<PAGE>
As filed with the Securities and Exchange Commission on March 31, 2000
REGISTRATION NO. 333-88069
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO.1
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
--------------
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2461439
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE SUN LIFE EXECUTIVE PARK, WELLESLEY HILLS, MASSACHUSETTS 02481
(781) 237-6030
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
<TABLE>
<S> <C>
COPIES TO:
EDWARD M. SHEA, ASSISTANT VICE PRESIDENT JOAN BOROS, ESQ.
AND SENIOR COUNSEL JORDEN BURT BOROS CICCHETTI
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) BERENSON & JOHNSON LLP
RETIREMENT PRODUCTS AND SERVICES 1025 THOMAS JEFFERSON STREET, N.W.
ONE COPLEY PLACE SUITE 400E
BOSTON, MASSACHUSETTS 02116 WASHINGTON, D.C. 20007
(617) 348-9600
</TABLE>
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
--------------
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date hereof
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act, check the following box. /X/
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
-----------------------------------
<PAGE>
PART I
INFORMATION REQUIRED IN PROSPECTUS
Attached hereto and made a part hereof is a Prospectus dated April 10, 2000
for each of the following:
Futurity Accolade Variable and Fixed Annuity
MFS Regatta Extra Variable and Fixed Annuity
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
APRIL 10, 2000
PROFILE
FUTURITY ACCOLADE
VARIABLE AND FIXED
ANNUITY
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS THAT YOU
SHOULD KNOW AND CONSIDER BEFORE PURCHASING THE CONTRACT. THE CONTRACT IS MORE
FULLY DESCRIBED IN THE FULL PROSPECTUS WHICH ACCOMPANIES THIS PROFILE. PLEASE
READ THE PROSPECTUS CAREFULLY.
1. THE ANNUITY CONTRACT
The Futurity Accolade Annuity ("Contract") is a 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. The Contract is intended to help you achieve your
retirement savings or other long-term investment goals.
The Contract has two phases: an Accumulation Phase and an Income Phase.
During the Accumulation Phase you make payments into the Contract; any
investment earnings under your Contract accumulate on a tax-deferred basis and
are taxed as income only when withdrawn. During the Income Phase, we make
annuity payments in amounts determined in part by the amount of money you have
accumulated under your Contract during the Accumulation Phase. You choose when
the Income Phase begins.
You may choose among 35 variable investment options and a range of fixed
interest options. For a variable investment return you choose one or more
Sub-Accounts in our Variable Account, each of which invests in shares of a
corresponding mutual fund or series thereof (collectively, the "Funds") listed
in Section 4. The value of any portion of your Contract allocated to the
Sub-Accounts will fluctuate up or down depending on the performance of the Funds
you select, and you may experience losses. For a fixed interest rate, you may
choose one or more 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. In addition, your Contract will be
credited with extra interest at the time you purchase your Contract.
The Contract is designed to meet your need for investment flexibility.
Over the life of your Contract, you may allocate amounts among as many as 18 of
the available variable and fixed options. Until we begin making annuity payments
under your Contract, you 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 you can elect to have your Contract value accumulate on either a
variable or fixed basis, or a combination of both, you can elect to receive
annuity payments on either a variable or fixed basis or both. If you choose to
have 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. You can select from
among the following methods of receiving either variable or fixed annuity
payments under your Contract: (1) monthly payments continuing for your lifetime
(assuming you are the annuitant); (2) monthly payments for your lifetime, but
with payments continuing to your chosen beneficiary for 5, 10, 15 or 20 years
after your first payment if you die before the end of the period you have
selected; (3) monthly payments for your lifetime and the life of another person
(usually your spouse) you have chosen; and (4) monthly payments for a specified
number of years (from 10 to 30), with a cash-out option for variable payments.
We may also agree to other annuity options at our discretion.
Once the Income Phase begins, you cannot change your choice of annuity
payment method.
<PAGE>
3. PURCHASING A CONTRACT
You may purchase a Contract for $10,000 or more, under most circumstances.
You may increase the value of your investment by adding $1,000 or more at any
time during the Accumulation Phase. We may waive these limits. 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
You can allocate your money among Sub-Accounts investing in the following
Funds:
<TABLE>
<S> <C>
AIM VARIABLE INSURANCE FUNDS, INC. MFS/SUN LIFE SERIES TRUST
AIM V.I. Capital Appreciation Fund Capital Appreciation Series
AIM V.I. Growth Fund Emerging Growth Series
AIM V.I. Growth and Income Fund Government Securities Series
AIM V.I. International Equity Fund High Yield Series
THE ALGER AMERICAN FUND Massachusetts Investors Growth Stock Series
Growth Portfolio Massachusetts Investors Trust Series
Income and Growth Portfolio New Discovery Series
Small Capitalization Portfolio Total Return Series
GOLDMAN SACHS VARIABLE INSURANCE TRUST Utilities Series
("VIT") OCC ACCUMULATION TRUST
VIT CORE-SM- Large Cap Growth Fund Equity Portfolio
VIT CORE-SM- Small Cap Equity Fund Managed Portfolio
VIT CORE-SM- U.S. Equity Fund Mid Cap Portfolio
VIT Growth and Income Fund Small Cap Portfolio
VIT International Equity Fund SUN CAPITAL ADVISERS TRUST
J.P. MORGAN SERIES TRUST II Sun Capital Blue Chip Mid Cap Fund
J.P. Morgan International Opportunities Sun Capital Investment Grade Bond Fund
Portfolio Sun Capital Investors Foundation Fund
J.P. Morgan Small Company Portfolio Sun Capital Money Market Fund
J.P. Morgan U.S. Disciplined Equity Sun Capital Real Estate Fund
Portfolio Sun Capital Select Equity Fund
LORD ABBETT SERIES FUND, INC.
Growth and Income Portfolio
</TABLE>
Market conditions will determine the value of an investment in any Fund.
Each Fund is described in the relevant Fund prospectus.
In addition to these variable options, you may also allocate your money to
one or more of the 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:
During the first 5 years of a Contract, we impose an annual Account Fee
equal to $35. After the fifth year, we may change this fee annually, but it will
never exceed $50. During the Income Phase, the annual Account Fee is $35. We
also deduct insurance charges (which include an administrative expense charge)
equal to 1.45% per year of the average daily value of the Contract allocated
among the Sub-Accounts.
If you elect one or more optional death benefit riders, we will deduct an
additional charge per year, depending upon the number of riders you elect, as
follows:
<TABLE>
<CAPTION>
NUMBER OF % OF AVERAGE
RIDERS YOU ELECT DAILY VALUE
- ---------------- ------------
<S> <C>
1 0.15%
2 0.25%
3 0.40%
</TABLE>
2
<PAGE>
No optional death benefit is offered if you are 80 or older at issue.
There are no sales charges when you purchase your Contract. However, if
you withdraw money from your Contract, we will, with certain exceptions, impose
a withdrawal charge. Your Contract allows a "free withdrawal amount," which you
may withdraw before you incur the withdrawal charge. The rest of your withdrawal
is subject to a withdrawal charge equal to a percentage of each purchase payment
you withdraw. Each payment begins a new 7-year period and moves down a declining
surrender charge scale at each Account Anniversary. Payments received during the
current Account Year will be charged 8%, if withdrawn. On your next scheduled
Account Anniversary, that payment, along with any other payments made during
that Account Year, will be considered to be in their second Account Year and
will have an 8% withdrawal charge. On the next Account Anniversary, these
payments will move into their third Account Year and will have a withdrawal
charge of 7%, if withdrawn. This withdrawal charge decreases according to the
number of Account Years the purchase payment has been held in your Account. The
declining scale is as follows:
<TABLE>
<CAPTION>
NUMBER OF ACCOUNT YEARS
PAYMENT HAS BEEN IN
YOUR CONTRACT WITHDRAWAL CHARGE
- ------------------------ -----------------
<S> <C>
0-1 8%
1-2 8%
2-3 7%
3-4 7%
4-5 6%
5-6 5%
6-7 4%
7+ 0%
</TABLE>
If you withdraw, transfer, or annuitize money allocated to a Guarantee
Period more than 30 days before the expiration date of the Guarantee Period, the
amount will be subject to a Market Value Adjustment. This adjustment reflects
the relationship between our current Guaranteed Interest Rates and the
Guaranteed Interest Rate applicable to the amount being withdrawn. Generally, if
your Guaranteed Interest Rate is lower than the relevant current rate, then the
adjustment will decrease your Contract value. Conversely, if your Guaranteed
Interest Rate is higher than the relevant current rate, the adjustment will
increase your Contract value. The Market Value Adjustment will not apply to the
withdrawal of interest credited during the current Account Year, or to transfers
as part of our dollar-cost averaging program.
In addition to the charges we impose under the Contracts, there are
charges (which include management fees and operating expenses) imposed by each
Fund, which range from 0.51% to 1.35% of the average net assets of the Fund,
depending upon which Funds you have selected. The investment advisers to some of
the Funds have agreed to waive or reimburse a portion of expenses for some of
the Funds; without this agreement, Fund expenses could be higher. Some of these
agreements may be terminated at any time.
The following chart is designed to help you understand the expenses you
will incur under your Contract, 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 (net of any applicable expense reimbursement and/or fee waiver) for
each Fund. The next two columns show two examples of the expenses, in dollars,
you would pay under a Contract. The examples assume that you invested $1,000 in
a Contract 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.
During the Accumulation Phase, "Total Annual Insurance Charges" of 1.55%
as shown in the table below include the insurance charges of 1.45% of your daily
net assets (1.30% for mortality and
3
<PAGE>
expense risks and 0.15% for administrative expenses) plus an additional 0.10%,
which is used to represent the $35 annual Account Fee based on an assumed
Contract value of $35,000. The actual impact of the Account Fee may be greater
or less than 0.10%, depending upon the value of your Contract.
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL ANNUAL TOTAL ANNUAL TOTAL TOTAL EXPENSES
INSURANCE SERIES ANNUAL AT END
SUB-ACCOUNT CHARGES EXPENSES EXPENSES 1 YEAR 10 YEARS
- ----------- ------------ ------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund 1.55% 0.73% 2.28% $ 96 $270
AIM V.I. Growth Fund 1.55% 0.73% 2.28% $ 96 $270
AIM V.I. Growth and Income Fund 1.55% 0.77% 2.32% $ 96 $274
AIM V.I. International Equity Fund 1.55% 0.97% 2.52% $ 98 $295
Alger American Growth Portfolio 1.55% 0.79% 2.34% $ 96 $276
Alger American Income and Growth Portfolio 1.55% 0.70% 2.25% $ 95 $267
Alger American Small Capitalization Portfolio 1.55% 0.90% 2.45% $ 97 $288
Goldman Sachs VIT CORE-SM- Large Cap Growth Fund 1.55% 0.90% 2.45% $ 97 $288
Goldman Sachs VIT CORE-SM- Small Cap Equity Fund 1.55% 1.00% 2.55% $ 98 $298
Goldman Sachs VIT CORE-SM- U.S. Equity Fund 1.55% 0.90% 2.45% $ 97 $288
Goldman Sachs VIT Growth and Income Fund 1.55% 1.00% 2.55% $ 98 $298
Goldman Sachs VIT International Equity Fund 1.55% 1.35% 2.90% $102 $333
J.P. Morgan International Opportunities Portfolio 1.55% 1.20% 2.75% $100 $318
J.P. Morgan Small Company Portfolio 1.55% 1.15% 2.70% $100 $313
J.P. Morgan U.S. Disciplined Equity Portfolio 1.55% 0.85% 2.40% $ 97 $283
Lord Abbett Growth and Income Portfolio 1.55% 0.51% 2.06% $ 93 $247
MFS/Sun Life Capital Appreciation Series 1.55% 0.76% 2.31% $ 96 $273
MFS/Sun Life Emerging Growth Series 1.55% 0.75% 2.30% $ 96 $272
MFS/Sun Life Government Securities Series 1.55% 0.61% 2.16% $ 94 $258
MFS/Sun Life High Yield Series 1.55% 0.83% 2.38% $ 97 $281
MFS/Sun Life Massachusetts Investors Growth Stock
Series 1.55% 0.83% 2.38% $ 97 $281
MFS/Sun Life Massachusetts Investors Trust Series 1.55% 0.59% 2.14% $ 94 $255
MFS/Sun Life New Discovery Series 1.55% 1.06% 2.61% $ 99 $304
MFS/Sun Life Total Return Series 1.55% 0.69% 2.24% $ 95 $266
MFS/Sun Life Utilities Series 1.55% 0.81% 2.36% $ 96 $279
OCC Equity Portfolio 1.55% 0.91% 2.46% $ 97 $289
OCC Managed Portfolio 1.55% 0.83% 2.38% $ 97 $281
OCC Mid Cap Portfolio 1.55% 1.03% 2.58% $ 99 $301
OCC Small Cap Portfolio 1.55% 0.89% 2.44% $ 97 $287
Sun Capital Blue Chip Mid Cap Fund 1.55% 1.00% 2.55% $ 96 $298
Sun Capital Investment Grade Bond Fund 1.55% 0.75% 2.30% $ 96 $272
Sun Capital Investors Foundation Fund 1.55% 0.90% 2.45% $ 97 $288
Sun Capital Money Market Fund 1.55% 0.65% 2.20% $ 95 $262
Sun Capital Real Estate Fund 1.55% 1.25% 2.80% $101 $323
Sun Capital Select Equity Fund 1.55% 0.90% 2.45% $ 97 $288
</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
Under current federal tax laws, your earnings are not taxed until you take
them out of your Contract. If you take money out, earnings come out first and
are taxed as income. If your Contract is funded with pre-tax or tax deductible
dollars (such as with a pension or IRA contribution) -- we call this a Qualified
Contract -- your entire withdrawal will be taxable. 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,
except under a Qualified Contract, in which case the entire payment will be
taxable. In all cases, you should consult with your tax adviser for specific tax
information.
Different laws apply if your Contract is issued in Puerto Rico. Under the
tax laws of Puerto Rico, when an annuity payment is made under your Contract,
your annuitant or any other payee is required to include as gross income the
portion of each annuity payment equal to 3% of the aggregate purchase payments
you made under the Contract. The amount if any, in excess of the included amount
is excluded from gross income. After an amount equal to the aggregate amount
excluded from gross
4
<PAGE>
income has been received, all of the annuity payments are considered to be
taxable income. You should consult with your tax adviser for specific tax
information.
7. ACCESS TO YOUR MONEY
You can withdraw money from your Contract at any time during the
Accumulation Phase. You may withdraw a portion of the value of your Contract in
each year without the imposition of the withdrawal charge -- the amount of all
purchase payments you made prior to the last 7 years and have not withdrawn plus
the greater of (1) your Contract's earnings in the prior Account Year and (2)
10% of all purchase payments you have made in the last 7 years. All other
purchase payments you withdraw will be subject to a withdrawal charge ranging
from 8% to 4%. 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 annuitization or transfers. In
certain circumstances, we will waive the withdrawal charges for a full or
partial withdrawal when you are confined to an eligible nursing home. In
addition, there may be other circumstances under which we may waive the
withdrawal charge.
In addition to the withdrawal charge, amounts you withdraw, transfer or
annuitize from the Fixed Account before your Guarantee Period has ended may be
subject to a Market Value Adjustment.
8. PERFORMANCE
If you invest in one or more Sub-Accounts, the value of your Contract will
increase or decrease depending upon the investment performance of the Funds you
choose.
<TABLE>
<CAPTION>
PERIOD ENDED
SUB-ACCOUNT DECEMBER 31, 1999
- ----------- -----------------
<S> <C>
AIM V.I. Capital Appreciation Fund 37.46%
AIM V.I. Growth Fund 26.22%
AIM V.I. Growth and Income Fund 27.25%
AIM V.I. International Equity Fund 38.42%
Alger American Growth Portfolio 24.94%
Alger American Income and Growth Portfolio 39.65%
Alger American Small Capitalization Portfolio 33.87%
Goldman Sachs VIT CORE(SM) Large Cap Growth Fund 26.15%
Goldman Sachs VIT CORE(SM) Small Cap Equity Fund 20.38%
Goldman Sachs VIT CORE(SM) U.S. Equity Fund 17.73%
Goldman Sachs VIT Growth and Income Fund 12.06%
Goldman Sachs VIT International Equity Fund 20.98%
J.P. Morgan International Opportunities Portfolio 17.68%
J.P. Morgan Small Company Portfolio 37.12%
J.P. Morgan U.S. Disciplined Equity Portfolio 15.32%
Lord Abbett Growth and Income Portfolio 14.17%
MFS/Sun Life Capital Appreciation Series 34.44%
MFS/Sun Life Emerging Growth Series 58.65%
MFS/Sun Life Government Securities Series (0.04)%
MFS/Sun Life High Yield Series 2.89%
MFS/Sun Life Massachusetts Investors Growth Stock Series 31.03%
MFS/Sun Life Massachusetts Investors Trust Series 14.11%
MFS/Sun Life New Discovery Series 58.59%
MFS/Sun Life Total Return Series 4.57%
MFS/Sun Life Utilities Series 20.31%
OCC Equity Portfolio 7.14%
OCC Managed Portfolio 5.85%
OCC Mid Cap Portfolio 25.62%
OCC Small Cap Portfolio 5.55%
Sun Capital Blue Chip Mid Cap Fund 32.13%
Sun Capital Investment Grade Bond Fund 0.22%
Sun Capital Investors Foundation Fund 19.05%
Sun Capital Money Market Fund 0.78%
Sun Capital Real Estate Fund 3.02%
Sun Capital Select Equity Fund 35.39%
</TABLE>
5
<PAGE>
9. DEATH BENEFIT
If you die before the Contract 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.
BASIC DEATH BENEFIT
If you were 85 or younger when we issued your Contract, the death benefit
is the greatest of:
(1) the value of the Contract on the Death Benefit Date;
(2) the amount we would pay in the event of a full surrender of the
Contract on the Death Benefit Date; and
(3) your total purchase payments (adjusted for partial withdrawals)
calculated as of the Death Benefit Date.
If you were 86 or older when we issued your Contract, the death benefit is
equal to the amount set forth in (2) above. Because this amount will reflect any
applicable withdrawal charges and Market Value Adjustment, it may be less than
your Account value.
OPTIONAL DEATH BENEFIT RIDERS
Subject to availability in your state, if you are 79 or younger when we
issue your Contract, you may enhance this basic death benefit by electing one or
more of the following optional death benefit riders: the Maximum Anniversary
Account Value Rider, the Earnings Enhancement Rider, and the 5% Premium Roll-Up
Rider.
MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER
If you elect the Maximum Anniversary Account Value Rider, the death
benefit is the greater of:
- any death benefit amounts payable under (1), (2) or (3) above, or
- your highest Contract value on any Account Anniversary before your 81st
birthday, adjusted for any subsequent purchase payments, partial
withdrawals, and charges made between that Account Anniversary and the
Death Benefit Date.
5% PREMIUM ROLL-UP RIDER
If you elect the 5% Premium Roll-Up Rider, the death benefit is
- the greatest of any death benefit amounts payable under (1), (2) or
(3) above, or
- the sum of your total purchase payment plus interest accruals, adjusted
for partial withdrawals.
Under this rider, interest accrues at a rate of 5% per year on purchase
payments and transfers to the Variable Account while they remain in the Variable
Account. The 5% accruals will continue until the earlier of:
- the first day of the month following your 80th birthday, or
- the day the death benefit amount under this rider equals twice the total
of the purchase payments and transferred amounts adjusted for
withdrawals.
Net Purchase Payments under this rider will be adjusted for all partial
withdrawals as described in "Calculating the Death Benefit."
6
<PAGE>
EARNINGS ENHANCEMENT RIDER
If you elect the Earnings Enhancement Rider and you are 69 or younger when
we issue your Contract, the death benefit is:
- the greatest of any death benefit amounts payable under (1), (2) or
(3) above, plus
- 40% of the lesser of your net purchase payments or your Account value
minus net purchase payments, calculated as of the Death Benefit Date.
If you elect the Earnings Enhancement Rider, and you are between the ages
of 70 and 79 when we issue your Contract, the death benefit is:
- the greatest of any death benefit amounts payable under (1), (2) or
(3) above, plus
- 25% of the lesser of your net purchase payment or your Account Value
minus net purchase payments, calculated as of the Death Benefit Date.
SELECTING MULTIPLE DEATH BENEFIT RIDERS
If you elect more than one death benefit rider, the death benefit will be
calculated as follows:
1) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH 5% PREMIUM
ROLL-UP RIDER: The death benefit will equal the greater of the death
benefit under the Maximum Anniversary Account Value Rider or the death
benefit under the 5% Premium Roll-Up Rider.
2) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH EARNINGS
ENHANCEMENT RIDER: The death benefit will equal the death benefit under
the Maximum Anniversary Account Value Rider, PLUS the amount calculated
under the Earnings Enhancement Rider. The death benefit under the
Earnings Enhancement Rider is calculated using the Account Value before
the application of the Maximum Anniversary Account Rider.
3) EARNINGS ENHANCEMENT RIDER COMBINED WITH 5% PREMIUM ROLL-UP RIDER: The
death benefit will equal the death benefit under the 5% Premium Roll-Up
Rider, PLUS the amount calculated under the Earnings Enhancement Rider.
The death benefit under the Earnings Enhancement Rider is calculated
using the Account Value before the application of the 5% Premium Roll-Up
Rider.
4) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH BOTH THE EARNINGS
ENHANCEMENT RIDER AND THE 5% PREMIUM ROLL-UP RIDER: The death benefit
will equal the greater of the death benefit under the Maximum
Anniversary Account Value Rider or the death benefit under the 5%
Premium Roll-Up Rider, PLUS the amount calculated under the Earnings
Enhancement Rider. The death benefit under the Earnings Enhancement
Rider is calculated using the Account Value before the application of
the 5% Premium Roll-Up Rider and that of the Maximum Anniversary Account
Value Rider.
If your spouse is the sole beneficiary, your spouse may elect to continue
the Contract. The death benefit amount described above will be your new Account
value as of the Death Benefit Date. For purposes of calculating future death
benefits, your age and the original issue date will be used to determine
applicable expense and death benefit amounts.
10. OTHER INFORMATION
PURCHASE PAYMENT INTEREST. We credit your Contract with interest at a rate
of 2% to 5% of each purchase payment based upon the interest rate option you
chose when you apply for your Contract. In the future, we may make additional
interest rate options available, at our discretion, to new Participants.
FREE LOOK. Depending upon applicable state or federal law, if you cancel
your Contract within 10 days after receiving it we will send you the value of
your Contract less any "adjusted" purchase payment interest as of the day we
received your cancellation request (this may be more or less than the
7
<PAGE>
original purchase payment) and we will not deduct a withdrawal charge. However,
based upon applicable state or federal law, we will refund the full amount of
any purchase payment(s) we receive and the "free look" period may be greater
than 10 days.
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 a tax liability as a result of receiving
the death benefit.
WHO SHOULD PURCHASE A CONTRACT? The Contract is designed for those seeking
long-term tax-deferred accumulation of assets and annuity features, generally
for retirement or other long-term investment purposes. The tax-deferred feature
is most attractive to purchasers in high federal and state income tax brackets.
You should note that qualified retirement investments automatically provide tax
deferral regardless of whether or not the underlying contract is an annuity. You
should not buy a Contract if you are looking for a short-term investment or if
you do not wish to risk a decrease in the value of your investment.
CONFIRMATIONS AND QUARTERLY STATEMENTS. You will receive a confirmation or
an acknowledgment of transactions within your Contract, except for those
transactions which are part of an automated program, such as Dollar-Cost
Averaging, Asset Allocation, Systematic Withdrawal and/or Portfolio Rebalancing.
On a quarterly basis, you will receive a complete statement of your transactions
over the past quarter and a summary of your Account values at the end of that
period.
ADDITIONAL FEATURES. The Contract offers the following additional
convenient features, which you may choose at no extra charge. These features may
be started or discontinued at any time by either you or the Company with at
least 30 days notice.
DOLLAR-COST AVERAGING -- This program lets you invest gradually in up to
12 Sub-Accounts.
ASSET ALLOCATION -- This program rebalances your Account balance based on
the terms of the program. Different asset allocation models may be available
over the lifetime of the Contract; however, only one program can be in effect at
any one time.
SYSTEMATIC WITHDRAWAL AND INTEREST OUT PROGRAM -- These programs allow you
to receive monthly, quarterly, semi-annual or annual payments during the
Accumulation Phase.
PORTFOLIO REBALANCING PROGRAMS -- Under this program, we automatically
reallocate your investments in the Sub-Accounts to maintain the proportions you
select. You can elect rebalancing on a quarterly, semi-annual or annual basis.
SECURED FUTURE PROGRAM -- This program guarantees the return of your
purchase payment by investing a portion of your investment into a Guarantee
Period, and also allows you to allocate a portion of your investment to one or
more Sub-Accounts.
11. INQUIRIES
If you would like more information about buying a Contract, please contact
your broker or registered representative. If you have any other questions,
please contact us at:
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 9133
BOSTON, MASSACHUSETTS 02117
TELEPHONE: TOLL FREE (888) 786-2435
8
<PAGE>
PROSPECTUS
APRIL 10, 2000
FUTURITY ACCOLADE
Sun Life Assurance Company of Canada (U.S.) and Sun Life of Canada (U.S.)
Variable Account F offer the flexible payment deferred annuity contracts and
certificates described in this Prospectus to groups and individuals.
You may choose among 35 variable investment options and a range of fixed
options. The variable options are Sub-Accounts in the Variable Account, each of
which invests in shares of one of the following mutual funds or series thereof
(the "Funds"):
<TABLE>
<S> <C>
AIM VARIABLE INSURANCE FUNDS, INC. MFS/SUN LIFE SERIES TRUST
AIM V.I. Capital Appreciation Fund Capital Appreciation Series
AIM V.I. Growth Fund Emerging Growth Series
AIM V.I. Growth and Income Fund Government Securities Series
AIM V.I. International Equity Fund High Yield Series
THE ALGER AMERICAN FUND Massachusetts Investors Growth Stock Series
Growth Portfolio Massachusetts Investors Trust Series
Income and Growth Portfolio New Discovery Series
Small Capitalization Portfolio Total Return Series
GOLDMAN SACHS VARIABLE INSURANCE TRUST ("VIT") Utilities Series
VIT CORE-SM- Large Cap Growth Fund OCC ACCUMULATION TRUST
VIT CORE-SM- Small Cap Equity Fund Equity Portfolio
VIT CORE-SM- U.S. Equity Fund Managed Portfolio
VIT Growth and Income Fund Mid Cap Portfolio
VIT International Equity Fund Small Cap Portfolio
J.P. MORGAN SERIES TRUST II SUN CAPITAL ADVISERS TRUST
J.P. Morgan International Opportunities Portfolio Sun Capital Investment Grade Bond Fund
J.P. Morgan Small Company Portfolio Sun Capital Investors Foundation Fund
J.P. Morgan U.S. Disciplined Equity Portfolio Sun Capital Blue Chip Mid Cap Fund
LORD ABBETT SERIES FUND, INC. Sun Capital Money Market Fund
Growth and Income Portfolio Sun Capital Real Estate Fund
Sun Capital Select Equity Fund
</TABLE>
The fixed account options are available for specified time periods, called
Guarantee Periods, and pay interest at a guaranteed rate for each period.
PLEASE READ THIS PROSPECTUS AND THE FUND PROSPECTUSES CAREFULLY BEFORE
INVESTING AND KEEP THEM FOR FUTURE REFERENCE. THEY CONTAIN IMPORTANT INFORMATION
ABOUT THE CONTRACTS AND THE FUNDS.
We have filed a Statement of Additional Information dated April 10, 2000
(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 xx of this Prospectus. You may obtain a copy without charge by
writing to us at the address shown below (which we sometimes refer to as our
"Annuity Mailing Address") or by telephoning (888) 786-2435. 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.
EXPENSES ASSOCIATED WITH SOME CONTRACTS OFFERING A BONUS CREDIT MAY BE HIGHER
THAN THOSE ASSOCIATED WITH CONTRACTS THAT DO NOT OFFER A BONUS CREDIT. ON SOME
CONTRACTS, THE BONUS CREDIT MAY BE MORE THAN OFFSET BY THE CHARGES ASSOCIATED
WITH THE CREDIT.
ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY US MEANS RECEIPT AT THE FOLLOWING
ADDRESS:
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
P.O. BOX 9133 C/O RETIREMENT PRODUCTS AND SERVICES
BOSTON, MASSACHUSETTS 02117
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Special Terms 5
Expense Summary 5
Summary of Contract Expenses 5
Underlying Fund Annual Expenses 6
Examples 8
Condensed Financial Information 10
The Annuity Contract 10
Communicating To Us About Your Contract 10
Sun Life Assurance Company of Canada (U.S.) 11
The Variable Account 11
Variable Account Options: The Funds 11
The Fixed Account 14
The Fixed Account Options: The Guarantee Periods 15
The Accumulation Phase 15
Issuing Your Contract 15
Amount and Frequency of Purchase Payments 16
Allocation of Net Purchase Payments 16
Your Account 16
Your Account Value 16
Purchase Payment Interest 16
Variable Account Value 17
Fixed Account Value 18
Transfer Privilege 19
Waivers; Reduced Charges; Credits; Bonus Guaranteed
Interest Rates 20
Optional Programs 20
Withdrawals, Withdrawal Charge and Market Value Adjustment 22
Cash Withdrawals 22
Withdrawal Charge 23
Types of Withdrawals not Subject to Withdrawal Charge 25
Market Value Adjustment 25
Contract Charges 26
Account Fee 26
Administrative Expense Charge 26
Mortality and Expense Risk Charge 26
Charge for Optional Death Benefit Riders 27
Premium Taxes 27
Fund Expenses 27
Modification in the Case of Group Contracts 27
Death Benefit 27
Amount of Death Benefit 27
The Basic Death Benefit 28
Optional Death Benefit Riders 28
Calculating the Death Benefit 30
Method of Paying Death Benefit 30
Non-Qualified Contracts 30
Selection and Change of Beneficiary 31
Payment of Death Benefit 31
Due Proof of Death 31
The Income Phase -- Annuity Provisions 31
Selection of the Annuitant or Co-Annuitant 31
Selection of the Annuity Commencement Date 31
Annuity Options 32
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Selection of Annuity Option 33
Amount of Annuity Payments 33
Exchange of Variable Annuity Units 34
Account Fee 34
Annuity Payment Rates 34
Annuity Options as Method of Payment for Death Benefit 35
Other Contract Provisions 35
Exercise of Contract Rights 35
Change of Ownership 35
Voting of Fund Shares 36
Periodic Reports 36
Substitution of Securities 37
Change in Operation of Variable Account 37
Splitting Units 37
Modification 37
Discontinuance of New Participants 38
Reservation of Rights 38
Right to Return 38
Tax Considerations 38
U.S. Federal Tax Considerations 39
DEDUCTIBILITY OF PURCHASE PAYMENTS 39
PRE-DISTRIBUTION TAXATION OF CONTRACTS 39
DISTRIBUTIONS AND WITHDRAWALS FROM NON-QUALIFIED
CONTRACTS 39
DISTRIBUTION AND WITHDRAWALS FROM QUALIFIED
CONTRACTS 40
WITHHOLDING 40
INVESTMENT DIVERSIFICATION AND CONTROL 40
TAX TREATMENT OF THE COMPANY AND THE VARIABLE
ACCOUNT 40
QUALIFIED RETIREMENT PLANS 40
PENSION AND PROFIT-SHARING PLANS 41
TAX-SHELTERED ANNUITIES 41
INDIVIDUAL RETIREMENT ACCOUNTS 41
ROTH IRAS 42
Puerto Rico Tax Considerations 42
Administration of the Contracts 42
Distribution of the Contracts 42
Performance Information 43
Available Information 44
Incorporation of Certain Documents by Reference 44
Additional Information About the Company 45
General 45
Selected Financial Data 45
Management's Discussion and Analysis of Financial
Condition and Results of Operations 46
Quantitative and Qualitative Disclosures About Market
Risk 54
Reinsurance 56
Reserves 56
Investments 56
Competition 56
Employees 57
Properties 57
State Regulation 57
Legal Proceedings 58
Accountants 58
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Financial Statements 58
Table of Contents of Statement of Additional Information 83
Appendix A -- Glossary 85
Appendix B -- Condensed Financial Information --
Accumulation Unit Values 88
Appendix C -- Withdrawals, Withdrawal Charges and the Market
Value Adjustment 92
Appendix D -- Calculation of Basic Death Benefit 95
Appendix E -- Calculation of Earnings Enhancement Optional
Death Benefit Rider 96
Appendix F -- Calculation of Death Benefit When All Three
Optional Death Benefit Riders are Selected 97
Appendix G -- Calculation Used to Determine Purchase Payment
Interest 98
</TABLE>
4
<PAGE>
SPECIAL TERMS
Your 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 Fund. The table should be considered
together with the narrative provided under the heading "Contract Charges" in
this Prospectus, and with the Funds' prospectuses. In addition to the expenses
listed below, we may deduct premium taxes, where required by state law.
