.
MODIFICATION
Upon notice to the Owner (or the Payee(s) during the Income Phase), we may
modify the Contract if such modification: (i) is necessary to make the Contract
or the Variable Account comply with any law or regulation issued by a
governmental agency to which the Company or the Variable Account is subject;
(ii) is necessary to assure continued qualification of the Contract under the
Internal Revenue Code or other federal or state laws relating to retirement
annuities or annuity contracts; (iii) is necessary to reflect a change in the
operation of the Variable Account or the Sub-Account(s) (See "Change in
Operation of Variable Account"); or (iv) provides additional Variable Account
and/or fixed accumulation options. In the event of any such modification, we may
make appropriate endorsement in the Contract to reflect such modification.
In addition, upon notice to the Owner, we may modify a Contract to change
the withdrawal charges, Account Fees, mortality and expense risk charges, the
tables used in determining the amount of the first monthly Variable Annuity and
Fixed Annuity payments and the formula used to calculate the Market Value
Adjustment, provided that such modification applies only to Participant Accounts
established after the effective date of such modification. In order to exercise
our modification rights in these particular instances, we must notify the Owner
of such modification in writing. The notice shall specify the effective date of
such modification which must be at least 60 days following the date we mail
notice of modification. All of the charges and the annuity tables which are
provided in the Contract prior to any such modification will remain in effect
permanently, unless improved by the Company, with respect to Participant
Accounts established prior to the effective date of such modification.
DISCONTINUANCE OF NEW PARTICIPANTS
We may limit or discontinue the acceptance of new Participant Enrollment
Forms and the issuance of new Certificates under a Contract by giving 30 days
prior written notice to the Owner. This will not affect rights or benefits with
respect to any Participant Accounts established under such Contract prior to the
effective date of such limitation or discontinuance.
CUSTODIAN
We are the custodian of the assets of the Variable Account. We will
purchase Mutual Fund and Series Fund shares at net asset value in connection
with amounts allocated to the particular Sub-Account in accordance with the
instructions of the Owner and redeem Mutual Fund and Series Fund shares at net
asset value for the purpose of meeting the contractual obligations of the
Variable Account, paying charges relating to the Variable Account or making
adjustments for annuity reserves in the Variable Account.
RIGHT TO RETURN (IRAS ONLY)
If the Owner is establishing an Individual Retirement Account ("IRA"), the
Internal Revenue Code requires that we give the Owner a disclosure statement
containing certain information about the Contract and applicable legal
requirements. We must give the Owner this statement on or before the date the
IRA is established. If we give the Owner the disclosure statement before the
seventh day preceding the date the IRA is established, the Owner will not have
any right of revocation under the Code. If we give the Owner the disclosure
statement at a later date, then the Owner may give us a notice of revocation at
any time within 7 days after the date the IRA is established. Upon such
revocation, we will refund all Purchase Payments made to the Contract.
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FEDERAL TAX STATUS
INTRODUCTION
The Contracts described in this Prospectus are designed for use by
employer, association and other group retirement plans under the provisions of
Sections 401 (including Section 401(k), 403, 408(c), 408(k) and 408(p)) of the
Internal Revenue Code (the "Code"), as well as certain non-qualified retirement
plans, such as payroll savings plans. The ultimate effect of federal income
taxes on the Contract's Accumulation Account and the Participant Account, on an
annuity payments and on the economic benefit to the Owner, the Participant, the
Annuitant, the Payee or the Beneficiary may depend upon the type of Plan for
which the Contract is purchased and a number of different factors. The
discussion contained herein is general in nature, is based upon the Company's
understanding of current federal income tax laws (including recently enacted
amendments), and is not intended as tax advice. Congress has the power to enact
legislation affecting the tax treatment of annuity contracts, and such
legislation could be applied retroactively to Contracts purchased before the
date of enactment. Also, because the Internal Revenue Code, as amended, is not
in force in the commonwealth of Puerto Rico, some references herein will not be
applicable to Contracts issued in Puerto Rico. An person contemplating the
purchase of a Contract should consult a qualified tax adviser. THE COMPANY DOES
NOT MAKE ANY GUARANTEE REGARDING THE FEDERAL, STATE OR LOCAL TAX STATUS OF ANY
CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACTS.
TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT
The Company is taxed as a life insurance company under the Code. Although
the operations of the Variable Account are accounted for separately from other
operations of the Company for purposes of federal income taxation, the Variable
Account is not separately taxable as a regulated investment company or otherwise
as a taxable entity separate from the Company. Under existing federal income tax
laws, the income and capital gains of the Variable Account, to the extent
applied to increase reserves under the Contracts, are not taxable to the
Company.
TAXATION OF ANNUITIES IN GENERAL
Generally, no taxes are imposed on the increases in the value of a
Contract until a distribution occurs, either as annuity payments under the
Annuity Option elected or in the form of cash withdrawals or lump-sum payments
prior to the Annuity Commencement Date. Corporate Owners and other Owners that
are not natural persons (other than the estate of a decedent Owner) are subject
to current taxation on the annual increase in the value of a Non-Qualified
Contract's Accumulation Account. This rule does not apply where a non-natural
person holds the Contract as agent for a natural person (such as where a bank
holds a Contract as trustee under a trust agreement). This provision does not
apply to earnings accumulated where the Annuity Commencement Date occurs within
one year of the Date of Coverage. This provision applies to earnings on Purchase
Payments made after February 28, 1986.
The following discussion of annuity taxation applies only to contributions
(and attributable earnings) made to Non-Qualified Contracts after August 13,
1982. If an Owner has made contributions before August 14, 1982 to another
annuity contract and exchanges that contract for the Contract offered by this
Prospectus, then different tax treatment will apply to the contributions (and
attributable earnings) made before August 14, 1982. For example, non-taxable
principal may be withdrawn before taxable earnings and the ten percent (10%)
penalty tax for early withdrawal is not applicable.
The Code is unclear in its application to a group annuity contract where
the Owner is distinct from the individuals with respect to whom the Contract
benefits are accumulated (the Participants). The following discussion is the
Company's best understanding of the operation of the Code in the context of
group contracts. However, Owners and Participants should consult a qualified tax
adviser.
For Contracts offered by this Prospectus (other than Contracts issued in
exchange for contracts issued prior to August 14, 1982, as described above), in
the case of a Non-Qualified Contract a partial cash withdrawal (that is, a
withdrawal of less than the entire value of the Participant's Account) must
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be treated first as a withdrawal from the increase in the Participant's
Account's value over the Contract's cost basis. The amount of the withdrawal so
allocable will be includible in the Participant's income. Similarly, if a
Participant receives a loan under a Contract or if part or all of a
Participant's Account is assigned or pledged as collateral for a loan, the
amount of the loan or the amount assigned or pledged must be treated as if
withdrawn from the Contract. For Non-Qualified Contracts entered into after
October 21, 1988 (or any annuity contract entered into on or before such date
that is exchanged for a Non-Qualified Contract issued after such date), any
withdrawal or loan amount that is includible in the Participant's income will
increase the Contract's cost basis. Repayment of a loan or payment of interest
on a loan will not affect the Contract's cost basis. For these purposes the
Participant's Account value will not be reduced by the amount of any loan,
assignment or pledge of the Contract. In addition, all non-qualified deferred
annuity certificates or other non-qualified deferred annuity contracts that are
issued by the Company to the same Participant during any calendar year will be
treated as a single annuity contract. Therefore, the proceeds of a withdrawal
from, or assignment or pledge of, one or more such contracts or certificates
will be fully includible in the Participant's income to the extent of the
aggregate excess of the accumulation account values over the cost bases of all
such contracts or certificates entered into during the calendar year.)
The taxable portion of a cash withdrawal or a lump-sum payment prior to
the Annuity Commencement Date is subject to tax at ordinary income rates. In the
case of payments after the Annuity Commencement Date under the Annuity Option
elected, a portion of each payment generally is taxable at ordinary income
rates. The nontaxable portion is determined by applying to each payment an
"exclusion ratio" which is the ratio that the Participant's cost basis in the
Contract bears to the Payee's expected return under the Contract. The remainder
of the payment is taxable.
The total amount that a Payee may exclude from income through application
of the "exclusion ratio" is limited to the cost basis in the Contract. If the
Payee survives for his full life expectancy, and thereby recovers the entire
basis in the Contract, any subsequent annuity payment after basis recovery will
be fully taxable as income. Conversely, if the Payee dies prior to recovering
the entire basis, he will be allowed a deduction on his final income tax return
for the amount of the unrecovered basis. This limitation applies to
distributions made under a Contract with an Annuity Commencement Date after
December 31, 1986.
In the case of Non-Qualified Contracts, taxable cash withdrawals and
lump-sum payments will be subject to a ten percent (10%) penalty, except in the
circumstances described below. This ten percent (10%) penalty also affects
certain annuity payments. In a situation where this penalty applies, the
recipient's tax for the tax year in which the amount is received shall be
increased by an amount equal to ten percent (10%) of the portion of the amount
which is includible in the recipient's gross income. The circumstances in which
this penalty will not apply are distributions which are: (a) made upon the death
of the Participant; or (b) allocable to Purchase Payments made before August 14,
1982. Further, in the case of Contracts issued prior to January 18, 1985, the
ten percent (10%) penalty on taxable cash withdrawals and lump-sum distributions
will not apply if the amount withdrawn is allocable to a Purchase Payment made
prior to the preceding ten (10) year period. For this purpose, a "first in,
first out" rule is used, so that the earliest Purchase Payment with respect to
which amounts have not been previously fully allocated will be deemed to be the
source of the amount.
In the case of the Non-Qualified Contracts, if the Participant dies before
the Annuity Commencement Date the entire value of the Participant's account must
be either (1) distributed within 5 years after the date of death of the
Participant, or (2) distributed over some period not greater than the expected
life of the designated Beneficiary, with annuity payments beginning within one
year after the date of death of the Participant. If a Payee dies on or after the
Annuity Commencement Date and before the entire Participant's Account has been
distributed, the remaining portion of such accumulation, if any, must be
distributed at least as rapidly as the method of distribution then in effect.
These distribution requirements will not apply where the Beneficiary is the
spouse of the Participant; rather, in such a case, the Contract may be continued
in the name of the spouse as Participant or Payee. In the case of the Contracts
issued prior to January 18, 1985, these rules regarding distributions upon the
death of the Participant or the Annuitant will not apply. In the case of
Contracts issued after April 22, 1987, a chance in the Participant would be
treated as the death of the Participant. Distributions
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required due to the death of the Participant will not be subject to the ten
percent (10%) penalty on premature distributions. A purchaser of a Qualified
Contract should refer to the terms of the applicable retirement plan and contact
a tax adviser regarding distribution requirements upon the death of the
Participant.
A transfer of a Non-Qualified Contract by gift (other than to the
Participant's spouse) is treated as the receipt by the Participant of income in
an amount equal to the excess of the cash surrender value over the Contract's
cost basis. This provision applies to Contracts issued after April 22, 1987.
In the case of Qualified Contracts, distributions made prior to age 59 1/2
generally are subject to a ten percent (10%) penalty tax, although this tax will
not apply in certain circumstances. Certain distributions, known as "eligible
rollover distributions," if rolled over to certain other qualified retirement
plans (either directly or after being distributed to the Participant or Payee),
are not taxable until distributed from the plan to which they are rolled over.
In general, an eligible rollover distribution is any taxable distribution other
than a distribution that is part of a series of payments made for life or for a
specified period of ten years or more. Owners, Participants, Annuitants, Payees
and Beneficiaries should seek qualified advice about the tax consequences of
distributions, withdrawals, rollovers and payments under the retirement plans in
connection with which the Contracts are purchased.