SUMMARY OF CONTRACT EXPENSES
<TABLE>
<S> <C>
TRANSACTION EXPENSES
Sales Load Imposed on Purchase Payments..................... $ 0
Deferred Sales Load (as a percentage of Purchase Payments
withdrawn) (1)
Number of complete Account Years Purchase Payment in
Account
0-1..................................................... 8%
1-2..................................................... 8%
2-3..................................................... 7%
3-4..................................................... 7%
4-5..................................................... 6%
5-6..................................................... 5%
6-7..................................................... 4%
7 or more............................................... 0%
Transfer Fee (2)............................................ $ 15
ANNUAL ACCOUNT FEE per Contract or Certificate (3).......... $ 35
VARIABLE ACCOUNT ANNUAL EXPENSES (as a percentage of average
Variable Account assets)
Mortality and Expense Risks Charge........................ 1.30%
Administrative Expense Charge............................. 0.15%
Other Fees and Expenses of the Variable Account........... 0.00%
-----
Total Variable Account Annual Expenses (4).................. 1.45%
</TABLE>
- ------------------------
(1) A portion of your Account may be withdrawn each year without imposition of
any withdrawal charge and, after a Purchase Payment has been in your Account
for 7 Account Years, it may be withdrawn free of the withdrawal charge.
(2) We currently do not assess the transfer fee. However, a Market Value
Adjustment may be imposed on amounts transferred from or within the Fixed
Account.
(3) The annual Account Fee is $35 in Account Years 1 through 5; thereafter, the
Account Fee may be changed annually, but it will not exceed $50.
(4) An additional charge will apply if you elect one or more of the optional
death benefit riders. For more information, refer to "Charge for Optional
Death Benefit Riders."
5
<PAGE>
UNDERLYING FUND ANNUAL EXPENSES (1)
(AS A PERCENTAGE OF FUND NET ASSETS)
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT OTHER ANNUAL
FEES (AFTER EXPENSES (AFTER EXPENSES (AFTER
REIMBURSEMENT)(2) REIMBURSEMENT)(2) REIMBURSEMENT)(2)
----------------- ----------------- -----------------
<S> <C> <C> <C>
AIM V.I. Capital Appreciation Fund............ 0.62% 0.11% 0.73%
AIM V.I. Growth Fund.......................... 0.63% 0.10% 0.73%
AIM V.I. Growth and Income Fund............... 0.61% 0.16% 0.77%
AIM V.I. International Equity Fund............ 0.75% 0.22% 0.97%
Alger American Growth Portfolio............... 0.75% 0.04% 0.79%
Alger American Income and Growth Portfolio.... 0.62% 0.08% 0.70%
Alger American Small Capitalization
Portfolio.................................... 0.85% 0.05% 0.90%
Goldman Sachs VIT CORE-SM- Large Cap Growth
Fund (3)..................................... 0.70% 0.20% 0.90%
Goldman Sachs VIT CORE-SM- Small Cap Equity
Fund (3)..................................... 0.75% 0.25% 1.00%
Goldman Sachs VIT CORE-SM- U.S. Equity Fund
(3).......................................... 0.70% 0.20% 0.90%
Goldman Sachs VIT Growth and Income Fund (3).. 0.75% 0.25% 1.00%
Goldman Sachs VIT International Equity Fund
(3).......................................... 1.00% 0.35% 1.35%
J.P. Morgan International Opportunities
Portfolio (4)................................ 0.60% 0.60% 1.20%
J.P. Morgan Small Company Portfolio (4)....... 0.60% 0.55% 1.15%
J.P. Morgan U.S. Disciplined Equity Portfolio
(4).......................................... 0.35% 0.50% 0.85%
Lord Abbett Growth and Income Portfolio....... 0.50% 0.01% 0.51%
MFS/Sun Life Capital Appreciation Series
(5).......................................... 0.71% 0.05% 0.76%
MFS/Sun Life Emerging Growth Series........... 0.70% 0.05% 0.75%
MFS/Sun Life Government Securities Series..... 0.55% 0.06% 0.61%
MFS/Sun Life High Yield Series (5)............ 0.75% 0.08% 0.83%
MFS/Sun Life Massachusetts Investors Growth
Stock Series................................. 0.75% 0.08% 0.83%
MFS/Sun Life Massachusetts Investors Trust
Series....................................... 0.55% 0.04% 0.59%
MFS/Sun Life New Discovery Series (5)......... 0.90% 0.16% 1.06%
MFS/Sun Life Total Return Series.............. 0.65% 0.04% 0.69%
MFS/Sun Life Utilities Series (5)............. 0.75% 0.06% 0.81%
OCC Equity Portfolio (6)...................... 0.80% 0.11% 0.91%
OCC Managed Portfolio (6)..................... 0.77% 0.06% 0.83%
OCC Mid Cap Portfolio (6)..................... 0.10% 0.93% 1.03%
OCC Small Cap Portfolio (6)................... 0.80% 0.09% 0.89%
Sun Capital Blue Chip Mid Cap Fund (7)(8)..... 0.80% 0.20% 1.00%
Sun Capital Investment Grade Bond Fund (7).... 0.60% 0.15% 0.75%
Sun Capital Investors Foundation Fund
(7)(8)....................................... 0.75% 0.15% 0.90%
Sun Capital Money Market Fund (7)............. 0.50% 0.15% 0.65%
Sun Capital Real Estate Fund (7).............. 0.95% 0.30% 1.25%
Sun Capital Select Equity Fund (7)(8)......... 0.75% 0.15% 0.90%
</TABLE>
- ------------------------
(1) The information relating to Fund expenses was provided by the Funds and we
have not independently verified it. You should consult the Fund prospectuses
for more information about Fund expenses.
(2) For all Funds, "Management Fees," "Other Expenses" and "Total Fund Annual
Expenses" are based on actual expenses for the fiscal year ended December
31, 1999, net of any applicable expense reimbursement or waiver.
(3) The investment advisers for the Goldman Sachs VIT Funds have voluntarily
agreed to waive or reimburse a portion of the management fees and/or
operating expenses, resulting in a reduction of the total expenses. In
particular, the investment advisers to the Goldman Sachs VIT CORE-SM-
6
<PAGE>
Large Capital Growth Fund, the Goldman Sachs VIT CORE-SM- Small Cap Equity
Fund, the Goldman Sachs VIT CORE-SM- U.S. Equity Fund, the Goldman Sachs VIT
Growth and Income Fund and the Goldman Sachs VIT International Equity Fund
have voluntarily agreed to reduce or limit certain "Other Expenses" of such
Funds (excluding management fees, taxes, interest and brokerage fees,
litigation, indemnification and other extraordinary expenses) to the extent
such expenses exceed 0.20%, 0.25%, 0.20%, 0.25%, and 0.35% per annum of such
Funds' average daily net assets, respectively. The expenses of the Goldman
Sachs VIT Funds are estimated for the fiscal year ended December 31, 2000.
Absent any such waiver or reimbursement, estimated "Management Fees,"
estimated "Other Expenses," and estimated "Total Fund Annual Expenses" for
the year ended December 31, 2000 will be: 0.70%, 0.42%, and 1.12% for the
Goldman Sachs VIT CORE-SM- Large Cap Growth Fund; 0.75%, 0.75%, and 1.50%
for the Goldman Sachs VIT CORE-SM- Small Cap Equity Fund; 0.70%, 0.20%, and
0.90% for the Goldman Sachs VIT CORE-SM- U.S. Equity Fund; 0.75%, 0.47%, and
1.22% for the Goldman Sachs VIT Growth and Income Fund; and 1.00%, 0.77%,
and 1.77% for the Goldman Sachs VIT International Equity Fund. Fee waivers
and expense reimbursements for the Goldman Sachs VIT Funds may be
discontinued at any time.
(4) An affiliate of the adviser has agreed to reimburse the Fund to the extent
certain expenses exceed the following percentages of the Fund's average
daily net assets through fiscal year 1999: 0.85% for the J.P. Morgan U.S.
Disciplined Equity Portfolio; 1.20% for the J.P. Morgan International
Opportunities Portfolio, and 1.15% for the J.P. Morgan Small Company
Portfolio. Absent this reimbursement, "Total Fund Annual Expenses" would
have been 0.87% for the J.P. Morgan U.S. Disciplined Equity Portfolio, 1.98%
for the J.P. Morgan International Opportunities Portfolio, and 2.57% for the
J.P. Morgan Small Company Portfolio.
(5) The 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 such other
arrangements and directed brokerage arrangement (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected in the table. Had these fees been taken into account, "Total Fund
Annual Expenses" would have been: 0.75% for the MFS/Sun Life Capital
Appreciation Series; 0.82% for the MFS/Sun Life High Yield Series; 1.05% for
the MFS/Sun Life New Discovery Series; and 0.80% for the MFS/Sun Life
Utilities Series.
(6) "Total Fund Annual Expenses" for the OCC Equity Portfolio, the OCC Small Cap
Portfolio, the OCC Managed Portfolio and the OCC Mid Cap Portfolio are
limited contractually by OpCap Advisers so that the Funds' respective
annualized operating expenses (net of expense offsets) do not exceed 1% of
average daily net assets. Absent this limit, "Management Fees", "Other
Expenses" and "Total Fund Annual Expenses" were 0.80%, 3.48%, and 4.28% for
the OCC Mid Cap Portfolio. "Other Expenses" are shown gross of expense
offsets afforded the portfolio, which effectively lowered custody expenses.
(7) The investment adviser for the Sun Capital Funds has voluntarily agreed to
waive or reimburse a portion of the management fees and/or operating
expenses, resulting in a reduction of the total expenses. For the year ended
December 1999, the investment adviser waived all investment advisory fees.
Absent any such waiver or reimbursement, "Management Fees," "Other Expenses"
and "Total Fund Annual Expenses" for the year ended December 31, 1999 were:
0.80%, 3.31%; and 4.11% for the Sun Capital Blue Chip Mid Cap Fund; 2.70%,
1.38%; and 1.98% for the Sun Capital Investment Grade Bond Fund; 0.75%,
4.37%; and 5.12% for the Sun Capital Investors Foundation Fund; 0.50%,
2.20%, and 2.70% for the Sun Capital Money Market Fund; 0.95%, 2.44%, and
3.39% for the Sun Capital Real Estate Fund; and 0.75%, 3.50%, and 4.25% for
the Sun Capital Select Equity Fund. Fee waivers and expense reimbursements
for the Sun Capital Funds may be discontinued at any time after May 1, 2000.
To the extent that the expense ratio of any Fund in the Sun Capital Advisers
Trust falls below the Fund's expense limit, the Fund's adviser reserves the
right to be reimbursed for management fees waived and Fund expenses paid by
it during the prior two years.
(8) The management fee for each of the Sun Capital Blue Chip Mid Cap Fund, the
Sun Capital Investors Foundation Fund, and the Sun Capital Select Equity
Fund decreases to 0.75%, 0.70%, and 0.70%, respectively, as the daily net
assets of each Fund exceed $300 million.
7
<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>
AIM V.I. Capital Appreciation Fund.......................... $ 96 $136 $179 $270
AIM V.I. Growth Fund........................................ $ 96 $136 $179 $270
AIM V.I. Growth and Income Fund............................. $ 96 $137 $181 $274
AIM V.I. International Equity Fund.......................... $ 98 $143 $191 $295
Alger American Growth Portfolio............................. $ 96 $138 $182 $276
Alger American Income and Growth Portfolio.................. $ 95 $135 $177 $267
Alger American Small Capitalization Portfolio............... $ 97 $141 $187 $288
Goldman Sachs VIT CORE-SM- Large Cap Growth Fund............ $ 97 $141 $187 $288
Goldman Sachs VIT CORE-SM- Small Cap Equity Fund............ $ 98 $144 $193 $298
Goldman Sachs VIT CORE-SM- U.S. Equity Fund................. $ 97 $141 $187 $288
Goldman Sachs VIT Growth and Income Fund.................... $ 98 $144 $193 $298
Goldman Sachs VIT International Equity Fund................. $102 $155 $210 $333
J.P. Morgan International Opportunities Portfolio........... $100 $150 $203 $318
J.P. Morgan Small Company Portfolio......................... $100 $149 $200 $313
J.P. Morgan U.S. Disciplined Equity Portfolio............... $ 97 $139 $185 $283
Lord Abbett Growth and Income Portfolio..................... $ 93 $129 $167 $247
MFS/Sun Life Capital Appreciation Series.................... $ 96 $137 $180 $273
MFS/Sun Life Emerging Growth Series......................... $ 96 $136 $180 $272
MFS/Sun Life Government Securities Series................... $ 94 $132 $173 $258
MFS/Sun Life High Yield Series.............................. $ 97 $139 $184 $281
MFS/Sun Life Massachusetts Investors Growth Stock Series.... $ 97 $139 $184 $281
MFS/Sun Life Massachusetts Investors Trust Series........... $ 94 $131 $171 $255
MFS/Sun Life New Discovery Series........................... $ 99 $146 $196 $304
MFS/Sun Life Total Return Series............................ $ 95 $134 $177 $266
MFS/Sun Life Utilities Series............................... $ 96 $138 $183 $279
OCC Equity Portfolio........................................ $ 97 $141 $188 $289
OCC Managed Portfolio....................................... $ 97 $139 $184 $281
OCC Mid Cap Portfolio....................................... $ 99 $145 $194 $301
OCC Small Cap Portfolio..................................... $ 97 $141 $187 $287
Sun Capital Blue Chip Mid Cap Fund.......................... $ 96 $144 $193 $298
Sun Capital Investment Grade Bond Fund...................... $ 96 $136 $180 $272
Sun Capital Investors Foundation Fund....................... $ 97 $141 $187 $288
Sun Capital Money Market Fund............................... $ 95 $133 $175 $262
Sun Capital Real Estate Fund................................ $101 $152 $205 $323
Sun Capital Select Equity Fund.............................. $ 97 $141 $187 $288
</TABLE>
8
<PAGE>
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>
AIM V.I. Capital Appreciation Fund.......................... $24 $73 $125 $270
AIM V.I. Growth Fund........................................ $24 $73 $125 $270
AIM V.I. Growth and Income Fund............................. $24 $74 $127 $274
AIM V.I. International Equity Fund.......................... $26 $80 $137 $295
Alger American Growth Portfolio............................. $24 $75 $128 $276
Alger American Income and Growth Portfolio.................. $23 $72 $123 $267
Alger American Small Capitalization Portfolio............... $25 $78 $133 $288
Goldman Sachs VIT CORE-SM- Large Cap Growth Fund............ $25 $78 $133 $288
Goldman Sachs VIT CORE-SM- Small Cap Equity Fund............ $26 $81 $139 $298
Goldman Sachs VIT CORE-SM- U.S. Equity Fund................. $25 $78 $133 $288
Goldman Sachs VIT Growth and Income Fund.................... $26 $81 $139 $298
Goldman Sachs VIT International Equity Fund................. $30 $92 $156 $333
J.P. Morgan International Opportunities Portfolio........... $28 $87 $149 $318
J.P. Morgan Small Company Portfolio......................... $28 $86 $146 $313
J.P. Morgan U.S. Disciplined Equity Portfolio............... $25 $76 $131 $283
Lord Abbett Growth and Income Portfolio..................... $21 $66 $113 $247
MFS/Sun Life Capital Appreciation Series.................... $24 $74 $126 $273
MFS/Sun Life Emerging Growth Series......................... $24 $73 $126 $272
MFS/Sun Life Government Securities Series................... $22 $69 $119 $258
MFS/Sun Life High Yield Series.............................. $25 $76 $130 $281
MFS/Sun Life Massachusetts Investors Growth Stock Series.... $25 $76 $130 $281
MFS/Sun Life Massachusetts Investors Trust Series........... $22 $68 $117 $255
MFS/Sun Life New Discovery Series........................... $27 $83 $142 $304
MFS/Sun Life Total Return Series............................ $23 $71 $123 $266
MFS/Sun Life Utilities Series............................... $24 $75 $129 $279
OCC Equity Portfolio........................................ $25 $78 $134 $289
OCC Managed Portfolio....................................... $25 $76 $130 $281
OCC Mid Cap Portfolio....................................... $27 $82 $140 $301
OCC Small Cap Portfolio..................................... $25 $78 $133 $287
Sun Capital Blue Chip Mid Cap Fund.......................... $26 $81 $139 $298
Sun Capital Investors Foundation Fund....................... $25 $78 $133 $288
Sun Capital Investment Grade Bond Fund...................... $24 $73 $126 $272
Sun Capital Money Market Fund............................... $23 $70 $121 $262
Sun Capital Real Estate Fund................................ $29 $89 $151 $323
Sun Capital Select Equity Fund.............................. $25 $78 $133 $288
</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.
9
<PAGE>
CONDENSED FINANCIAL INFORMATION
Historical information about the value of the units we use to measure the
variable portion of your Contract ("Variable Accumulation Units") is included as
Appendix B to this Prospectus.
THE ANNUITY CONTRACT
Sun Life Assurance Company of Canada (U.S.) (the "Company", "we" or "us")
and Sun Life of Canada (U.S.) Variable Account F (the "Variable Account") offer
the Contract to groups and individuals for use in connection with their
retirement plans. The Contract is available on a group basis and, in certain
states, may be available on an individual basis. We issue an Individual Contract
directly to the individual owner of the Contract. We issue a Group Contract to
the Owner covering all individuals participating under the Group Contract; each
individual receives a Certificate that evidences his or her participation under
the Group Contract.
In this Prospectus, unless we state otherwise, we refer to both the owners
of Individual Contracts and participating individuals under Group Contracts as
"Participants" and we address all Participants as "you"; we use the term
"Contracts" to include Individual Contracts, Group Contracts, and Certificates
issued under Group Contracts. For the purpose of determining benefits under both
Individual Contracts and Group Contracts, we establish an Account for each
Participant, which we will refer to as "your" Account or a "Participant
Account."
Your Contract provides a number of important benefits for your retirement
planning. It has an Accumulation Phase, during which you make payments under the
Contract and allocate them to one or more Variable Account or Fixed Account
options, and an Income Phase, during which we make annuity payments based on the
amount you have accumulated. Your Contract provides tax deferral, so that you do
not pay taxes on your earnings under your Contract until you withdraw them. It
provides a basic death benefit if you die during the Accumulation Phase; you may
enhance the basic death benefit by electing one or more optional death benefit
riders and paying an additional charge for each optional death benefit rider you
elect. Finally, if you so elect, during the Income Phase we will make annuity
payments to you or someone else for life or for another period that you choose.
You choose these benefits on a variable or fixed basis or a combination of
both. When you choose Variable Account investment options or a Variable Annuity
option, 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 variable options, you assume all
investment risk under your Contract. When you choose a Guarantee Period in our
Fixed Account or a Fixed Annuity option, we assume the investment risk, except
in the case of early withdrawals in the Accumulation Phase, 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 might not exceed our minimum guaranteed rate,
which is 3% per year, compounded annually.
The Contract is 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 or 408A of the Internal Revenue Code.
The Contract is also designed so that it 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 other contracts as "Non-Qualified Contracts."
COMMUNICATING TO US ABOUT YOUR CONTRACT
All materials sent to us, including Purchase Payments, must be sent to our
Annuity Mailing Address as set forth on the first page of this Prospectus. For
all telephone communications, you must call (888) 786-2435.
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 our Annuity Mailing Address. However, we will consider
all financial transactions, including Purchase Payments, withdrawal
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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) completed its demutualization
on March 22, 2000. As a result of the demutualization, a new holding company,
Sun Life Financial Services of Canada Inc. ("Sun Life Financial"), is now the
ultimate parent of Sun Life (Canada) and the Company. Sun Life Financial, a
corporation organized in Canada, is a reporting company under the Securities
Exchange Act of 1934 with common shares listed on the Toronto, New York, London,
and Manila stock exchanges.
THE VARIABLE ACCOUNT
We established the Variable Account as a separate account on July 13,
1989, pursuant to a resolution of our Board of Directors. The Variable Account
funds the Contract and various other variable annuity and variable life product
contracts which we offer. These other products may have features, benefits and
charges that are different from those under the Contract.
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 shares of a specific Fund. All amounts
allocated to the Variable Account will be used to purchase Fund shares as
designated by you at their net asset value. Any and all distributions made by
the Funds with respect to the shares held by the Variable Account will be
reinvested to purchase additional Fund shares at their net asset value.
Deductions will be made from the Variable Account for cash withdrawals, 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. The Variable Account will be
fully invested in Fund shares at all times.
VARIABLE ACCOUNT OPTIONS:
THE FUNDS
The Contract offers Sub-Accounts that invest in a number of Fund
investment options, which are briefly discussed below. Each Fund is a mutual
fund registered under the Investment Company Act of 1940, or a separate series
of shares of such a mutual fund.
MORE COMPREHENSIVE INFORMATION ABOUT THE FUNDS, INCLUDING A DISCUSSION OF
THEIR MANAGEMENT, INVESTMENT OBJECTIVES, EXPENSES, AND POTENTIAL RISKS, IS FOUND
IN THE CURRENT PROSPECTUSES FOR THE FUNDS (THE "FUND PROSPECTUSES"). THE FUND
PROSPECTUSES SHOULD BE READ IN CONJUNCTION WITH THIS PROSPECTUS BEFORE YOU
INVEST. A COPY OF EACH FUND PROSPECTUS, AS WELL AS A STATEMENT OF ADDITIONAL
INFORMATION FOR EACH FUND, MAY BE OBTAINED WITHOUT CHARGE FROM THE COMPANY BY
CALLING 1-888-388-8748 OR WRITING TO SUN LIFE ASSURANCE COMPANY OF CANADA
(U.S.), C/O RETIREMENT PRODUCTS AND SERVICES, P.O. BOX 9133, BOSTON
MASSACHUSETTS 02117.
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The Funds currently available are:
AIM VARIABLE INSURANCE FUNDS, INC. (advised by A I M Advisors, Inc.)
AIM V.I. CAPITAL APPRECIATION FUND seeks growth of capital through
investment in common stocks, with emphasis on medium- and small-sized
growth companies.
AIM V.I. GROWTH FUND seeks growth of capital primarily by investing in
seasoned and better capitalized companies considered to have strong
earnings momentum.
AIM V.I. GROWTH AND INCOME FUND seeks growth of capital with a secondary
objective of current income.
AIM V.I. INTERNATIONAL EQUITY FUND seeks to provide long-term growth of
capital by investing in a diversified portfolio of international equity
securities whose issuers are considered to have strong earnings momentum.
THE ALGER AMERICAN FUND (advised by Fred Alger Management, Inc.)
ALGER AMERICAN GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of companies which have market
capitalizations of $1 billion or more.
ALGER AMERICAN INCOME AND GROWTH PORTFOLIO seeks primarily to provide a
high level of dividend income by investing in dividend paying equity
securities. Capital appreciation is a secondary objective.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO seeks long-term capital
appreciation. It invests primarily in the equity securities of small
companies with market capitalizations within the range of the Russell 2000
Growth Index or the S&P SmallCap 600 Index.
GOLDMAN SACHS VARIABLE INSURANCE TRUST ("VIT") (advised by Goldman Sachs Asset
Management, a unit of the Investment Management Division of Goldman, Sachs & Co.
("Goldman Sachs"), except for Goldman Sachs International Equity Fund, which is
advised by Goldman Sachs Asset Management International, an affiliate of Goldman
Sachs)
GOLDMAN SACHS VIT CORE-SM- LARGE CAP GROWTH FUND seeks long-term growth of
capital through a broadly diversified portfolio of equity securities of
large cap U.S. issuers that are expected to have better prospects for
earnings growth than the growth rate of the general domestic economy.
Dividend income is a secondary consideration.
GOLDMAN SACHS VIT CORE-SM- SMALL CAP EQUITY FUND seeks long-term growth of
capital through a broadly diversified portfolio of equity securities of
U.S. issuers which are included in the Russell 2000 Index at the time of
investment.
GOLDMAN SACHS VIT CORE-SM- U.S. EQUITY FUND seeks long-term growth of
capital and dividend income through a broadly diversified portfolio of
large cap and blue chip equity securities representing all major sectors of
the U.S. economy.
GOLDMAN SACHS VIT GROWTH AND INCOME FUND seeks long-term growth of capital
and growth of income through investments in equity securities that are
considered to have favorable prospects for capital appreciation and/or
dividend paying ability.
GOLDMAN SACHS VIT INTERNATIONAL EQUITY FUND seeks long-term capital
appreciation through investments in equity securities of companies that are
organized outside the U.S. or whose securities are principally traded
outside the U.S.
J.P. MORGAN SERIES TRUST II (advised by J.P. Morgan Investment Management Inc.)
J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO seeks to provide a high
total return from a portfolio of equity securities of foreign companies.
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J.P. MORGAN SMALL COMPANY PORTFOLIO seeks to provide a high total return
from a portfolio of small company stocks.
J.P. MORGAN U.S. DISCIPLINED EQUITY PORTFOLIO (formerly, the J.P. Morgan
Equity Portfolio) seeks to provide a high total return from a portfolio of
selected equity securities.
LORD ABBETT SERIES FUND, INC. (advised by Lord Abbett & Co.)
GROWTH AND INCOME PORTFOLIO seeks to provide long-term growth of capital
and income without excessive fluctuation in market value.
MFS/SUN LIFE SERIES TRUST (advised by Massachusetts Financial Services Company,
an affiliate of the Company)
CAPITAL APPRECIATION SERIES will seek to maximize capital appreciation by
investing in securities of all types, with major emphasis on common stocks.
EMERGING GROWTH SERIES will seek long-term growth of capital.
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 low rated or unrated fixed income securities
(possibly with equity features) of U.S. and foreign issuers (also known as
"junk bonds").
MASSACHUSETTS INVESTORS GROWTH STOCK SERIES will seek to provide long-term
growth of capital and future income rather than current income.
MASSACHUSETTS INVESTORS TRUST SERIES will seek long-term growth of capital
and future income while providing more current dividend income than is
normally obtainable from a portfolio of only growth stocks.
NEW DISCOVERY SERIES will seek capital appreciation.
TOTAL RETURN SERIES will primarily seek to obtain above-average income
(compared to a portfolio entirely invested in equity securities) consistent
with prudent employment of capital; its secondary objective is to take
advantage of opportunities for growth of capital and income since many
securities offering a better than average yield may also possess growth
potential.
UTILITIES SERIES will seek capital growth and current income (income above
that available from a portfolio invested entirely in equity securities) by
investing under normal market conditions, at least 65% of its assets in
equity and debt securities of both domestic and foreign companies in the
utilities industry.
OCC ACCUMULATION TRUST (advised by OpCap Advisors)
EQUITY PORTFOLIO seeks long-term capital appreciation through investment in
a diversified portfolio of equity securities selected on the basis of a
value oriented approach to investing.
MANAGED PORTFOLIO seeks to achieve growth of capital over time through
investment in a portfolio consisting of common stocks, bonds and cash
equivalents, the percentages of which will vary based on the portfolio
manager's assessments of the relative outlook for such investments.
MID CAP PORTFOLIO seeks long-term capital appreciation through investment
in a diversified portfolio of equity securities. The portfolio will invest
primarily in companies with market capitalizations of between $500 million
and $5 billion.
SMALL CAP PORTFOLIO seeks capital appreciation through investment in a
diversified portfolio of equity securities of companies with market
capitalizations of under $1 billion.
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SUN CAPITAL ADVISERS TRUST (advised by Sun Capital Advisers, Inc., an affiliate
of the Company; Wellington Management Company, LLP serves as investment
subadviser to Sun Capital Blue Chip Mid Cap Fund, Sun Capital Investors
Foundation Fund and Sun Capital Select Equity Fund)
SUN CAPITAL BLUE CHIP MID CAP FUND seeks long-term capital growth by
investing primarily in a diversified portfolio of common stocks and other
equity securities of U.S. companies with market capitalizations within the
range represented by the Standard & Poor's Mid Cap 400 Index.
SUN CAPITAL INVESTORS FOUNDATION FUND seeks long-term capital growth by
investing primarily in a diversified portfolio of common stocks and other
equity securities of U.S. companies with market capitalizations generally
within the range represented by the Standard & Poor's 500 Index.
Investments are selected using a combination of fundamental analysis and
quantitative tools.
SUN CAPITAL INVESTMENT GRADE BOND FUND seeks high current income consistent
with relative stability of principal by investing at least 80% of its
assets in investment grade bonds. The Fund may invest up to 20% of its
assets in lower rated or unrated bonds (also known as high yield or junk
bonds).
SUN CAPITAL MONEY MARKET FUND seeks to maximize current income, consistent
with maintaining liquidity and preserving capital, by investing exclusively
in high quality U.S. dollar-denominated money market securities.
SUN CAPITAL REAL ESTATE FUND primarily seeks long-term capital growth and,
secondarily, seeks current income and growth of income. The Fund invests at
least 80% of its assets in securities of real estate investment trusts and
other real estate companies.
SUN CAPITAL SELECT EQUITY FUND seeks long-term capital growth by investing
in 20 to 40 common stocks and other equity securities of large
capitalization U.S. companies selected primarily from the Standard & Poor's
500 Index.
The Funds may also be available to registered separate accounts offering
variable annuity and variable life products of other affiliated and unaffiliated
insurance companies, as well as to the Variable Account and other separate
accounts of the Company. Although we do not anticipate any disadvantages to
this, 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
participating in the Funds. A conflict may occur due to a change in law
affecting the operations of variable life and variable annuity separate
accounts, differences in the voting instructions of the Participants and Payees
and those of other companies, or some other reason. In the event of conflict, we
will take any steps necessary to protect Participants and Payees, including
withdrawal of the Variable Account from participation in the underlying Funds
which are involved in the conflict or substitution of shares of other Funds.
Certain of the investment advisers to the Funds may reimburse us for
administrative costs in connection with administering the Funds as options under
the Contracts. These amounts are not charged to the Funds or Participants, but
are paid from assets of the advisers. Certain Funds may reimburse us from their
assets for distribution costs pursuant to the terms of their Rule 12b-1 plans.
Certain publically available mutual funds may have similar investment
goals and principal investment policies and risks as one or more of the Funds,
and may be managed by a Fund's portfolio managers(s). While a Fund may have many
similarities to these other funds, its investment performance will differ from
their investment performance. This is due to a number of differences between a
Fund and these similar products, including differences in sales charges, expense
ratios and cash flows.
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 you allocate to
Guarantee Periods become part of the
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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 4 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.
THE FIXED ACCOUNT OPTIONS:
THE GUARANTEE PERIODS
You may elect one or more Guarantee Period(s) from those we make available
from time to time. We publish Guaranteed Interest Rates for each 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 3% per year,
compounded annually. Also, once we have accepted your 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 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.
We may from time to time in our discretion offer interest rate specials
for new Purchase Payments that are higher than the rates we are then offering
for renewals or transfers.
Early withdrawals from your allocation to a Guarantee Period, including
cash withdrawals, transfers, and commencement of an annuity option, may be
subject to a Market Value Adjustment, which could decrease or increase the value
of your Account. See "Withdrawals, Withdrawal Charge, and Market Value
Adjustment."
THE ACCUMULATION PHASE
During the Accumulation Phase of your Contract, you make payments 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 you surrender your Contract or die before the Annuity
Commencement Date.
ISSUING YOUR CONTRACT
When you purchase a Contract, a completed Application and the initial
Purchase Payment are sent to us for acceptance. When we accept an Individual
Contract, we issue the Contract to you. When we accept a Group Contract, we
issue the Contract to the Owner; we issue a Certificate to you as a Participant.