The Company will withhold and remit to the U.S. Government a part of the
taxable portion of each distribution made under a Non-Qualified Contract or
under a Qualified Contract issued for use with an individual retirement account
unless the Participant or Payee provides his or her taxpayer identification
number to the Company and notifies the Company (in the manner prescribed) before
the time of the distribution that the Participant or Payee chooses not to have
any amounts withheld.
In the case of distributions from a Qualified Contract (other than
distributions from a Contract issued for use with an individual retirement
account), the Company or the plan administrator must withhold and remit to the
U.S. Government 20% of each distribution that is an eligible rollover
distribution (as defined above) unless the Participant or Payee elects to make a
direct rollover of the distribution to another qualified retirement plan that is
eligible to receive the rollover. If a distribution from a Qualified Contract is
not an eligible rollover distribution, then the Participant or Payee can choose
not to have amounts withheld as described above for Non-Qualified Contracts and
Qualified Contracts issued for use with individual retirement accounts.
Amounts withheld from any distribution may be credited against the
Participant's or Payee's federal income tax liability for the year of the
distribution.
The Internal Revenue Service has issued regulations that prescribe
investment diversification requirements for mutual fund series underlying
nonqualified variable contracts. Contracts that do not comply with these
regulations do not qualify as annuities for income tax purposes. The Company
believes that each Series of the Series Fund complies with the regulations.
The preamble to the regulations states that the Internal Revenue Service
may promulgate guidelines under which a variable contract will not be treated as
an annuity for tax purposes if the owner has excessive control over the
investments underlying the contract. It is not known whether such guidelines, if
in fact promulgated, would have retroactive effect. If guidelines are
promulgated, the Company will take any action (including modification of the
Contract or the Variable Account) necessary to comply with the guidelines.
QUALIFIED RETIREMENT PLANS
The Qualified Contracts described in this Prospectus are designed for use
with several types of qualified retirement plans. Following are brief
descriptions of various types of qualified retirement plans and the use of the
Qualified Contracts in connection therewith. The tax rules applicable to
participants in such qualified retirement plans vary according to the type of
plan and its terms and conditions. Therefore, no attempt is made herein to
provide more than general information about the use of the Qualified Contracts
with the various types of qualified retirement plans. Participants under such
plans, as well as Owners, Annuitants, Payees and Beneficiaries, are cautioned
that the rights of any person to any benefits under these plans may be subject
to the terms and conditions of the plans
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themselves, regardless of the terms and conditions of the Qualified Contracts
issued in connection therewith. These terms and conditions may include
restrictions on, among other things, ownership, transferability, assignability,
contributions and distributions. Any person contemplating the purchase of a
Qualified Contract should consult a qualified tax advisor. In addition, Owners,
Participants, Payees, Beneficiaries and administrators of qualified retirement
plans should consider and consult their tax advisor concerning whether the death
benefit payable under the Contract affects the qualified status of their
retirement plan. Following are brief descriptions of various types of qualified
retirement plans and the use of the Qualified Contracts in connection therewith.
PENSION AND PROFIT-SHARING PLANS
Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of retirement plans for
employees. The Tax Equity and Fiscal Responsibility Act of 1982 eliminated most
differences between qualified retirement plans of corporations and those of
self-employed individuals. The Contract may be purchased by those who would have
been covered under the rules governing old H.R. 10 (Keogh) Plans, as well as by
corporate plans. Such retirement plans may permit the purchase of the Qualified
Contracts to provide benefits under the plans. Employers intending to use the
Qualified Contracts in connection with such plans should seek qualified advice
in connection therewith.
TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits public school employees and employees
of certain types of charitable, educational and scientific organizations
specified in Section 501(c)(3) of the Code to purchase annuity contracts and,
subject to certain limitations, exclude the amount of purchase payments from
gross income for tax purposes. The Code imposes restrictions on cash withdrawals
from Section 403(b) annuities.
If the Contracts are to receive tax deferred treatment, cash withdrawals
of amounts attributable to salary reduction contributions (other than
withdrawals of accumulation account value as of December 31, 1988) may be made
only when the Participant attains age 59 1/2, separates from service with the
employer, dies or becomes disabled (within the meaning of Section 72(m)(7) of
the Code). These restrictions apply to (i) any post-1988 salary reduction
contributions, (ii) any growth or interest on post-1988 salary reduction
contributions, and (iii) any growth or interest on pre-1989 salary reduction
contributions that occurs on or after January 1, 1989. It is permissible,
however, to withdraw post-1988 salary reduction contributions in cases of
financial hardship. While the Internal Revenue Service has not issued specific
rules defining financial hardship, we expect that to qualify for a hardship
distribution, the Participant must have an immediate and heavy bona fide
financial need and lack other resources reasonably available to satisfy the
need. Hardship withdrawals (as well as certain other premature withdrawals) will
be subject to a 10% tax penalty, in addition to any withdrawal charge applicable
under the Contracts. Under certain circumstances the 10% tax penalty will not
apply if the withdrawal is for medical expenses.
Under the terms of a particular Section 403(b) plan, the Participant may
be entitled to transfer all or a portion of the Account Value to one or more
alternative funding options. Participants should consult the documents governing
their plan and the person who administers the plan for information as to such
investment alternatives.
INDIVIDUAL RETIREMENT ACCOUNTS
Sections 219 and 408 of the Code permit eligible individuals to contribute
to an individual retirement program, including Simplified Employee Pension
Plans, Employer/Association of Employees Established Individual Retirement
Account Trusts and Simple Retirement Accounts, known as an individual Retirement
Account ("IRA"). These IRAs are subject to limitations on the amount that may be
contributed, the persons who may be eligible, and on the time when distributions
may commence. In addition, certain distributions from some other types of
retirement plans may be placed on a tax-deferred basis in an IRA. Contracts are
offered by this Prospectus for IRA Trusts, but not for IRAs
31
<PAGE>
established as "Individual Retirement Annuities" under Section 408(b) of the
Code. Sale of the Contracts for use with IRAs may be subject to special
requirements imposed by the Internal Revenue Service. Purchasers of the
Contracts for such purposes will be provided with such supplementary information
as may be required by the Internal Revenue Service or other appropriate agency,
and will have the right to revoke the Contract under certain circumstances as
described in the section of this Prospectus entitles "Right to Return Contract."
TEXAS OPTIONAL RETIREMENT PROGRAM
Under the terms of the Optional Retirement Program, if a participant makes
the required contribution, the State of Texas will contribute a specified amount
to the participant's retirement account. If a participant does not commence the
second year of participation in the plan as a "faculty member" as defined in
Title 110B of the State of Texas Statutes, the Company will return the state's
contribution. If a participant does begin a second year of participation, the
employer's first year contributions will then be applied as a Purchase Payment
under the Qualified Contract, as will the employer's subsequent contributions.
The Attorney General of the State of Texas has ruled that under Title 110B
of the State of Texas Statutes, withdrawal benefits of contracts issued under
the Optional Retirement Program are available only in the event of a
participant's death, retirement, termination of employment due to total
disability, or other termination of employment in a Texas public institution of
higher education. A participant will not, therefore, be entitled to exercise the
right of withdrawal in order to receive the cash values credited to such
participant under the Qualified Contract unless one of the foregoing conditions
has been satisfied. The value of such Qualified Contracts may, however, be
transferred to other contracts or other carriers during the period of
participation in the Program.
ADMINISTRATION OF THE CONTRACTS
We perform certain administrative functions relating to the Contracts,
Participant Accounts, and the Variable Account. These functions include, but are
not limited to, maintaining the books and records of the Variable Account and
the Sub-Accounts; maintaining records of the name, address, taxpayer
identification number, Contract number, Participant Account number and type, the
status of each Participant Account and other pertinent information necessary to
the administration and operation of the Contracts; processing Contract
applications, Participant Enrollment Forms, Purchase Payments, transfers and
full and partial withdrawals; issuing Contracts and Certificates; administering
annuity payments; furnishing accounting and valuation services; reconciling and
depositing cash receipts; providing confirmations; providing toll-free customer
service lines; and furnishing telephonic transfer services.
DISTRIBUTION OF THE CONTRACTS
We offer the Contracts on a continuous basis. The Contracts are sold by
licensed insurance agents in those states where the Contracts 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
distribution agreements with the Company and the general distributor, Clarendon
Insurance Agency, Inc. ("Clarendon"), One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02481. Clarendon, a wholly-owned subsidiary of the Company,
is registered with the SEC under the Securities Exchange Act of 1934 as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc. Clarendon also acts as the general distributor of other individual and
group combination fixed/variable annuity contracts issued by the Company and its
wholly-owned subsidiary, Sun Life Insurance and Annuity Company of New York, and
variable life insurance contracts issued by the Company. Commissions and other
distribution compensation will be paid by the Company to the selling agents and
will not be more than 5.5% of Purchase Payments. During 1996, 1997 and 1998,
approximately $381,758, $312,588 and $189,326, respectively, was paid to and
retained by Clarendon in connection with the distribution of the Contracts.
32
<PAGE>
AVAILABLE INFORMATION
The Company and the Variable Account have filed with the SEC registration
statements under the Securities Act of 1933 relating to the Contracts. This
Prospectus does not contain all of the information contained in the registration
statements and their exhibits. For further information regarding the Variable
Account, the Company and the Contracts, please refer to the registration
statements and their exhibits.
In addition, the Company is subject to the informational requirements of
the Securities Exchange Act of 1934. We file reports and other information with
the SEC to meet these requirements. You can inspect and copy this information
and our registration statements at the SEC's public reference facilities at the
following locations: WASHINGTON, D.C. 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549; CHICAGO, ILLINOIS 500 West Madison Street, Chicago, IL
60661; NEW YORK, NEW YORK 7 World Trade Center, 13th Floor, New York, NY 10048.
The Washington, D.C. office will also provide copies by mail for a fee. You may
also find these materials on the SEC's website (http://www.sec.gov).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1998 filed with the SEC is incorporated by reference in this Prospectus. Any
statement contained in a document we incorporate by reference is deemed modified
or superceded to the extent that a later filed document, including this
Prospectus, shall modify or supercede that statement. Any statement so modified
or superceded shall not be deemed, except as so modified or superceded, to
constitute part of this Prospectus.
The Company will furnish, without charge, to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of the document referred to above which has been incorporated by reference
in this Prospectus, other than exhibits to such document (unless such exhibits
are specifically incorporated by reference in this Prospectus). Requests for
such document should be directed to the Secretary, Sun Life Assurance Company of
Canada (U.S.), One Sun Life Executive Park, Wellesley Hills, Massachusetts
02481, telephone (800) 225-3950.
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting the Variable Account. We
and our subsidiaries are engaged in various kinds of routine litigation which,
in management's judgment, is not of material importance to our respective total
assets or material with respect to the Variable Account.
ACCOUNTANTS
The financial statements of the Variable Account for the year ended
December 31, 1998 included in the Statement of Additional Information and the
statutory financial statements of the Company for the years ended December 31,
1998, 1997 and 1996 included in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein,
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
FINANCIAL STATEMENTS
The financial statements of the Company which are included in this
Prospectus should be considered only as bearing on the ability of the Company to
meet its obligations with respect to amounts allocated to the Fixed Account and
with respect to the death benefit and the Company's assumption of the mortality
and expense risks. They should not be considered as bearing on the investment
performance of the Mutual Fund and Series Fund shares held in the Sub-Accounts
of the Variable Account.
The financial statements of the Variable Account for the year ended
December 31, 1998 are included in the Statement of Additional Information.
------------------------
33
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND
CAPITAL STOCK AND SURPLUS
DECEMBER 31, 1998 AND 1997 (IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 1,763,468 $ 1,910,699
Common stocks 128,445 117,229
Mortgage loans on real estate 535,003 684,035
Properties acquired in satisfaction of debt 17,207 22,475
Investment real estate 78,021 78,426
Policy loans 41,944 40,348
Cash and short-term investments 265,226 544,418
Other invested assets 64,177 55,716
Life insurance premiums and annuity considerations due and uncollected -- 9,203
Investment income due and accrued 35,706 39,279
Federal income tax recoverable and interest thereon 1,110 --
Receivable from parent, subsidiaries and affiliates -- 27,136
Funds withheld on reinsurance assumed -- 982,653
Other assets 1,928 1,842
------------- -------------
General account assets 2,932,235 4,513,459
Separate account assets:
Unitized 11,774,745 9,068,021
Non-unitized 2,195,641 2,343,877
------------- -------------
Total Admitted Assets $ 16,902,621 $ 15,925,357
------------- -------------
------------- -------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 1,216,107 $ 2,188,243
Supplementary contracts 1,885 2,247
Policy and contract claims 369 2,460
Provision for policyholders' dividends and coupons payable -- 32,500
Liability for premium and other deposit funds 1,000,875 1,450,705
Surrender values on cancelled policies 5 215
Interest maintenance reserve 40,490 33,830
Commissions to agents due or accrued 2,615 2,826
General expenses due or accrued 5,932 6,238
Transfers from Separate Accounts due or accrued (361,863) (284,078)
Taxes, licenses and fees due or accrued, excluding FIT 401 105
Federal income taxes due or accrued 25,019 56,384
Unearned investment income 23 34
Amounts withheld or retained by company as agent or trustee 529 47
Remittances and items not allocated 5,176 1,363
Borrowed money -- 110,142
Asset valuation reserve 44,392 47,605
Payable to parent, subsidiaries, and affiliates 30,381 --
Payable for securities 428 27,104
Other liabilities 9,770 2,924
------------- -------------
General account liabilities 2,022,534 3,680,894
Separate account liabilities:
Unitized 11,774,522 9,067,891
Non-unitized 2,195,641 2,343,877
------------- -------------
Total liabilities 15,992,697 15,092,662
------------- -------------
CAPITAL STOCK AND SURPLUS
Common capital stock 5,900 5,900
------------- -------------
Surplus notes 565,000 565,000
Gross paid in and contributed surplus 199,355 199,355
Unassigned funds 139,669 62,440
------------- -------------
Surplus 904,024 826,795
------------- -------------
Total common capital stock and surplus 909,924 832,695
------------- -------------
Total Liabilities, Capital Stock and Surplus $ 16,902,621 $ 15,925,357
------------- -------------
------------- -------------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
34
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN 000'S)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Premiums and annuity considerations $ 210,198 $ 254,066 $ 266,942
Deposit-type funds 2,140,604 2,155,297 1,775,230
Considerations for supplementary
contracts without life
contingencies and dividend
accumulations 2,086 1,615 2,340
Net investment income 184,532 270,249 303,753
Amortization of interest maintenance
reserve 2,282 1,166 1,557
Income from fees associated with
investment management and
administration and contract
guarantees from Separate Account 141,211 109,757 83,278
Net gain from operations from
Separate Account -- 5 --
Other income 87,364 102,889 87,532
---------- ---------- ----------
Total 2,768,277 2,895,044 2,520,632
---------- ---------- ----------
BENEFITS AND EXPENSES:
Death benefits 15,335 17,284 12,394
Annuity benefits 153,636 148,135 146,654
Disability benefits and benefits
under accident and health policies 104 132 105
Surrender benefits and other fund
withdrawals 1,933,833 1,854,004 1,507,263
Interest on policy or contract funds (140) 699 2,205
Payments on supplementary contracts
without life contingencies and
dividend accumulations 2,528 1,687 2,120
Increase (decrease) in aggregate
reserves for life and accident and
health policies and contracts (972,135) 127,278 162,678
Decrease in liability for premium
and other deposit funds (449,831) (447,603) (392,348)
Increase (decrease) in reserve for
supplementary contracts without
life contingencies and for
dividend and coupon accumulations (362) 42 327
---------- ---------- ----------
Total 682,968 1,701,658 1,441,398
Commissions on premiums and annuity
considerations (direct business
only) 137,718 132,700 109,894
Commissions and expense allowances
on reinsurance assumed 13,032 17,951 18,910
General insurance expenses 58,132 46,624 37,206
Insurance taxes, licenses and fees,
excluding federal income taxes 7,388 8,267 8,431
Increase (decrease) in loading on
and cost of collection in excess
of loading on deferred and
uncollected premiums (1,663) 523 901
Net transfers to Separate Accounts 722,851 844,130 761,941
Reserve and fund adjustments on
reinsurance terminated 1,017,112 -- --
---------- ---------- ----------
Total 2,637,538 2,751,853 2,378,681
---------- ---------- ----------
Net gain from operations before
dividends to policyholders and
Federal Income Taxes 130,739 143,191 141,951
Dividends to policyholders (5,981) 33,316 29,189
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
before Federal Income Taxes 136,720 109,875 112,762
Federal income tax expense
(benefit), (excluding tax on
capital gains) 11,713 7,339 (5,400)
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
federal income taxes and before
realized capital gains 125,007 102,536 118,162
Net realized capital gains less
capital gains tax and transferred
to the IMR 394 26,706 4,862
---------- ---------- ----------
NET INCOME $ 125,401 $ 129,242 $ 123,024
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
35
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN 000'S)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Capital and surplus, Beginning of year $ 832,695 $ 567,143 $ 792,452
---------- ----------- -----------
Net income 125,401 129,242 123,024
Change in net unrealized capital gains (losses) (384) 1,152 (1,715)
Change in non-admitted assets and related items (1,086) (463) 67
Change in reserve on account of change in valuation basis -- 39,016 --
Change in asset valuation reserve 3,213 6,307 (11,812)
Surplus (contributed to) withdrawn from Separate Accounts
during period 82 -- 100
Other changes in surplus in Separate Accounts Statements 10 -- --
Change in surplus notes -- 250,000 (335,000)
Dividends to stockholders (50,000) (159,722) --
Aggregate write-ins for gains and losses in surplus (7) 20 27
---------- ----------- -----------
Net change in capital and surplus for the year 77,229 265,552 (225,309)
---------- ----------- -----------
Capital and surplus, End of year $ 909,924 $ 832,695 $ 567,143
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
36
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash Provided by Operations:
Premiums, annuity considerations and
deposit funds received $ 2,361,669 $ 2,410,919 $ 2,059,577
Considerations for supplementary
contracts and dividend accumulations
received 2,086 1,615 2,340
Net investment income received 236,944 345,279 324,914
Other income received 253,147 208,223 88,295
----------- ----------- -----------
Total receipts 2,853,846 2,966,036 2,475,126
----------- ----------- -----------
Benefits paid (other than dividends) 2,107,736 2,020,747 1,671,483
Insurance expenses and taxes paid
(other than federal income and
capital gains taxes) 217,023 203,650 172,015
Net cash transferred to Separate
Accounts 800,636 895,465 755,605
Dividends paid to policyholders 26,519 28,316 22,689
Federal income tax payments
(recoveries),(excluding tax on
capital gains) 46,965 1,397 (15,363)
Other--net (138) 698 2,205
----------- ----------- -----------
Total payments 3,198,741 3,150,273 2,608,634
----------- ----------- -----------
Net cash used in operations (344,895) (184,237) (133,508)
----------- ----------- -----------
Proceeds from long-term investments
sold, matured or repaid (after
deducting taxes on capital gains of
$2,038 for 1998, $750 for 1997 and
$1,555 for 1996) 1,261,396 1,343,803 1,768,147
Issuance (repayment) of surplus notes -- 250,000 (335,000)
Other cash provided (used) (40,529) 71,095 147,956
----------- ----------- -----------
Total cash provided 1,220,867 1,664,898 1,581,103
----------- ----------- -----------
Cash Applied:
Cost of long-term investments acquired (967,901) (773,783) (1,318,880)
Other cash applied (187,263) (310,519) (177,982)
----------- ----------- -----------
Total cash applied (1,155,164) (1,084,302) (1,496,862)
Net change in cash and short-term
investments (279,192) 396,359 (49,267)
Cash and short-term investments:
Beginning of year 544,418 148,059 197,326
----------- ----------- -----------
End of year $ 265,226 $ 544,418 $ 148,059
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
37
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Sun Life Assurance Company of Canada (U.S.) (the "Company") is incorporated as a
life insurance company and is currently engaged in the sale of individual
variable life insurance, individual fixed and variable annuities, group fixed
and variable annuities and group pension contracts.
Effective May 1, 1997, the Company became a wholly-owned subsidiary of the newly
established Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). On
December 18, 1997, Life Holdco became a wholly-owned subsidiary of the Sun Life
Assurance Company of Canada -- U.S. Operations Holdings, Inc. ("US Holdco"). US
Holdco is a wholly-owned subsidiary of Sun Life Assurance Company of Canada
("SLOC"). Prior to December 18, 1997, Life Holdco was a direct wholly-owned
subsidiary of SLOC.
The Company, which is domiciled in the State of Delaware, prepares its financial
statements in accordance with statutory accounting practices prescribed or
permitted by the State of Delaware Insurance Department. Prescribed accounting
practices include practices described in a variety of publications of the
National Association of Insurance Commissioners ("NAIC"), as well as state laws,
regulations and general administrative rules. Permitted accounting practices
encompass all accounting practices not so prescribed. The permitted accounting
practices adopted by the Company are not material to the financial statements.
Prior to 1996, statutory accounting practices were recognized by the insurance
industry and the accounting profession as generally accepted accounting
principles for mutual life insurance companies and stock life insurance
companies wholly-owned by mutual life insurance companies. In April 1993, the
Financial Accounting Standards Board ("FASB") issued an interpretation (the
"Interpretation"), that became effective in 1996, which changed the previous
practice of mutual life insurance companies (and stock life insurance companies
that are wholly-owned subsidiaries of mutual life insurance companies) with
respect to utilizing statutory basis financial statements for general purposes,
in that it will no longer allow such financial statements to be described as
having been prepared in conformity with generally accepted accounting principles
("GAAP"). Consequently, these financial statements prepared in conformity with
statutory accounting practices, as described above, vary from and are not
intended to present the Company's financial position, results of operations or
cash flow in conformity with generally accepted accounting principles. (See Note
20 for further discussion relative to the Company's basis of financial statement
presentation.) The effects on the financial statements of the variances between
the statutory basis of accounting and GAAP, although not reasonably
determinable, are presumed to be material.
INVESTED ASSETS
Bonds are carried at cost, adjusted for amortization of premium or accrual of
discount. Investments in non-insurance subsidiaries are carried on the equity
basis. Investments in mortgage backed securities are generally carried at
amortized cost. Changes in prepayment assumptions and resulting cash flows are
evaluated periodically. The adjusted yield is used to calculate investment
income in future periods. If current book value exceeds future undiscounted cash
flows, a realized capital loss is recorded and amortized through IMR.