We will credit your initial Purchase Payment to your Account within 2
business days of receiving your completed Application. If your Application is
not complete, we will notify you. If we do not have the necessary information to
complete the Application within 5 business days, we will send your money back to
you or ask your permission to retain your Purchase Payment until the Application
is made
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complete. Then we will apply the Purchase Payment within 2 business days of when
the Application is complete.
AMOUNT AND FREQUENCY OF PURCHASE PAYMENTS
The amount of Purchase Payments may vary; however, we will not accept an
initial Purchase Payment of less than $10,000, and each additional Purchase
Payment must be at least $1,000, unless we waive these limits. 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
You may allocate your Purchase Payments among the different Sub-Accounts
and Guarantee Periods we offer, but any allocation to a Guarantee Period must be
at least $1,000. Over the life of your Contract, you may allocate amounts among
as many as 18 of the available options.
In your Application, you may specify the percentage of each Purchase
Payment to be allocated to each Sub-Account or Guarantee Period. These
percentages are called your allocation factors. You may change the allocation
factors for future Payments by sending us written notice of the change, as
required. We will use your 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 taxes or similar taxes from your Purchase Payments. See "Contract
Charges -- Premium Taxes." In that case, we will credit your 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 Contract.
YOUR ACCOUNT VALUE
Your Account Value is the sum of the value of the 2 components of your
Contract: the Variable Account portion of your Contract ("Variable Account
Value") and the Fixed Account portion of your Contract ("Fixed Account Value").
These 2 components are calculated separately, as described under "Variable
Account Value" and "Fixed Account Value."
PURCHASE PAYMENT INTEREST
We will credit your Contract with interest at the rate you selected when
you applied for the Contract. Currently, we offer 2 interest rate options:
OPTION A: THE 2% FIVE-YEAR ANNIVERSARY INTEREST OPTION -- Under this option
we will credit your Contract with interest at a rate of 2% of each Purchase
Payment received prior to the first Account Anniversary. In addition, if
you chose this option, we will credit your Contract with interest at a rate
of 2% of the Account Value at the end of every Fifth-Year Anniversary.
OPTION B: THE 3%, 4%, OR 5% INTEREST OPTION -- Under this option we will
credit your Contract with interest at the following rates:
- 3% of each Purchase Payment if the sum of all Purchase Payments,
reduced by the sum of all withdrawals (your "Net Purchase Payments"),
is less than $100,000 on the day we receive the Purchase Payment;
- 4% of each Purchase Payment if your Net Purchase Payments is $100,000
or more but less than $500,000 on the day we receive the Purchase
Payment; and
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- 5% of each Purchase Payment if your Net Purchase Payments are $500,000
or more on the day we receive the Purchase Payment.
If you chose this Option B, there may be an additional credit paid at the
end of the first Account Year. If your Net Purchase Payments at the end of
your first Account Year are greater than or equal to $100,000, but less
than $500,000, and some of your Net Purchase Payment(s) received a credit
of 3% (rather than 4%), then an additional 1% will be paid on the amount
of Net Purchase Payments that received the 3% credit. Similarly, if your
Net Purchase Payments at the end of your first Account Year are greater
than or equal to $500,000 and some of your Purchase Payment(s) received a
credit of either 3% or 4% (rather than 5%), then an additional 2% or 1%
will be paid on the amount of Net Purchase Payments that received a 3%
credit or a 4% credit, respectively.
We credit Purchase Payment Interest during the same Valuation Period in
which we receive the Purchase Payment. We allocate the Purchase Payment Interest
to the Sub-Accounts and/or the Guarantee Periods in the same proportion as the
Net Purchase Payment is allocated. For any additional 1% or 2% interest credit
under Option B or any Five-Year Anniversary credit under Option A, we allocate
the credit on a pro rata basis to all Sub-Accounts and/or Guarantee Periods in
which you are invested, excluding any Guarantee Periods established to support a
dollar-cost averaging program. Any additional interest adjustments will be
credited on your Account Anniversary. We will deduct the "Adjusted" Purchase
Payment Interest if the Contract is returned during the "free look period." For
a description of the free look period and Adjusted Purchase Payment Interest,
see "Right to Return." For examples of how we calculate Purchase Payment
Interest, see Appendix F.
Because the Company does not recapture any Purchase Payment Interest on
the Contracts, there are no general circumstances in which a Participant would
be disadvantaged by purchasing one of the Contracts rather than purchasing a
similar contract without a bonus credit feature. However, the Contracts are
designed to give the most value to Participants with long-term investment goals.
We may credit Purchase Payment Interest at rates other than those
described above on Contracts sold to officers, directors and employees of the
Company or its affiliates, registered representatives, and employees of
broker-dealers with a current selling agreement with the Company and affiliates
of such representatives and broker-dealers, employees of affiliated asset
management firms, and persons who have retired from such positions ("Eligible
Employees") and immediate family members of Eligible Employees.
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. (The close of trading is
determined by the New York Stock Exchange.) 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.
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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. We calculate the Net Investment Factor by dividing
(1) the net asset value of a Fund share held in the Sub-Account at the end of
that Valuation Period, plus the per share amount of any dividend or capital
gains distribution made by that Fund during the Valuation Period, by (2) the net
asset value per share of the Fund share at the end of the previous Valuation
Period; we then deduct a factor representing the mortality and expense risk
charge and administrative expense charge for each day in the Valuation Period.
See "Contract Charges."
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 you transfer or withdraw amounts 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
Your Fixed Account value is the sum of all amounts allocated to Guarantee
Periods, either from Net Purchase Payments, transfers or renewals, plus interest
credited on those amounts, and minus withdrawals, transfers out of Guarantee
Periods, and any deductions for charges under the Contract taken from your Fixed
Account Value.
A Guarantee Period begins the day we apply your allocation and ends when
the number of calendar years (or months if the Guarantee Period is less than one
year) in the Guarantee Period (measured from the end of the calendar month in
which the amount was allocated to the Guarantee Period) have elapsed. The last
day of the Guarantee Period is its Renewal Date.
Each additional Purchase Payment, transfer or renewal credited to your
Fixed Account value will result in a new Guarantee Period with its own Renewal
Date. Amounts allocated at different times to Guarantee Periods of the same
duration may have different Renewal Dates.
CREDITING INTEREST
We credit interest on amounts allocated to a Guarantee Period at the
applicable Guaranteed Interest Rate for the duration of the Guarantee Period.
During the Guarantee Period, we credit interest daily at a rate that yields the
Guaranteed Interest Rate on an annual effective basis.
GUARANTEE AMOUNTS
Each separate allocation you make to a Guarantee Period, together with
interest credited thereon, is called a Guarantee Amount. Each Guarantee Amount
is treated separately for purposes of determining the Market Value Adjustment. A
Guarantee Period that will extend beyond your maximum Annuity Commencement Date
will result in an application of a Market Value Adjustment upon annuitization or
withdrawals. Each new allocation to a Guarantee Period must be at least $1,000.
RENEWALS
We will notify you in writing between 45 and 75 days before the Renewal
Date for any Guarantee Amount. A new Guarantee Period of the same duration will
begin automatically for that Guarantee Amount on the first day following the
Renewal Date, unless before the Renewal Date we receive:
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1) written notice from you electing a different Guarantee Period from
among those we then offer, or
2) instructions to transfer the Guarantee Amount to one or more
Sub-Accounts, in accordance with the transfer privilege provisions of
the Contract described below (see "Transfer Privilege.")
A Guarantee Amount will not renew into a Guarantee Period that will extend
beyond your Maximum Annuity Commencement Date. We will automatically renew your
amount into the next available Guarantee Period.
EARLY WITHDRAWALS
If you withdraw, transfer, or annuitize an allocation to a Guarantee
Period more than 30 days prior to the Renewal Date, we will apply a Market Value
Adjustment to the transaction. This could result in an increase or decrease of
your Account 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, you may transfer all or part of your
Account Value to one or more Sub-Accounts or Guarantee Periods then available,
subject to the following restrictions:
- You may not make more than 12 transfers in any Account Year;
- The amount transferred from a Sub-Account must be at least $1,000,
unless you are transferring your entire balance in that Sub-Account;
- Your Account Value remaining in a Sub-Account must be at least $1,000;
- The amount transferred from a Guarantee Period must be the entire
Guarantee Amount, except for transfers of interest credited during the
current Account Year;
- At least 30 days must elapse between transfers to or from Guarantee
Periods;
- Transfers to or from Sub-Accounts are subject to terms and conditions
that may be imposed by the Funds; and
- We impose additional restrictions on market timers, which are further
described below.
These restrictions do not apply to transfers made under an approved
dollar-cost averaging program.
There is usually no charge imposed on transfers; however, we reserve the
right to impose a transfer charge of $15 for each transfer. Transfers out of a
Guarantee Period made more than 30 days before the Renewal Date will be subject
to the Market Value Adjustment described below. Under current law, there is no
tax liability for transfers.
REQUESTS FOR TRANSFERS
You may request transfers in writing or by telephone. The telephone
transfer privilege is available automatically, and does not require your written
election. We will require personal identifying information to process a request
for a transfer made by telephone. We will not be liable for following
instructions communicated by telephone that we reasonably believe are genuine.
If we receive your 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.
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<PAGE>
MARKET TIMERS
The Contracts are not designed for professional market timing
organizations or other entities using programmed and frequent transfers. If you
wish to employ such strategies, you should not purchase a Contract. Accordingly,
transfers may be subject to restrictions if exercised by a market timing firm or
any other third party authorized to initiate transfer transactions on behalf of
multiple Participants. In imposing such restrictions, we may, among other
things, not accept (1) the transfer instructions of any agent acting under a
power of attorney on behalf of more than one Participant, or (2) the transfer
instructions of individual Participants who have executed pre-authorized
transfer forms that are submitted at the same time by market timing firms or
other third parties on behalf of more than one Participant. We will not impose
these restrictions unless our actions are reasonably intended to prevent the use
of such transfers in a manner that will disadvantage or potentially impair the
Contract rights of other Participants.
In addition, some of the Funds have reserved the right to temporarily or
permanently refuse exchange requests from the Variable Account if, in the
judgment of the Fund's investment adviser, the Fund would be unable to invest
effectively in accordance with its investment objective and policies, or would
otherwise potentially be adversely affected. In particular, a pattern of
exchanges that coincide with a market timing strategy may be disruptive to a
Fund and therefore may be refused. Accordingly, the Variable Account may not be
in a position to effectuate transfers and may refuse transfer requests without
prior notice. We also reserve the right, for similar reasons, to refuse or delay
exchange requests involving transfers to or from the Fixed Account.
WAIVERS; REDUCED CHARGES; CREDITS; BONUS GUARANTEED INTEREST RATES
We may reduce or waive the withdrawal charge the mortality and expense
risk charges, the administrative services charge, or the annual Account Fee,
credit additional amounts, or grant bonus Guaranteed Interest Rates in certain
situations. These situations may include sales of Contracts (1) where selling
and/or maintenance costs associated with the Contracts are reduced, such as the
sale of several Contracts to the same Participant, sales of large Contracts, and
certain group sales, and (2) to officers, directors and employees of the Company
or its affiliates, registered representatives and employees of broker-dealers
with a current selling agreement with the Company and affiliates of such
representatives and broker-dealers, employees of affiliated asset management
firms, and persons who have retired from such positions ("Eligible Employees")
and immediate family members of Eligible Employees. Eligible Employees and their
immediate family members may also purchase a Contract without regard to minimum
Purchase Payment requirements. For other situations in which withdrawal charges
may be waived, see "Withdrawals, Withdrawal Charge and Market Value Adjustment."
OPTIONAL PROGRAMS
DOLLAR-COST AVERAGING
Dollar-cost averaging allows you to invest gradually, over time, in up to
12 Sub-Accounts. You may select a dollar-cost averaging program at no extra
charge by allocating a minimum of $1,000 to a designated Sub-Account or to a
Guarantee Period we make available in connection with the program. Amounts
allocated to the Fixed Account under the program will earn interest at a rate
declared by the Company for the Guarantee Period you select. Previously applied
amounts may not be transferred to a Guarantee Period made available in
connection with this program. Each month or quarter, as you select, we will
transfer the same amount automatically (including a portion of the Purchase
Payment Interest) to one or more Sub-Accounts that you choose, up to a maximum
of 12 Sub-Accounts. The program continues until your Account Value allocated to
the program is depleted or you elect to stop the program. The final amount
transferred from the Fixed Account will include all interest earned (excluding
Purchase Payment Interest).
No Market Value Adjustment (either positive or negative) will apply to
amounts automatically transferred from the Fixed Account under the dollar-cost
averaging program. However, if you discontinue or alter the program prior to
completion, amounts remaining in the Fixed Account will be transferred to the
Sun Capital Money Market Sub-Account, unless you instruct us otherwise, and the
20
<PAGE>
Market Value Adjustment will be applied. Any new allocation of a Purchase
Payment to the program is treated as commencing a new dollar-cost averaging
program and is subject to the $1,000 minimum.
The main objective of a dollar-cost averaging program is to minimize the
impact of short-term price fluctuations on Account Value. In general, since you
transfer the same dollar amount to the variable investment options at set
intervals, dollar-cost averaging allows you to purchase more Variable
Accumulation Units (and, indirectly, more Fund shares) when prices are low and
fewer Variable Accumulation Units (and, indirectly, fewer Fund shares) when
prices are high. Therefore, you may achieve a lower average cost per Variable
Accumulation Unit over the long term. A dollar-cost averaging program allows you
to take advantage of market fluctuations. However, it is important to understand
that a dollar-cost averaging program does not assure a profit or protect against
loss in a declining market. We do not allow transfers into any of the Guarantee
Periods.
ASSET ALLOCATION
One or more asset allocation programs may be available in connection with
the Contracts, at no extra charge. Asset allocation is the process of investing
in different asset classes -- such as equity funds, fixed income funds, and
money market funds -- depending on your personal investment goals, tolerance for
risk, and investment time horizon. By spreading your money among a variety of
asset classes, you may be able to reduce the risk and volatility of investing,
although there are no guarantees, and asset allocation does not insure a profit
or protect against loss in a declining market.
Currently, you may select one of three asset allocation models, each of
which represents a combination of Sub-Accounts with a different level of risk.
The available models are: the conservative asset allocation model, the moderate
asset allocation model, and the aggressive asset allocation model. Each model
allocates a different percentage of Account Value to Sub-Accounts investing in
the various asset classes, with the conservative model allocating the lowest
percentage to Sub-Accounts investing in the equity asset class and the
aggressive model allocating the highest percentage to the equity asset class.
These models, as well as the terms and conditions of the asset allocation
program, are fully described in a separate brochure. Additional programs may be
available in the future.
If you elect an asset allocation program, we will automatically allocate
your Purchase Payments among the Sub-Accounts represented in the model you
choose. Sun Capital Advisers' Asset Allocation Committee will direct the
allocations. By your election of an asset allocation program, you thereby
authorize us to automatically reallocate your Account Value on a quarterly
basis, or as determined by the terms of the Asset Allocation Program, to reflect
the current composition of the model you have selected, without further
instruction, until we receive notification that you wish to terminate the
program, or choose a different model.
SYSTEMATIC WITHDRAWAL AND INTEREST OUT PROGRAMS
If you have an Account Value of $10,000 or more, you may select our
Systematic Withdrawal Program or our Interest Out Program.
Under the Systematic Withdrawal Program, you determine the amount and
frequency of regular withdrawals you would like to receive from your Fixed
Account Value and/or Variable Account Value and we will effect them
automatically; a Market Value Adjustment may be applicable upon withdrawal.
Under the Interest Out Program, we automatically pay you or reinvest interest
credited for all Guarantee Periods you have chosen. The withdrawals under these
programs are subject to surrender charges. They may also be included as income
and subject to a 10% federal tax penalty. You should consult your adviser before
choosing these options.
You may change or stop either program at any time, by written notice to
us.
PORTFOLIO REBALANCING PROGRAM
Under the Portfolio Rebalancing Program, we transfer funds among the
Sub-Accounts to maintain the percentage allocation you have selected among these
Sub-Accounts. At your election, we will make these transfers on a quarterly,
semi-annual or annual basis.
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<PAGE>
Portfolio Rebalancing does not permit transfers to or from any Guarantee
Period.
SECURED FUTURES PROGRAM
Under the Secured Futures Program, we divide your Purchase Payments and
Purchase Payment Interest between the Fixed Account and the Variable Account.
For the Fixed Account portion, you choose a Guarantee Period from among those we
offer. We then allocate to that Guarantee Period the portion of your Purchase
Payment and Purchase Payment Interest necessary so that, at the end of the
Guarantee Period, your Fixed Account allocation, including interest, will equal
the entire amount of your original Purchase Payment. The remainder of the
original Purchase Payment and Purchase Payment Interest will be invested in the
Sub-Accounts of your choice. At the end of the Guarantee Period, you will be
guaranteed the amount of your Purchase Payment and Purchase Payment Interest
(assuming no withdrawals), plus you will have the benefit, if any, of the
investment performance of the Sub-Accounts you have chosen.
WITHDRAWALS, WITHDRAWAL CHARGE AND MARKET VALUE ADJUSTMENT
CASH WITHDRAWALS
REQUESTING A WITHDRAWAL
At any time during the Accumulation Phase you may withdraw in cash all or
any portion of your Account Value. To make a withdrawal, you must send us a
written request at our Annuity Mailing Address. Your request must specify
whether you want to withdraw the entire amount of your Account or, if less, the
amount you wish to receive.
All withdrawals may be subject to a withdrawal charge (see "Withdrawal
Charge," below), and withdrawals from your 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 "Tax Considerations." You should carefully consider these
tax consequences before requesting a cash withdrawal.
FULL WITHDRAWALS
If you request a full withdrawal, we calculate the amount we will pay you
as follows: We start with the total value of your Account at the end of the
Valuation Period during which we receive your withdrawal request; we deduct the
Account Fee for the Account Year in which the withdrawal is made; we add or
subtract the amount of any Market Value Adjustment applicable to your Fixed
Account Value; and finally, we deduct any applicable withdrawal charge.
A full withdrawal results in the surrender of your Contract, and
cancellation of all rights and privileges under your Contract.
PARTIAL WITHDRAWALS
If you request a partial withdrawal, we will pay you the actual amount
specified in your request and then adjust the value of your Account by deducting
the amount paid, adding or deducting any Market Value Adjustment applicable to
amounts withdrawn from the Fixed Account, and deducting any applicable
withdrawal charge.
You may specify the amount you want withdrawn from each Sub-Account and/or
Guarantee Amount to which your Account is allocated. If you do not so specify,
we will deduct the total amount you request pro rata, based on your Account
Value at the end of the Valuation Period during which we receive your request.
If you request a partial withdrawal that would result in your Account
Value being reduced to an amount less than the Account Fee for the Account Year
in which you make the withdrawal, we will treat it as a request for a full
withdrawal.
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<PAGE>
TIME OF PAYMENT
We will pay you the applicable amount of any full or partial withdrawal
within 7 days after we receive your withdrawal request, except in cases where we
are permitted, and choose, to defer payment under the Investment Company Act of
1940 and applicable state insurance law. Currently, we may defer payment of
amounts you withdraw from the Variable Account only for the 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 a
Fund or to determine the value of the net assets of a 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 you withdraw from the Fixed Account for up
to 6 months from the date we receive your withdrawal request. We do not pay
interest on the amount of any payments we defer.
WITHDRAWAL RESTRICTIONS FOR QUALIFIED PLANS
If your Contract is a Qualified Contract, you should carefully check the
terms of your retirement plan for limitations and restrictions on cash
withdrawals.
Special restrictions apply to withdrawals from Contracts used for Section
403(b) annuities. See "Tax Considerations -- Tax Sheltered Annuities."
WITHDRAWAL CHARGE
We do not deduct any sales charge from your Purchase Payments when they
are made. However, we may impose a withdrawal charge (known as a "contingent
deferred sales charge") on certain amounts you withdraw. 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.
FREE WITHDRAWAL AMOUNT
In each Account Year you may withdraw a portion of your Account Value --
which we call the "free withdrawal amount" -- before incurring the withdrawal
charge. For any year, the free withdrawal amount is equal to the amount of all
Purchase Payments made before the last 7 Account Years that you have not
previously withdrawn, PLUS the greater of:
(1) your Contract's earnings (defined below) during the prior Account
Year; and
(2) 10% of the amount of all Purchase Payments you have made during the
last 7 Account Years, including the current Account Year.
Any portion of the "free withdrawal amount" that you do not use in an
Account Year is not cumulative; that is, it will not be carried forward or
available for use in future years.
Your Contract's earnings during the prior Account Year are equal to:
(a) the difference between your Account Value at the end of the prior
Account Year and your Account Value at the beginning of the prior
Account Year, minus
(b) any Purchase Payments made during the prior Account Year, plus
(c) any partial withdrawals and charges taken during the prior Account
Year.
For an example of how we calculate the "free withdrawal amount," see
Appendix B.
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<PAGE>
WITHDRAWAL CHARGE ON PURCHASE PAYMENTS
If you withdraw more than the free withdrawal amount in any Account Year,
we consider the excess amount to be withdrawn first from Payments that you have
not previously withdrawn. We impose the withdrawal charge on the amount of these
Payments. Thus, the maximum amount on which we will impose the withdrawal charge
in any year will never be more than the total of all Payments that you have not
previously withdrawn.
The amount of your withdrawal, if any, that exceeds the total of the free
withdrawal amount plus the aggregate amount of all Payments not previously
withdrawn, is not subject to the withdrawal charge.
ORDER OF WITHDRAWAL
When you make a withdrawal, we consider the oldest Purchase Payment that
you have not already withdrawn to be withdrawn first, then the next oldest, and
so forth. Once all Purchase Payments are withdrawn, the balance withdrawn is
considered to be accumulated value.
CALCULATION OF WITHDRAWAL CHARGE
We calculate the amount of the withdrawal charge by multiplying the
Purchase Payments you withdraw by a percentage. The percentage varies according
to the number of Account Years the Purchase Payment has been held in your
Account, including the Account Year in which you made the Payment, but not the
Account Year in which you withdraw it. Each Payment begins a new 7-year period
and moves down a declining surrender charge scale as shown below at each Account
Anniversary. Payments received during the current Account Year will be charged
8%, if withdrawn. On your next scheduled Account Anniversary, that Payment,
along with any other Payments made during that Account Year, will be considered
to be in their second Account Year and will have an 8% withdrawal charge. On the
next Account Anniversary, these payments will move into their third Account Year
and will have a withdrawal charge of 7%, if withdrawn. This withdrawal charge
decreases according to the number of Account Years the Purchase Payment has been
held in your Account.
<TABLE>
<CAPTION>
NUMBER OF
ACCOUNT YEARS
PAYMENT HAS
BEEN WITHDRAWAL
IN YOUR CONTRACT CHARGE
- ---------------- ----------
<S> <C>
0-1 8%
1-2 8%
2-3 7%
3-4 7%
4-5 6%
5-6 5%
6-7 4%
7+ 0%
</TABLE>
For example, the percentage applicable to withdrawals of a Payment that
has been in an Account for more than 2 Account Years but less than 3 will be 7%
regardless of the issue date of the Contract.
The withdrawal charge will never be greater than 8% of the excess of
Purchase Payments you make under your Contract over the "free withdrawal
amount," as defined above.
For a Group Contract, we may modify the withdrawal charges and limits,
upon notice to the Owner of the Group Contract. However, any modification will
apply only to Accounts established after the date of the modification.
For additional examples of how we calculate withdrawal charges, see
Appendix B.
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<PAGE>
TYPES OF WITHDRAWALS NOT SUBJECT TO WITHDRAWAL CHARGE
If approved by your state, we will waive the withdrawal charge for a full
or partial withdrawal if:
- at least one year has passed since we issued your Contract, and
- you are confined to an eligible nursing home and have been confined
there for at least the preceding 180 days, or any shorter period
required by your state.
An "eligible nursing home" means a licensed hospital or licensed skilled
or intermediate care nursing facility at which medical treatment is available on
a daily basis and daily medical records are kept for each patient. You must
provide us with evidence of confinement in the form we determine.
For each Qualified Contract, the free withdrawal amount in any Account
Year will be the greater of the free withdrawal amount described above and any
amounts required to be withdrawn to comply with the minimum distribution
requirement of the Internal Revenue Code. This waiver of the withdrawal charge
applies only to the portion of the required minimum distribution attributable to
that Qualified Contract.
We do not impose the withdrawal charge on amounts you apply to provide an
annuity, amounts we pay as a death benefit (except under the Cash Surrender
method), or amounts you transfer 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 you withdraw or transfer
amounts from your Fixed Account Value more than 30 days before the end of the
applicable Guarantee Period. For this purpose, using Fixed Account Value to
provide an annuity is considered a withdrawal, and the Market Value Adjustment
will apply. However, we will not apply the Market Value Adjustment to automatic
transfers to a Sub-Account from a Guarantee Period as part of our dollar-cost
averaging program.
We apply the Market Value Adjustment separately to each Guarantee Amount
in the Fixed Account, that is to each separate allocation you have made to a
Guarantee Period together with interest credited on that allocation. However, we
do not apply the adjustment to the amount of interest credited during your
current Account Year. Any withdrawal from a Guarantee Amount is attributed first
to such interest.
A Market Value Adjustment may decrease, increase or have no effect on your
Account Value. This will depend on changes in interest rates since you made your
allocation to the Guarantee Period and the length of time remaining in the
Guarantee Period. In general, if the Guaranteed Interest Rate we currently
declare for Guarantee Periods equal to the balance of your Guarantee Period (or
your entire Guarantee Period for Guarantee Periods of less than one year) is
higher than your Guaranteed Interest Rate, the Market Value Adjustment is likely
to decrease your Account Value. If our current Guaranteed Interest Rate is
lower, the Market Value Adjustment is likely to 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:
<TABLE>
<C> <S> <C> <C> <C>
N/12
1 + I
( -------- ) -1
1 + J + b
</TABLE>
where:
I is the Guaranteed Interest Rate applicable to the Guarantee Amount from
which you withdraw, transfer or annuitize;
J is the Guaranteed Interest Rate we declare at the time of your
withdrawal, transfer or annuitization for Guarantee Periods equal to the length
of time remaining in the Guarantee Period applicable to your Guarantee Amount,
rounded to the next higher number of complete years, for Guarantee Periods of
one year or more. For any Guarantee Periods of less than one year, J is the
Guaranteed Interest Rate we declare at the time of your withdrawal, transfer or
annuitization for a Guarantee
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<PAGE>
Period of the same length as your Guarantee Period. If, at that time, we do not
offer the applicable Guarantee Period we will use an interest rate determined by
straight-line interpolation of the Guaranteed Interest Rates for the Guarantee
Periods we do offer;
N is the number of complete months remaining in your Guarantee Period; and
b is a factor that currently is 0% but that in the future we may increase
to up to 0.25%. Any increase would be applicable only to Participants who
purchase their Contracts after the date of that increase.
We will apply the Market Value Adjustment to the amount being withdrawn
after deduction of any Account Fee, if applicable, but before we impose any
withdrawal charge on the amount withdrawn.
For examples of how we calculate the Market Value Adjustment, see
Appendix B.
No Market Value Adjustment will apply to Contracts issued in the states of
California, Maryland, Oregon, Texas and Washington.
CONTRACT CHARGES
ACCOUNT FEE
During the Accumulation Phase of your Contract, we will deduct from your
Account an annual Account Fee of $35 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. In Account Years 1
through 5, the Account Fee is $35. After Account Year 5, we may change the
Account Fee each year, but the Account Fee will never exceed $50. 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.
We will not charge the Account Fee if:
(1) your Account has been allocated only to the Fixed Account during the
applicable Account Year; or
(2) your Account Value is more than $100,000 on your Account Anniversary.
If you make a full withdrawal of your Account, 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 an annual Account Fee
of $35 in the aggregate in equal amounts from each Variable Annuity payment we
make during the year. We do not deduct any fee from Fixed Annuity payments.
ADMINISTRATIVE EXPENSE CHARGE
We deduct an administrative expense charge from the assets of the Variable
Account at an annual effective rate equal to 0.15% during both the Accumulation
Phase and the Income Phase. This charge is designed to reimburse us for expenses
we incur in administering the Contracts, the Accounts and the Variable Account
that are not covered by the annual Account Fee.
MORTALITY AND EXPENSE RISK CHARGE
During both the Accumulation Phase and the Income Phase, we deduct a
mortality and expense risk charge from the assets of the Variable Account at an
effective annual rate equal to 1.30%. 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 mortality risk also arises from our contractual
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<PAGE>
obligation to pay a death benefit upon the death of the Participant prior to the
Annuity Commencement Date. The expense risk we assume is the risk that the
Account Fee and administrative expense charge 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 expect to
make a profit on the excess expense charge associated with the purchase payment
interest. We may use this profit for any proper corporate purpose, including the
payment of marketing and distribution expenses for the Contracts.
CHARGES FOR OPTIONAL DEATH BENEFIT RIDERS
If you elect an optional death benefit rider, we will deduct a charge from
the assets of the Variable Account based upon the number of optional death
benefit riders you elect, as follows:
<TABLE>
<CAPTION>
% OF
NUMBER OF AVERAGE
RIDERS YOU ELECT DAILY VALUE
- ---------------- -----------
<S> <C>
1 0.15%
2 0.25%
3 0.40%
</TABLE>
PREMIUM TAXES
Some states and local jurisdictions impose a premium tax on us that is
equal to a specified percentage of the Purchase Payments you make. 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 you
apply 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 you make a Purchase Payment or make a full or
partial withdrawal. We do not make any profit on the deductions we make to
reimburse premium taxes.
FUND EXPENSES
There are fees and charges deducted from each Fund. These fees and
expenses are described in the Fund prospectuses and related Statements of
Additional Information.
MODIFICATION IN THE CASE OF GROUP CONTRACTS
For Group Contracts, we may modify the annual Account Fee, the
administrative expense charge 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 your date of death,
we will pay the death benefit in one sum to your estate. We do not 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 your death benefit, we use a "Death Benefit
Date." The Death Benefit Date is the date we receive proof of your death in an
acceptable form ("Due Proof of Death") if you have elected a death benefit
payment method before your death and it remains effective. Otherwise, the Death
Benefit Date is the later of the date we receive Due Proof of Death or the date
we receive the Beneficiary's election of either payment method or, if the
Beneficiary is your spouse,
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<PAGE>
Contract continuation. If we do not receive the Beneficiary's election within 60
days after we receive Due Proof of Death, we reserve the right to provide a lump
sum to your Beneficiary.
The amount of the death benefit is determined as of the Death Benefit
Date.
THE BASIC DEATH BENEFIT
In general, if you were 85 or younger on your Contract Date (the date we
accepted your first Purchase Payment), the death benefit will be the greatest of
the following amounts:
1. Your Account Value for the Valuation Period during which the Death
Benefit Date occurs;
2. The amount we would pay if you had surrendered your entire Account on
the Death Benefit Date; and
2. Your total Purchase Payments (adjusted for partial withdrawals as
described in "Calculating the Death Benefit") as of the Death Benefit
Date.
For examples of how to calculate this basic death benefit, see
Appendix C.
If you were 86 or older on your Contract Date, the death benefit is equal
to amount (2) above. Because this amount will reflect any applicable withdrawal
charges and Market Value Adjustment, the basic death benefit may be less than
your Account Value.
OPTIONAL DEATH BENEFIT RIDERS
Subject to availability in your state, you may enhance the basic death
benefit by electing one or more of the following optional death benefit riders.
You must make your election before the date on which your Contract becomes
effective. You will pay a charge for each optional death benefit rider you
elect. (For a description of these charges, see "Charges for Optional Death
Benefit Riders.") The Maximum Anniversary Account Value Rider, the 5% Premium
Roll-Up Rider, and the Earnings Enhancement Riders are available only if you are
younger than 80 on the Contract Date. Any optional death benefit rider election
may not be changed after your Contract is issued. For a complete description of
how the death benefits under the optional death benefit riders are calculated,
see "Calculating the Death Benefit."
MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER
Under this rider, the death benefit will be the greater of:
- any of the death benefit amounts payable under options (1), (2) or
(3) under the basic death benefit, above, or
- your highest Account Value on any Account Anniversary before your 81st
birthday, adjusted for any subsequent Purchase Payments, partial
withdrawals and charges made between that Account Anniversary and the
Death Benefit Date.
5% PREMIUM ROLL-UP RIDER
Under this rider, the death benefit will be the greater of:
- any of the death benefit amounts payable under options (1), (2) or
(3) under the basic death benefit, above, or
- the sum of your total Purchase Payments plus interest accruals,
adjusted for partial withdrawals.
Under this rider, interest accrues at 5% per year on Purchase Payments and
transfers to the Variable Account while they remain in the Variable Account. The
5% interest accruals will continue until the earlier of:
- the first day of the month following your 80th birthday, or
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<PAGE>
- the day the death benefit amount under this rider equals twice the
total of your Purchase Payments and transferred amounts, adjusted for
withdrawals.
EARNINGS ENHANCEMENT RIDER
Under this rider, if you are 69 or younger on your Contract Date, the
death benefit will be:
- the greatest of any of the death benefit amounts payable under options
(1), (2) or (3) under the basic death benefit, above, plus
- 40% of the lesser of your net Purchase Payments or your Account Value
minus net Purchase Payments, calculated as of the Death Benefit Date.
If you are between the ages of 70 and 79 on your Contract Date, the death
benefit will be:
- the greatest of any of the death benefit amounts payable under options
(1), (2) or (3) under the basic death benefit, above, plus
- 25% of the lesser of your net Purchase Payments or your Account Value
minus net Purchase Payments, calculated as of the Death Benefit Date.
Net Purchase Payments under this rider will be adjusted for all partial
withdrawals as described in "Calculating the Death Benefit." For examples of how
the death benefit is calculated under the Earnings Enhancement Rider, see
Appendix D.
SELECTING MULTIPLE DEATH BENEFIT RIDERS
If you elect more than one death benefit rider, the death benefit will be
calculated as follows:
1) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH 5% PREMIUM
ROLL-UP RIDER: The death benefit will equal the greater of the death
benefit under the Maximum Anniversary Account Value Rider and the
death benefit under the 5% Premium Roll-Up Rider.
2) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH EARNINGS
ENHANCEMENT RIDER: The death benefit will equal the death benefit
under the Maximum Anniversary Account Value Rider, PLUS the amount
calculated under the Earnings Enhancement Rider. The death benefit
under the Earnings Enhancement Rider is calculated using the Account
Value before the application of the Maximum Anniversary Account Rider.
3) EARNINGS ENHANCEMENT RIDER COMBINED WITH 5% PREMIUM ROLL-UP RIDER: The
death benefit will equal the death benefit under the 5% Premium
Roll-Up Rider, PLUS the amount calculated under the Earnings
Enhancement Rider. The death benefit under the Earnings Enhancement
Rider is calculated using the Account Value before the application of
the 5% Premium Roll-Up Rider.
4) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER, THE 5% PREMIUM ROLL-UP RIDER
AND THE EARNINGS ENHANCEMENT RIDER: The death benefit will equal the
GREATER of the death benefit under the Maximum Anniversary Account
Value Rider or the death benefit under the 5% Premium Roll-Up Rider,
PLUS the amount calculated under the Earnings Enhancement Rider. The
death benefit under the Earnings Enhancement Rider is calculated using
the Account Value before the application of the 5% Premium Roll-Up
Rider and the Maximum Anniversary Account Value Rider.
SPOUSAL CONTINUANCE
If your spouse is your Beneficiary, upon your death your spouse may elect
to continue the Contract as the Participant, rather than receive the death
benefit amount. In that case, we will not pay a death benefit, but the
Contract's Account Value will be equal to your Contract's death benefit amount,
as defined under the basic death benefit or any rider you have selected. All
Contract provisions, including any riders you have selected, will continue as if
your spouse had purchased the Contract on the Death Benefit Date with a value
equal to the death benefit amount. For purposes of
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calculating death benefits and expenses from that date forward, the surviving
spouse's age on the original effective date of the Contract will be used.
CALCULATING THE DEATH BENEFIT
In calculating the death benefit amount payable under option (3) of the
basic death benefit or any of the optional death benefit riders, any partial
withdrawals will reduce the death benefit amount to an amount equal to the death
benefit amount immediately before the withdrawal multiplied by the ratio of the
Account Value immediately after the withdrawal to the Account Value immediately
before the withdrawal.
If the death benefit is the amount payable under options (2) or (3) of the
basic death benefit or under any of the optional death benefit riders, your
Account Value will be increased by the excess, if any, of that amount over
option (1) of the basic death benefit. Any such increase will be allocated to
the Sub-Accounts in proportion to your Account Value in those Sub-Accounts on
the Death Benefit Date. Also, any portion of this new Account Value attributed
to the Fixed Account will be transferred to the Sun Capital Money Market
Sub-Account (without the application of a Market Value Adjustment). If your
spouse, as the named Beneficiary, elects to continue the Contract after your
death, your spouse may transfer any such Fixed Account portion back to the Fixed
Account and begin a new Guarantee Period.
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, you 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. If the
Beneficiary is the Owner's spouse, the Beneficiary may elect to continue the
Contract. 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/Payee under the terms of that Annuity Option.
NON-QUALIFIED CONTRACTS
If your Contract is 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 you have named as Beneficiary under your Contract, if any, will
be the "designated beneficiary." If the named Beneficiary is not living and no
contingent beneficiary has been named, the Annuitant automatically becomes the
designated beneficiary.
If the designated beneficiary is your surviving spouse, your spouse may
continue the Contract 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. The special distribution rules will then apply on
the death of your spouse. To understand what happens when your spouse continues
the Contract, see "Spousal Continuance," above.
During the Income Phase, if the Annuitant dies, the remaining value of the
Annuity Option(s) in place must be distributed at least as rapidly as the method
of distribution under that option.
If the Participant is not a natural person, these distribution
rules apply on a change in, or the death of, either the Annuitant or the
Co-Annuitant.
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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.
SELECTION AND CHANGE OF BENEFICIARY
You select your Beneficiary in your Application. You may change your
Beneficiary at any time by sending us written notice on our required form,
unless you previously made an irrevocable Beneficiary designation. 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 any of 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 annuity payments to the
Annuitant.
The Income Phase of your Contract begins with the Annuity Commencement
Date. On that date, we apply your Account Value, adjusted as described below,
under the Annuity Option(s) you have selected, and we make the first payment.
Once the Income Phase begins, no lump sum settlement option or cash
withdrawals are permitted, except pursuant to Annuity Option D, Monthly Payments
for a Specified Period Certain, as described below under the heading "Annuity
Options," and you cannot change the Annuity Option selected. You may request a
full withdrawal before the Annuity Commencement Date, which will be subject to
all charges applicable on withdrawals. See "Withdrawals, Withdrawal Charge and
Market Value Adjustment."
SELECTION OF THE ANNUITANT OR CO-ANNUITANT
You select the Annuitant in your Application. The Annuitant is the person
who receives annuity payments during the Income Phase and on whose life these
payments are based. In your Contract, the Annuity Option(s) refer to the
Annuitant as the "Payee." If you name someone other than yourself as Annuitant
and the Annuitant dies before the Income Phase, you become the Annuitant.
In a Non-Qualified Contract, if you name someone other than yourself as
Annuitant, you may also select a Co-Annuitant, who will become the new Annuitant
if the original Annuitant dies before the Income Phase. If both the Annuitant
and Co-Annuitant die before the Income Phase, you become the Annuitant. If you
have named both an Annuitant and a Co-Annuitant, you may designate one of them
to become the sole Annuitant as of the Annuity Commencement Date, if both are
living at that time. If you have not made that designation on the 30th day
before the Annuity Commencement Date, and both the Annuitant and the
Co-Annuitant are still living, the Co-Annuitant will become the Annuitant.
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When an Annuity Option has been selected as the method of paying the death
benefit, the Beneficiary is the Payee of the annuity payment.
SELECTION OF THE ANNUITY COMMENCEMENT DATE
You select the Annuity Commencement Date in your Application. The
following restrictions apply to the date you may select:
- The earliest possible Annuity Commencement Date is the first day of the
first month following your first Account Anniversary.
- The latest possible Annuity Commencement Date is the first day of the
month following the Annuitant's 95th birthday or, if there is a
Co-Annuitant, the 95th birthday of the younger of the Annuitant and
Co-Annuitant.
- The Annuity Commencement Date must always be the first day of a month.
You may change the Annuity Commencement Date from time to time by sending
us written notice, with the following additional limitations:
- We must receive your 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.
There may be other restrictions on your selection of the Annuity
Commencement Date imposed by your retirement plan or applicable law. In most
situations, current law requires that for a Qualified Contract, certain minimum
distributions must commence 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).
ANNUITY OPTIONS
We offer the following Annuity Options for payments during the Income
Phase. Each Annuity Option may be selected for a Variable Annuity, a Fixed
Annuity, or a combination of both. 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
a Variable Annuity will be the assumed interest rate in effect; 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
person you designate and during the lifetime of the survivor of the two. We stop
making payments when the survivor dies. There is no provision for continuance of
any payments to a Beneficiary.
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ANNUITY OPTION D -- MONTHLY PAYMENTS FOR A SPECIFIED PERIOD CERTAIN
We make monthly payments for a specified period of time from 10 to 30
years, as you elect. If payments under this option are paid on a variable
annuity basis, the Annuitant may elect to receive in one sum the discounted
value of the remaining payments, less any applicable withdrawal charge; the
discount rate for this purpose will be the assumed interest rate in effect. If
the Annuitant dies during the period selected, the remaining income payments are
made as described under Annuity Option B. The election of this Annuity Option
may result in the imposition of a penalty tax.
SELECTION OF ANNUITY OPTION
You select one or more of the Annuity Options, which you may change from
time to time during the Accumulation Phase, as long as we receive your selection
or change in writing at least 30 days before the Annuity Commencement Date. If
we have not received your 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.
You may specify the proportion of your Adjusted Account Value you wish to
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 you do not specify a Variable
Annuity or a Fixed Annuity, 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. You may allocate your Adjusted Account Value applied to a
Variable Annuity among the Sub-Accounts, or we will use your existing
allocations.
There may be additional limitations on the options you may elect 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 apply the Market Value Adjustment to your Account
Value in the Fixed Account, which may result in a deduction, an
addition, or no change.
- We deduct any applicable premium tax or similar tax if not previously
deducted.
- On the Annuity Commencement Date, we will exchange your Account's
Variable Annuity Units for Annuitization Units which have an annual
mortality and expense risk charge of 1.45% of your average Account's
daily net assets.
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 3% 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
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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 3%, 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.
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 3% 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."
MINIMUM PAYMENTS
If your Adjusted Account Value is less than $2,000, or the first annuity
payment for any Annuity Option is less than $20, we will pay the Adjusted
Account Value to the Annuitant in one payment.
EXCHANGE OF VARIABLE ANNUITY UNITS
During the Income Phase, the Annuitant may exchange Annuity Units in one
Sub-Account for Annuity Units in another Sub-Account, up to 12 times each
Account Year. To make an exchange, the Annuitant sends us, at our Annuity
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.
Before exchanging Annuity Units in one Sub-Account for those in another,
the Annuitant should carefully review the Fund prospectuses for the investment
objectives and risk disclosure of the Funds in which the Sub-Accounts invest.
During the Income Phase, 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 annual Account Fee of $35 in equal
amounts from each Variable Annuity payment. We do not deduct the annual Account
Fee from Fixed Annuity payments.
ANNUITY PAYMENT RATES
The Contracts contain 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 3% 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 3% per
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year, compounded annually). We may change these rates under Group Contracts 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(s)
elected and the adjusted age of the Annuitant. The Contracts 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 1983
Individual Annuitant Mortality Table.
ANNUITY OPTIONS AS METHOD OF PAYMENT FOR DEATH BENEFIT
You or your Beneficiary may also select one or more Annuity Options to be
used in the event of the Annuitant's 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
An Individual Contract belongs to the individual to whom the Contract is
issued. A Group Contract belongs to the Owner. In the case of a Group Contract,
the Owner may expressly reserve all Contract rights and privileges; otherwise,
each Annuitant will be entitled to exercise such rights and privileges. In any
case, such rights and privileges can be exercised without the consent of the
Beneficiary (other than an irrevocably designated Beneficiary) or any other
person. Such rights and privileges may be exercised only during the lifetime of
the Annuitant 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 Annuitant; (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 or custodian 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 prior to the Annuity Commencement Date; and each Participant, in like
manner, may change the ownership interest in a Contract. 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. If you change the Owner of a
Non-Qualified Contract, you will become immediately liable for the payment of
taxes on any gain realized under the Contract prior to the change of ownership,
including possible liability for a 10% federal excise tax.
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VOTING OF FUND SHARES
We will vote Fund shares held by the Sub-Accounts at meetings of
shareholders of the Funds 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, you will have the right to give
voting instructions, except in the case of a Group Contract where the Owner has
reserved this right. 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 Fund shares for which no
timely voting instructions are received in the same proportion as the shares for
which we receive instructions from Owners, Participants and Payees, as
applicable.
Owners of Qualified Contracts issued on a group basis 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 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 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 Fund shares. Except as the Variable Account or the Company has actual
knowledge to the contrary, the instructions given by Owners under Group
Contracts 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.
All 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 Fund. We will determine the number of Fund shares as to
which each such person is entitled to give instructions as of the record date
set by the Fund for such meeting, which is expected to be not more than 90 days
prior to each such meeting. Prior to the Annuity Commencement Date, the number
of 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 Fund share as of the same date. On or after the Annuity
Commencement Date, the number of 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 a
Fund share as of the same date. After the Annuity Commencement Date, the number
of 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, or such other person
having voting rights, 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 shall
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 and the Fund as may be required
by the Investment Company Act of
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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.
Upon request, we will provide you with information regarding fixed and
variable accumulation values.
SUBSTITUTION OF SECURITIES
Shares of any or all Funds may not always be available for investment
under the Contracts. We may add or delete Funds 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 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 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.
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 Participant, in the case of an Individual Contract, and
the Owner and Participant(s), in the case of a Group Contract (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"); (iv) provides additional
Variable Account and/or fixed accumulation options; or (v) as may otherwise be
in the best interests of Owners, Participants, or Payees, as applicable. 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 Group Contract to
change the withdrawal charges, Account Fees, mortality and expense risk charges,
administrative expense 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 Group 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.
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<PAGE>
DISCONTINUANCE OF NEW PARTICIPANTS
We may limit or discontinue the acceptance of new Applications and the
issuance of new Certificates under a Group 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 Group Contract prior
to the effective date of such limitation or discontinuance.
RESERVATION OF RIGHTS
We reserve the right, to the extent permitted by law, to: (1) combine any
2 or more variable accounts; (2) add or delete Funds, sub-series thereof or
other investment companies and corresponding Sub-Accounts; (3) add or remove
Guarantee Periods available at any time for election by a Participant; and
(4) restrict or eliminate any of the voting rights of Participants (or Owners)
or other persons who have voting rights as to the Variable Account. Where
required by law, we will obtain approval of changes from Participants or any
appropriate regulatory authority. In the event of any change pursuant to this
provision, we may make appropriate endorsement to the Contract to reflect the
change.
RIGHT TO RETURN
If you are not satisfied with your Contract, you may return it by mailing
or delivering it to us at our Annuity Mailing Address as shown on the cover of
this Prospectus within 10 days after it was delivered to you. When we receive
the returned Contract, it will be cancelled and we will refund to you your
Account Value less the Adjusted Purchase Payment Interest. The Adjusted Purchase
Payment Interest that maybe deducted is equal to the lesser of:
- the portion of the Account Value that is attributable to any Purchase
Payment Interest, and
- all Purchase Payment Interest.
This means you receive any gain on Purchase Payment Interest and we bear
any loss. However, if applicable state law requires, we will return the full
amount of any Purchase Payment(s) we received. State law may also require us to
give you a longer "free look" period or allow you to return the Contract to your
sales representative.
If you are establishing an Individual Retirement Account ("IRA"), the
Internal Revenue Code requires that we give you a disclosure statement
containing certain information about the Contract and applicable legal
requirements. We must give you this statement on or before the date the IRA is
established. If we give you the disclosure statement before the seventh day
preceding the date the IRA is established, you will not have any right of
revocation under the Code. If we give you the disclosure statement at a later
date, then you may give us a notice of revocation at any time within 7 days
after your Contract Date. Upon such revocation, we will refund your Purchase
Payment(s). This right of revocation with respect to an IRA is in addition to
the return privilege set forth in the preceding paragraph. We allow a
Participant establishing an IRA a "ten day free-look," notwithstanding the
provisions of the Internal Revenue Code.
TAX CONSIDERATIONS
This section describes general federal income tax consequences based upon
our understanding of current federal tax laws. Actual federal tax consequences
may vary depending on, among other things, the type of retirement plan with
which you use the Contract and the site where your Contract was issued. Also,
legislation affecting the current tax treatment of annuity contracts could be
enacted in the future and could apply retroactively to Contracts that you
purchased before the date of enactment. We do not make any guarantee regarding
the federal, state, or local tax status of any Contract or any transaction
involving any Contract. You should consult a qualified tax professional for
advice before purchasing a Contract or executing any other transaction (such as
a rollover, distribution, withdrawal or payment) involving a Contract.
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<PAGE>
U.S. FEDERAL TAX CONSIDERATIONS
The following discussion applies only to those Contracts issued in the
United States. For a discussion of tax considerations effecting Contracts issued
in Puerto Rice, see "Puerto Rico Tax Considerations," below.
DEDUCTIBILITY OF PURCHASE PAYMENTS
For federal income tax purposes, Purchase Payments made under
Non-Qualified Contracts are not deductible.
PRE-DISTRIBUTION TAXATION OF CONTRACTS
Generally, an increase in the value of a Contract will not give rise to
tax, prior to distribution.
However, corporate (or other non-natural person) Owners of, and
Participants under, a Non-Qualified Contract incur current tax, regardless of
distribution, on Contract value increases. Such current taxation does not apply,
though, to (i) immediate annuities, which the Internal Revenue Code (the "Code")
defines as a single premium contract with an annuity commencement date within
one year of the date of purchase, or (ii) any Contract that the non-natural
person holds as agent for a natural person (such as where a bank or other entity
holds a Contract as trustee under a trust agreement).
You should note that qualified retirement investments generally provide
tax deferral regardless of whether the underlying contract is an annuity.
DISTRIBUTIONS AND WITHDRAWALS FROM NON-QUALIFIED CONTRACTS
The Account Value will include an amount attributable to Purchase
Payments, the return of which is not taxable, and an amount attributable to
investment earnings, the return of which is taxable at ordinary income rates.
The relative portions of a distribution that derive from nontaxable Purchase
Payments and taxable investment earnings depend upon the timing of the
distribution.
If you withdraw less than your entire Account Value under a Non- Qualified
Contract before the Annuity Commencement Date, you must treat the withdrawal
first as a return of investment earnings.
You may treat only withdrawals in excess of the amount of the Account
Value attributable to investment earnings as a return of Purchase Payments.
Account Value amounts assigned or pledged as collateral for a loan will be
treated as if withdrawn from the Contract.
If a Payee receives annuity payments under a Non-Qualified Contract after
the Annuity Commencement Date, however, the Payee treats a portion of each
payment as a nontaxable return of Purchase Payments. In general, the nontaxable
portion of such a payment bears the same ratio to the total payment as the
Purchase Payments bear to the Payee's expected return under the Contract. The
remainder of the payment constitutes a taxable return of investment earnings.
Once the Payee has received nontaxable payments in an amount equal to total
Purchase Payments, all future distributions constitute fully taxable ordinary
income. If the Annuitant dies before the Payee recovers the full amount of
Purchase Payments, the Payee may deduct an amount equal to unrecovered Purchase
Payments.
Upon the transfer of a Non-Qualified Contract by gift (other than to the
Participant's spouse), the Participant must treat an amount equal to the Account
Value minus the total amount paid for the Contract as income.
A penalty tax of 10% may apply to taxable cash withdrawals and lump- sum
payments from Non-Qualified Contracts. This penalty will not apply in certain
circumstances, such as distributions pursuant to the death of the Participant or
distributions under an immediate annuity (as defined above), or after
age 59 1/2.
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<PAGE>
DISTRIBUTIONS AND WITHDRAWALS FROM QUALIFIED CONTRACTS
Generally, distributions from a Qualified Contract will constitute fully
taxable ordinary income. Also, a 10% penalty tax will, except in certain
circumstances, apply to distributions prior to age 59 1/2.
Distributions from a Qualified Contract are not subject to current
taxation or a 10% penalty, however, if:
- the distribution is a hardship distribution or part of a series of
payments for life or for a specified period of 10 years or more (an
"eligible rollover distribution"), and
- the Participant or Payee rolls over the distribution (with or without
actually receiving the distribution) into a qualified retirement plan
eligible to receive the rollover.
Only you or your spouse may elect to roll over a distribution to an
eligible retirement plan.
WITHHOLDING
In the case of an eligible rollover distribution (as defined above) from a
Qualified Contract (other than from a Contract issued for use with an individual
retirement account), we (or the plan administrator) must withhold and remit to
the U.S. Government 20% of the distribution, 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; however, only you or
your spouse may elect a direct rollover. In the case of a distribution from
(i) a Non-Qualified Contract, (ii) a Qualified Contract issued for use with an
individual retirement account, or (iii) a Qualified Contract where the
distribution is not an eligible rollover distribution, we will withhold and
remit to the U.S. Government a part of the taxable portion of each distribution
unless, prior to the distribution, the Participant or Payee provides us his or
her taxpayer identification number and instructs us (in the manner prescribed)
not to withhold. The Participant or Payee may credit against his or her federal
income tax liability for the year of distribution any amounts that we (or the
plan administrator) withhold.
INVESTMENT DIVERSIFICATION AND CONTROL
The Treasury Department has issued regulations that prescribe investment
diversification requirements for mutual fund series underlying nonqualified
variable contracts. Contracts must comply with these regulations to qualify as
annuities for federal income tax purposes. Contracts that do not meet the
guidelines are subject to current taxation on annual increases in value. We
believe that each Fund complies with these regulations. The preamble to the
regulations states that the Internal Revenue Service may promulgate guidelines
under which an owner's excessive control over investments underlying the
contract will preclude the contract from qualifying as an annuity for federal
tax purposes. We cannot predict whether such guidelines, if in fact promulgated,
will be retroactive. We reserve the right to modify the Contract and/or the
Variable Account to the extent necessary to comply with any such guidelines, but
cannot assure that such modifications would satisfy any retroactive guidelines.
TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT
As a life insurance company under the Code, we will record and report
operations of the Variable Account separately from other operations. The
Variable Account will not, however, constitute a regulated investment company or
any other type of taxable entity distinct from our other operations. We will not
incur tax on the income of the Variable Account (consisting primarily of
interest, dividends, and net capital gains) if we use this income to increase
reserves under Contracts participating in the Variable Account.
QUALIFIED RETIREMENT PLANS
You may use Qualified Contracts with several types of qualified retirement
plans. Because tax consequences will vary with the type of qualified retirement
plan and the plan's specific terms and conditions, we provide below only brief,
general descriptions of the consequences that follow from
40
<PAGE>
using Qualified Contracts in connection with various types of qualified
retirement plans. We stress that the rights of any person to any benefits under
these plans may be subject to the terms and conditions of the plans themselves,
regardless of the terms of the Qualified Contracts that you are using. These
terms and conditions may include restrictions on, among other things, ownership,
transferability, assignability, contributions and distributions.
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. Self-employed persons may therefore use Qualified
Contracts as a funding vehicle for their retirement plans, as a general rule.
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. Such IRAs are subject to
limitations on contribution levels, 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 in an IRA on a tax-deferred
basis. If we sell Contracts for use with IRAs, the Internal Revenue Service or
other agency may impose supplementary information requirements. We will provide
purchasers of the Contracts for such purposes with any necessary information.
You will have the right to revoke the Contract under certain circumstances, as
described in the section of this Prospectus entitled "Right to Return."
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<PAGE>
ROTH IRAS
Section 408A of the Code permits an individual to contribute to an
individual retirement program called a Roth IRA. Unlike contributions to a
traditional IRA under Section 408 of the Code, contributions to a Roth IRA are
not tax-deductible. Provided certain conditions are satisfied, distributions are
generally tax-free. Like traditional IRAs, Roth IRAs are subject to limitations
on contribution amounts and the timing of distributions. If an individual
converts a traditional IRA into a Roth IRA the full amount of the IRA is
included in taxable income. The Internal Revenue Service and other agencies may
impose special information requirements with respect to Roth IRAs. If and when
we make Contracts available for use with Roth IRAs, we will provide any
necessary information.
PUERTO RICO TAX CONSIDERATIONS
Puerto Rico tax laws with respect to qualified retirement plans described
in this Prospectus vary significantly from those discussed above under
"U.S. Federal Tax Considerations." Although we currently offer the Contract in
Puerto Rico in connection with qualified retirement plans, the text of this
Prospectus under the heading "U.S. Federal Tax Considerations" dealing with such
qualified retirement plans is inapplicable to Puerto Rico and should be
disregarded.
The following discussion applies if your Contract is issued in Puerto
Rico.
Under Section 1022 of the Puerto Rico Internal Revenue Code of 1994, as
amended (the "1994 Code"), the Contract offered by this Prospectus is considered
an annuity contract. The 1994 Code provides that no income tax is payable on
increases in value of accumulation shares of annuity units credited to a
variable annuity contract until payments are made to the annuitant or other
payee under such contract.
If any annuity distributions are made under an annuity contract, the
annuitant or other payee will be required to include as gross income the portion
of each payment equal to 3% of the aggregate premiums or other consideration
paid for the annuity. The amount, if any, in excess of the included amount is
excluded from gross income. After an amount equal to the aggregate amount
excluded from gross income has been received, all of the annuity payments are
considered to be taxable income.
In the event payment under a Contract is made in a lump sum, the amount of
the payment would be included in the gross income of the Annuitant or other
Payee to the extent of the Annuitant's aggregate premiums or other consideration
paid.
For further information regarding the income tax consequences of owning a
Contract, you should consult a qualified tax adviser.
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 Applications,
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
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<PAGE>
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.
Commissions and other distribution compensation will be paid by the
Company to the selling agents and will not be more than 6.50% of Purchase
Payments. In addition, after the first Account Year, broker-dealers who have
entered into distribution agreements with the Company may receive an annual
renewal commission of no more than 0.50% of the Participant's Account Value. In
addition to commissions, the Company may, from time to time, pay or allow
additional promotional incentives, in the form of cash or other compensation. We
reserve the right to offer these additional incentives only to certain
broker-dealers that sell or are expected to sell during specified time periods
certain minimum amounts of the Contracts or Certificates or other contracts
offered by the Company. Promotional incentives may change at any time.
Commissions may be waived or reduced in connection with certain transactions
described in this Prospectus under the heading "Waivers; Reduced Charges;
Credits; Bonus Guaranteed Interest Rates." We began offering the Contract in
October 1999. During 1999, approximately $126,568 in commissions were paid to
and retained by Clarendon in connection with the distribution of the Contracts.
PERFORMANCE INFORMATION
From time to time the Variable Account may publish reports to
shareholders, sales literature and advertisements containing performance
information relating to the Sub-Accounts. This information may include
standardized and non-standardized "Average Annual Total Return," "Cumulative
Growth Rate" and "Compound Growth Rate." We may also advertise "yield" and
"effective yield" for some Sub-Accounts.
Average Annual Total Return measures the net income of the Sub-Account and
any realized or unrealized gains or losses of the Funds in which it invests,
over the period stated. Average Annual Total Return figures are annualized and
represent the average annual percentage change in the value of an investment in
a Sub-Account over that period. Standardized Average Annual Total Return
information covers the period since we started offering the Sub-Accounts under
the Futurity products or, if shorter, the life of the Sub-Account.
Non-standardized Average Annual Total Return covers the life of each Fund, which
may predate the Futurity products. Cumulative Growth Rate represents the
cumulative change in the value of an investment in the Sub-Account for the
period stated, and is arrived at by calculating the change in the Accumulation
Unit Value of a Sub-Account between the first and the last day of the period
being measured. The difference is expressed as a percentage of the Accumulation
Unit Value at the beginning of the base period. "Compound Growth Rate" is an
annualized measure, calculated by applying a formula that determines the level
of return which, if earned over the entire period, would produce the cumulative
return.
Average Annual Total Return figures assume an initial Purchase Payment of
$1,000 and reflect all applicable withdrawal and Contract charges. The
Cumulative Growth Rate and Compound Growth Rate figures that we advertise do not
reflect withdrawal charges, the annual Account Fee, or any Purchase Payment
Interest, although such figures do reflect all recurring charges. If such
figures were calculated to reflect Purchase Payment Interest credited, the
calculation would also reflect any withdrawal charges made. Results calculated
without withdrawal and/or certain Contract charges will be higher. We may also
use other types of rates of return that do not reflect withdrawal and Contract
charges.
The performance figures used by the Variable Account are based on the
actual historical performance of the Funds for the specified periods, and the
figures are not intended to indicate future performance. For periods before the
date the Contracts became available, we calculate the performance information
for the Sub-Accounts on a hypothetical basis. To do this, we reflect deductions
of the current Contract fees and charges from the historical performance of the
corresponding Fund.
Yield is a measure of the net dividend and interest income earned over a
specific one month or 30-day period (7-day period for the Sun Capital Money
Market Sub-Account), expressed as a percentage of the value of the Sub-Account's
Accumulation Units. Yield is an annualized figure, which means
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that we assume that the Sub-Account generates the same level of net income over
a one-year period and compound that income on a semi-annual basis. We calculate
the effective yield for the Sun Capital Money Market Sub-Account similarly, but
include the increase due to assumed compounding. The Sun Capital Money Market
Sub-Account's effective yield will be slightly higher than its yield as a result
of its compounding effect.
The Variable Account may also from time to time compare its investment
performance to various unmanaged indices or other variable annuities and may
refer to certain rating and other organizations in its marketing materials. More
information on performance and our computations is set forth in the Statement of
Additional Information.
The Company may also advertise the ratings and other information assigned
to it by independent industry ratings organizations. Some of these organizations
are A.M. Best, Moody's Investor's Service, Standard and Poor's Insurance Rating
Services, and Duff and Phelps. Each year A.M. Best reviews the financial status
of thousands of insurers, culminating in the assignment of Best's rating. These
ratings reflect A.M. Best's current opinion of the relevant financial strength
and operating performance of an insurance company in comparison to the norms of
the life/health industry. Best's ratings range from A++ to F. Standard and
Poor's and Duff and Phelps' ratings measure the ability of an insurance company
to meet its obligations under insurance policies it issues. These two ratings do
not measure the insurance company's ability to meet non-policy obligations.
Ratings in general do not relate to the performance of the Sub-Accounts.
We may also advertise endorsements from organizations, individuals or
other parties that recommend the Company or the Contracts. We may occasionally
include in advertisements (1) comparisons of currently taxable and tax deferred
investment programs, based on selected tax brackets; or (2) discussions of
alternative investment vehicles and general economic conditions.
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,
1999 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.
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ADDITIONAL INFORMATION ABOUT THE COMPANY
GENERAL
The Company is engaged in the sale of individual variable life insurance
and individual and group fixed and variable annuities. These contracts are sold
in both the tax-qualified and non-tax-qualified markets. These products are
distributed through individual insurance agents, insurance brokers and
broker-dealers.
The following table sets forth premiums and deposits by major product
categories for each of the last 3 years. See the Notes to the Statutory
Financial Statements of the Company included in this Prospectus for industry
segment information.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(IN $ THOUSANDS)
<S> <C> <C> <C>
Protection $ 16,509 $ 155,907 $ 204,671
Wealth Management $2,651,247 $2,194,895 $2,204,693
---------- ---------- ----------
$2,667,756 $2,350,802 $2,409,364
========== ========== ==========
</TABLE>
SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the Statutory Financial Statements and the Notes thereto
included in this Prospectus beginning on page .