Investments in insurance subsidiaries are carried at their statutory surplus
values. Mortgage loans acquired at a premium or discount are carried at
amortized values and other mortgage loans are carried at the amounts of the
unpaid balances. Real estate investments are carried at the lower of cost,
adjusted for accumulated depreciation or appraised value, less encumbrances.
Short-term investments are carried at amortized cost, which approximates fair
value. Depreciation of buildings and improvements is calculated using the
straight-line method over the estimated useful life of the property, generally
40 to 50 years.
38
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
POLICY AND CONTRACT RESERVES
The reserves for life insurance and annuity contracts, developed by accepted
actuarial methods, have been established and maintained on the basis of
published mortality tables using assumed interest rates and valuation methods
that will provide reserves at least as great as those required by law and
contract provisions.
INCOME AND EXPENSES
For life and annuity contracts, premiums are recognized as revenues over the
premium paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
SEPARATE ACCOUNTS
The Company has established unitized separate accounts applicable to various
classes of contracts providing for variable benefits. Contracts for which funds
are invested in separate accounts include variable life insurance and individual
and group qualified and non-qualified variable annuity contracts.
Assets and liabilities of the separate accounts, representing net deposits and
accumulated net investment earnings less fees, held primarily for the benefit of
contract holders, are shown as separate captions in the financial statements.
Assets held in the separate accounts are carried at market value as determined
by quoted market prices of the underlying investments.
The Company has also established a non-unitized separate account for amounts
allocated to the fixed portion of certain combination fixed/variable deferred
annuity contracts. The assets of this account are available to fund general
account liabilities, and general account assets are available to fund
liabilities of this account.
Gains (losses) from mortality experience and investment experience of the
separate accounts, not applicable to contract owners, are transferred to (from)
the general account. Accumulated gains (losses) that have not been transferred
are recorded as a payable (receivable) to (from) the general account. Amounts
payable to the general account of the Company were $361,863,000 in 1998 and
$284,078,000 in 1997.
CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING
As described more fully in Note 10, during 1997 the Company changed certain
assumptions used in determining actuarial reserves.
In March 1998, the National Association of Insurance Commissioners adopted the
Codification of Statutory Accounting Principles ("Codification"). The
Codification, which is intended to standardize regulatory accounting and
reporting for the insurance industry, is proposed to be effective January 1,
2001. However, statutory accounting principles will continue to be established
by individual state laws and permitted practices and it is uncertain when, or
if, the state of Delaware will require adoption of Codification for the
preparation of statutory financial statements. The Company has not finalized the
quantification of the effects of Codification on its statutory financial
statements.
OTHER
Preparation of the financial statements requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to amounts as
presented in the current year.
39
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2. INVESTMENTS IN SUBSIDIARIES
The Company owns all of the outstanding shares of Sun Life Insurance and Annuity
Company of New York ("Sun Life (N.Y.)"), Massachusetts Casualty Insurance
Company ("MCIC"), Sun Life of Canada (U.S.) Distributors, Inc. (formerly Sun
Investment Services Company) ("Sundisco"), New London Trust, F.S.B. ("NLT"), Sun
Life Financial Services Limited ("SLFSL"), Sun Benefit Services Company, Inc.
("Sunbesco"), Sun Capital Advisers, Inc. ("Sun Capital"), Sun Life Finance
Corporation ("Sunfinco"), Sun Life of Canada (U.S.) SPE 97-1, Inc. ("SPE 97-1"),
Clarendon Insurance Agency, Inc. ("Clarendon") and Sun Life Information Services
Ireland Ltd. ("SLISL").
On February 5, 1999, the Company finalized the sale of MCIC, a disability
insurance company which issues primarily individual disability income policies,
to Centre Solutions (U.S.) Limited, a wholly-owned subsidiary of Centre
Reinsurance Holdings Limited for approximately $34 million. The impact of this
sale to the ongoing operations of the Company is not expected to be material.
On September 28, 1998, the Company formed SLISL as an offshore technology center
for the purpose of completing systems projects for affiliates.
On October 30, 1997, the Company established a wholly-owned special purpose
corporation, SPE 97-1, for the purpose of engaging in activities incidental to
securitizing mortgage loans.
On December 31, 1997, the Company purchased from Massachusetts Financial
Services ("MFS") all of the outstanding shares of Clarendon, a registered
broker-dealer that acts as the general distributor of certain annuity and life
insurance contracts issued by the Company and its affiliates.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding shares of
MFS. On December 24, 1997, the Company transferred all of its shares of MFS to
Life Holdco in the form of a dividend valued at $159,722,000. As a result of
this transaction, the Company realized a gain of $21,195,000 of undistributed
earnings.
MFS, a registered investment adviser, serves as investment adviser to the mutual
funds in the MFS family of funds as well as certain mutual funds and separate
accounts established by the Company. The MFS Asset Management Group provides
investment advice to substantial private clients.
Sun Life (N.Y.) is engaged in the sale of individual fixed and variable annuity
contracts and group life and disability insurance contracts in the State of New
York.
Sundisco is a registered investment adviser and broker-dealer.
NLT is a federally chartered savings bank.
SLFSL serves as the marketing administrator for the distribution of the offshore
products of Sun Life Assurance Company of Canada (Bermuda), an affiliate.
Sun Capital is a registered investment adviser.
Sunfinco and Sunbesco are currently inactive.
On September 28, 1998 a $500,000 note was issued by SLISL to the Company at a
rate of 6.0%, maturing on September 28, 2002.
A $110,000,000 note was issued to the Company by MFS on February 11, 1998 at an
interest rate of 6.0% due February 11, 1999. Another $110,000,000 note was
issued to the Company by MFS on December 22, 1998 at an interest rate of 5.55%
due February 11, 1999.
40
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2. INVESTMENTS IN SUBSIDIARIES (CONTINUED)
On December 23, 1997, the Company issued a $110,000,000 note to US Holdco at an
interest rate of 5.80%, which was repaid on March 1, 1998. A $110,000,000 note
was also issued to the Company by MFS on December 23, 1997 at an interest rate
of 5.85% and was repaid on February 11, 1998.
On December 31, 1996, the Company issued a $58,000,000 note to SLOC at an
interest rate of 5.70% which was repaid on February 10, 1997. Also on December
31, 1996, the Company was issued a $58,000,000 note by MFS at an interest rate
of 5.76%. This note was repaid to the Company on February 10, 1997. On December
31, 1998, 1997 and 1996, the Company had an additional $20,000,000 in notes
issued by MFS, scheduled to mature in 2000.
During 1998, 1997, and 1996, the Company contributed capital in the following
amounts to its subsidiaries:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
MCIC -- $ 2,000 $ 10,000
SLFSL $ 750 1,000 1,500
SPE 97-1 -- 20,377 --
Sundisco 10,000 -- --
Sun Capital 500 -- --
Clarendon 10 -- --
SLISL 502 -- --
</TABLE>
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1998, 1997 and 1996 and for the years then ended, follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Intangible assets $ -- $ -- $ 9,646
Other assets 1,315,317 1,190,951 1,376,014
Liabilities (1,186,872) (1,073,966) (1,241,617)
------------- ------------- -------------
Total net assets $ 128,445 $ 116,985 $ 144,043
------------- ------------- -------------
------------- ------------- -------------
Total revenues $ 222,853 $ 750,364 $ 717,280
Operating expenses (221,933) (646,896) (624,199)
Income tax expense (1,222) (43,987) (42,820)
------------- ------------- -------------
Net income (loss) $ (302) $ 59,481 $ 50,261
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
On December 24, 1997, the Company transferred all of its shares of MFS to its
parent, Life Holdco.
41
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3. BONDS
Investments in debt securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term bonds:
United States government and government agencies and
authorities $ 140,417 $ 7,635 $ (177) $ 147,875
States, provinces and political subdivisions 16,632 2,219 -- 18,851
Public utilities 397,670 38,740 (238) 436,172
Transportation 197,207 22,481 (18) 219,670
Finance 144,958 12,542 (494) 157,006
All other corporate bonds 866,584 50,814 (6,419) 910,979
------------ ----------- ----------- ------------
Total long-term bonds 1,763,468 134,431 (7,346) 1,890,553
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and commercial
paper 43,400 -- -- 43,400
Affiliates 220,000 -- -- 220,000
------------ ----------- ----------- ------------
Total short-term bonds 263,400 -- -- 263,400
------------ ----------- ----------- ------------
Total bonds $ 2,026,868 $ 134,431 $ (7,346) $ 2,153,953
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term bonds:
United States government and government agencies and
authorities $ 126,923 $ 5,529 $ -- $ 132,452
States, provinces and political subdivisions 22,361 2,095 -- 24,456
Public utilities 398,939 35,338 (91) 434,186
Transportation 214,130 22,000 (390) 235,740
Finance 157,891 5,885 (120) 163,656
All other corporate bonds 990,455 52,678 (5,456) 1,037,677
------------ ----------- ----------- ------------
Total long-term bonds 1,910,699 123,525 (6,057) 2,028,167
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and commercial
paper 431,032 -- -- 431,032
Affiliates 110,000 -- -- 110,000
------------ ----------- ----------- ------------
Total short-term bonds 541,032 -- -- 541,032
------------ ----------- ----------- ------------
Total bonds $ 2,451,731 $ 123,525 $ (6,057) $ 2,569,199
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
42
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3. BONDS (CONTINUED)
The amortized cost and estimated fair value of bonds at December 31, 1998 are
shown below by contractual maturity. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call and/or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Maturities:
Due in one year or less $ 459,631 $ 460,787
Due after one year through five years 329,625 336,516
Due after five years through ten years 264,372 283,840
Due after ten years 703,341 781,253
------------ ------------
1,756,969 1,862,396
Mortgage-backed securities 269,899 291,557
------------ ------------
Total bonds $ 2,026,868 $ 2,153,953
------------ ------------
------------ ------------
</TABLE>
Proceeds from sales and maturities of investments in debt securities during
1998, 1997, and 1996 were $1,016,811,000, $980,264,000, and $1,554,016,000,
gross gains were $17,025,000, $10,732,000, and $16,975,000 and gross losses were
$866,000, $2,446,000, and $10,885,000, respectively.
Bonds included above with an amortized cost of approximately $2,572,000,
$2,578,000 and $2,060,000 at December 31, 1998, 1997 and 1996, respectively,
were on deposit with governmental authorities as required by law.
Excluding investments in U.S. government and agencies securities, the Company is
not exposed to significant concentration of credit risk in its portfolio.
4. SECURITIES LENDING
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chase Manhattan Bank of New York. The custodian has
indemnified the Company against losses arising from this program. There were no
securities out on loan as of December 31, 1998 and 1997. Income resulting from
this program was $94,000, $200,000 and $137,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
5. MORTGAGE LOANS
The Company invests in commercial first mortgage loans throughout the United
States. The Company monitors the condition of the mortgage loans in its
portfolio. In those cases where mortgages have been restructured, appropriate
allowances for losses have been made. In those cases where, in management's
judgment, the mortgage loans' values are impaired, appropriate losses are
recorded.
43
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
5. MORTGAGE LOANS (CONTINUED)
The following table shows the geographical distribution of the mortgage loan
portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
California $ 82,397 $ 119,122
Massachusetts 53,528 58,981
Michigan 34,357 42,912
New York 21,190 45,696
Ohio 36,171 51,862
Pennsylvania 93,587 97,949
Washington 36,548 54,948
All other 177,225 212,565
---------- ----------
$ 535,003 $ 684,035
---------- ----------
---------- ----------
</TABLE>
The Company has restructured mortgage loans totaling $30,743,000 and $26,284,000
at December 31, 1998 and 1997, respectively, against which there are allowances
for losses of $2,120,000 and $3,026,000, respectively.