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(IN $ THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues
Premiums, annuity deposits
and other revenue $ 2,869,250 $ 2,581,463 $ 2,623,629 $ 2,215,322 $ 1,883,901
Net investment income and
realized gains 190,844 187,208 298,121 310,172 315,966
----------- ----------- ----------- ----------- -----------
3,060,094 2,768,671 2,921,750 2,525,494 2,199,867
----------- ----------- ----------- ----------- -----------
Benefits and expenses
Policyholder benefits 2,706,121 2,416,950 2,579,104 2,232,528 1,995,208
Other expenses 239,136 214,607 206,065 175,342 150,937
----------- ----------- ----------- ----------- -----------
2,945,257 2,631,557 2,785,169 2,407,870 2,146,145
----------- ----------- ----------- ----------- -----------
Operating gain 114,837 137,114 136,581 117,624 53,722
Federal income tax expense
(benefit) 24,479 11,713 7,339 (5,400) 17,807
----------- ----------- ----------- ----------- -----------
Net income $ 90,358 $ 125,401 $ 129,242 $ 123,024 $ 35,915
=========== =========== =========== =========== ===========
Assets $19,948,155 $16,902,621 $15,925,357 $13,621,952 $12,359,683
=========== =========== =========== =========== ===========
Surplus notes $ 565,000 $ 565,000 $ 565,000 $ 315,000 $ 650,000
=========== =========== =========== =========== ===========
</TABLE>
See "Reinsurance," below, for the effect of the reinsurance agreements on 1999
net income.
See Note 1 to the Statutory Financial Statements for changes in accounting
principles and reporting.
See discussion in "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAUTIONARY STATEMENT
This Prospectus includes forward-looking statements by the Company under
the Private Securities Litigation Reform Act of 1995. These statements are not
matters of historical fact; they relate to such topics as future product sales,
volume growth, market share, market risk and financial goals. It is important to
understand that these forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those that the statements anticipate. These risks and uncertainties may concern,
among other things:
- Heightened competition, particularly in terms of price, product features,
and distribution capability, which could constrain the Company's growth
and profitability.
- Changes in interest rates and market conditions.
- Regulatory and legislative developments.
- Developments in consumer preferences and behavior patterns.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998:
NET INCOME
Net income decreased by $35.0 million to $90.4 million in 1999, reflecting
a decrease of $54.7 million in income from operations and an increase of
$19.7 million in net realized capital gains. (In the following discussion,
"income from operations" refers to the statutory statements of operations line
item, "net gain from operations after dividends to policyholders and federal
income tax and before realized capital gains.")
Income from operations decreased from $125.0 million in 1998 to
$70.3 million in 1999, mainly as a result of the following factors:
- A $32.3 million increase, to $63.7 million in 1999, in the income from
operations from the Company's Wealth Management segment. (See "1999
Compared to 1998 -- Wealth Management Segment," below.)
- The effect of terminating certain reinsurance agreements with the
Company's ultimate parent in 1998. The termination of these agreements was
the predominant factor in the $94.2 million decrease in income from
operations for the Company's Protection segment. (See "1999 Compared to
1998 -- Protection Segment," below.)
- An increase of $7.2 million in income from operations from the Corporate
segment, mainly reflecting dividends from a subsidiary. (See "1999
Compared to 1998 -- Corporate Segment," below.)
INCOME FROM OPERATIONS BY SEGMENT
The Company's income from operations reflects the operations of its 3
business segments: the Wealth Management segment, the Protection segment and the
Corporate segment.
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The following table provides a summary of income from operations by
segment, which is discussed more fully below.
INCOME FROM OPERATIONS BY SEGMENT*
($ IN MILLIONS)
<TABLE>
<CAPTION>
% CHANGE
---------------------
1999 1998 1997 1999/1998 1998/1997
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Wealth Management 63.7 31.4 14.7 102.9% 113.6%
Protection (5.1) 89.1 18.0 (105.7)% 395.0%
Corporate 11.7 4.5 69.8 160.0% (93.6)%
---- ----- ----- ------ -----
70.3 125.0 102.5 (43.8)% 22.0%
==== ===== ===== ====== =====
</TABLE>
* Before net realized capital gains
WEALTH MANAGEMENT SEGMENT
The Wealth Management segment focuses on the savings and retirement needs
of individuals preparing for retirement or who have already retired. It
primarily markets to upscale consumers in the U.S., selling individual and group
fixed and variable annuities. Its major product lines, "Regatta" and "Futurity,"
are combination fixed/variable annuities. In these combination annuities,
contract holders have the choice of allocating payments either to a fixed
account, which provides a guaranteed rate of return, or to variable accounts.
Withdrawals from the fixed account are subject to market value adjustment. In
the variable accounts, the contract holder can choose from a range of investment
options and styles. The return depends upon investment performance of the
options selected. Investment funds available under Regatta products are managed
by Massachusetts Financial Services Company ("MFS"), an affiliate of the
Company. Investment funds available under Futurity products are managed by
several investment managers, including MFS and Sun Capital Advisers, Inc., a
subsidiary of the Company.
The Company distributes its annuity products through a variety of
channels. For the Regatta products, about half are sold through securities
brokers; a further one-fourth through financial institutions, and the remainder
through insurance agents and financial planners. The Futurity products,
introduced in February 1998, are primarily distributed through a dedicated
wholesaler network, including Sun Life of Canada (U.S.) Distributors, Inc., a
subsidiary of the Company.
Although new pension products are not currently sold, there has been a
substantial block of group retirement business in-force, including guaranteed
investment contracts ("GICs"), pension plans and group annuities. A significant
portion of these pension contracts are non-surrenderable, with the result that
the Company's liquidity exposure is limited. GICs were marketed directly in the
U.S. through independent managers. In 1997, the Company decided to no longer
market group pension and GIC products.
Following are the major factors affecting this segment's results in 1999
as compared to 1998.
- - Deposit-type funds, which primarily comprised annuity deposits, increased by
$457.7 million, or 21%, to $2,598.3 million in 1999. Fixed annuity account
deposits were higher by approximately $625 million in 1999, which management
believes is mainly a result of the success of the Company's introduction,
during the fourth quarter of 1998, of a higher Dollar Cost Averaging ("DCA")
rate and a new 6-month DCA program. Under these programs, which were
redesigned in late 1996, deposits are made into the fixed portion of the
annuity contract and receive a bonus rate of interest for the policy year.
During the year, the fixed deposit is systematically transferred to the
variable portion of the contract in equal periodic installments. While fixed
annuity account deposits increased, deposits directly into variable accounts
declined by approximately 13% in 1999. The Company believes this decline was a
consequence of the heightened interest in the DCA programs in 1999.
Sales of the Futurity line of products, introduced in February 1998,
represented approximately 9% of total annuity deposits in 1999. The Company
expects that sales of the Futurity products will continue to increase in the
future, based on management's beliefs that market demand is growing for multi-
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manager variable annuity products, such as Futurity; that the productivity of
Futurity's wholesale distribution network, established in 1998, will continue
to grow; and that the marketplace will respond favorably to introductions of
new Futurity products and product enhancements.
- - Fee income increased as a result of higher variable annuity account balances.
Fee income was higher by approximately $32 million in 1999. The factors
driving this growth in account balances have been market appreciation and net
deposit activity. This growth has generated corresponding increases in fee
income, since fees are determined based on the average assets held in these
accounts. Other income increased by approximately $5 million in 1999, mainly
reflecting a reinsurance agreement entered into in July 1999 with an unrelated
company, which provides reinsurance on certain fixed group annuity contracts.
The net effect of this agreement was to increase income from operations by
approximately $3.4 million.
- - The net year-over-year change in aggregate reserves on policies and contracts
for the Wealth Management segment had the effect of increasing income from
operations for this segment. This change reflected lower reserves related to
minimum guaranteed death benefit product features as well as a variety of
other factors.
- - There has been a shift in demand to variable account products from general
account products. As a consequence, there has been a decline in average
general account invested assets and, in turn, net investment income has
declined. Net investment income reflects only income earned on invested assets
of the general account. In 1999, net investment income for the Wealth
Management segment decreased by $44.0 million, to $114.0 million. This decline
in average general account assets primarily reflects the Company's decision in
1997 to no longer market group pension and GIC products and as a consequence,
a declining block of in-force business as GICs mature and are surrendered.
- - Policyholder benefits (the major elements of which are surrenders and
withdrawals, changes in the liability for premium and other deposit funds, and
related separate account transfers) were higher by approximately $430 million
in 1999, mainly as a result of higher variable annuity surrenders. The
increase in variable annuity surrenders primarily related to a block of
separate account contracts that had been issued seven or more years previously
and for which the surrender charge periods had expired. The Company expects
that as the separate account block of business continues to grow and as an
increasing number of accounts are no longer subject to surrender charges,
surrenders will tend to increase. The Company is implementing a conservation
program with the aim of improving asset retention.
- - Operational expenses, which include general insurance expenses and insurance
taxes, licenses and fees, excluding federal income taxes, increased by
$5.4 million, or 9%, in 1999. This increase reflected costs associated with
operations and technology improvements to support the growth of the Company's
in-force business. Commissions of $153.6 million were higher by $17.7 million
in 1999, mainly as a result of higher sales.
PROTECTION SEGMENT
The Protection Segment comprises two main elements, internal reinsurance
and variable life products.
INTERNAL REINSURANCE
In recent years, the Company has had various reinsurance agreements with
Sun Life (Canada). In some of these arrangements, Sun Life (Canada) has
reinsured the mortality risks of individual life policies sold in prior years by
the Company. These agreements, in the aggregate, had an immaterial effect on net
income in the years 1998 and 1999. Under another reinsurance agreement, which
became effective January 1, 1991 and terminated October 1, 1998, the Company
reinsured certain individual life insurance contracts issued by Sun Life
(Canada). This agreement had the effect of increasing income from operations by
$24.6 million in 1998. In addition, the effect of terminating this agreement was
to further increase 1998 net income by $65.7 million as the termination payment
was less than the
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<PAGE>
reserves held under the agreement. Because this agreement terminated in 1998, it
had no effect on income from operations in 1999.
VARIABLE LIFE PRODUCTS
The Company's primary individual variable life insurance product is its
variable universal life product marketed to the company-owned life insurance
("COLI") market. This product was introduced in late 1997. The Company's
management expects that the Company's variable life business will grow and
become more significant in the future. In September 1999, the Company introduced
a new variable universal life product as part of the Futurity product portfolio.
Costs related to developing this product were primarily responsible for the
decrease of approximately $4 million in income from operations for this portion
of the Protection segment.
CORPORATE SEGMENT
The Corporate segment includes the capital of the Company, its investments
in subsidiaries and items not otherwise attributable to either the Wealth
Management segment or the Protection segment.
In 1999, income from operations for this segment increased by
$7.2 million to $11.7 million. This increase reflected higher net investment
income, mainly from dividends of $19.3 million received during the 4th quarter
from a subsidiary, New London Trust, F.S.B. Partially offsetting this change in
net investment income were higher operational expenses and higher federal income
taxes attributable to this segment.
1998 COMPARED TO 1997:
NET INCOME
Net income decreased by $3.8 million to $125.4 million in 1998, reflecting
an increase of $22.5 million in income from operations and a decrease of
$26.3 million in net realized capital gains.
Income from operations increased from $102.5 million in 1997 to
$125.0 million in 1998, mainly as a result of the following factors:
- - A $16.7 million increase, to $31.4 million in 1998, in the income from
operations from the Company's Wealth Management segment. (See "1998 Compared
to 1997 -- Wealth Management Segment," below.)
- - The effect of terminating certain reinsurance agreements with Sun Life
(Canada). The termination of these agreements was the predominant factor in
the $71.1 million increase in income from operations for the Company's
Protection segment.
- - The effects of the Company's December 1997 reorganization (described in
"Corporate Segment," below), as a result of which MFS is no longer a
subsidiary of the Company. As a result of this reorganization, dividends from
subsidiaries were lower in 1998 than in 1997 and certain subsidiary tax
benefits were no longer available to the Company. Also affecting income from
operations for the Corporate segment in 1998 was that income earned on the
proceeds of a December 1997 issuance of a $250 million surplus note was lower
than the related interest expense.
Net realized capital gains decreased from $26.7 million in 1997 to
$0.4 million in 1998. This decrease was also due to the Company's December
1997 reorganization which resulted in a realized capital gain of
$21.2 million in 1997.
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<PAGE>
INCOME FROM OPERATIONS BY SEGMENT
WEALTH MANAGEMENT SEGMENT
Following are the major factors affecting the Wealth Management segment's
results in 1998 as compared to 1997:
- Annuity deposits declined by about $27 million, or 1%, to $2.2 billion in
1998. Fixed annuity account deposits were lower by approximately 7% in
1998, while deposits into variable annuity accounts increased in total and
as a proportion of total annuity deposits. These trends reflected market
conditions and competitive factors.
Deposits into the DCA programs, a feature of the Company's combination
fixed/variable annuity products, were a significant element of account
deposits. Under these programs, which were redesigned in late 1996,
deposits are made into the fixed portion of the annuity contract and
receive a bonus rate of interest for the policy year. During the year, the
fixed deposit is systematically transferred to the variable portion of the
contract in equal periodic installments. DCA deposits overall were flat in
1998 compared to 1997. This pattern resulted, in part, from heightened
competition, as other companies introduced similar DCA programs within in
1998. During the fourth quarter of 1998, the Company introduced a higher
DCA rate and a new six-month DCA program. DCA deposits for that quarter
were higher, compared to the preceding 1998 quarters.
An increase in variable account deposits in 1998 reflected both the
continuing strong growth in equity markets generally and the continuing
strong performance of the investment funds underlying the Company's
variable annuity products. The continuing strong equity markets, low
interest rate environment, and demographic trends, among other factors,
increased the demand and market for wealth accumulation products in the
U.S., particularly for variable annuities. These factors contributed to the
growth in the Company's variable account deposits in 1998, despite
heightened competition.
The Company introduced its Futurity line of products in February 1998.
Related deposits represented about 6% of the total for the Wealth
Management segment in 1998.
- Fee income increased as a result of higher variable annuity account
balances. The main factors driving this growth in account balances were
market appreciation and net deposit activity. This growth generated
corresponding increases in fee income, since fees are determined based on
the average assets held in these accounts. Fee income increased by
approximately $43 million, or 39%, in 1998.
- Because there was a shift to variable accounts from the general account,
net investment income declined. Net investment income reflects only income
earned on invested assets of the general account. In 1998, net investment
income for the Wealth Management segment decreased by about $40 million,
or 20%, compared to 1997, mainly as a result of the decline in average
invested assets in the Company's general account. This decline in average
general account assets mainly reflected the shift in deposits in recent
years from the fixed account to variable accounts. It also reflected the
Company's decision in 1997 to no longer market group pension and GICs.
- Policyholder benefits were lower, mainly reflecting lower surrender
activity compared to 1997. During 1997 and into the first half of 1998,
surrender and withdrawal activity had been high. This activity primarily
related to a block of separate account contracts that had been issued 7 or
more years previously and for which the surrender charge periods had
expired. While variable account surrenders continued to rise, general
account surrenders declined in 1998. As a result of this pattern of
activity, policyholder benefits (of which surrenders and withdrawals, the
related changes in the liability for premium and other deposit funds, and
related separate account transfers are the major elements) increased in
1997 and were lower in 1998.
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<PAGE>
- As a result of investments in technology and infrastructure to enhance
annuity operations, operational expenses increased by approximately $12
million, or 25%, in 1998 compared to 1997. These increases reflected 3
main factors:
- Higher volumes of annuity business, requiring greater administrative
support.
- Improvements to the computer systems and technology that support the
annuity business. These improvements involved information systems
supporting the growth of the Company's in-force business, particularly
its combination fixed/variable annuities.
- Costs associated with the product design and implementation of the new
Futurity multi-manager annuity product and the development of a new
product within the Regatta product line.
PROTECTION SEGMENT
The reinsurance arrangements in which Sun Life (Canada) has reinsured the
mortality risks of individual life policies sold in prior years by the Company
had an immaterial effect, in the aggregate, on net income in 1997 and 1998.
Under another agreement, which became effective January 1, 1991 and terminated
October 1, 1998, the Company reinsured certain individual life insurance
contracts issued by Sun Life (Canada). This agreement had the effect of
increasing income from operations by $37.1 million in 1997. Income from
operations decreased to $24.6 million in 1998, because the agreement was in
place only through the first 9 months of 1998. In addition, the effect of
terminating this agreement was to further increase 1998 net income by $65.7
million. This termination-related increase in 1998 represented a reasonable
approximation of the value of the stream of future earnings that the agreement
would have generated had it remained in effect.
The Company's primary individual variable life insurance product is its
variable universal life product marketed to the company-owned life insurance
("COLI") market. This product was introduced in late 1997.
CORPORATE SEGMENT
In 1998, income from operations decreased by $65.3 million to
$4.5 million for the Corporate segment. This decrease reflected 2 main factors:
- Dividends from subsidiaries were lower than in 1997 by $37.5 million. This
decrease mainly resulted from a December 1997 reorganization, in which the
Company transferred its ownership of MFS to its parent company, Sun Life
of Canada (U.S.) Holdings, Inc. ("Sun Life (U.S.) Holdings.") As a result
of this reorganization, the Company received no dividends from MFS in
1998. By comparison, it received $33.1 million of MFS dividends in 1997.
- Net investment income, other than dividends from subsidiaries, decreased
by $5.9 million in 1998 over 1997, reflecting the effect of the Company's
December 1997 issuance of a $250 million surplus note to Sun Life (U.S.)
Holdings. Interest expense exceeded investment earnings on the related
funds.
FINANCIAL CONDITION AND LIQUIDITY
ASSETS
The Company's total assets comprise those held in its general account and
those held in its separate accounts. General account assets support general
account liabilities. Separate accounts and their assets are of 2 main types:
- Those assets held in a "fixed" separate account, which the Company
established for amounts that contract holders allocate to the fixed
portion of their combination fixed/variable deferred annuity contracts.
Fixed separate account assets are available to fund general account
liabilities and general account assets are available to fund the
liabilities of this fixed separate account. The
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<PAGE>
Company manages the assets of this fixed separate account according to
general account investment policy guidelines.
- Those assets held in a number of registered and non-registered "variable"
separate accounts as investment vehicles for the Company's variable life
and annuity contracts. Policyholders may choose from among various
investment options offered under these contracts according to their
individual needs and preferences. Policyholders assume the investment
risks associated with these choices. General account and fixed separate
account assets are not available to fund the liabilities of these variable
accounts.
The following table summarizes significant changes in asset balances
during 1999, 1998 and 1997. The changes are discussed below.
<TABLE>
<CAPTION>
ASSETS % CHANGE
1999 1998 1997 1999/1998 1998/1997
--------- --------- --------- --------- ---------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
General account assets.................. $ 2,377.1 $ 2,932.2 $ 4,513.5 (18.9)% (35.0)%
Fixed separate account assets........... 2,080.7 2,195.6 2,343.9 (5.2)% (6.3)%
--------- --------- --------- ----- -----
$ 4,457.8 $ 5,127.8 $ 6,857.4 (13.1)% (25.2)%
Variable separate account assets........ 15,490.3 11,774.8 9,068.0 31.6% 29.9%
--------- --------- --------- ----- -----
Total assets............................ $19,948.1 $16,902.6 $15,925.4 18.0% 6.1%
========= ========= ========= ===== =====
</TABLE>
General account and fixed separate account assets, taken together,
decreased by 13.2% in 1999; but variable separate account assets increased by
31.6%. In 1998, the combined general account and fixed separate account
decreased by 25.2%, while variable separate account assets increased by 29.9%.
This growth in variable accounts relative to the general and fixed accounts
reflects 2 main factors: (1) appreciation of the funds held in the variable
separate accounts has exceeded that of the funds held in the general and fixed
separate accounts; and (2) annuity deposits and exchanges into variable accounts
have increased, while annuity deposits into fixed accounts have slowed. The
Company believes this pattern has reflected a shift in the preferences of
policyholders, which is largely attributable to the strong performance of equity
markets in general and of the Company's variable account funds in particular.
The assets of the general account are available to support general account
liabilities. For management purposes, it is the Company's practice to segment
its general account to facilitate the matching of assets and liabilities.
General account assets primarily comprise cash and invested assets, which
represented essentially all of general account assets at year-end 1999. Major
types of invested asset holdings included bonds, mortgages, real estate and
common stock. The Company's bond holdings comprised 51.5% of the Company's
portfolio at year-end 1999. Bonds included both public and private issues. It is
the Company's policy to acquire only investment-grade securities. As a result,
the overall quality of the bond portfolio is high. At year-end 1999, only 0.5%
were rated below-investment-grade; i.e., they had National Association of
Insurance Commissioners ("NAIC") ratings lower than "1" or "2." The Company's
mortgage holdings amounted to $528.9 million at year-end 1999, representing
22.3% of the total portfolio. All mortgage holdings at year-end 1999 were in
good standing. The Company believes that the high quality of its mortgage
portfolio is largely attributable to its stringent underwriting standards. At
year-end 1999, investment real estate amounted to $79.2 million, representing
about 3.3% of the total portfolio. The Company invests in real estate to enhance
yields and, because of the long-term nature of these investments, the Company
uses them for purposes of matching with products having long-term liability
durations. Common stock holdings amounted to $75.3 million, representing about
3.2% of the portfolio. These holdings comprised the Company's ownership shares
in subsidiaries.
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<PAGE>
LIABILITIES
As with assets, the proportion of variable separate account liabilities to
total liabilities has been increasing. Most of the Company's liabilities
comprise reserves for life insurance and for annuity contracts and deposit
funds. The Company expects the declining trend in general account liabilities to
continue, because it believes that net maturities will continue to exceed sales
for the fixed contracts associated with these liabilities. This trend stems
mainly from the Company's 1997 decision to discontinue selling group pension and
GIC contracts and to focus its marketing efforts on its combination
fixed/variable annuity products.
CAPITAL MARKETS RISK MANAGEMENT
See "Quantitative and Qualitative Disclosures About Market Risk," below,
for a discussion of the Company's capital markets risk management.
CAPITAL RESOURCES
CAPITAL ADEQUACY
The National Association of Insurance Commissioners ("NAIC") adopted
regulations at the end of 1993 that established minimum capitalization
requirements for insurance companies, based on risk-based capital ("RBC")
formulas. These requirements are intended to identify undercapitalized
companies, so that specific regulatory actions can be taken on a timely basis.
The RBC formula for life insurance companies calculates capital requirements
related to asset, insurance, interest rate, and business risks. According to the
RBC calculation, the Company's capital was well in excess of its required
capital at year-end 1999.
LIQUIDITY
The Company's liquidity requirements are generally met by funds from
operations. The Company's main uses of funds are to pay out death benefits and
other maturing insurance and annuity contract obligations; to make pay-outs on
contract terminations; to purchase new investments; to fund new business
ventures; and to pay normal operating expenditures and taxes. The Company's main
sources of funds are premiums and deposits on insurance and annuity products;
proceeds from the sale of investments; income from investments; and repayments
of investment principal.
In managing its general account and fixed separate account assets in
relation to its liabilities, the Company has segmented these assets by product
or by groups of products. The Company manages each segment's assets based on an
investment policy that it has established for that segment. Among other matters,
this investment policy considers liquidity requirements and provides cash flow
estimates. The Company reviews these policies quarterly.
The Company's liquidity targets are intended to enable it to meet its
day-to-day cash requirements. On a quarterly basis, the Company compares its
total "liquifiable" assets to its total demand liabilities. Liquifiable assets
comprise cash and assets that could quickly be converted to cash should the need
arise. These assets include short-term investments and other current assets and
investment-grade bonds. The Company's policy is to maintain a liquidity ratio in
excess of 100%, and it did so throughout 1999. Based on its ongoing liquidity
analyses, the Company believes that its available liquidity is more than
sufficient to meet its liquidity needs.
OTHER MATTERS
DEMUTUALIZATION
On January 27, 1998, Sun Life (Canada) announced that its Board of
Directors had requested that management develop a plan to demutualize.
Demutualization would involve converting from a mutual structure, with ownership
by policyholders, to a shareholder-owned company. It would provide that the
ownership interest currently held by policyholders be distributed to them in the
form of shares, without affecting their interests as policyholders. In
June 1999, the Sun Life (Canada)'s Board of
53
<PAGE>
Directors approved the demutualization timetable recommended by management, and
on September 28, 1999, Sun Life (Canada)'s Board of Directors approved the
demutualization plan. On December 6, 1999, Sun Life (Canada) received approval
for its demutualization plan from the Michigan Commissioner of Insurance. At a
Special Meeting on December 15, 1999, eligible policyholders of Sun Life
(Canada) voted in favor of the Company's plans to demutualize. Sun Life (Canada)
completed its demutualization on March 22, 2000 and its Initial Public Offering
("IPO") on March 29, 2000. The demutualization of Sun Life (Canada) is not
expected to have any significant impact on the Company.
SALE OF SUBSIDIARIES
On February 5, 1999, the Company sold Massachusetts Casualty Insurance
Company ("MCIC"), a disability insurance company, to an unaffiliated party. The
net proceeds of this sale were $34.0 million and the Company realized a post tax
gain of $4.9 million.
On October 29, 1999, the Company completed the sale of its wholly-owned
subsidiary, New London Trust F.S.B. ("NLT"), for approximately $30.3 million to
an unaffiliated party. The Company realized a post-tax gain of $13.2 million
from this sale. This transaction is not expected to have a significant effect on
the ongoing operations of the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This discussion covers market risks associated with investment portfolios
that support the Company's general account liabilities. This discussion does not
cover market risks associated with those investment portfolios that support
separate account products. For these products, the policyholder, rather than the
Company, assumes these market risks.
GENERAL
The assets of the general account are available to support general account
liabilities. For purposes of managing these assets in relation to these
liabilities, the Company notionally segments these assets by product or by
groups of products. The Company manages each segment's assets based on an
investment policy that it has established for that segment. The policy covers
the segment's liability characteristics and liquidity requirements, provides
cash flow estimates, and sets targets for asset mix, duration, and quality. Each
quarter, investment and business unit managers review these policies to ensure
that the policies remain appropriate, taking into account each segment's
liability characteristics.
TYPES OF MARKET RISKS
The Company's stringent underwriting standards and practices have resulted
in high-quality portfolios and have the effect of limiting credit risk. It is
the Company's policy, for example, not to purchase below-investment-grade
securities. Also, as a matter of investment policy, the Company assumes no
foreign currency or commodity risk; nor does it assume equity price risk except
to the extent that it holds real estate in its portfolios. (At year-end 1999,
investment real estate holdings represented less than 4% of its total general
account portfolio.) The management of interest rate risk exposure is discussed
below.
INTEREST RATE RISK MANAGEMENT
The Company's fixed interest rate liabilities are primarily supported by
well-diversified portfolios of fixed interest investments. They are also
supported by holdings of real estate and floating rate notes. All of these fixed
interest investments are held for other than trading purposes and can include
publicly issued and privately placed bonds and commercial mortgage loans. Public
bonds can include Treasury bonds, corporate bonds, and money market instruments.
The Company's fixed income portfolios also hold securitized assets, including
mortgage-backed securities ("MBS") and asset-backed securities. These securities
are subject to the same standards applied to other portfolio investments,
including relative value criteria and diversification guidelines. In portfolios
backing interest-sensitive liabilities, the Company's policy is to limit MBS
holdings to less than 10% of total portfolio assets. In all portfolios, the
Company restricts MBS investments to pass-through securities issued by U.S.
government agencies
54
<PAGE>
and to collateralized mortgage obligations, which are expected to exhibit
relatively low volatility. The Company does not engage in lever-aged
transactions and it does not invest in the more speculative forms of these
instruments such as the interest-only, principal-only, inverse floater, or
residual tranches.
Changes in the level of domestic interest rates affect the market value of
fixed interest assets and liabilities. Segments whose liabilities mainly arise
from the sale of products containing interest rate guarantees for certain terms
are sensitive to changes in interest rates. In these segments, the Company uses
"immunization" strategies, which are specifically designed to minimize the loss
from wide fluctuations in interest rates. The Company supports these strategies
using analytical and modeling software acquired from outside vendors.
Significant features of the Company's immunization models include:
- an economic or market value basis for both assets and liabilities;
- an option pricing methodology;
- the use of effective duration and convexity to measure interest rate
sensitivity;
- the use of key rate durations to estimate interest rate exposure at
different parts of the yield curve and to estimate the exposure to
non-parallel shifts in the yield curve.
The Company's Interest Rate Risk Committee meets monthly. After reviewing
duration analyses, market conditions and forecasts, the Committee develops
specific asset management strategies for the interest-sensitive portfolios.
These strategies may involve managing to achieve small intentional mismatches,
either in terms of total effective duration or for certain key rate durations,
between the liabilities and related assets of particular segments. The Company
manages these mismatches to a tolerance range of plus or minus 0.5.
Asset strategies may include the use of Treasury futures or interest rate
swaps to adjust the duration profiles for particular portfolios. All derivative
transactions are conducted under written operating guidelines and are marked to
market. Total positions and exposures are reported to the Board of Directors on
a monthly basis. The counterparties to hedging transactions are major highly
rated financial institutions, with respect to which the risk of the Company's
incurring losses related to credit exposures is considered remote.
Liabilities categorized as financial instruments and held in the Company's
general account at December 31, 1999 had a fair value of $1,024.6 million. Fixed
income investments supporting those liabilities had a fair value of $2,072.1
million at that date. The Company performed a sensitivity analysis on these
interest-sensitive liabilities and assets at December 31, 1999. The analysis
showed that if there were an immediate increase of 100 basis points in interest
rates, the fair value of the liabilities would show a net decrease of $30.6
million and the corresponding assets would show a net decrease of $80.5 million.
By comparison, liabilities categorized as financial instruments and held
in the Company's general account at December 31, 1998 had a fair value of
$1,538.3 million. Fixed income investments supporting those liabilities had a
fair value of $2,710.1 million at that date. The Company performed a sensitivity
analysis on these interest-sensitive liabilities and assets at December 31,
1998. The analysis showed that if there were an immediate increase of 100 basis
points in interest rates, the fair value of the liabilities would show a net
decrease of $46.3 million and the corresponding assets would show a net decrease
of $113.2 million.
The Company produced these estimates using computer models. Since these
models reflect assumptions about the future, they contain an element of
uncertainty. For example, the models contain assumptions about future
policyholder behavior and asset cash flows. Actual policyholder behavior and
asset cash flows could differ from what the models show. As a result, the
models' estimates of duration and market values may not reflect what actually
will occur. The models are further limited by the fact that they do not provide
for the possibility that management action could be taken to mitigate adverse
results. The Company believes that this limitation is one of conservatism; that
is, it will tend to cause
55
<PAGE>
the models to produce estimates that are generally worse than one might actually
expect, all other things being equal.
Based on its processes for analyzing and managing interest rate risk, the
Company believes its exposure to interest rate changes will not materially
affect its near-term financial position, results of operations, or cash flows.
REINSURANCE
The Company has agreements with Sun Life (Canada) which provide that Sun
Life (Canada) 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
in 1999 had the effect of decreasing net income from operations by approximately
$1,527,000.
Effective January 1, 1991, the Company entered into an agreement with Sun
Life (Canada) under which certain individual life insurance contracts issued by
Sun Life (Canada) were reinsured by the Company on a 90% coinsurance basis. Also
effective January 1, 1991 the Company entered into an agreement with Sun Life
(Canada) which provides that Sun Life (Canada) will reinsure the mortality risks
in excess of $500,000 per policy for the individual life insurance contracts
assumed by the Company in the reinsurance agreement described above. Such death
benefits are reinsured on a yearly renewable term basis. The life reinsurance
assumed agreement requires 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 for the year ended December 31, 1998.
The Company terminated these agreements effective October 1, 1998, resulting in
an increase in income from operations in 1998 of $65,679,000 which included a
cash settlement.
The Company has also executed reinsurance agreements with unrelated
companies which provide reinsurance of certain individual life insurance
contracts on a modified coinsurance basis under which all deficiency reserves
are ceded. Reinsurance transactions under this agreement had the effect of
increasing income from operations by $193,000 in 1999.
During 1999, the Company entered into an agreement with an unrelated
company which provides reinsurance on certain fixed group annuity contracts. The
net effect of this agreement was to increase income from operations by
approximately $3,400,000. Also during 1999, the Company entered into three
agreements with two unrelated companies for the purpose of obtaining stop-loss
coverage of guaranteed minimum death benefit exposure with respect to the
Company's variable annuity business. The net effect of these agreements was to
increase income from operations by approximately $157,000.
RESERVES
In accordance with the life insurance laws and regulations under which the
Company operates, it is obligated to carry on its books, as liabilities,
actuarially determined reserves to meet its obligations on its outstanding
contracts. Reserves are based on mortality tables in general use in the United
States and are computed to equal amounts that, with additions from premiums to
be received, and with interest on such reserves compounded annually at certain
assumed rates, will be sufficient to meet the Company's policy obligations at
their maturities or in the event of an insured's death. In the accompanying
Financial Statements, these reserves are determined in accordance with statutory
regulations.
INVESTMENTS
Of the Company's total assets of $19.9 billion at December 31, 1999, 88.1%
($17.6 billion) consisted of unitized and non-unitized separate account assets,
6.1% ($1.2 billion) was invested in bonds and similar securities, 2.7%
($528 million) was invested in mortgages, 0.4% ($75.3 million) was invested in
subsidiaries, 0.4% ($94.8 million) was invested in real estate, and the
remaining 2.3% ($456.1 million) was invested in cash and other assets.
56
<PAGE>
COMPETITION
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other entities
marketing insurance products. According to a 1999 statistical study published by
A.M. Best, the Company ranked 36th among North American life insurance companies
based upon total assets as of December 31, 1998.
EMPLOYEES
The Company and Sun Life (Canada) have entered into a service agreement
which provides that the latter will furnish the Company, as required, with
personnel as well as certain services and facilities on a cost reimbursement
basis. As of March 31, 2000, the Company had direct employees who are
employed at its Principal Executive Office in Wellesley Hills, Massachusetts and
at its Retirement Products and Services Division in Boston, Massachusetts.
PROPERTIES
The Company occupies office space owned by it and leased to Sun Life
(Canada), and certain unrelated parties for lease terms not exceeding 5 years.
The Company also occupies office space which it leases from unaffiliated parties
for various lease terms.
STATE REGULATION
The Company is subject to the laws of the State of Delaware governing life
insurance companies and to regulation by the Commissioner of Insurance of
Delaware. An annual statement is filed with the Commissioner of Insurance on or
before March lst in each year relating to the operations of the Company for the
preceding year and its financial condition on December 31st of such year. Its
books and records are subject to review or examination by the Commissioner or
his agents at any time and a full examination of its operations is conducted at
periodic intervals.
The Company is also subject to the insurance laws and regulations of the
other states and jurisdictions in which it is licensed to operate. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative powers with respect to licensing to transact business, overseeing
trade practices, licensing agents, approving policy forms, establishing reserve
requirements, fixing maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. Each insurance company is required to file detailed
annual reports with supervisory agencies in each of the fire jurisdictions in
which it does business and its operations and accounts are subject to
examination by such agencies at regular intervals.
In addition, many states regulate affiliated groups of insurers, such as
the Company, Sun Life (Canada) and its affiliates, under insurance holding
company legislation. Under such laws, inter-company transfers of assets and
dividend payments from insurance subsidiaries may be subject to prior notice or
approval, depending on the size of such transfers and payments in relation to
the financial positions of the companies involved. Under insurance guaranty fund
laws in most states, insurers doing business therein can be assessed (up to
prescribed limits) for policyholder losses incurred by insolvent companies. The
amount of any future assessments of the Company under these laws cannot be
reasonably estimated. However, most of these laws do provide that an assessment
may be excused or deferred if it would threaten an insurer's own financial
strength and many permit the deduction of all or a portion of any such
assessment from any future premium or similar taxes payable.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies, the tax treatment
of insurance products and its impact on the relative desirability of various
personal investment vehicles.
------------------------
57
<PAGE>
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, 1999 included in the Statement of Additional Information and the
statutory financial statements of the Company for the years ended December 31,
1999, 1998 and 1997 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 Fund shares held in the Sub-Accounts of the Variable Account.
The financial statements of the Variable Account for the year ended
December 31, 1999 are included in the Statement of Additional Information.
58
<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, 1999 AND 1998 (IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 1,221,970 $ 1,763,468
Common stocks 75,283 128,445
Mortgage loans on real estate 528,911 535,003
Properties acquired in satisfaction of debt 15,641 17,207
Investment real estate 79,182 78,021
Policy loans 40,095 41,944
Cash and short-term investments 316,971 265,226
Other invested assets 67,938 64,177
Investment income due and accrued 25,303 35,706
Federal income tax recoverable and interest thereon -- 1,110
Other assets 5,807 1,928
----------- -----------
General account assets 2,377,101 2,932,235
Separate account assets
Unitized 15,490,328 11,774,745
Non-unitized 2,080,726 2,195,641
----------- -----------
Total admitted assets $19,948,155 $16,902,621
=========== ===========
LIABILITIES
Aggregate reserve for life policies and contracts $ 1,153,642 $ 1,216,107
Supplementary contracts 3,182 1,885
Policy and contract claims 962 369
Liability for premium and other deposit funds 564,820 1,000,875
Surrender values on cancelled policies 16 5
Interest maintenance reserve 41,771 40,490
Commissions to agents due or accrued 3,253 2,615
General expenses due or accrued 14,055 5,932
Transfers from Separate Accounts due or accrued (467,619) (361,863)
Taxes, licenses and fees due or accrued, excluding FIT 379 401
Federal income taxes due or accrued 89,031 25,019
Unearned investment income 22 23
Amounts withheld or retained by company as agent or
trustee (442) 529
Remittances and items not allocated 1,078 5,176
Asset valuation reserve 44,071 44,392
Payable to parent, subsidiaries, and affiliates 26,284 30,381
Payable for securities -- 428
Other liabilities 16,674 9,770
----------- -----------
General account liabilities 1,491,179 2,022,534
Separate account liabilities:
Unitized 15,489,908 11,774,522
Non-unitized 2,080,726 2,195,641
----------- -----------
Total liabilities 19,061,813 15,992,697
----------- -----------
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 116,087 139,669
----------- -----------
Surplus 880,442 904,024
----------- -----------
Total common capital stock and surplus 886,342 909,924
----------- -----------
Total liabilities, capital stock and surplus $19,948,155 $16,902,621
=========== ===========
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
59
<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, 1999, 1998 AND 1997 (IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INCOME:
Premiums and annuity considerations $ 69,492 $ 210,198 $ 254,066
Deposit-type funds 2,598,265 2,140,604 2,155,297
Considerations for supplementary contracts without
life contingencies and dividend accumulations 3,461 2,086 1,615
Net investment income 167,035 184,532 270,249
Amortization of interest maintenance reserve 3,702 2,282 1,166
Income from fees associated with investment
management and administration and contract
guarantees from Separate Account 173,417 141,211 109,757
Net gain from operations from Separate Account 61 -- 5
Other income 24,554 87,364 102,889
---------- ---------- ----------
Total Income 3,039,987 2,768,277 2,895,044
---------- ---------- ----------
BENEFITS AND EXPENSES:
Death benefits 4,386 15,335 17,284
Annuity benefits 155,387 153,636 148,135
Disability benefits and benefits under accident and
health policies -- 104 132
Surrender benefits and other fund withdrawals 2,313,179 1,933,833 1,854,004
Interest on policy or contract funds 237 (140) 699
Payments on supplementary contracts without life
contingencies and dividend accumulations 2,345 2,528 1,687
Increase (decrease) in aggregate reserves for life
and accident and health policies and contracts (62,465) (972,135) 127,278
Decrease in liability for premium and other deposit
funds (436,055) (449,831) (447,603)
Increase (decrease) in reserve for supplementary
contracts without life contingencies and for
dividend and coupon accumulations 1,296 (362) 42
---------- ---------- ----------
Total Benefits 1,978,310 682,968 1,701,658
---------- ---------- ----------
Commissions on premiums and annuity considerations
(direct business only) 155,381 137,718 132,700
Commissions and expense allowances on reinsurance
assumed -- 13,032 17,951
General insurance expenses 75,046 58,132 46,624
Insurance taxes, licenses and fees, excluding federal
income taxes 8,710 7,388 8,267
Increase (decrease) in loading on and cost of
collection in excess of loading on deferred and
uncollected premiums -- (1,663) 523
Net transfers to Separate Accounts 727,811 722,851 844,130
Reserve and fund adjustments on reinsurance
terminated -- 1,017,112 --
---------- ---------- ----------
Total Benefits and Expenses $2,945,258 $2,637,538 $2,751,853
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
60
<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 (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net gain from operations before dividends to
policyholders and federal income tax expense 94,729 130,739 143,191
Dividends to policyholders -- (5,981) 33,316
------- -------- --------
Net gain from operations after dividends to
policyholders and before federal income tax
expense 94,729 136,720 109,875
Federal income tax expense, (excluding tax on
capital gains) 24,479 11,713 7,339
------- -------- --------
Net gain from operations after dividends to
policyholders and federal income taxes and
before realized capital gains 70,250 125,007 102,536
Net realized capital gains less capital gains
tax and transferred to the Interest
Maintenance Reserve 20,108 394 26,706
------- -------- --------
NET INCOME $90,358 $125,401 $129,242
======= ======== ========
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
61
<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, 1999, 1998 AND 1997 (IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- --------
<S> <C> <C> <C>
Capital and Surplus, Beginning of Year $909,924 $832,695 $567,143
-------- -------- --------
Net Income 90,358 125,401 129,242
Change in net unrealized capital gains (losses) (36,111) (384) 1,152
Change in non-admitted assets and related items 1,715 (1,086) (463)
Change in reserve due to change in valuation basis -- 39,016
Change in asset valuation reserve 320 3,213 6,307
Surplus (contributed to) withdrawn from Separate
Accounts during period 136 82 --
Other changes in surplus in Separate Accounts
Statements -- 10 --
Change in surplus notes -- -- 250,000
Dividends to stockholders (80,000) (50,000) (159,722)
Aggregate write-ins for gains and (losses) in surplus -- (7) 20
-------- -------- --------
Net change in capital and surplus for the year (23,582) 77,229 265,552
-------- -------- --------
Capital and Surplus, End of Year $886,342 $909,924 $832,695
======== ======== ========
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
62
<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, 1999, 1998 AND 1997 (IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash Provided by Operations:
Premiums, annuity considerations and deposit
funds received $ 2,667,756 $ 2,361,669 $ 2,410,919
Considerations for supplementary contracts and
dividend accumulations received 3,461 2,086 1,615
Net investment income received 225,038 236,944 345,279
Fees associated with investment management,
administration, and contract guarentees from
Separate Accounts 173,417 141,211 --
Other income received 24,555 111,936 208,223
----------- ----------- -----------
Total receipts 3,094,227 2,853,846 2,966,036
----------- ----------- -----------
Benefits paid (other than dividends) 2,474,693 2,107,736 2,020,747
Insurance expenses and taxes paid (other than
federal income and capital gains taxes) 230,744 217,023 203,650
Net cash transferred to Separate Accounts 833,567 800,636 895,465
Dividends paid to policyholders -- 26,519 28,316
Federal income tax payments
(recoveries),(excluding tax on capital
gains) (40,644) 46,965 1,397
Other--net 237 (138) 698
----------- ----------- -----------
Total payments 3,498,597 3,198,741 3,150,273
----------- ----------- -----------
Net cash used in operations (404,370) (344,895) (184,237)
----------- ----------- -----------
Proceeds from long-term investments sold,
matured or repaid (after deducting taxes on
capital gains (losses) of $(1,768) for 1999,
$2,038 for 1998, and $750 for 1997) 1,065,307 1,261,396 1,343,803
Issuance of surplus notes -- -- 250,000
Other cash provided (used) 13,797 (40,529) 71,095
----------- ----------- -----------
Total cash provided 1,079,104 1,220,867 1,664,898
----------- ----------- -----------
Cash Applied:
Cost of long-term investments acquired (484,417) (967,901) (773,783)
Other cash applied (138,572) (187,263) (310,519)
----------- ----------- -----------
Total cash applied (622,989) (1,155,164) (1,084,302)
Net change in cash and short-term investments 51,745 (279,192) 396,359
Cash and short-term investments:
Beginning of year 265,226 544,418 148,059
----------- ----------- -----------
End of year $ 316,971 $ 265,226 $ 544,418
=========== =========== ===========
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
63
<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, 1999, 1998 AND 1997
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 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"), a mutual insurance company.
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
19 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 mortgage backed securities are generally carried at
amortized cost. Changes in prepayment assumptions and resulting cash flows are
confirmed retrospectively. 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 the Interest
Maintenance Reserve (IMR). Investments in non-insurance subsidiaries are carried
on the equity basis. 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.
64
<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, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
POLICY AND CONTRACT RESERVES
The reserves for life insurance and annuity contracts are computed in accordance
with presently accepted actuarial standards, and are based on actuarial
assumptions and methods (including use of published mortality tables and
prescribed interest rates) which produce 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.
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.
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.
Gains (losses) from mortality experience and investment experience of the
separate accounts, not applicable to contract owners, and accrued expense
allowances recognized in reserves are receivable from or payable to the general
account. Accumulated amounts 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 $467,619,000 in 1999 and $361,863,000 in
1998.
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.
65
<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, 1999, 1998 AND 1997
2. INVESTMENTS IN SUBSIDIARIES
The Company owns all of the outstanding shares of the following subsidiaries:
Sun Life Insurance and Annuity Company of New York ("Sun Life (N.Y.)") is
engaged in the sale of individual fixed and variable annuity contracts and group
life and group long term disability insurance contracts in the State of New
York;
Sun Life of Canada (U.S.) Distributors, Inc. (formerly Sun Investment Services
Company) ("Sundisco"), is a registered broker-dealer;
Sun Life Financial Services Limited ("SLFSL"), serves as the marketing
administrator for the distribution of the offshore products of SLOC (Bermuda
branch), an affiliate;
Sun Benefit Services Company, Inc. ("Sunbesco") receives renewal commissions on
a disability product and is currently inactive;
Sun Capital Advisers, Inc. ("Sun Capital") is a registered investment adviser;
Sun Life Finance Corporation ("Sunfinco") is a finance company and currently
inactive;
Sun Life of Canada (U.S.) SPE 97-1, Inc. ("SPE 97-1") is a special purpose
corporation engaging in activities incidental to securitizing mortgage loans;
Clarendon Insurance Agency, Inc. ("Clarendon") is a registered broker-dealer
that acts as the general distributor of certain annuity and life insurance
contracts issued by the Company and its affiliates;
Sun Life Information Services Ireland Limited ("SLISL") is an offshore
technology services center for affiliates.
On October 29,1999, the Company sold New London Trust F.S.B. ("NLT") to an
unaffiliated party for $30,254,000. The Company realized a post tax gain of
$13,170,000.
On February 5, 1999, the Company sold Massachusetts Casualty Insurance Company
("MCIC"), a disability insurance company, to an unaffiliated party. The net
proceeds of this sale were $33,965,000. The Company realized a post tax gain of
$4,900,000.
The impact of the sales of NLT and MCIC on continuing operations of the Company
is not expected to be material.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding shares of
Massachusetts Financial Services Company ("MFS"), a registered investment
adviser. 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. 7
66
<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, 1999, 1998 AND 1997
2. INVESTMENTS IN SUBSIDIARIES (CONTINUED)
During 1999, 1998, and 1997, the Company contributed capital in the following
amounts to its subsidiaries:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
MCIC $ -- $ -- $ 2,000
SLFSL 1,000 750 1,000
SPE 97-1 -- -- 20,377
Sundisco 19,000 10,000 --
Sun Capital -- 500 --
Clarendon -- 10 --
SLISL -- 502 --
</TABLE>
During 1999, 1998, and 1997, the Company received dividends from the following
subsidiaries:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
SUN Life (N.Y.) $ 6,500 $ 3,000 $ --
NLT 19,319 -- 7,500
MFS -- -- 33,110
SPE 97-1 -- 675 --
SUNDISCO -- -- 571
</TABLE>
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1999, 1998 and 1997 and for the years then ended, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Assets $ 877,939 $ 1,315,317 $ 1,190,951
Liabilities (802,656) (1,186,872) (1,073,966)
----------- ----------- -----------
Total net assets $ 75,283 $ 128,445 $ 116,985
=========== =========== ===========
Total revenues $ 82,443 $ 222,853 $ 750,364
Operating expenses (90,318) (221,933) (646,896)
Income tax expense 3,249 (1,222) (43,987)
----------- ----------- -----------
Net income (loss) $ (4,626) $ (302) $ 59,481
=========== =========== ===========
</TABLE>
67
<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, 1999, 1998 AND 1997
3. BONDS
Investments in debt securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------
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 $ 78,161 $ 2,091 $ (2,454) $ 77,798
States, provinces and political subdivisions 20,428 69 (57) 20,440
Public utilities 181,466 6,854 (5,907) 182,413
Transportation 188,285 7,689 (2,709) 193,265
Finance 88,517 4,631 (518) 92,630
All other corporate bonds 665,113 18,353 (17,152) 666,314
---------- -------- -------- ----------
Total long-term bonds 1,221,970 39,687 (28,797) 1,232,860
---------- -------- -------- ----------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 312,585 -- -- 312,585
---------- -------- -------- ----------
Total short-term bonds 312,585 -- -- 312,585
---------- -------- -------- ----------
Total bonds $1,534,555 $ 39,687 $(28,797) $1,545,445
========== ======== ======== ==========
</TABLE>
<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>
68
<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, 1999, 1998 AND 1997
3. BONDS (CONTINUED)
The amortized cost and estimated fair value of bonds at December 31, 1999 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, 1999
-----------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
---- ----------
(IN THOUSANDS)
<S> <C> <C>
Maturities:
Due in one year or less $ 376,761 $ 376,823
Due after one year through five years 184,077 182,788
Due after five years through ten years 259,042 263,321
Due after ten years 542,678 543,301
---------- ----------
1,362,558 1,366,233
Mortgage-backed securities 171,997 179,212
---------- ----------
Total bonds $1,534,555 $1,545,445
========== ==========
</TABLE>
Proceeds from sales and maturities of investments in debt securities during
1999, 1998, and 1997 were $740,081,000, $1,016,811,000 and $980,264,000, gross
gains were $7,688,000, $17,025,000, and $10,732,000 and gross losses were
$4,477,000, $866,000, and $2,446,000, respectively.
Bonds included above with an amortized cost of approximately $2,604,000,
$2,572,000, and $2,578,000 at December 31, 1999, 1998 and 1997, 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 concentrations 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 on loan as of December 31, 1999, 1998 or 1997. Income resulting from
this program was $20,000, $94,000, and $200,000 for the years ended
December 31, 1999, 1998 and 1997, 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.
69
<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, 1999, 1998 AND 1997
5. MORTGAGE LOANS (CONTINUED)
The following table shows the geographical distribution of the mortgage loan
portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
California $ 72,693 $ 82,397
Massachusetts 38,083 53,528
Michigan 32,941 34,357
New York 22,912 21,190
Ohio 31,914 36,171
Pennsylvania 92,825 93,587
Washington 30,265 36,548
All other 207,278 177,225
-------- --------
$528,911 $535,003
======== ========
</TABLE>
The Company has restructured mortgage loans totaling $15,644,000 and $30,743,000
and corresponding allowances for losses of $1,043,000 and $2,120,000 at December
31, 1999 and 1998, respectively.
On December 22, 1999, the Company acquired 28 mortgages from SLOC at a cost of
$118,091,637. The Company in turn sold a 90% participation in these 28 plus an
additional 11 existing mortgage loans to a third party as part of two mortgage
participation agreements, for which the Company received proceeds of
$146,974,851.
The Company has outstanding mortgage loan commitments on real estate totaling
$2,384,000 and $18,005,000 at December 31, 1999 and 1998, respectively.
6. INVESTMENT GAINS AND LOSSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Net realized gains (losses):
Bonds $ 70 $ 5,659 $ 2,882
Common stock of affiliates 15,290 -- 21,195
Common stocks -- 48 --
Mortgage loans 787 2,374 3,837
Real estate (481) 955 2,912
Other invested assets -- (3,827) (717)
-------- ------- -------
Subtotal 15,666 5,209 30,109
Capital gains tax expense (benefit) (4,442) 4,815 3,403
-------- ------- -------
Total $ 20,108 $ 394 $26,706
======== ======= =======
Changes in unrealized gains (losses):
Bonds $ (6,689) $ -- $ --
Common stock of affiliates (30,966) (302) (2,894)
Mortgage loans 83 (1,312) 1,524
Real estate 1,461 403 3,377
Other invested assets -- 827 (855)
-------- ------- -------
Total $(36,111) $ (384) $ 1,152
======== ======= =======
</TABLE>
70
<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, 1999, 1998 AND 1997
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 $4,965,000 in 1999, $8,943,000
in 1998, and $6,321,000 in 1997. 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,
------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income from bonds $128,992 $167,436 $188,924
Income from investment in common stock of affiliates 25,819 3,675 41,181
Interest income from mortgage loans 50,327 53,269 76,073
Real estate investment income 15,696 15,932 17,161
Interest income from policy loans 3,118 2,881 3,582
Other investment income (loss) (1,700) (641) (193)
-------- -------- --------
Gross investment income 222,252 242,552 326,728
-------- -------- --------
Interest on surplus notes and notes payable (43,266) (44,903) (42,481)
Investment expenses (11,951) (13,117) (13,998)
-------- -------- --------
Net investment income $167,035 $184,532 $270,249
======== ======== ========
</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 and foreign currency
exchange rates. The Company's use of derivatives has included U.S. Treasury
futures, conventional interest rate swaps, and currency and interest rate swap
agreements structured as 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, 1999 and 1998, 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 IMR and amortized over the shorter of the remaining life of the
hedged asset 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.
71
<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, 1999, 1998 AND 1997
8. DERIVATIVES (CONTINUED)
The Company's open positions are as follows:
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1999
--------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
----------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Conventional interest rate swaps $20,000 $249
Foreign currency swap 648 113
</TABLE>
<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>
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 creditworthiness 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.
The Company's net investment in leveraged leases is composed of the following
elements:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Lease contracts receivable $ 69,766 $ 78,937
Less non-recourse debt (69,749) (78,920)
-------- --------
Net receivable 17 17
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (7,808) (8,932)
-------- --------
Investment in leveraged leases 33,359 32,235
Less fees (113) (138)
-------- --------
Net investment in leveraged leases $ 33,246 $ 32,097
======== ========
</TABLE>
The net investment is included in "Other invested assets" on the balance sheet.
72
<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, 1999, 1998 AND 1997
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 $1,527,000, $2,128,000 and $1,381,000
for the years ended December 31, 1999, 1998 and 1997, 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, and $37,050,000 for the years ended December 31, 1998 and 1997,
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.
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1999, 1998 and 1997 before the effect of
reinsurance transactions with SLOC:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $2,874,513 $2,377,364 $2,340,733
Net investment income and realized gains 190,845 187,208 298,120
---------- ---------- ----------
Subtotal 3,065,358 2,564,572 2,638,853
---------- ---------- ----------
Benefits and Expenses:
Policyholder benefits 2,709,712 2,312,247 2,350,354
Other expenses 239,282 203,238 187,591
---------- ---------- ----------
Subtotal 2,948,994 2,515,485 2,537,945
---------- ---------- ----------
Income from operations $ 116,364 $ 49,087 $ 100,908
========== ========== ==========
</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 $193,000 in 1999, $3,008,000 in
1998, and decreasing income from operations by $2,658,000 in 1997.
During 1999 the Company entered into an agreement with an unrelated company
which provides reinsurance on certain fixed group annuity contracts. The net
effect of this agreement was to increase income from operations by approximately
$3,400,000. Also during 1999, the Company entered into three agreements with two
unrelated companies for the purpose of obtaining stop-loss coverage of
guaranteed minimum death benefit exposure with respect to the Company's variable
annuity business. The net effect of these agreements was to increase income from
operations by approximately $157,000.
73
<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, 1999, 1998 AND 1997
10. REINSURANCE (CONTINUED)
The Company is contingently liable for the portion of the policies reinsured
under each of its existing reinsurance agreements in the event the reinsurance
companies are unable to pay their portion of any reinsured claim. Management
believes that any liability from this contingency is unlikely. However, to limit
the possibility of such losses, the Company evaluates the financial condition of
its reinsurers and monitors concentration of credit risk.
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, 1999
------------------------
AMOUNT % OF TOTAL
------ ----------
(IN THOUSANDS)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 2,346,853 13
At market value 15,010,696 81
At book value less surrender charges (surrender charge
>5%) 45,722 --
At book value (minimal or no charge or adjustment) 104,539 1
Not subject to discretionary withdrawal provision 1,015,108 5
----------- ---
Total annuity actuarial reserves and deposit liabilities $18,522,918 100
=========== ===
</TABLE>
<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 market value 11,368,059 73
At book value less surrender charges (surrender charge
>5%) 62,404 --
At book value (minimal or no charge or adjustment) 111,757 1
Not subject to discretionary withdrawal provision 1,055,642 7
----------- ---
Total annuity actuarial reserves and deposit liabilities $15,494,391 100
=========== ===
</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 Protection 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
Wealth Management 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.
74
<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, 1999, 1998 AND 1997
12. SEGMENT INFORMATION (CONTINUED)
The following amounts pertain to the various business segments:
<TABLE>
<CAPTION>
FEDERAL
TOTAL TOTAL PRETAX INCOME TOTAL
REVENUES EXPENDITURES* INCOME TAX ASSETS
---------- ------------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1999
Protection $ 33,236 $ 41,030 $ (7,794) $ (2,661) $ 136,127
Wealth Management 2,979,450 2,898,158 81,292 18,593 19,015,394
Corporate 27,301 6,070 21,231 8,547 796,634
---------- ---------- -------- -------- -----------
Total $3,039,987 $2,945,258 $ 94,729 $ 24,479 $19,948,155
---------- ---------- -------- -------- -----------
1998
Protection $ 229,710 $ 144,800 $ 84,910 $ (4,148) $ 199,683
Wealth Management 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
Protection $ 304,141 $ 272,333 $ 31,808 $ 13,825 $ 1,143,697
Wealth Management 2,533,006 2,507,592 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
---------- ---------- -------- -------- -----------
</TABLE>
- ------------------------
* Total expenditures includes dividends to policyholders of $0 for 1999,
$(5,981) for 1998, and $33,316 for 1997.
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 obligation was $1,914,000,
and $1,178,000 at December 31, 1999 and 1998, respectively. The Company's share
of net periodic pension cost was $736,000, $586,000, and $146,000 for 1999, 1998
and 1997, 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 $284,000, $231,000, and $259,000 for the years ended
December 31, 1999, 1998 and 1997, 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.
75
<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, 1999, 1998 AND 1997
13. RETIREMENT PLANS (CONTINUED)
The Company records an accrual of the estimated cost of retiree benefit payments
during the years the employee provides services, and amortizes an obligation of
approximately $400,000 over a period of ten years. The Company's cash flows are
not affected by this method, however the net effect decreased income by
$185,000, $95,000, and $117,000, for the years ended December 31, 1999, 1998,
and 1997, respectively. The Company's post-retirement health, dental and life
insurance benefits currently are not funded.
The following table sets forth the change in the pension and other
post-retirement 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
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $110,792 $ 79,684 $ 10,419 $ 9,845
Service cost 5,632 4,506 413 240
Interest cost 6,952 6,452 845 673
Actuarial loss (gain) (21,480) 21,975 1,048 308
Benefits paid (2,376) (1,825) (508) (647)
-------- -------- -------- --------
Benefit obligation at end of year $ 99,520 $110,792 $ 12,217 $ 10,419
======== ======== ======== ========
The Company's share:
Benefit obligation at beginning of year $ 9,125 $ 5,094 $ 416 $ 385
Benefit obligation at end of year $ 8,816 $ 9,125 $ 743 $ 416
Change in plan assets:
Fair value of plan assets at beginning of year $151,575 $136,610 $ -- $ --
Actual return on plan assets 9,072 16,790 -- --
Employer contribution -- -- 508 647
Benefits paid (2,376) (1,825) (508) (647)
-------- -------- -------- --------
Fair value of plan assets at end of year $158,271 $151,575 $ -- $ --
======== ======== ======== ========
Funded status $ 58,752 $ 40,783 $(12,217) $(10,419)
Unrecognized net actuarial gain (loss) (20,071) (2,113) 1,469 586
Unrecognized transition obligation (asset) (22,617) (24,674) 140 185
Unrecognized prior service cost 7,081 7,661 -- --
-------- -------- -------- --------
Prepaid (accrued) benefit cost $ 23,145 $ 21,657 $(10,608) $ (9,648)
======== ======== ======== ========
The Company's share of accrued benefit cost $ (1,914) $ (1,178) $ (381) $ (195)
Weighted-average assumptions as of December 31:
Discount rate 7.50% 6.75% 7.50% 6.75%
Expected return on plan assets 8.75% 8.00% N/A N/A
Rate of compensation increase 4.50% 4.50% N/A N/A
</TABLE>
76
<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, 1999, 1998 AND 1997
13. RETIREMENT PLANS (CONTINUED)
For measurement purposes, a 10.9% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1999 (5.6% for dental benefits).
The rates were assumed to decrease gradually to 5% for 2005 and remain at that
level thereafter.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 5,632 $ 4,506 $ 413 $ 240
Interest cost 6,952 6,452 845 673
Expected return on plan assets (12,041) (10,172) -- --
Amortization of transition obligation (asset) (2,056) (2,056) 45 45
Amortization of prior service cost 580 580 -- --
Recognized net actuarial (gain) loss (554) (677) 164 (20)
-------- ------- ------ ------
Net periodic benefit cost $ (1,487) $(1,367) $1,467 $ 938
======== ======= ====== ======
The Company's share of net periodic benefit cost $ 736 $ 586 $ 185 $ 95
======== ======= ====== ======
</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 $ 288 $ (518)
Effect on postretirement benefit obligation 2,754 (2,279)
</TABLE>
77
<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, 1999, 1998 AND 1997
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:
<TABLE>
<CAPTION>
1999
--------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
--------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Bonds (including short-term) $1,534,555 $1,545,445
Mortgages 528,911 526,608
Derivatives -- 362
Other Invested Assets 67,938 67,938
Policy loans 40,095 40,095
LIABILITIES:
Insurance reserves $ 120,536 $ 120,536
Individual annuities 247,619 238,229
Pension products 661,806 665,830
<CAPTION>
1998
--------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
--------------- --------------------
(IN THOUSANDS)
ASSETS:
<S> <C> <C>
Bonds (including short-term) $2,026,868 $2,153,953
Mortgages 535,003 556,143
Derivatives -- 771
Policy loans 41,944 41,944
LIABILITIES:
Insurance reserves $ 121,100 $ 121,100
Individual annuities 274,448 271,849
Pension products 1,104,489 1,145,351
</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 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 policy loans approximate carrying amounts.
The fair values of derivative financial instruments are estimated using the
process described in Note 8.
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 fair value.
78
<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, 1999, 1998 AND 1997
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 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,
1999 1998
------------------- -------------------
AVR IMR AVR IMR
--- --- --- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of year $44,392 $40,490 $47,605 $33,830
Net realized investment gains, net of tax 9,950 4,983 256 8,942
Amortization of net investment gains -- (3,702) -- (2,282)
Unrealized investment losses (9,705) -- (6,550) --
Required by formula (566) -- 3,081 --
------- ------- ------- -------
Balance, end of year $44,071 $41,771 $44,392 $40,490
======= ======= ======= =======
</TABLE>
16. FEDERAL INCOME TAXES
The Company, its subsidiaries and certain other affiliates 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 $3,000,000,
$48,144,000, and $31,000,000 for the years ended December 31, 1999, 1998 and
1997, 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. RELATED PARTY TRANSACTIONS
A. 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.
The Company accrued $4,259,000 and $4,259,000 for interest on surplus notes for
the years ended December 31, 1999 and 1998, respectively.
79
<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, 1999, 1998 AND 1997
17. RELATED PARTY TRANSACTIONS
A. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE) (CONTINUED)
The Company expensed $43,266,000, $44,903,000, and $42,481,000 for interest on
surplus notes and notes payable for the years ended December 31, 1999, 1998 and
1997, respectively.