The Company has made commitments of mortgage loans on real estate into the
future.The outstanding commitments for these mortgages amount to $18,005,000 and
$12,300,000 at December 31, 1998 and 1997, respectively.
6. INVESTMENT GAINS AND LOSSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net realized gains (losses):
Bonds $ 5,659 $ 2,882 $ 5,631
Common stock of affiliates -- 21,195 --
Common stocks 48
Mortgage loans 2,374 3,837 763
Real estate 955 2,912 599
Other invested assets (3,827) (717) 567
---------- ---------- ---------
Subtotal 5,209 30,109 7,560
Capital gains tax expense 4,815 3,403 2,698
---------- ---------- ---------
Total $ 394 $ 26,706 $ 4,862
---------- ---------- ---------
---------- ---------- ---------
Changes in unrealized gains (losses):
Common stock of affiliates $ (302) $ (2,894) $ (5,739)
Mortgage loans (1,312) 1,524 (600)
Real estate 403 3,377 4,624
Other invested assets 827 (855) --
---------- ---------- ---------
Total $ (384) $ 1,152 $ (1,715)
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
44
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
6. INVESTMENT GAINS AND LOSSES (CONTINUED)
Realized capital gains and losses on bonds and mortgages and interest rate swaps
which relate to changes in levels of interest rates are charged or credited to
an interest maintenance reserve ("IMR") and amortized into income over the
remaining contractual life of the security sold. The net realized capital gains
credited to the interest maintenance reserve were $8,943,000 in 1998, $6,321,000
in 1997, and $7,710,000 in 1996. All gains and losses are transferred net of
applicable income taxes.
7. NET INVESTMENT INCOME
Net investment income consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income from bonds $ 167,436 $ 188,924 $ 178,695
Income from investment in common stock of affiliates 3,675 41,181 50,408
Interest income from mortgage loans 53,269 76,073 92,591
Real estate investment income 15,932 17,161 16,249
Interest income from policy loans 2,881 3,582 2,790
Other investment income (loss) (641) (193) 1,710
---------- ---------- ----------
Gross investment income 242,552 326,728 342,443
---------- ---------- ----------
Interest on surplus notes and notes payable (44,903) (42,481) (23,061)
Investment expenses (13,117) (13,998) (15,629)
---------- ---------- ----------
Net investment income $ 184,532 $ 270,249 $ 303,753
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
8. DERIVATIVES
The Company uses derivative instruments for interest rate risk management
purposes, including hedges against specific interest rate risk and to minimize
the Company's exposure to fluctuations in interest rates. The Company's use of
derivatives has included U.S. Treasury futures, conventional interest rate
swaps, and forward spread lock interest rate swaps.
In the case of interest rate futures, gains or losses on contracts that qualify
as hedges are deferred until the earliest of the completion of the hedging
transaction, determination that the transaction will no longer take place, or
determination that the hedge is no longer effective. Upon completion of the
hedge, where it is impractical to allocate gains or losses to specific hedged
assets or liabilities, gains or losses are deferred in IMR and amortized over
the remaining life of the hedged assets. At December 31, 1998 and 1997 there
were no futures contracts outstanding.
In the case of interest rate and foreign currency swap agreements and forward
spread lock interest rate swap agreements, gains or losses on terminated swaps
are deferred in the IMR and amortized over the shorter of the remaining life of
the hedged asset sold or the remaining term of the swap contract. The net
differential to be paid or received on interest rate swaps is recorded monthly
as interest rates change.
45
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
8. DERIVATIVES (CONTINUED)
Options are used to hedge the stock market interest exposure in the mortality
and expense risk charges and guaranteed minimum death benefit features of the
Company's variable annuities. The Company's open positions are as follows:
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1998
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Conventional interest rate swaps $ 45,000 $ 508
Foreign currency swap 1,178 263
</TABLE>
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1997
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Conventional interest rate swaps $ 80,000 $ (2,891)
Foreign currency swap 1,700 208
Forward spread lock swaps 50,000 274
Asian Put Option S & P 500 75,000 693
</TABLE>
The market value of swaps is the estimated amount that the Company would receive
or pay on termination or sale, taking into account current interest rates and
the current credit worthiness of the counterparties. The Company is exposed to
potential credit loss in the event of nonperformance by counterparties. The
counterparties are major financial institutions and management believes that the
risk of incurring losses related to credit risk is remote.
9. LEVERAGED LEASES
The Company is a lessor in a leveraged lease agreement entered into on October
21, 1994, under which equipment having an estimated economic life of 25-40 years
was leased for a term of 9.75 years. The Company's equity investment represented
22.9% of the purchase price of the equipment. The balance of the purchase price
was furnished by third-party long-term debt financing, collateralized by the
equipment and non-recourse to the Company. At the end of the lease term, the
Master Lessee may exercise a fixed price purchase option to purchase the
equipment.
46
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
9. LEVERAGED LEASES (CONTINUED)
The Company's net investment in leveraged leases is composed of the following
elements:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Lease contracts receivable $ 78,937 $ 92,605
Less non-recourse debt (78,920) (92,589)
---------- ----------
17 16
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (8,932) (10,324)
---------- ----------
Investment in leveraged leases 32,235 30,842
Less fees (138) (163)
---------- ----------
Net investment in leveraged leases $ 32,097 $ 30,679
---------- ----------
---------- ----------
</TABLE>
The net investment is included in "other invested assets" on the balance sheet.
10. REINSURANCE
The Company has agreements with SLOC which provide that SLOC will reinsure the
mortality risks of the individual life insurance contracts sold by the Company.
Under these agreements basic death benefits and supplementary benefits are
reinsured on a yearly renewable term basis and coinsurance basis, respectively.
Reinsurance transactions under these agreements had the effect of decreasing
income from operations by approximately $2,128,000, $1,381,000 and $1,603,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
Effective January 1, 1991, the Company entered into an agreement with SLOC under
which certain individual life insurance contracts issued by SLOC were reinsured
by the Company on a 90% coinsurance basis. During 1997 SLOC changed certain
assumptions used in determining the gross and the ceded reserve balance. The
Company reflected the effect of the changes in assumptions to its assumed
reserves as a direct credit to surplus. The effect of the change was a
$39,016,000 decrease in reserves. Also, the agreement required SLOC to reinsure
the mortality risks in excess of $500,000 per policy for the individual life
insurance contracts assumed by the Company. Such death benefits are reinsured on
a yearly renewable term basis. The life reinsurance assumed agreement required
the reinsurer to withhold funds in amounts equal to the reserves assumed. These
agreements had the effect of increasing income from operations by approximately
$24,579,000, $37,050,000 and $35,161,000 for the years ended December 31, 1998,
1997 and 1996, respectively. The Company terminated this agreement effective
October 1, 1998, resulting in an increase in income from operations of
$65,679,000 which included a cash settlement.
47
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
10. REINSURANCE (CONTINUED)
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1998, 1997 and 1996 before the effect of
reinsurance transactions with SLOC:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $ 2,377,364 $ 2,340,733 $ 1,941,423
Net investment income and realized gains 187,208 298,120 310,172
------------ ------------ ------------
Subtotal 2,564,572 2,638,853 2,251,595
------------ ------------ ------------
Benefits and Expenses:
Policyholder benefits 2,312,247 2,350,354 2,011,998
Other expenses 203,238 187,591 155,531
------------ ------------ ------------
Subtotal 2,515,485 2,537,945 2,167,529
------------ ------------ ------------
Income from operations $ 49,087 $ 100,908 $ 84,066
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Company has an agreement with an unrelated company which provides
reinsurance of certain individual life insurance contracts on a modified
coinsurance basis and under which all deficiency reserves related to these
contracts are reinsured. Reinsurance transactions under this agreement had the
effect of increasing income from operations by $3,008,000 in 1998, and
decreasing income from operations by $2,658,000 in 1997 and $46,000 in 1996.
48
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
11. WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT
LIABILITIES
The withdrawal characteristics of general account and separate account annuity
reserves and deposits are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------
AMOUNT % OF TOTAL
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 2,896,529 19
At book value less surrender charges (surrender charge >5%) 10,227,212 66
At book value (minimal or no charge or adjustment) 1,264,453 8
Not subject to discretionary withdrawal provision 1,106,197 7
------------- ---
Total annuity actuarial reserves and deposit liabilities $ 15,494,391 100
------------- ---
------------- ---
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
AMOUNT % OF TOTAL
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 3,415,394 25
At book value less surrender charges (surrender charge >5%) 7,672,211 57
At book value (minimal or no charge or adjustment) 1,259,698 9
Not subject to discretionary withdrawal provision 1,164,651 9
------------- ---
Total annuity actuarial reserves and deposit liabilities $ 13,511,954 100
------------- ---
------------- ---
</TABLE>
12. SEGMENT INFORMATION
The Company offers financial products and services such as fixed and variable
annuities, retirement plan services and life insurance on an individual basis.
Within these areas, the Company conducts business principally in two operating
segments and maintains a corporate segment to provide for the capital needs of
the various operating segments and to engage in other financing related
activities.
The Individual Insurance segment markets and administers a variety of life
insurance products sold to individuals and corporate owners of individual life
insurance. The products include whole life, universal life and variable life
products.
The Retirement Products and Services ("RPS") segment markets and administers
individual and group variable annuity products, individual and group fixed
annuity products which include market value adjusted annuities, and other
retirement benefit products.
49
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
12. SEGMENT INFORMATION (CONTINUED)
The following amounts pertain to the various business segments:
<TABLE>
<CAPTION>
FEDERAL
TOTAL TOTAL PRETAX INCOME TOTAL
(IN THOUSANDS) REVENUES EXPENDITURES INCOME TAXES ASSETS
- ------------------------------------------------------ ------------ ------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
1998
Individual Insurance $ 229,710 $ 144,800 $ 84,910 $ (4,148) $ 199,683
RPS 2,527,608 2,483,715 43,893 12,486 16,123,905
Corporate 10,959 3,042 7,917 3,375 579,033
------------ ------------- ---------- ---------- -------------
Total $ 2,768,277 $ 2,631,557 $ 136,720 $ 11,713 $ 16,902,621
------------ ------------- ---------- ---------- -------------
1997
Individual Insurance 304,141 272,333 31,808 13,825 1,143,697
RPS 2,533,006 2,507,591 25,414 10,667 14,043,221
Corporate 57,897 5,244 52,653 (17,153) 738,439
------------ ------------- ---------- ---------- -------------
Total $ 2,895,044 $ 2,785,169 $ 109,875 $ 7,339 $ 15,925,357
------------ ------------- ---------- ---------- -------------
1996
Individual Insurance 281,309 255,846 25,463 13,931 817,115
RPS 2,174,602 2,151,126 23,476 1,203 12,057,572
Corporate 64,721 898 63,823 (20,534) 689,266
------------ ------------- ---------- ---------- -------------
Total $ 2,520,632 $ 2,407,870 $ 112,762 $ (5,400) $ 13,563,953
------------ ------------- ---------- ---------- -------------
</TABLE>
- ------------------------
* Total expenditures include dividends to policyholders of $(5,981) for 1998,
$33,316 for 1997 and $29,189 for 1996.
13. RETIREMENT PLANS
The Company participates with SLOC in a noncontributory defined benefit pension
plan covering essentially all employees. The benefits are based on years of
service and compensation.
The funding policy for the pension plan is to contribute an amount which at
least satisfies the minimum amount required by ERISA; currently, the plan is
fully funded. The Company is charged for its share of the pension cost based
upon its covered participants. Pension plan assets consist principally of
separate accounts of SLOC.