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 on December 22, 1998 at an interest rate of 5.55% due
February 11, 1999. These two notes and an additional $10,000,000 were combined
into a new note of $230,000,000 with a floating interest rate based on the six
month LIBOR rate plus 25 basis points. The $230,000,000 note was repaid to the
Company on December 21, 1999.
On January 14, 2000, the Company purchased $200,000,000 of notes from MFS.
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, the Company had an additional $20,000,000 in notes issued
by MFS, scheduled to mature in 2000. These notes were repaid to the Company on
December 21,1999.
B. STOCKHOLDER DIVIDENDS
The maximum amount of dividends which can be paid by the Company without prior
approval of the Insurance Commissioner of the State of Delaware is subject to
restrictions relating to statutory surplus. In 1999, a dividend in the amount of
$80,000,000 was declared and paid by the Company to its parent, Life Holdco.
This dividend was approved by the Board of Directors, but did not require
approval of the Insurance Commissioner. In 1998, a dividend in the amount of
$50,000,000 was declared and paid by the Company to its parent, Life Holdco.
This dividend was approved by the Insurance Commissioner and the Board of
Directors. 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. This dividend
was approved by the Insurance Commissioner and the Board of Directors.
C. SERVICE AGREEMENTS
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 $28,700,000 in 1999, $16,344,000 in 1998, and $15,997,000 in 1997.
The Company leases office space to SLOC under lease agreements with terms
expiring in December, 2004 and options to extend the terms for each of twelve
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 1999 amounted to approximately $6,943,000.
18. 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
80
<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, 1999, 1998 AND 1997
18. RISK-BASED CAPITAL (CONTINUED)
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, 1999, 1998 and 1997.
19. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in pending and threatened litigation in the normal
course of its business in which claims for monetary and punitive damages have
been asserted. Although there can be no assurances, at the present time the
Company does not anticipate that the ultimate liability arising from such
pending or threatened litigation, after consideration of provisions made for
potential losses and costs of defense, will have a material adverse effect on
the financial condition or operating results of the Company.
Under insurance guaranty fund laws in each state, the District of Columbia and
Puerto Rico, insurers licensed to do business can be assessed by state insurance
guaranty associations for certain obligations of insolvent insurance companies
to policyholders and claimants. Recent regulatory actions against certain large
life insurers encountering financial difficulty have prompted various state
insurance guaranty associations to begin assessing life insurance companies for
the deemed losses. Most of these laws do provide, however, that an assessment
may be excused or deferred it it would threaten an insurer's solvency and
further provide annual limits on such assessments. Part of the assessments paid
by the Company and its subsidiaries pursuant to these laws may be used as
credits for a portion of the associated premium taxes. The Company incurred
guaranty fund assessments of approximately $3,500,000, $3,500,000, and
$3,083,000 in 1999, 1998 and 1997, respectively.
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 items. 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 life and investment-type products are recognized as income for
statutory purposes and as deposits to policyholders' accounts for GAAP.
Investments in fixed maturity securities classified as available-for-sale are
carried at aggregate fair value with changes in unrealized gains and losses
reported net of taxes in a separate component of stockholder's equity for GAAP
and generally at amortized cost under statutory accounting practices.
81
<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, 1999 and 1998, 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, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
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, 1999 and 1998, and the results of its operations and its cash flow
for each of the three years in the period ended December 31, 1999 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, 1999 and 1998 or the results of its
operations or its cash flow for each of the three years in the period ended
December 31, 1999.
Deloitte & Touche
Boston, Massachusetts
February 10, 2000
82
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Calculation of Performance Data
Tax Deferred Accumulation
Advertising and Sales Literature
Calculations
Example of Variable Accumulation Unit Value Calculation
Example of Variable Annuity Unit Calculation
Example of Variable Annuity Payment Calculation
Distribution of the Contracts
Designation and Change of Beneficiary
Custodian
Financial Statements
</TABLE>
83
<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 April 10, 2000 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 (888) 786-2435.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
To: Sun Life Assurance Company of Canada (U.S.)
c/o Retirement Products and Services
P.O. Box 9133
Boston, Massachusetts 02117
Please send me a Statement of Additional Information for
Futurity Accolade Variable and Fixed Annuity
Sun Life of Canada (U.S.) Variable Account F.
</TABLE>
<TABLE>
<S> <C>
Name ------------------------------------------------------------
Address ------------------------------------------------------------
------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
City -------------------------------- State -------------- Zip -------
</TABLE>
<TABLE>
<S> <C>
Telephone ------------------------------------------------------------
</TABLE>
84
<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 365 days from the date on which we issued your Contract. Your Account
Anniversary is the last day of an Account Year. Each Account Year after the
first is the 365-day period that begins on your Account Anniversary. For
example, if the Contract Date is on March 12, the first Account Year is
determined from the Contract Date and ends on March 12 of the following year.
Your Account Anniversary is March 12 and all Account Years after the first are
measured from March 12. (If the Anniversary Date falls on a non-Business Day,
the previous Business Day will be used.)
ACCUMULATION PHASE: The period before the Annuity Commencement Date and
during the lifetime of the Annuitant during which you make Purchase Payments
under the Contract. This is called the "Accumulation Period" in the Contract.
*ANNUITANT: The person or persons to whom the first annuity payment is
made. If the Annuitant dies prior to the Annuity Commencement Date, the
Co-Annuitant will become the sole Annuitant. If the Co-Annuitant dies or if no
Co-Annuitant is named, the Participant becomes the Annuitant upon the
Annuitant's death prior to the Annuity Commencement Date. If you have not named
a sole Annuitant on the 30th day before the Annuity Commencement Date and both
the Annuitant and Co-Annuitant are living, the Co-Annuitant will be the sole
Annuitant/Payee during the Income Phase.
ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment
under each Contract is to be made.
ANNUITY OPTION: The method you choose for receiving 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 you or other evidence acceptable to us
that serves as your application for participation under a Group Contract or
purchase of an Individual 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.
CERTIFICATE: The document for each Participant which evidences the
coverage of the Participant under a Group Contract.
COMPANY: Sun Life Assurance Company of Canada (U.S.).
CONTRACT: Any Individual Contract, Group Contract or Certificate issued
under a Group Contract.
CONTRACT DATE: The date on which we issue your Contract. This is called
the "Date of Coverage" in the Contract.
*You specify these items on the Application, and may change them, as we describe
in this Prospectus.
85
<PAGE>
DEATH BENEFIT DATE: If you have elected a death benefit payment option
before the Annuitant's death that remains in effect, the date on which we
receive Due Proof of Death. 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 one lump sum.
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.
FIFTH-YEAR ANNIVERSARY: The fifth Account Anniversary and each succeeding
Account Anniversary occurring at any five year interval thereafter; for example,
the 10th, 15th, and 20th Account Anniversaries.
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 ANNUITY: An annuity with payments which do not vary as to dollar
amount.
FUND: A registered management investment company, or series thereof, in
which assets of a Sub-Account may be invested.
GROUP CONTRACT: A Contract issued by the Company on a group basis.
GUARANTEE AMOUNT: Each separate allocation of Account Value to a
particular Guarantee Period (including interest earned thereon).
GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is
credited.
GUARANTEED INTEREST RATE: The rate of interest we credit on a compound
annual basis during any 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.
INDIVIDUAL CONTRACT: A Contract issued by the Company on an individual
basis.
NET INVESTMENT FACTOR: An index applied to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The Net
Investment Factor may be greater or less than or equal to one.
NET PURCHASE PAYMENT (NET PAYMENTS): The portion of a Purchase Payment
which remains after the deduction of any applicable premium tax or similar tax.
This is also the term used to describe the total contribution made to the
Contract minus the total withdrawals.
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, 408, or 408A of the Internal Revenue Code. The Participant's interest
in the Contract must be owned by a natural person or agent for a natural person
for the Contract to receive income tax treatment as an annuity.
*OWNER: The person, persons or entity entitled to the ownership rights
stated in a Group Contract and in whose name or names the Group 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), Section 408(k),
Section 408(p) or Section 408A 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 Group Contract.
*You specify these items on the Application, and may change them, as we describe
in this Prospectus.
86
<PAGE>
*PARTICIPANT: In the case of an Individual Contract, the owner of the
Contract. In the case of a Group Contract, the person named in the Contract who
is entitled to exercise all rights and privileges of ownership under the
Contract, except as reserved by the Owner. If there are 2 Participants, the
death benefit is paid upon the death of either Participant.
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, or on the Annuity Commencement Date.
PURCHASE PAYMENT (PAYMENT): An amount paid to the Company as consideration
for the benefits provided by a Contract.
PURCHASE PAYMENT INTEREST: The amount of extra interest the Company
credits to a Contract at a rate of 2% to 5% of each purchase payment based upon
the size of the investment or Account Value or the interest rate option chosen
at the time of application.
QUALIFIED CONTRACT: A Contract used in connection with a retirement plan
which may receive favorable federal income tax treatment under Sections 401,
403, 408 or 408A of the Internal Revenue Code of 1986, as amended.
RENEWAL DATE: The last day of a Guarantee Period.
SUB-ACCOUNT: That portion of the Variable Account which invests in shares
of a specific Fund or series of a Fund.
VALUATION PERIOD: The period of time from one determination of Variable
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.
VARIABLE ACCOUNT: Variable Account F 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.
*You specify these items on the Application, and may change them, as we describe
in this Prospectus.
87
<PAGE>
APPENDIX B
CONDENSED FINANCIAL INFORMATION - ACCUMULATION UNIT VALUES
The following information should be read in conjunction with the Variable
Account's Financial Statements appearing the Statement of Additional
Information. All of the Variable Account's Financial Statements have been
audited by Deloitte & Touche LLP, independent certified public accountants.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1999*
------------------
<S> <C>
AIM V.I. CAPITAL APPRECIATION FUND
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $13.7461
Units outstanding at end of period........................ 27,793
AIM V.I. GROWTH FUND
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $12.6219
Units outstanding at end of period........................ 71,866
AIM V.I. GROWTH AND INCOME FUND
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $12.7245
Units outstanding at end of period........................ 41,234
AIM V.I. INTERNATIONAL EQUITY FUND
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $13.8416
Units outstanding at end of period........................ 40,021
ALGER AMERICAN GROWTH PORTFOLIO
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $12.4941
Units outstanding at end of period........................ 77,992
ALGER AMERICAN INCOME AND GROWTH PORTFOLIO
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $13.9651
Units outstanding at end of period........................ 25,358
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $13.3871
Units outstanding at end of period........................ 12,969
GOLDMAN SACHS VIT CORE-SM- LARGE CAP GROWTH FUND
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $12.6147
Units outstanding at end of period........................ 17,289
GOLDMAN SACHS VIT CORE-SM- SMALL CAP EQUITY FUND
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $12.0375
Units outstanding at end of period........................ 1,775
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1999*
------------------
<S> <C>
GOLDMAN SACHS VIT CORE-SM- U.S. EQUITY FUND
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $11.7733
Units outstanding at end of period........................ 23,427
GOLDMAN SACHS VIT GROWTH AND INCOME FUND
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $11.2057
Units outstanding at end of period........................ 5,354
GOLDMAN SACHS VIT INTERNATIONAL EQUITY FUND
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $12.0983
Units outstanding at end of period........................ 6,582
J.P. MORGAN SERIES TRUST II INTERNATIONAL OPPORTUNITIES
PORTFOLIO
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $11.7681
Units outstanding at end of period........................ 10,730
J.P. MORGAN SERIES TRUST II SMALL COMPANY PORTFOLIO
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $13.7122
Units outstanding at end of period........................ 5,598
J.P. MORGAN SERIES TRUST II U.S. DISCIPLINED EQUITY
PORTFOLIO
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $11.5320
Units outstanding at end of period........................ 6,455
LORD ABBETT SERIES FUND GROWTH AND INCOME PORTFOLIO
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $11.4167
Units outstanding at end of period........................ 55,559
MFS/SUN LIFE CAPITAL APPRECIATION SERIES
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $13.4436
Units outstanding at end of period........................ 4,427
MFS/SUN LIFE EMERGING GROWTH SERIES
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $15.8653
Units outstanding at end of period........................ 58,261
MFS/SUN LIFE GOVERNMENT SECURITIES SERIES
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $ 9.9962
Units outstanding at end of period........................ 11,021
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1999*
------------------
<S> <C>
MFS/SUN LIFE HIGH YIELD SERIES
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $10.2886
Units outstanding at end of period........................ 44,229
MFS/SUN LIFE MASSACHUSETTS INVESTORS GROWTH STOCK SERIES
Unit Value:
Beginning of Period..................................... $10.0000**
End of Period........................................... $13.1026
Units outstanding at end of period........................ 55,773
MFS/SUN LIFE MASSACHUSETTS INVESTORS TRUST SERIES
Unit Value:
Beginning of Period..................................... $10.0000**
End of Period........................................... $11.4114
Units outstanding at end of period........................ 48,386
MFS/SUN LIFE NEW DISCOVERY SERIES
Unit Value:
Beginning of Period..................................... $10.0000**
End of Period........................................... $15.8588
Units outstanding at end of period........................ 18,482
MFS/SUN LIFE TOTAL RETURN SERIES
Unit Value:
Beginning of Period..................................... $10.0000**
End of Period........................................... $10.4572
Units outstanding at end of period........................ 42,271
MFS/SUN LIFE UTILITIES SERIES
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $12.0305
Units outstanding at end of period........................ 49,859
OCC ACCUMULATION TRUST EQUITY PORTFOLIO
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $10.7137
Units outstanding at end of period........................ 102
OCC ACCUMULATION TRUST MANAGED PORTFOLIO
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $10.5852
Units outstanding at end of period........................ 25,785
OCC ACCUMULATION TRUST MID CAP PORTFOLIO
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $12.5624
Units outstanding at end of period........................ 19,070
OCC ACCUMULATION TRUST SMALL CAP PORTFOLIO
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $10.5551
Units outstanding at end of period........................ 102
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1999*
------------------
<S> <C>
SUN CAPITAL BLUE CHIP MID CAP FUND
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $13.2132
Units outstanding at end of period........................ 17,878
SUN CAPITAL INVESTMENT GRADE BOND FUND
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $10.0222
Units outstanding at end of period........................ 11,553
SUN CAPITAL INVESTORS FOUNDATION FUND
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $11.9051
Units outstanding at end of period........................ 394
SUN CAPITAL MONEY MARKET FUND
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $10.0779
Units outstanding at end of period........................ 366,623
SUN CAPITAL REAL ESTATE FUND
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $10.3018
Units outstanding at end of period........................ 2,281
SUN CAPITAL SELECT EQUITY FUND
Unit Value:
Beginning of Period..................................... $10.0000
End of Period........................................... $13.5393
Units outstanding at end of period........................ 9,027
</TABLE>
- ------------------------
* From commencement of operations on October 14, 1999 to December 31, 1999.
91
<PAGE>
APPENDIX C
WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: VARIABLE ACCOUNT (THE MARKET VALUE ADJUSTMENT DOES NOT APPLY TO THE
VARIABLE ACCOUNT)
WITHDRAWAL CHARGE CALCULATION:
FULL WITHDRAWAL:
Assume a Purchase Payment of $40,000 is made on the Contract Date, no
additional Purchase Payments are made and there are no partial withdrawals. The
table below presents three examples of the withdrawal charge resulting from a
full withdrawal of your Account, based on hypothetical Account Values.
<TABLE>
<CAPTION>
PAYMENT
HYPOTHETICAL CUMULATIVE FREE SUBJECT TO WITHDRAWAL WITHDRAWAL
ACCOUNT ACCOUNT ANNUAL ANNUAL WITHDRAWAL WITHDRAWAL CHARGE CHARGE
YEAR VALUE EARNINGS EARNINGS AMOUNT CHARGE PERCENTAGE AMOUNT
-------- ------------ -------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(a) 1 $41,000 $1,000 $ 1,000 $4,000 $36,000 8.00% $2,880
2 $45,100 $4,100 $ 5,100 $4,000 $36,000 8.00% $2,880
3 $49,600 $4,500 $ 9,600 $4,100 $35,900 7.00% $2,513
(b) 4 $52,100 $2,500 $12,100 $4,500 $35,500 7.00% $2,485
5 $57,300 $5,200 $17,300 $4,000 $36,000 6.00% $2,160
6 $63,000 $5,700 $23,000 $5,200 $34,800 5.00% $1,740
7 $66,200 $3,200 $26,200 $5,700 $34,300 4.00% $1,372
(c) 8 $72,800 $6,600 $32,800 $4,000 $ 0 0.00% $ 0
</TABLE>
(a) The free withdrawal amount in any year is equal to the amount of any
Purchase Payments made prior to the last 7 Account Years ("Old Payments")
that were not previously withdrawn plus the greater of (1) the Contract's
earnings during the prior Account Year, and (2) 10% of any Purchase Payments
made in the last 7 Account Years ("New Payments"). In Account Year 1, the
free withdrawal amount is $4,000, which equals 10% of the Purchase Payment
of $40,000. On a full withdrawal of $41,000, the amount subject to a
withdrawal charge is $36,000, which equals the New Payments of $40,000 minus
the free withdrawal amount of $4,000.
(b) In Account Year 4, the free withdrawal amount is $4,500, which equals the
prior Account Year's earnings. On a full withdrawal of $52,100, the amount
subject to a withdrawal charge is $35,500.
(c) In Account Year 8, the free withdrawal amount is $4,000, which equals 10% of
the Purchase Payment of $40,000. On a full withdrawal of $72,800, the amount
subject to a withdrawal charge is $0, since equals the New Payments equal
$0.
PARTIAL WITHDRAWAL
Assume a single Purchase Payment of $40,000 is made on the Contract Date,
no additional Purchase Payments are made, no partial withdrawals have been taken
prior to the fourth Account Year, and there are a series of 4 partial
withdrawals made during the fourth Account Year of $4,100, $9,000, $12,000, and
$20,000.
<TABLE>
<CAPTION>
REMAINING
HYPOTHETICAL FREE AMOUNT OF
ACCOUNT WITHDRAWAL WITHDRAWAL
VALUE AMOUNT SUBJECT TO WITHDRAWAL WITHDRAWAL
ACCOUNT BEFORE CUMULATIVE AMOUNT OF BEFORE WITHDRAWAL CHARGE CHARGE
YEAR WITHDRAWAL EARNINGS EARNINGS WITHDRAWAL WITHDRAWAL CHARGE PERCENTAGE AMOUNT
-------- ------------ -------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $41,000 $1,000 $ 1,000 $ 0 $4,000 $ 0 8.00% $ 0
2 $45,100 $4,100 $ 5,100 $ 0 $4,000 $ 0 8.00% $ 0
3 $49,600 $4,500 $ 9,600 $ 0 $4,100 $ 0 7.00% $ 0
(a) 4 $50,100 $ 500 $10,100 $ 4,100 $4,500 $ 0 7.00% $ 0
(b) 4 $46,800 $ 800 $10,900 $ 9,000 $ 400 $ 8,600 7.00% $ 602
(c) 4 $38,400 $ 600 $11,500 $12,000 $ 0 $12,000 7.00% $ 840
(d) 4 $26,800 $ 400 $11,900 $20,000 $ 0 $14,900 7.00% $1,043
</TABLE>
92
<PAGE>
(a) In Account Year 4, the free withdrawal amount is $4,500, which equals the
prior Account Year's earnings. The partial withdrawal amount of $4,100 is
less than the free withdrawal amount, so there is no withdrawal charge.
(b) Since a partial withdrawal of $4,100 was taken, the remaining free
withdrawal amount in Account Year 4 is $4,500 - $4,000 = $400. Therefore,
$400 of the $9,000 withdrawal is not subject to a withdrawal charge, and
$8,600 is subject to a withdrawal charge.
(c) Since the total of the two prior Account Year 4 partial withdrawals
($13,100) is greater than the free withdrawal amount of $4,500, there is no
remaining free withdrawal amount. The entire withdrawal amount of $12,000 is
subject to a withdrawal charge.
(d) Since the total of the three prior Account Year 4 partial withdrawals
($25,100) is greater than the free withdrawal amount of $4,500, there is no
remaining free withdrawal amount. Since the total amount of New Purchase
Payments was $40,000 and $25,100 of New Payments has already been assessed a
surrender charge, only $14,900 of this $20,000 withdrawal comes from
liquidating Purchase Payments. The remaining $5,100 of this withdrawal comes
from liquidating earnings and is not subject to a withdrawal charge.
Note that since all of the Purchase Payments were liquidated by the final
withdrawal of $20,000, the total withdrawal charge for the four Account Year 4
withdrawals is $2,485, which is the same amount that was assessed for a full
liquidation in Account Year 4 in the example on the previous page. Any
additional Account Year 4 withdrawals in the example shown on this page would
come from the liquidating of earnings and would not be subject to a withdrawal
charge.
PART 2 -- FIXED ACCOUNT -- EXAMPLES OF THE MARKET VALUE ADJUSTMENT ("MVA")
The MVA Factor is:
<TABLE>
<C> <C> <S> <C> <C>
N/12
1 + I
( -------- ) -1
1 + J + b
</TABLE>
These examples assume the following:
1) The Guarantee Amount was allocated to a 5-year Guarantee Period with
a Guaranteed Interest Rate of 6% or .06.
2) The date of surrender is 2 years from the Expiration Date (N = 24).
3) The value of the Guarantee Amount on the date of surrender is
$11,910.16.
4) The interest earned in the current Account Year is $674.16.
5) No transfers or partial withdrawals affecting this Guarantee Amount
have been made.
6) Withdrawal charges, if any, are calculated in the same manner as
shown in the examples in Part 1.
93
<PAGE>
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of surrender, the current rate (J) is 8% or .08
and the b factor is zero.
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
N/12
1 + I
The MVA factor = ( -------- ) -1
1 + J + b
</TABLE>
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
24/12
1 + .06
= ( ------ ) -1
1 + .08
2
= (.981) -1
= .963 -1
= - .037
</TABLE>
The value of the Guarantee Amount less interest credited to the Guarantee
Amount in the current Account Year is multiplied by the MVA factor to determine
the MVA:
($11,910.16 - $674.16) X -.037 = -$415.73
-$415.73 represents the MVA that will be deducted from the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA
would be ($2,000.00 - $674.16) X -.037 = -$49.06. -$49.06 represents the MVA
that will be deducted from the partial withdrawal amount before the deduction of
any withdrawal charge.
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of surrender, the current rate (J) is 5% or .05
and the b factor is zero.
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
N/12
1 + I
The MVA factor = ( -------- ) -1
1 + J + b
</TABLE>
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
24/12
1 + .06
= ( ------ ) -1
1 + .05
2
= (1.010) -1
= 1.019 -1
= .019
</TABLE>
The value of the Guarantee Amount less interested credit to the Guarantee
Amount in the current Account Year is multiplied by the MVA factor to determine
the MVA:
($11,910.16 - $674.16) X .019 = $213.48
$213.48 represents the MVA that would be added to the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA
would be ($2,000.00 - $674.16) X .019 = $25.19.
$25.19 represents the MVA that would be added to the value of the partial
withdrawal amount before the deduction of any withdrawal charge.
94
<PAGE>
APPENDIX D
CALCULATION OF BASIC DEATH BENEFIT
EXAMPLE 1:
Assume a Purchase Payment of $60,000.00 is made on the Contract Date and
an additional Purchase Payment of $40,000.00 is made one year later. Assume that
all of the money is invested in the Variable Sub-Accounts, that no Withdrawals
are made and that the Account Value on the Death Benefit Date is $80,000.00. The
calculation of the Death Benefit to be paid is as follows:
<TABLE>
<CAPTION>
The Basic Death Benefit is the greatest of:
<S> <C> <C>
Account Value = $ 80,000.00
Cash Surrender Value = $ 74,400.00
Purchase Payments = $100,000.00
The Basic Death Benefit would therefore be: $100,000.00
</TABLE>
EXAMPLE 2:
Assume a Purchase Payment of $60,000.00 is made on the Contract Date and
an additional Purchase Payment of $40,000.00 is made one year later. Assume that
all of the money is invested in the Variable Sub-Accounts and that the Account
Value is $80,000.00 just prior to a $20,000.00 withdrawal. The Account Value on
the Death Benefit Date is $60,000.00.
<TABLE>
<S> <C> <C>
The Basic Death Benefit is the greatest of:
Account Value = $ 60,000.00
Cash Surrender Value = $ 55,200.00
Adjusted Purchase Payments* = $ 75,000.00
The Basic Death Benefit would therefore be: $ 75,000.00
*Adjusted Purchase Payments can be calculated as follows:
Payments X (Account Value after withdrawal / Account Value before withdrawal)
$100,000.00 X ($60,000.00/$80,000.00)
</TABLE>
95
<PAGE>
APPENDIX E
CALCULATION OF EARNINGS ENHANCEMENT OPTIONAL DEATH BENEFIT
EXAMPLE 1:
Assume a Purchase Payment of $60,000.00 is made on the Contract Date and
an additional Purchase Payment of $40,000.00 is made one year later. Assume that
all of the money is invested into the Variable Sub-Accounts, no withdrawals are
made and the Account Value on the Death Benefit Date is $150,000.00. In
addition, this Contract was issued prior to the owner's 70th birthday. The
calculation of the Basic Death Benefit to be paid is as follows:
<TABLE>
<CAPTION>
The Basic Death Benefit is the greatest of:
<S> <C> <C>
Account Value = $150,000.00
Cash Surrender Value = $ 72,800.00
Adjusted Purchase Payments = $100,000.00
The Basic Death Benefit would therefore be: $150,000.00
The rider benefit can be calculated as follows:
The lesser of:
Adjusted Purchase payments = $100,000.00
Account Value -- adjusted Purchase Payments $ 50,000.00
Amount to use to determine rider benefit: $ 50,000.00
The amount to be paid on the rider benefit = $ 50,000.00 X 40% = $20,000.00
</TABLE>
The total Death Benefit would be the Basic Benefit plus the Optional Death
Benefit Rider a Purchase Payment of $60,000.00 is made on the Contract Date and
an additional Purchase Payment of $40,000.00 is made one year later. Assume that
all of the money is invested into the Variable Sub-Accounts, no withdrawals are
made and the Account Value on the Death Benefit Date is $150,000.00. In
addition, this Contract was issued prior to the owner's 70th birthday. The
calculation of the Basic Death Benefit to be paid is as follows:
<TABLE>
<S> <C>
The total Death Benefit would be the Basic Benefit plus the
Optional.
$150,000.00 + $20,000.00 = $170,000.00
</TABLE>
EXAMPLE 2:
Assume a Purchase Payment of $60,000.00 is made on the Contract Date and
an additional Purchase Payment of $40,000.00 is made one year later. Assume that
all of the money is invested in the Variable Sub-Accounts and that the Account
Value is $150,000.00 just prior to a $20,000.00 withdrawal. The Account Value on
the Death Benefit Date is $130,000.00.
<TABLE>
<S> <C> <C>
The Basic Death Benefit is the greatest of:
Account Value = $130,000.00
Cash Surrender Value = $123,600.00
Adjusted Purchase Payments* = $ 86,666.67
The Basic Death Benefit would therefore be: $130,000.00
*Adjusted Purchase Payments can be calculated as follows:
Payments X (Account Value after withdrawal / Account Value before withdrawal)
$100,000.00 X ($130,000.00/$150,000.00)
The rider benefit can be calculated as follows:
The lesser of:
Adjusted Purchase payments = $ 86,666.67
Account Value -- adjusted Purchase Payments $ 43,333.33
Amount to use to determine rider benefit: $ 43,333.33
The amount to be paid on the rider benefit = $ 43,333.33 X 40% = $17,333.33
</TABLE>
The total Death Benefit would be the amount paid on the Basic Death
Benefit plus the amount paid on the Earnings Enhancement Optional Death Benefit
Rider: $130,000.00 + $17,333.33 = $147,333.33
96
<PAGE>
APPENDIX F
CALCULATION OF DEATH BENEFIT WHEN ALL THREE DEATH BENEFITS RIDERS ARE SELECTED
Assume a Purchase Payment of $100,000.00 is made on the Contract Date, no
additional Purchase Payments or withdrawals are made and all of the money is
invested in the Variable Sub-Accounts. In addition, on the Death Benefit Date
the Account Value is $150,000.00, the value of the Purchase Payment accumulated
at 5% until the Death Benefit Date is $160,000.00 and that the Maximum Account
Anniversary Value is $170,000.00. The calculation of the death benefit to be
paid is as follows:
<TABLE>
<S> <C> <C>
The Death Benefit Amount will be the greatest of:
Account Value = $150,000.00
Cash Surrender Value = $142,800.00
Total of adjusted Purchase Payments = $100,000.00
5% Premium Roll-Up Rider = $160,000.00
Maximum Account Anniversary Value Rider = $170,000.00
The Death Benefit Amount would therefore be: $170,000.00
~ PLUS ~
The Earnings Enhancement Rider benefit is calculated as follows:
The lesser of:
Adjusted Purchase payments = $100,000.00
Account Value -- adjusted Purchase Payments $ 50,000.00
Amount to use to determine this rider benefit: $ 50,000.00
The amount to be paid on the rider benefit = $ 50,000.00 X 40% = $20,000.00
</TABLE>
The total Death Benefit would be the amount paid on the Maximum Account
Anniversary Rider plus the amount paid on the Earnings Enhancement Rider:
$170,000.00 + $20,000.00 = $190,000.00
97
<PAGE>
APPENDIX G
CALCULATION FOR PURCHASE PAYMENT INTEREST (BONUS CREDIT)
EXAMPLE 1:
IF YOU SELECT OPTION A, the 2% Bonus Option, we will credit Purchase
Payment Interest on all Purchase Payments made during the first Account Year. On
each fifth Account Anniversary, we will credit additional Purchase Payment
Interest of 2% based on your Account Value, illustrated below:
Initial Purchase Payment of $50,000.00 receives 2% Purchase Payment
Interest of $1,000.00.
Subsequent Purchase Payment in the first Account Year of $20,000.00
receives 2% Purchase Payment Interest of $400.00.
Suppose the Account had not gained any earnings or interest during the
first 5 Account Years and the Account Value is $71,400.00 (sum of all Purchase
Payments and Purchase Payment Interest), we will credit your Account with an
additional 2% ($1,428.00).
Using the same Purchase Payments as above, suppose your value on the fifth
Account Anniversary is $74,970.00. We will credit your Account with an
additional 2% of Purchase Payment Interest (equal to $1,499.40).
This 2% Purchase Payment Interest will occur on every fifth Account
Anniversary (i.e., 5th, 10th, 15th).
EXAMPLE 2: OPTION B WITH NO WITHDRAWALS
IF YOU SELECT OPTION B, the 3% Bonus Option the amount we will credit to
your Contract depends on the size of your Net Purchase Payments. The scale is as
follow:
<TABLE>
<S> <C>
Net Purchase Payments less than $100,000.00 will receive 3%
Net Purchase Payments between $100,000.00 through
$499,999.99 will receive 4%
Net Purchase Payments greater than or equal to $500,000.00
will receive 5%
</TABLE>
Therefore, if your initial investment is $50,000.00, your Purchase Payment
Interest will equal 3% of $50,000, or $1500.00.
If you make additional Payments that cause your total Net Purchase
Payments to exceed $100,000.00, these Purchase Payments will receive either a 4%
or 5% bonus, using the above scale. As an example:
Initial Purchase Payment of $50,000.00 will receive 3% Purchase Payment
Interest. A second Purchase Payment of $80,000.00 will result in Net
Purchase Payments of $130,000.00. Thus, the $80,000.00 will receive
Purchase Payment Interest of 4% equal to $3,200.00.
Suppose a third Purchase Payment of $400,000.00 is made. This will bring
the Net Purchase Payments to $530,000.00. This $400,000.00 will receive
Purchase Payment Interest of 5% equal to $20,000.00.
This Account now has total Net Purchase Payments of $530,000.00 and total
Purchase Payment Interest of $24,700.00.
In addition to the Purchase Payment Interest paid at the time of each
Payment, we will review your first Account Anniversary to ensure that all Net
Purchase Payments receive the Purchase Payment
98
<PAGE>
Interest as described in the above scale. Using the above scenario as an
example, upon the first Account Anniversary, we will credit your Account an
additional $1800.00, which is equal to:
<TABLE>
<S> <C> <C>
Total Net Purchase Payments of $530,000.00 X 5% = $26,500.00
Total Purchase Payment Interest received = $24,700.00
----------
First Account Anniversary Adjustment = $ 1,800.00
</TABLE>
EXAMPLE 3: OPTION B WITH A WITHDRAWAL.