The Company's share of the group's accrued pension cost was $1,178,000 and
$593,000 at December 31, 1998 and 1997, respectively. The Company's share of net
periodic pension cost was $586,000, $146,000 and $27,000, for 1998, 1997 and
1996, respectively.
The Company also participates with SLOC and certain affiliates in a 401(k)
savings plan for which substantially all employees are eligible. The Company
matches, up to specified amounts, employees' contributions to the plan. Company
contributions were $231,000, $259,000 and $233,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
OTHER POST-RETIREMENT BENEFIT PLANS
In addition to pension benefits the Company provides certain health, dental, and
life insurance benefits ("post-retirement benefits") for retired employees and
dependents. Substantially all employees may become eligible for these benefits
if they reach normal retirement age while working for the Company, or retire
early upon satisfying an alternate age plus service condition. Life insurance
benefits are generally set at a fixed amount.
50
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
13. RETIREMENT PLANS (CONTINUED)
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employer's Accounting for Postretirement Benefits
Other Than Pensions." SFAS No. 106 requires an accrual of the estimated cost of
retiree benefit payments during the years the employee provides services. SFAS
No. 106 allows recognition of the cumulative effect of the liability in the year
of adoption or the amortization of the obligation over a period of up to 20
years. The obligation of approximately $455,000 is recognized over a period of
ten years. The Company's cash flows are not affected by implementation of this
standard, but implementation decreased net income by $95,000, $117,000, and
$8,000 for the years ended December 31, 1998, 1997, and 1996, respectively. The
Company's post retirement health, dental and life insurance benefits currently
are not funded.
OTHER POST-RETIREMENT BENEFIT PLANS CONTINUED
The following table sets forth the change in the pension and other
postretirement benefit plans' benefit obligations and assets as well as the
plans' funded status reconciled with the amount shown in the Company's financial
statements at December 31:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
1998 1997 1998 1997
---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 79,684 $ 70,848 $ 9,845 $ 9,899
Service cost 4,506 4,251 240 306
Interest cost 6,452 5,266 673 725
Amendments -- 1,000 -- --
Actuarial loss (gain) 21,975 -- 308 (801)
Benefits paid (1,825) (1,681) (647) (284)
---------- ---------- ---------- ---------
Benefit obligation at end of year $ 110,792 $ 79,684 $ 10,419 $ 9,845
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
The Company's share:
Benefit obligation at beginning of year $ 5,094 $ 4,529 $ 385 $ 384
Benefit obligation at end of year $ 9,125 $ 5,094 $ 416 $ 385
Change in plan assets:
Fair value of plan assets at beginning of year $ 136,610 $ 122,807 $ -- $ --
Actual return on plan assets 16,790 15,484 -- --
Employer contribution -- -- 647 284
Benefits paid (1,825) (1,681) (647) (284)
---------- ---------- ---------- ---------
Fair value of plan assets at end of year $ 151,575 $ 136,610 $ -- $ --
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Funded status $ 40,783 $ 56,926 $ (10,419) $ (9,845)
Unrecognized net actuarial gain (loss) (2,113) (18,147) 586 257
Unrecognized transition obligation (asset) (24,674) (26,730) 185 230
Unrecognized prior service cost 7,661 8,241 -- --
---------- ---------- ---------- ---------
Prepaid (accrued) benefit cost $ 21,657 $ 20,290 $ (9,648) $ (9,358)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
The Company's share of accrued benefit cost $ (1,178) $ (593) $ (195) $ (102)
Weighted-average assumptions as of December 31:
Discount rate 6.75% 7.50% 6.75% 7.50%
Expected return on plan assets 8.00% 7.50% N/A N/A
Rate of compensation increase 4.50% 4.50% N/A N/A
</TABLE>
51
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
13. RETIREMENT PLANS (CONTINUED)
For measurement purposes, a 10.1% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1998 (5.7% for dental benefits).
The rates were assumed to decrease gradually to 5% for 2005 and remain at that
level thereafter.
<TABLE>
<CAPTION>
1998 1997 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 4,506 $ 4,251 $ 240 $ 306
Interest cost 6,452 5,266 673 725
Expected return on plan assets (10,172) (9,163) -- --
Amortization of transition obligation (asset) (2,056) (2,056) 45 45
Amortization of prior service cost 580 517 -- --
Recognized net actuarial (gain) loss (677) (789) (20) 71
---------- --------- --------- ---------
Net periodic benefit cost $ (1,367) $ (1,974) $ 938 $ 1,147
---------- --------- --------- ---------
---------- --------- --------- ---------
The Company's share of net periodic benefit cost $ 586 $ 146 $ 95 $ 117
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT
INCREASE DECREASE
------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Effect on total of service and interest cost components $ 210 $ (170)
Effect on postretirement benefit obligation 2,026 (1,697)
</TABLE>
52
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Bonds $ 2,026,868 $ 2,153,953
Mortgages 535,003 556,143
Derivatives -- 771
LIABILITIES:
Insurance reserves $ 121,100 $ 121,100
Individual annuities 274,448 271,849
Pension products 1,104,489 1,145,351
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Bonds $ 2,451,731 $ 2,569,199
Mortgages 684,035 706,975
LIABILITIES:
Insurance reserves $ 123,128 $ 123,128
Individual annuities 307,668 302,165
Pension products 1,527,433 1,561,108
Derivatives -- (1,716)
</TABLE>
The major methods and assumptions used in estimating the fair values of
financial instruments are as follows:
The fair values of short-term bonds are estimated to be the amortized cost. The
fair values of long-term bonds which are publicly traded are based upon market
prices or dealer quotes. For privately placed bonds, fair values are estimated
by taking into account prices for publicly traded bonds of similar credit risk
and maturity and repayment and liquidity characteristics.
The fair values of the Company's general account insurance reserves and
liabilities under investment-type contracts (insurance, annuity and pension
contracts that do not involve mortality or morbidity risks) are estimated using
discounted cash flow analyses or surrender values. Those contracts that are
deemed to have short-term guarantees have a carrying amount equal to the
estimated market value.
The fair values of mortgages are estimated by discounting future cash flows
using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
The fair values of derivative financial instruments are estimated using the
process described in Note 8.
53
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
15. STATUTORY INVESTMENT VALUATION RESERVES
The asset valuation reserve ("AVR") provides a reserve for losses from
investments in bonds, stocks, mortgage loans, real estate and other invested
assets with related increases or decreases being recorded directly to surplus.
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve ("IMR") and amortized into income over the remaining contractual life of
the security sold.
The table shown below presents changes in the major elements of the AVR and IMR.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997
-------------------- --------------------
AVR IMR AVR IMR
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of year $ 47,605 $ 33,830 $ 53,911 $ 28,675
Net realized investment gains, net of tax 256 8,942 17,400 6,321
Amortization of net investment gains -- (2,282) -- (1,166)
Unrealized investment losses (6,550) -- (2,340) --
Required by formula 3,081 -- (21,366) --
--------- --------- --------- ---------
Balance, end of year $ 44,392 $ 40,490 $ 47,605 $ 33,830
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
16. FEDERAL INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return.
Federal income taxes are calculated for the consolidated group based upon
amounts determined to be payable as a result of operations within the current
year. No provision is recognized for timing differences which may exist between
financial statement and taxable income. Such timing differences include
reserves, depreciation and accrual of market discount on bonds. Cash payments
for federal income taxes were approximately $48,144,000, $31,000,000 and
$19,264,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company is currently undergoing an audit by the Internal Revenue Service.
The Company believes that there will be no material audit adjustments for the
periods under examination.
17. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE)
On December 22, 1997, the Company issued a $250,000,000 surplus note to Life
Holdco. This note has an interest rate of 8.625% and is due on or after November
6, 2027.
On May 9, 1997, the Company issued a short-term note of $600,000,000 to Life
Holdco at an interest rate of 5.10%, which was extended at various interest
rates. This note was repaid on December 22, 1997.
On December 19, 1995, the Company issued surplus notes totaling $315,000,000 to
an affiliate, Sun Canada Financial Co., at interest rates between 5.75% and
7.25%. Of these notes, $157,500,000 will mature in the year 2007 and
$157,500,000 will mature in the year 2015. Interest on these notes is payable
semiannually.
Principal and interest on surplus notes are payable only to the extent that the
Company meets specified requirements regarding free surplus exclusive of the
principal amount and accrued interest, if any, on these notes and with the
consent of the Delaware Insurance Commissioner.
54
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
17. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE) (CONTINUED)
The Company accrued $4,259,000 and $ 964,000 for interest on surplus notes for
the years ended December 31, 1998 and 1997, respectively.
The Company accrued $4,259,000 and $964,000 for interest on surplus notes for
the years ended December 31, 1998 and 1997, respectively.
The Company expensed $44,903,000, $42,481,000 and $23,061,000 for interest on
surplus notes and notes payable for the years ended December 31, 1998, 1997 and
1996, respectively.
18. TRANSACTIONS WITH AFFILIATES
The Company has an agreement with SLOC which provides that SLOC will furnish, as
requested, personnel as well as certain services and facilities on a
cost-reimbursement basis. Expenses under this agreement amounted to
approximately $16,344,000 in 1998, $15,997,000 in 1997, and $20,192,000 in 1996.
The Company leases office space to SLOC under lease agreements with terms
expiring in September, 1999 and options to extend the terms for each of thirteen
successive five-year terms at fair market rental not to exceed 125% of the fixed
rent for the term which is ending. Rent received by the Company under the leases
for 1998 amounted to approximately $6,856,000.
19. RISK-BASED CAPITAL
Effective December 31, 1993, the NAIC adopted risk-based capital requirements
for life insurance companies. The risk-based capital requirements provide a
method for measuring the minimum acceptable amount of adjusted capital that a
life insurer should have, as determined under statutory accounting practices,
taking into account the risk characteristics of its investments and products.
The Company has met the minimum risk-based capital requirements at December 31,
1998, 1997 and 1996.
20. ACCOUNTING POLICIES AND PRINCIPLES
The financial statements of the Company have been prepared on the basis of
statutory accounting practices which, prior to 1996, were considered by the
insurance industry and the accounting profession to be in accordance with GAAP
for mutual life insurance companies. The primary differences between statutory
accounting practices and GAAP are described as follows. Under statutory
accounting practices, financial statements are not consolidated and investments
in subsidiaries are shown at net equity value. Accordingly, the assets,
liabilities and results of operations of the Company's subsidiaries are not
consolidated with the assets, liabilities and results of operations,
respectively, of the Company. Changes in net equity value of the common stock of
the Company's United States life insurance subsidiaries are directly reflected
in the Company's surplus. Changes in the net equity value of the common stock of
all other subsidiaries are directly reflected in the Company's Asset Valuation
Reserve. Dividends paid by subsidiaries to the Company are included in the
Company's net investment income.
Other differences between statutory accounting practices and GAAP include the
following: statutory accounting practices do not recognize the following assets
or liabilities which are reflected under GAAP: deferred policy acquisition
costs, deferred federal income taxes and statutory nonadmitted assets. Asset
Valuation Reserves and Interest Maintenance Reserves are established under
statutory accounting practices but not under GAAP. Methods for calculating real
estate depreciation and investment valuation allowances differ under statutory
accounting practices and GAAP. Actuarial assumptions and reserving methods
differ under statutory accounting practices and GAAP. Premiums for universal
55
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
20. ACCOUNTING POLICIES AND PRINCIPLES (CONTINUED)
life and investment-type products are recognized as income for statutory
purposes and as deposits to policyholders' accounts for GAAP.
Because the Company's management uses financial information prepared in
conformity with accounting principles generally accepted in Canada in the normal
course of business, the management of Sun Life Assurance Company of Canada
(U.S.) has determined that the cost of complying with Statement No. 120,
"Accounting and Reporting by Mutual Insurance Enterprises and by Insurance
Enterprises for Certain Long Duration Participating Contracts", exceeds the
benefits that the Company, or the users of its financial statements, would
experience. Consequently, the Company has elected not to apply such standards in
the preparation of these financial statements.
56
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
We have audited the accompanying statutory statements of admitted assets,
liabilities and capital stock and surplus of Sun Life Assurance Company of
Canada (U.S.) (the "Company") as of December 31, 1998 and 1997, and the related
statutory statements of operations, changes in capital stock and surplus, and
cash flow for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Notes 1 and 20 to the financial statements, the
Company prepared these financial statements using accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware,
which is a comprehensive basis of accounting other than generally accepted
accounting principles. The effects on the financial statements of the
differences between the statutory basis of accounting and generally accepted
accounting principles, although not reasonably determinable, are presumed to be
material.
In our opinion, the statutory financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities, and capital
stock and surplus of Sun Life Assurance Company of Canada (U.S.) as of December
31, 1998 and 1997, and the results of its operations and its cash flow for each
of the three years in the period ended December 31, 1998 on the basis of
accounting described in Notes 1 and 20.
However, because of the differences between the two bases of accounting referred
to in the second preceding paragraph, in our opinion, the statutory financial
statements referred to above do not present fairly, in conformity with generally
accepted accounting principles, the financial position of Sun Life Assurance
Company of Canada (U.S.) as of December 31, 1998 and 1997 or the results of its
operations or its cash flow for each of the three years in the period ended
December 31, 1998.
As management has stated in Note 20, because the Company's management uses
financial information prepared in accordance with accounting principles
generally accepted in Canada in the normal course of business, the management of
Sun Life Assurance Company of Canada (U.S.) has determined that the cost of
complying with Statement No. 120, ACCOUNTING AND REPORTING BY MUTUAL LIFE
INSURANCE ENTERPRISES AND BY INSURANCE ENTERPRISES FOR CERTAIN LONG-DURATION
PARTICIPATING CONTRACTS, would exceed the benefits that the Company, or the
users of its financial statements, would experience. Consequently, the Company
has elected not to apply such standards in the preparation of these financial
statements.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 5, 1999
57
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Calculations.........................................................................
Example of Variable Accumulation Unit Value Calculation............................
Example of Variable Annuity Unit Calculation.......................................
Example of Variable Annuity Payment Calculation....................................
Calculation of Annuity Unit Values.................................................
Distribution of the Contracts........................................................
Designation and Change of Beneficiary................................................
Custodian............................................................................
Financial Statements.................................................................
</TABLE>
58
<PAGE>
This Prospectus sets forth information about the Contracts and the
Variable Account that a prospective purchaser should know before investing.
Additional information about the Contracts and the Variable Account has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information dated May 3, 1999 which is incorporated herein by reference. The
Statement of Additional Information is available upon request and without charge
from Sun Life Assurance Company of Canada (U.S.). To receive a copy, return this
request form to the address shown below or telephone (617) 348-9600 or (800)
752-7215.
- --------------------------------------------------------------------------------
To: Sun Life Assurance Company of Canada (U.S.)
Annuity Service Mailing Address:
c/o Retirement Products and Services
P.O. Box 1024
Boston, Massachusetts 02103
Please send me a Statement of Additional Information for
Compass G Combination Fixed/Variable Group Annuity
Sun Life of Canada (U.S.) Variable Account D.
Name
- --------------------------------------------------------------
Address
- --------------------------------------------------------------
-------------------------------------------------------------------------
City
- ------------------------------------ State
- -------------- Zip
- -------
Telephone
- ----------------------------------------------------------------
59
<PAGE>
APPENDIX A
GLOSSARY
The following terms as used in this Prospectus have the indicated
meanings:
ACCOUNT or PARTICIPANT ACCOUNT: An account established for each
Participant to which Net Purchase Payments are credited.
ACCOUNT VALUE: The Variable Accumulation Value, if any, plus the Fixed
Accumulation Value, if any, of your Account for any Valuation Period.
ACCOUNT YEAR and ACCOUNT ANNIVERSARY: Your first Account Year is the
period of (a) 12 full calendar months plus (b) the part of the calendar month in
which we issue your Certificate (if not on the first day of the month),
beginning with the Contract Date. Your Account Anniversary is the first day
immediately after the end of an Account Year. Each Account Year after the first
is the 12 calendar month period that begins on your Account Anniversary. If, for
example, the Contract Date is in March, the first Account Year will be
determined from the Contract Date but will end on the last day of March in the
following year; your Account Anniversary is April 1 and all Account Years after
the first will be measured from April 1.
ACCUMULATION ACCOUNT: An account established for the Contract.
ACCUMULATION PHASE: The period before the Annuity Commencement Date and
during the lifetime of the Annuitant during which you Purchase Payments are made
under the Contract. This is called the "Accumulation Period" in the Contract.
*ANNUITANT: The Participant.
*ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment
under each Certificate is to be made.
*ANNUITY OPTION: The method chosen for making annuity payments.
ANNUITY UNIT: A unit of measure used in the calculation of the amount of
the second and each subsequent variable annuity payment from the Variable
Account.
APPLICATION: The document signed by the Owner or other evidence acceptable
to us that serves as the Owner's application for the Contract.
*BENEFICIARY: Prior to the Annuity Commencement Date, the person or entity
having the right to receive the death benefit and, for Non-Qualified Contracts,
who, in the event of the Participant's death, is the "designated beneficiary"
for purposes of Section 72(s) of the Internal Revenue Code. After the Annuity
Commencement Date, the person or entity having the right to receive any payments
due under the Annuity Option elected, if applicable, upon the death of the
Payee.
BUSINESS DAY: Any day the New York Stock Exchange is open for trading or
any other day on which there is enough trading in securities held by a
Sub-Account to materially affect the value of the Variable Accumulation Units.
CERTIFICATE: The document for each Participant which evidences the
coverage of the Participant under the Contract.
COMPANY: Sun Life Assurance Company of Canada (U.S.).
CONTRACT DATE: The date on which we issue your Certificate. This is called
the "Date of Coverage" in the Contract.
CURRENT RATE: As of a particular date, the interest rate for a Guarantee
Period that would be credited on a compound annual basis on [PAYMENTS?--AMOUNTS]
allocated to the Fixed Account on that date. We determine the Current rate from
time to time but it will never be less than 4%.
* These items are specified in the Participant Enrollment Form, and may be
changed as we describe in this Prospectus.
60
<PAGE>
DEATH BENEFIT DATE: If the Owner has elected a death benefit payment
option before your death that remains in effect, the date on which we receive
Due Proof of Death. If the Beneficiary is not living on the date of your death,
the date on which we receive Due Proof of Death of you and the Beneficiary. If
your Beneficiary elects the death benefit payment option, the later of (a) the
date on which we receive the Beneficiary's election and (b) the date on which we
receive Due Proof of Death. If we do not receive the Beneficiary's election
within 60 days after we receive Due Proof of Death, the Death Benefit Date will
be the last day of the 60 day period and we will pay the death benefit in cash.
DUE PROOF OF DEATH: An original certified copy of an official death
certificate, an original certified copy of a decree of a court of competent
jurisdiction as to the finding of death, or any other proof satisfactory to the
Company.
EXPIRATION DATE: The last day of any Guarantee Period.
FIXED ACCOUNT: The general account of the Company, consisting of all
assets of the Company other than those allocated to a separate account of the
Company.
FIXED ACCOUNT VALUE: The value of that portion of your Account allocated
to the Fixed Account.
FIXED ACCUMULATION UNIT: A unit of measure used in the calculation of
Fixed Account Value.
FIXED ANNUITY: An annuity with payments which do not vary as to dollar
amount.
GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is
credited, which may be 1, 3, 5 or 7 years. There are two types of Guarantee
Periods : Initial Guarantee Periods and Subsequent Guarantee Periods.
GUARANTEED INTEREST RATE: The rate of interest we credit on a compound
annual basis during any Initial or Subsequent Guarantee Period.
INCOME PHASE: The period on and after the Annuity Commencement Date and
during the lifetime of the Annuitant during which we make annuity payments under
the Contract.
NET LOAN INTEREST: Loan interest payable to us, less any interest credited
by us on amounts in the loan account established for the loan.
NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement
plan that does not receive favorable federal income tax treatment under Sections
401, 403, or 408 of the Internal Revenue Code.
*OWNER: The employer, association or other group entitled to the ownership
rights stated in the Contract and in whose name or names the Contract is issued.
The Owner may designate a trustee or custodian of a retirement plan which meets
the requirements of Section 401, Section 408(c), or Section 408(k) of the
Internal Revenue Code to serve as legal owner of assets of a retirement plan,
but the term "Owner," as used herein, shall refer to the organization entering
into the Contract.
PARTICIPANT: The person named in the Certificate who is entitled to
benefits under the plan as determined and reported to the Company by the Owner.
PARTICIPANT ENROLLMENT FORM: The document signed by you that serves as
your application for participation under the Contract.
PAYEE: A recipient of payments under a Contract. The term includes an
Annuitant or a Beneficiary who becomes entitled to benefits upon the death of
the Participant.
PURCHASE PAYMENT or PAYMENT: An amount paid to the Company as
consideration for the benefits provided by a Contract.
* These items are specified in the Participant Enrollment Form, and may be
changed as we describe in this Prospectus.
61
<PAGE>
QUALIFIED CONTRACT: A Contract used in connection with a retirement plan
which may receive favorable federal income tax treatment under Sections 401,
403, 408(c), 408(k) or 408(p) of the Internal Revenue Code of 1986, as amended.
SERIES FUND: MFS/Sun Life Series Trust.
SUB-ACCOUNT: That portion of the Variable Account which invests in shares
of a specific Mutual Fund or a specific series of the Series Fund.
VALUATION PERIOD: The period of time from one determination of
Accumulation Unit or Annuity Unit values to the next subsequent determination of
these values. Value determinations are made as of the close of the New York
Stock Exchange on each day that the Exchange is open for trading and [WHEN?] on
other Business Days.
VARIABLE ACCOUNT: Variable Account D of the Company, which is a separate
account of the Company consisting of assets set aside by the Company, the
investment performance of which is kept separate from that of the general assets
of the Company.
VARIABLE ACCUMULATION UNIT: A unit of measure used in the calculation of
Variable Account Value.
VARIABLE ACCOUNT VALUE: The value of that portion of your Account
allocated to the Variable Account.
VARIABLE ANNUITY: An annuity with payments which vary as to dollar amount
in relation to the investment performance of the Variable Account.
62
<PAGE>
APPENDIX B
CONDENSED FINANCIAL INFORMATION-- ACCUMULATION UNIT VALUES
The following information should be read in conjunction with the Variable
Accounts' financial statements appearing elsewhere in this Prospectus, all of
which has been audited by Deloitte & Touche LLP, independent certified public
accountants.
<TABLE>
<CAPTION>
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
MIT MWG
Unit Value: Unit Value:
Beginning of period $ 33.9934 $ 44.1981 Beginning of period $ 21.7932 $ 21.6012
End of period $ 44.1981 $ 53.6738 End of period $ 21.6012 $ 22.2095
Units outstanding end of
period 668,603 567,275 Units outstanding end of period 50,083 35,699
MIG CAPITAL APPRECIATION SERIES
Unit Value: Unit Value:
Beginning of period $ 29.9956 $ 43.9157 Beginning of period $ 35.6224 $ 43.3190
End of period $ 43.9157 $ 67.2213 End of period $ 43.3190 $ 55.0679
Units outstanding end of
period 225,178 89,584 Units outstanding end of period 680,351 628,268
MTR GOVERNMENT SECURITIES SERIES
Unit Value: Unit Value:
Beginning of period $ 29.9279 $ 33.2755 Beginning of period $ 18.7159 $ 20.1019
End of period $ 33.2755 $ 36.7917 End of period $ 20.1019 $ 21.5873
Units outstanding end of
period 759,684 628,337 Units outstanding end of period 377,706 317,889
MGO HIGH YIELD SERIES
Unit Value: Unit Value:
Beginning of period $ 26.5992 $ 32.3990 Beginning of period $ 22.0500 $ 22.0500
End of period $ 32.3990 $ 41.3383 End of period $ 24.6550 $ 24.4991
Units outstanding end of
period 100,623 95,086 Units outstanding end of period 161,891 147,334
MFB MONEY MARKET SERIES
Unit Value: Unit Value:
Beginning of period $ 19.3773 $ 21.1171 Beginning of period $ 15.2586 $ 15.8347
End of period $ 21.1171 $ 21.7979 End of period $ 15.8347 $ 16.4256
Units outstanding end of
period 86,309 76,030 Units outstanding end of period 246,919 254,576
</TABLE>
63
<PAGE>
APPENDIX C
WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT
A. FIXED ACCOUNT--3, 5 AND 7 YEAR GUARANTEE PERIODS:
For the purposes of this illustration, the following assumptions have been made:
1. 100% of Purchase Payments have been allocated to the Fixed Account and
the Owner has elected Initial Guarantee Periods of five (5) years.
2. The date of full surrender or partial withdrawal is the last day of the
12th month following the Date of Coverage.
3. The Guarantee Rate being credited on Payments allocated to the five (5)
year Guarantee Period on the date of full surrender or partial withdrawal
is 4.40%.
4. The Account Fee is $25.
PLEASE REFER TO THE TABLE BELOW.
TABLE 1*
<TABLE>
<CAPTION>
1 2 3 4 5 6 7 8 9 10
- --- ------ ----- --------- ----- ------ ------------------- ------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 100 4.25% $ 104.25 -- $ 0.00 $ 104.25($79.25) -0.45% -($0.47)(-$0.36) $103.78($78.89)
2 100 4.25 103.90 6.00% 4.80 99.10 -0.46 -(0.46) 98.64
3 100 4.50 103.75 6.00 6.00 97.75 0.31 0.31 98.06
4 100 4.50 103.38 6.00 6.00 97.38 0.32 0.31 97.69
5 100 4.70 103.13 6.00 6.00 97.13 0.98 0.95 98.08
6 100 4.70 102.74 6.00 6.00 96.74 0.99 0.96 97.70
7 100 4.70 102.35 6.00 6.00 96.35 1.01 0.98 97.33
8 100 4.50 101.88 6.00 6.00 95.88 0.34 0.33 96.20
9 100 4.50 101.50 6.00 6.00 95.50 0.35 0.33 95.83
10 100 4.50 101.13 6.00 6.00 95.13 0.36 0.34 95.46
11 100 4.50 100.75 6.00 6.00 94.75 0.36 0.34 95.09
12 100 4.40 100.37 6.00 6.00 94.37 0.00 0.00 94.37
------ --------- ------ ---------- -------------- -------------
$1,200 $1,229.11 $64.80 $ 1,164.31 $ 3.92 $1,168.23
------ --------- ------ ---------- -------------- -------------
------ --------- ------ ---------- -------------- -------------
($1,139.31) ($4.03) ($1,143.34)
</TABLE>
*See "Explanation of Columns in Table 1."
EXPLANATION OF COLUMNS IN TABLE 1.
COLUMNS 1 AND 2:
Represent Payments and Payment amounts, respectively. Each Payment of $100 was
made on the first (1st) day of each month for one year (12 payments).
COLUMN 3:
Represents the Initial Guarantee Rate being credited to each Payment.
COLUMN 4:
Represents the value of each Payment on the date of full surrender or partial
withdrawal before the imposition of any Withdrawal Charge and Market Value
Adjustment.
COLUMN 5:
Represents the Withdrawal Charge percentage that is applied to each Payment on
the date of full surrender or partial withdrawal.
The percentage is 6% for Payments 2-12 because these Payments have been in the
Account for less than one year. No Withdrawal Charge is imposed on Payment 1
because up to ten percent (10%) of Payments credited to a Participant's Account
may be withdrawn each Account Year without imposition of this charge. In this
example, 10% represents (10% x $1,200) = $120. The 10% amount is applied to the
oldest previously unliquidated Payment, then the next oldest and so forth. This
results in no Withdrawal Charge being imposed on Payment 1 and a Withdrawal
Charge imposed on $80 of Payment 2.
64
<PAGE>
COLUMN 6:
Represents the amount of Withdrawal Charge imposed on each Payment. It is
calculated by multiplying the Payment in Column 2 by the Withdrawal Charge
percentage in Column 5.
For example, the Withdrawal Charge imposed on Payment 8 = $100 X 6% = $6.00.
The Withdrawal Charge imposed on Payment 2 = ($100 - $20) X 6% = $4.80. The $20
represents the portion of the Payment on which no Withdrawal Charge is imposed
as described under the explanation of Column 5 above.
COLUMN 7:
Represents the value of each Payment in Column 4 on the date of full surrender
or partial withdrawal after the imposition of the Withdrawal Charge in Column 6.
In the case of a full surrender, the Account Fee is deducted from the oldest
unliquidated payment. This deduction is reflected in the Table by the amount in
parentheses beside Column 7, $79.25.
COLUMN 8:
Represents the Market Value Adjustment (MVA) percentage applied to the value of
each Payment on the date of full surrender or partial withdrawal after
imposition of the Withdrawal Charge.
FOR EXAMPLE:
The MVA% applied to Payment 3 = .75 (A - B) X C/12
<TABLE>
<S> <C> <C> <C>
Where A = The Guarantee Rate of the Payment being surrendered (Column 3)
= 4.50%,
B = The Guarantee Rate being credited to Payments allocated to the five (5)
year
Guarantee Period on the date of full surrender or partial withdrawal
= 4.40% and
C = The number of months remaining in the Guarantee Period of the Payment
being
surrendered
= 60 (5 years) - 10
= 50
MVA% = .75 (A - B) X C/12
= .75 (4.50 - 4.40) X 50/12
= .75 (.10) X 50/12
= .31%
</TABLE>
COLUMN 9:
Represents the dollar amount of the MVA. For each Payment, it is determined by
multiplying the value in Column 7 by the MVA percentage in Column 8.
For example, the MVA for Payment 3
<TABLE>
<C> <S> <C> <C>
= Column 7 X Column 9
= $97.75 X .31%
= $0.31
</TABLE>
COLUMN 10:
Represents the values of Payments on the date of full surrender or partial
withdrawal after deducting the Withdrawal Charge and either deducting or adding
the MVA. For any Payment, the amount in Column 10 is determined by adding the
amounts in Columns 7 and 9.
In each of Columns 9 and 10, the amounts in parentheses, -$.36 and $78.89,
respectively, reflect the deduction of the Account Fee, in the case of a full
surrender.
FULL SURRENDER:
The total of Column 10, in parentheses ($1,143.34), reflects the amount of a
full surrender after imposition of Withdrawal Charges, Account Fee and Market
Value Adjustments.
PARTIAL WITHDRAWAL:
The sum of amounts in Column 10 for as many payments as are liquidated reflects
the amount of a partial withdrawal.
65
<PAGE>
For example, if $1,000 of Payments were withdrawn, the amount of the withdrawal
would be the sum of the amounts in Column 10 for Payments 1 through 10 which is
$978.77.
B. VARIABLE ACCOUNT AND FIXED ACCOUNT--1 YEAR GUARANTEE PERIOD (NO MARKET VALUE
ADJUSTMENT APPLICABLE):
For the purposes of this illustration, the following assumptions have been made:
1. Purchase Payments have been allocated to either the Variable Account,
the Fixed Account-- one (1) Year Guarantee Period or to a combination of
both.
2. The date of full surrender or partial withdrawal is during the ninth
(9th) Account Year.
PLEASE REFER TO THE TABLE BELOW.
<TABLE>
<CAPTION>
TABLE 2*
1 2 3 4 5 6
--------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
1 $ 1,000 $ 1,000 $ 0 0% $ 0
2 1,200 1,200 0 0 0
3 1,400 1,280 120 1 1.20
4 1,600 0 1,600 2 32.00
5 1,800 0 1,800 3 54.00
6 2,000 0 2,000 4 80.00
7 2,000 0 2,000 5 100.00
8 2,000 0 2,000 6 120.00
9 2,000 0 2,000 6 120.00
--------- --------- --------- ---------
$ 15,000 $ 3,480 $ 11,520 $ 507.20
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
* See "Explanation of Columns in Table 2."
EXPLANATION OF COLUMNS IN TABLE 2
COLUMNS 1 AND 2:
Represent Payments and amounts of Payments. Each Payment was made at the
beginning of each Account Year.
COLUMN 3:
Represents the amounts that may be withdrawn without the imposition of
withdrawal charges, as follows:
a) Payments 1 and 2, $1,000 and $1,200, respectively, have been credited to the
Participant's Account for more than seven (7) years.
b) $1,280 of Payment 3 represents 10% of Payments that have been credited to
the Participant's Account for less than seven (7) years. The 10% amount is
applied to the oldest unliquidated Payment, then the next oldest and so
forth.
COLUMN 4:
Represents the amount of each Payment that is subject to a withdrawal charge. It
is determined by subtracting the amount in Column 3 from the Payment in Column
2.
COLUMN 5:
Represents the withdrawal charge percentages imposed on the amounts in Column 4.
COLUMN 6:
Represents the withdrawal charge imposed on each Payment. It is determined by
multiplying the amount in Column 4 by the percentage in Column 5.
For example, the withdrawal charge imposed on Payment 8
<TABLE>
<C> <S>
= Payment 8 Column 4 X Payment 8 Column 5
= $2,000 X 6%
= $120
</TABLE>
66
<PAGE>
FULL SURRENDER:
The total of Column 6, $507.20, represents the total amount of withdrawal
charges imposed on Payments in this illustration.
PARTIAL WITHDRAWAL:
The sum of amounts in Column 6 for as many Payments as are liquidated reflects
the withdrawal charges imposed in the case of a partial withdrawal.
For example, if $7,000 of Payments (Payments 1, 2, 3, 4 and 5) were withdrawn,
the amount of the withdrawal charges imposed would be the sum of amounts in
Column 6 for Payments 1, 2, 3, 4 and 5 which is $87.20.
67
<PAGE>
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<PAGE>
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<PAGE>
<TABLE>
<S> <C>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ANNUITY SERVICE MAILING ADDRESS:
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
TELEPHONE:
Toll Free (800) 752-7215
In Massachusetts (617) 348-9600
GENERAL DISTRIBUTOR
Clarendon Insurance Agency, Inc.
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
AUDITORS
Deloitte Touche LLP
125 Summer Street
Boston, Massachusetts 02110
COG-1 5/99
</TABLE>