Using the same example as above, suppose that before the first Account
Anniversary you take a withdrawal of $20,000.00. The annual Purchase Payment
Interest adjustment would be calculated as follows:
Because your Net Purchase Payments are $510,000.00 ($530,000.00
- -$20,000.00 withdrawal), your Purchase Payment Interest on all Net Purchase
Payments should be 5%.
<TABLE>
<S> <C>
Your initial Payment of $50,000.00 received 3%
Your second Payment of $80,000.00 received 4%
Your third Payment of $400,000.00 received the 5%
</TABLE>
Your first two Payments minus the withdrawal will receive additional
Purchase Payment Interest. This will bring your total Net Purchase Payments up
to 5%.
<TABLE>
<S> <C> <C>
$50,000.00 X 2% = $1,000.00
$80,000.00 - $20,000.00 = $60,000.00 X 1% = $ 600.00
Total credit due = $1,600.00
</TABLE>
On your First Account Anniversary we will credit your Account with an
additional Purchase Payment Interest of $1600.00.
99
<PAGE>
<TABLE>
<S> <C>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 9133
BOSTON, MASSACHUSETTS 02117
TELEPHONE:
Toll Free (888) 786-2435
GENERAL DISTRIBUTOR
Clarendon Insurance Agency, Inc.
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
AUDITORS
Deloitte & Touche LLP
200 Berkeley Street
Boston, Massachusetts 02116
</TABLE>
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
APRIL 10, 2000
PROFILE
MFS REGATTA EXTRA
VARIABLE AND FIXED
ANNUITY
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS THAT YOU
SHOULD KNOW AND CONSIDER BEFORE PURCHASING THE CONTRACT. THE CONTRACT IS MORE
FULLY DESCRIBED IN THE FULL PROSPECTUS WHICH ACCOMPANIES THIS PROFILE. PLEASE
READ THE PROSPECTUS CAREFULLY.
1. THE ANNUITY CONTRACT
The MFS Regatta Extra Annuity ("Contract") is a flexible payment deferred
annuity contract designed for use in connection with retirement and deferred
compensation plans, some of which may qualify for favorable federal income tax
treatment. The Contract is intended to help you achieve your retirement savings
or other long-term investment goals.
The Contract has two phases: an Accumulation Phase and an Income Phase.
During the Accumulation Phase you make payments into the Contract; any
investment earnings under your Contract accumulate on a tax-deferred basis and
are taxed as income only when withdrawn. During the Income Phase, we make
annuity payments in amounts determined in part by the amount of money you have
accumulated under your Contract during the Accumulation Phase. You choose when
the Income Phase begins.
You may choose among 26 variable investment options and a range of fixed
interest options. For a variable investment return you 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 corresponding mutual fund
or series thereof (collectively, the "Funds") listed in Section 4. The value of
any portion of your Contract allocated to the Sub-Accounts will fluctuate up or
down depending on the performance of the Funds you select, and you may
experience losses. For a fixed interest rate, you may choose one or more
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. In addition, your Contract will be credited with extra
interest at the time you purchase your Contract.
The Contract is designed to meet your need for investment flexibility.
Over the life of your Contract, you may allocate amounts among as many as 18 of
the available variable and fixed options. Until we begin making annuity payments
under your Contract, you 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 you can elect to have your Contract value accumulate on either a
variable or fixed basis, or a combination of both, you can elect to receive
annuity payments on either a variable or fixed basis or both. If you choose to
have 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. You can select from
among the following methods of receiving either variable or fixed annuity
payments under your Contract: (1) monthly payments continuing for your lifetime
(assuming you are the annuitant); (2) monthly payments for your lifetime, but
with payments continuing to your chosen beneficiary for 5, 10, 15 or 20 years
after your first payment if you die before the end of the period you have
selected; (3) monthly payments for your lifetime and the life of another person
(usually your spouse) you have chosen; and (4) monthly payments for a specified
number of years (from 10 to 30), with a cash-out option for variable payments.
We may also agree to other annuity options at our discretion.
Once the Income Phase begins, you cannot change your choice of annuity
payment method.
<PAGE>
3. PURCHASING A CONTRACT
You may purchase a Contract for $10,000 or more, under most circumstances.
You may increase the value of your investment by adding $1,000 or more at any
time during the Accumulation Phase. We may waive these limits. 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
You can allocate your money among Sub-Accounts investing in the following
Funds:
<TABLE>
<S> <C>
Bond Series International Growth and Income Series
Capital Appreciation Series Managed Sectors Series
Capital Opportunities Series Massachusetts Investors Growth Stock Series
Emerging Growth Series Massachusetts Investors Trust Series
Emerging Markets Equity Series Money Market Series
Equity Income Series New Discovery Series
Global Asset Allocation Series Research Series
Global Governments Series Research Growth and Income Series
Global Growth Series Research International Series
Global Total Return Series Strategic Growth Series
Government Securities Series Strategic Income Series
High Yield Series Total Return Series
International Growth Series Utilities Series
</TABLE>
Market conditions will determine the value of an investment in any Fund.
Each Fund is described in the prospectus of the MFS/Sun Life Series Trust.
In addition to these variable options, you may also allocate your money to
one or more of the 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:
During the first 5 years of a Contract, we impose an annual Account Fee
equal to $35. After the fifth year, we may change this fee annually, but it will
never exceed $50. During the Income Phase, the annual Account Fee is $35. We
also deduct insurance charges (which include an administrative expense charge)
equal to 1.45% per year of the average daily value of the Contract allocated
among the Sub-Accounts.
If you elect one or more optional death benefit riders, we will deduct an
additional charge per year, depending upon the number of riders you elect, as
follows:
<TABLE>
<CAPTION>
NUMBER OF % OF AVERAGE
RIDERS YOU ELECT DAILY VALUE
- ---------------- ------------
<S> <C>
1 0.15%
2 0.25%
3 0.40%
</TABLE>
No optional death benefit is offered if you are 80 or older at issue.
There are no sales charges when you purchase your Contract. However, if
you withdraw money from your Contract, we will, with certain exceptions, impose
a withdrawal charge. Your Contract allows a "free withdrawal amount," which you
may withdraw before you incur the withdrawal charge. The rest of your withdrawal
is subject to a withdrawal charge equal to a percentage of each purchase payment
you withdraw. Each payment begins a new 7-year period and moves down a declining
surrender charge scale at each Account Anniversary. Payments received during the
current Account Year will be charged 8%, if withdrawn. On your next scheduled
Account Anniversary, that payment, along with any other
2
<PAGE>
payments made during that Account Year, will be considered to be in their second
Account Year and will have an 8% withdrawal charge. On the next Account
Anniversary, these payments will move into their third Account Year and will
have a withdrawal charge of 7%, if withdrawn. This withdrawal charge decreases
according to the number of Account Years the purchase payment has been held in
your Account. The declining scale is as follows:
<TABLE>
<CAPTION>
NUMBER OF ACCOUNT YEARS
PAYMENT HAS BEEN IN
YOUR CONTRACT WITHDRAWAL CHARGE
- ----------------------- -----------------
<S> <C>
0-1 8%
1-2 8%
2-3 7%
3-4 7%
4-5 6%
5-6 5%
6-7 4%
7+ 0%
</TABLE>
If you withdraw, transfer, or annuitize money allocated to a Guarantee
Period more than 30 days before the expiration date of the Guarantee Period, the
amount will be subject to a Market Value Adjustment. This adjustment reflects
the relationship between our current Guaranteed Interest Rates and the
Guaranteed Interest Rate applicable to the amount being withdrawn. Generally, if
your Guaranteed Interest Rate is lower than the relevant current rate, then the
adjustment will decrease your Contract value. Conversely, if your Guaranteed
Interest Rate is higher than the relevant current rate, the adjustment will
increase your Contract value. The Market Value Adjustment will not apply to the
withdrawal of interest credited during the current Account Year, or to transfers
as part of our dollar-cost averaging program.
In addition to the charges we impose under the Contracts, there are
charges (which include management fees and operating expenses) imposed by each
Fund, which range from 0.57% to 1.50% of the average net assets of the Fund,
depending upon which Funds you have selected. The investment advisers to some of
the Funds have agreed to waive or reimburse a portion of expenses for some of
the Funds; without this agreement, Fund expenses could be higher. Some of these
agreements may be terminated at any time.
The following chart is designed to help you understand the expenses you
will incur under your Contract, 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 (net of any applicable expense reimbursement and/or fee waiver) for
each Fund. The next two columns show two examples of the expenses, in dollars,
you would pay under a Contract. The examples assume that you invested $1,000 in
a Contract 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.
During the Accumulation Phase, "Total Annual Insurance Charges" of 1.55%
as shown in the table below include the insurance charges of 1.45% of your daily
net assets (1.30% for mortality and expense risks and 0.15% for administrative
expenses) plus an additional 0.10%, which is used to represent the $35 annual
Account Fee based on an assumed Contract value of $35,000. The actual impact of
the Account Fee may be greater or less than 0.10%, depending upon the value of
your Contract.
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL ANNUAL TOTAL ANNUAL TOTAL TOTAL EXPENSES
INSURANCE FUND ANNUAL AT END
SUB-ACCOUNT CHARGES EXPENSES EXPENSES 1 YEAR 10 YEARS
- ----------- ------------ ------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Bond Series......................................... 1.55% 0.72% 2.27% $ 95 $ 269
Capital Appreciation Series......................... 1.55% 0.76% 2.31% $ 96 $ 273
Capital Opportunities Series........................ 1.55% 0.84% 2.39% $ 97 $ 282
Emerging Growth Series.............................. 1.55% 0.75% 2.30% $ 96 $ 272
Emerging Markets Equity Series...................... 1.55% 1.60% 3.15% $ 104 $ 357
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL ANNUAL TOTAL ANNUAL TOTAL TOTAL EXPENSES
INSURANCE FUND ANNUAL AT END
SUB-ACCOUNT CHARGES EXPENSES EXPENSES 1 YEAR 10 YEARS
- ----------- ------------ ------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Equity Income Series................................ 1.55% 1.01% 2.56% $ 98 $ 299
Global Asset Allocation Series...................... 1.55% 0.89% 2.44% $ 97 $ 287
]Global Governments Series.......................... 1.55% 0.90% 2.45% $ 97 $ 288
Global Growth Series................................ 1.55% 1.01% 2.56% $ 98 $ 299
Global Total Return Series.......................... 1.55% 0.89% 2.44% $ 97 $ 287
Government Securities Series........................ 1.55% 0.61% 2.16% $ 94 $ 258
High Yield Series................................... 1.55% 0.83% 2.38% $ 96 $ 279
International Growth Series......................... 1.55% 1.23% 2.78% $ 101 $ 321
International Growth and Income Series.............. 1.55% 1.16% 2.71% $ 100 $ 314
Managed Sectors Series.............................. 1.55% 0.79% 2.34% $ 96 $ 276
Massachusetts Investors Growth Stock Series......... 1.55% 0.83% 2.38% $ 97 $ 281
Massachusetts Investors Trust Series................ 1.55% 0.59% 2.14% $ 94 $ 255
Money Market Series................................. 1.55% 0.57% 2.12% $ 94 $ 253
New Discovery Series................................ 1.55% 1.06% 2.61% $ 99 $ 304
Research Series..................................... 1.55% 0.75% 2.30% $ 96 $ 272
Research Growth and Income Series................... 1.55% 0.86% 2.41% $ 97 $ 284
Research International Series....................... 1.55% 1.50% 3.05% $ 103 $ 348
Strategic Growth Series............................. 1.55% 1.00% 2.55% $ 98 $ 298
Strategic Income Series............................. 1.55% 1.08% 2.63% $ 99 $ 306
Total Return Series................................. 1.55% 0.69% 2.24% $ 95 $ 266
Utilities Series.................................... 1.55% 0.81% 2.36% $ 96 $ 279
</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
Under current federal tax laws, your earnings are not taxed until you take
them out of your Contract. If you take money out, earnings come out first and
are taxed as income. If your Contract is funded with pre-tax or tax deductible
dollars (such as with a pension or IRA contribution) -- we call this a Qualified
Contract -- your entire withdrawal will be taxable. 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,
except under a Qualified Contract, in which case the entire payment will be
taxable. In all cases, you should consult with your tax adviser for specific tax
information.
Different laws apply if your Contract is issued in Puerto Rico. Under the
tax laws of Puerto Rico, when an annuity payment is made under your Contract,
your annuitant or any other payee is required to include as gross income the
portion of each annuity payment equal to 3% of the aggregate purchase payments
you made under the Contract. The amount if any, in excess of the included amount
is excluded from gross income. After an amount equal to the aggregate amount
excluded from gross income has been received, all of the annuity payments are
considered to be taxable income. You should consult with your tax adviser for
specific tax information.
7. ACCESS TO YOUR MONEY
You can withdraw or transfer money from your Contract at any time during
the Accumulation Phase. You may withdraw a portion of the value of your Contract
in each year without the imposition of the withdrawal charge -- the amount of
all purchase payments you made prior to the last 7 years and have not withdrawn
plus the greater of (1) your Contract's earnings in the prior Account Year and
(2) 10% of all purchase payments you have made in the last 7 years. All other
purchase payments you withdraw will be subject to a withdrawal charge ranging
from 8% to 4%. 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 annuitization or transfers. In
certain circumstances, we will waive the withdrawal charges for a full or
partial withdrawal when you are confined to an eligible nursing home. In
addition, there may be other circumstances under which we may waive the
withdrawal charge.
4
<PAGE>
In addition to the withdrawal charge, amounts you withdraw, transfer or
annuitize from the Fixed Account before your Guarantee Period has ended may be
subject to a Market Value Adjustment.
8. PERFORMANCE
If you invest in one or more Sub-Accounts, the value of your Contract will
increase or decrease depending upon the investment performance of the Funds you
choose. The Sub-Accounts have not been in operation for a full calendar year;
therefore no performance information is provided in this Profile.
9. DEATH BENEFIT
If you die before the Contract 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.
BASIC DEATH BENEFIT
If you were 85 or younger when we issued your Contract, the death benefit
is the greatest of:
(1) the value of the Contract on the Death Benefit Date;
(2) the amount we would pay in the event of a full surrender of the
Contract on the Death Benefit Date; and
(3) your total purchase payments (adjusted for partial withdrawals)
calculated as of the Death Benefit Date.
If you were 86 or older when we issued your Contract, the death benefit is
equal to the amount set forth in (2) above.
OPTIONAL DEATH BENEFIT RIDERS
Subject to availability in your state, if you are 79 or younger when we
issue your Contract, you may enhance this basic death benefit by electing one or
more of the following optional death benefit riders: the Maximum Anniversary
Account Value Rider, the Earnings Enhancement Rider, and the 5% Premium Roll-Up
Rider.
MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER
If you elect the Maximum Anniversary Account Value Rider, the death
benefit is the greater of:
- any death benefit amounts payable under (1), (2) or (3) above, or
- your highest Contract value on any Account Anniversary before your 81st
birthday, adjusted for any subsequent purchase payments, partial
withdrawals, and charges made between that Account Anniversary and the
Death Benefit Date.
5% PREMIUM ROLL-UP RIDER
If you elect the 5% Premium Roll-Up Rider, the death benefit is
- the greatest of any death benefit amounts payable under (1), (2) or
(3) above or
- the sum of your total purchase payment plus interest accruals, adjusted
for partial withdrawals.
Under this rider, interest accrues at a rate of 5% per year on purchase
payments and transfers to the Variable Account while they remain in the Variable
Account. The 5% accruals will continue until the earlier of:
- the first day of the month following your 80th birthday, or
5
<PAGE>
- the day the death benefit amount under this rider equals twice the total
of the purchase payments and transferred amounts adjusted for withdrawals.
Net Purchase Payments under this rider will be adjusted for all partial
withdrawals as described in "Calculating the Death Benefit."
EARNINGS ENHANCEMENT RIDER
If you elect the Earnings Enhancement Rider and you are 69 or younger when
we issue your Contract, the death benefit is:
- the greatest of any death benefit amounts payable under (1), (2) or
(3) above, plus
- 40% of the lesser of your net purchase payments or your Account value
minus net purchase payments, calculated as of the Death Benefit Date.
If you elect the Earnings Enhancement Rider, and you are between the ages
of 70 and 79 when we issue your Contract, the death benefit is:
- the greatest of any death benefit amounts payable under (1), (2) or
(3) above, plus
- 25% of the lesser of your net purchase payment or your Account Value minus
net purchase payments, calculated as of the Death Benefit Date.
SELECTING MULTIPLE DEATH BENEFIT RIDERS
If you elect more than one death benefit rider, the death benefit will be
calculated as follows:
1) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH 5% PREMIUM
ROLL-UP RIDER: The death benefit will equal the greater of the death
benefit under the Maximum Anniversary Account Value Rider or the death
benefit under the 5% Premium Roll-Up Rider.
2) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH EARNINGS
ENHANCEMENT RIDER: The death benefit will equal the death benefit under
the Maximum Anniversary Account Value Rider, PLUS the amount calculated
under the Earnings Enhancement Rider. The death benefit under the
Earnings Enhancement Rider is calculated using the Account Value before
the application of the Maximum Anniversary Account Rider.
3) EARNINGS ENHANCEMENT RIDER COMBINED WITH 5% PREMIUM ROLL-UP RIDER: The
death benefit will equal the death benefit under the 5% Premium Roll-Up
Rider, PLUS the amount calculated under the Earnings Enhancement Rider.
The death benefit under the Earnings Enhancement Rider is calculated
using the Account Value before the application of the 5% Premium
Roll-Up Rider.
4) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH BOTH THE EARNINGS
ENHANCEMENT RIDER AND THE 5% PREMIUM ROLL-UP RIDER: The death benefit
will equal the greater of the death benefit under the Maximum
Anniversary Account Value Rider or the death benefit under the 5%
Premium Roll-Up Rider, PLUS the amount calculated under the Earnings
Enhancement Rider. The death benefit under the Earnings Enhancement
Rider is calculated using the Account Value before the application of
the 5% Premium Roll-Up Rider and that of the Maximum Anniversary
Account Value Rider.
If your spouse is the sole beneficiary, your spouse may elect to continue
the Contract, the death benefit amount described above will be your new Account
value as of the Death Benefit Date. For purposes of calculating future death
benefits, your age and the original issue date will be used to determine
applicable expense and death benefit amounts.
10. OTHER INFORMATION
PURCHASE PAYMENT INTEREST. We credit your Contract with interest at a rate
of 2% to 5% of each purchase payment based upon the interest rate option you
chose when you apply for your Contract. In
6
<PAGE>
the future, we may make additional interest rate options available, at our
discretion, to new Participants.
FREE LOOK. Depending upon applicable state or federal law, if you cancel
your Contract within 10 days after receiving it we will send you the value of
your Contract less any "adjusted" purchase payment Interest as of the day we
received your cancellation request (this may be more or less than the original
purchase payment) and we will not deduct a withdrawal charge. However, based
upon applicable state or federal law, we will refund the full amount of any
purchase payment(s) we receive and the "free look" period may be greater than 10
days.
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 a tax liability as a result of receiving
the death benefit.
WHO SHOULD PURCHASE A CONTRACT? The Contract is designed for those seeking
long-term tax-deferred accumulation of assets and annuity features, generally
for retirement or other long-term investment purposes. The tax-deferred feature
is most attractive to purchasers in high federal and state income tax brackets.
You should note that qualified retirement investments automatically provide tax
deferral regardless of whether or not the underlying contract is an annuity. You
should not buy a Contract if you are looking for a short-term investment or if
you do not wish to risk a decrease in the value of your investment.
CONFIRMATIONS AND QUARTERLY STATEMENTS. You will receive a confirmation or
an acknowledgment of transactions within your Contract, except for those
transactions which are part of an automated program, such as Dollar-Cost
Averaging, Asset Allocation, Systematic Withdrawal and/or Portfolio Rebalancing.
On a quarterly basis, you will receive a complete statement of your transactions
over the past quarter and a summary of your Account values at the end of that
period.
ADDITIONAL FEATURES. The Contract offers the following additional
convenient features, which you may choose at no extra charge. These features may
be started or discontinued at any time by either you or the Company with at
least 30 days notice.
DOLLAR-COST AVERAGING -- This program lets you invest gradually in up to
12 Sub-Accounts.
ASSET ALLOCATION -- This program rebalances your Account balance based on
the terms of the program. Different asset allocation models may be available
over the lifetime of the Contract; however, only one program can be in effect at
any one time.
SYSTEMATIC WITHDRAWAL AND INTEREST OUT PROGRAMS -- These programs allow
you to receive monthly, quarterly, semi-annual or annual payments during the
Accumulation Phase.
PORTFOLIO REBALANCING PROGRAM -- Under this program, we automatically
reallocate your investments in the Sub-Accounts to maintain the proportions you
select. You can elect rebalancing on a quarterly, semi-annual or annual basis.
SECURED FUTURE PROGRAM -- This program guarantees the return of your
purchase payment by investing a portion of your investment into a Guarantee
Period, and also allows you to allocate a portion of your investment to one or
more Sub-Accounts.
11. INQUIRIES
If you would like more information about buying a Contract, please contact
your broker or registered representative. If you have any other questions,
please contact us at:
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
TELEPHONE:
TOLL FREE (800) 752-7218
7
<PAGE>
PROSPECTUS
APRIL 10, 2000
MFS REGATTA EXTRA
Sun Life Assurance Company of Canada (U.S.) and Sun Life of Canada (U.S.)
Variable Account F offer the flexible payment deferred annuity contracts and
certificates described in this Prospectus to groups and individuals.
You may choose among 26 variable investment options and a range of fixed
options. The variable options are Sub-Accounts in the Variable Account, each of
which invests in shares of one of the following series of the MFS/Sun Life
Series Trust (the "Funds"). The MFS/Sun Life Series Trust (the "Series Fund") is
a mutual fund advised by our affiliate, Massachusetts Financial Services
Company:
<TABLE>
<S> <C>
Bond Series International Growth and Income Series
Capital Appreciation Series Managed Sectors Series
Capital Opportunities Series Massachusetts Investors Growth Stock Series
Emerging Growth Series Massachusetts Investors Trust Series
Emerging Markets Equity Series Money Market Series
Equity Income Series New Discovery Series
Global Asset Allocation Series Research Series
Global Governments Series Research Growth and Income Series
Global Growth Series Research International Series
Global Total Return Series Strategic Growth Series
Government Securities Series Strategic Income Series
High Yield Series Total Return Series
International Growth Series Utilities Series
</TABLE>
The fixed account options are available for specified time periods, called
Guarantee Periods, and pay interest at a guaranteed rate for each period.
PLEASE READ THIS PROSPECTUS AND THE SERIES FUND PROSPECTUS CAREFULLY
BEFORE INVESTING AND KEEP THEM FOR FUTURE REFERENCE. THEY CONTAIN IMPORTANT
INFORMATION ABOUT THE CONTRACT AND THE FUNDS.
We have filed a Statement of Additional Information dated April 10, 2000
(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 XX of this Prospectus. You may obtain a copy without charge by
writing to us at the address shown below (which we sometimes refer to as our
"Annuity Mailing Address") or by telephoning (888) 786-2435. 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.
EXPENSES ASSOCIATED WITH SOME CONTRACTS OFFERING A BONUS CREDIT MAY BE HIGHER
THAN THOSE ASSOCIATED WITH CONTRACTS THAT DO NOT OFFER A BONUS CREDIT. ON SOME
CONTRACTS, THE BONUS CREDIT MAY BE MORE THAN OFFSET BY THE CHARGES ASSOCIATED
WITH THE CREDIT.
ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY US MEANS RECEIPT AT THE FOLLOWING
ADDRESS:
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Special Terms 4
Expense Summary 4
Summary of Contract Expenses 4
Underlying Fund Annual Expenses 5
Examples 6
The Annuity Contract 7
Communicating To Us About Your Contract 8
Sun Life Assurance Company of Canada (U.S.) 8
The Variable Account 8
Variable Account Options: The Funds 9
The Fixed Account 11
The Fixed Account Options: The Guarantee Periods 11
The Accumulation Phase 12
Issuing Your Contract 12
Amount and Frequency of Purchase Payments 12
Allocation of Net Purchase Payments 12
Your Account 13
Your Account Value 13
Purchase Payment Interest 13
Variable Account Value 14
Fixed Account Value 15
Transfer Privilege 16
Waivers; Reduced Charges; Credits; Bonus Guaranteed
Interest Rates 17
Optional Programs 17
Withdrawals, Withdrawal Charge and Market Value Adjustment 19
Cash Withdrawals 19
Withdrawal Charge 20
Types of Withdrawals not Subject to Withdrawal Charge 21
Market Value Adjustment 22
Contract Charges 23
Account Fee 23
Administrative Expense Charge 23
Mortality and Expense Risk Charge 23
Charge for Optional Death Benefit Riders 24
Premium Taxes 24
Fund Expenses 24
Modification in the Case of Group Contracts 24
Death Benefit 24
Amount of Death Benefit 24
The Basic Death Benefit 25
Optional Death Benefit Riders 25
Calculating the Death Benefit 27
Method of Paying Death Benefit 27
Non-Qualified Contracts 27
Selection and Change of Beneficiary 28
Payment of Death Benefit 28
Due Proof of Death 28
The Income Phase -- Annuity Provisions 28
Selection of the Annuitant or Co-Annuitant 28
Selection of the Annuity Commencement Date 29
Annuity Options 29
Selection of Annuity Option 30
Amount of Annuity Payments 30
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Exchange of Variable Annuity Units 31
Account Fee 31
Annuity Payment Rates 31
Annuity Options as Method of Payment for Death Benefit 32
Other Contract Provisions 32
Exercise of Contract Rights 32
Change of Ownership 32
Voting of Fund Shares 33
Periodic Reports 33
Substitution of Securities 34
Change in Operation of Variable Account 34
Splitting Units 34
Modification 34
Discontinuance of New Participants 35
Reservation of Rights 35
Right to Return 35
Tax Considerations 35
U.S. Federal Tax Considerations 36
DEDUCTIBILITY OF PURCHASE PAYMENTS 36
PRE-DISTRIBUTION TAXATION OF CONTRACTS 36
DISTRIBUTIONS AND WITHDRAWALS FROM NON-QUALIFIED
CONTRACTS 36
DISTRIBUTION AND WITHDRAWALS FROM QUALIFIED
CONTRACTS 37
WITHHOLDING 37
INVESTMENT DIVERSIFICATION AND CONTROL 37
TAX TREATMENT OF THE COMPANY AND THE VARIABLE
ACCOUNT 37
QUALIFIED RETIREMENT PLANS 37
PENSION AND PROFIT-SHARING PLANS 38
TAX-SHELTERED ANNUITIES 38
INDIVIDUAL RETIREMENT ACCOUNTS 38
ROTH IRAS 38
Puerto Rico Tax Considerations 39
Administration of the Contracts 39
Distribution of the Contracts 39
Performance Information 40
Available Information 41
Incorporation of Certain Documents by Reference 41
Additional Information About the Company 42
Reinsurance 53
Reserves 53
Investments 53
Competition 54
Employees 54
Properties 54
State Regulation 54
Legal Proceedings 55
Accountants 55
Financial Statements 55
Table of Contents of Statement of Additional Information 80
Appendix A -- Glossary 82
Appendix B -- Withdrawals, Withdrawal Charges and the Market
Value Adjustment 85
Appendix C -- Calculation of Basic Death Benefit 88
Appendix D -- Calculation of Earnings Enhancement Optional
Death Benefit Rider 89
Appendix E -- Calculation of Death Benefit When All Three
Optional Death Benefit Riders are Selected 90
Appendix F -- Calculation Used to Determine Purchase Payment
Interest 91
</TABLE>
3
<PAGE>
SPECIAL TERMS
Your 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 Fund. The table should be considered
together with the narrative provided under the heading "Contract Charges" in
this Prospectus, and with the Funds' prospectuses. In addition to the expenses
listed below, we may deduct premium taxes, where required by state law.
SUMMARY OF CONTRACT EXPENSES
<TABLE>
<S> <C>
TRANSACTION EXPENSES
Sales Load Imposed on Purchase Payments..................... $ 0
Deferred Sales Load (as a percentage of Purchase Payments
withdrawn) (1)
Number of complete Account Years Purchase Payment in
Account
0-1..................................................... 8%
1-2..................................................... 8%
2-3..................................................... 7%
3-4..................................................... 7%
4-5..................................................... 6%
5-6..................................................... 5%
6-7..................................................... 4%
7 or more............................................... 0%
Transfer Fee (2)............................................ $ 15
ANNUAL ACCOUNT FEE PER CONTRACT OR CERTIFICATE (3).......... $ 35
VARIABLE ACCOUNT ANNUAL EXPENSES (as a percentage of average
Variable Account assets)
Mortality and Expense Risks Charge........................ 1.30%
Administrative Expense Charge............................. 0.15%
Other Fees and Expenses of the Variable Account........... 0.00%
-----
Total Variable Account Annual Expenses (4).................. 1.45%
</TABLE>
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(1) A portion of your Account may be withdrawn each year without imposition of
any withdrawal charge and, after a Purchase Payment has been in your Account
for 7 Account Years, it may be withdrawn free of the withdrawal charge.
(2) We currently do not assess the transfer fee. However, a Market Value
Adjustment may be imposed on amounts transferred from or within the Fixed
Account.
(3) The annual Account Fee is $35 in Account Years 1 through 5; thereafter, the
Account Fee may be changed annually, but it will not exceed $50.
(4) An additional charge will apply if you elect one or more of the optional
death benefit riders. For more information, refer to "Charge for Optional
Death Benefit Riders."
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UNDERLYING FUND ANNUAL EXPENSES (1)
(AS A PERCENTAGE OF FUND NET ASSETS)
<TABLE>
<CAPTION>
OTHER FUND TOTAL ANNUAL FUND
EXPENSES(2) EXPENSES
MANAGEMENT (AFTER (AFTER
FEES REIMBURSEMENT) REIMBURSEMENT)
--------------- --------------- -----------------
<S> <C> <C> <C>
Bond Series............................. 0.60% 0.12% 0.72%
Capital Appreciation Series............. 0.71% 0.05% 0.76%
Capital Opportunities Series............ 0.75% 0.09% 0.84%
Emerging Growth Series.................. 0.70% 0.05% 0.75%
Emerging Markets Equity Series.......... 1.25% 0.35% 1.60%
Equity Income Series.................... 0.75% 0.26% 1.01%
Global Asset Allocation Series.......... 0.75% 0.14% 0.89%
Global Governments Series............... 0.75% 0.15% 0.90%
Global Growth Series.................... 0.90% 0.11% 1.01%
Global Total Return Series.............. 0.75% 0.14% 0.89%
Government Securities Series............ 0.55% 0.06% 0.61%
High Yield Series....................... 0.75% 0.08% 0.83%
International Growth Series............. 0.98% 0.25% 1.23%
International Growth and Income
Series................................. 0.98% 0.18% 1.16%
Managed Sectors Series.................. 0.73% 0.06% 0.79%
Massachusetts Investors Growth Stock
Series................................. 0.75% 0.08% 0.83%
Massachusetts Investors Trust Series.... 0.55% 0.04% 0.59%
Money Market Series..................... 0.50% 0.07% 0.57%
New Discovery Series.................... 0.90% 0.16% 1.06%
Research Series......................... 0.70% 0.05% 0.75%
Research Growth and Income Series....... 0.75% 0.11% 0.86%
Research International Series........... 1.00% 0.50% 1.50%
Strategic Growth Series(3).............. 0.75% 0.25% 1.00%
Strategic Income Series................. 0.75% 0.33% 1.08%
Total Return Series..................... 0.65% 0.04% 0.69%
Utilities Series........................ 0.75% 0.06% 0.81%
</TABLE>
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(1) The information relating to Fund expenses was provided by the Funds and we
have not independently verified it. You should consult the Fund
prospectus(es) for more information about Fund expenses.
(2) 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 such other
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected.
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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>
Bond Series................................................ $ 95 $ 135 $ 178 $ 269
Capital Appreciation Series................................ 96 137 180 273
Capital Opportunities Series............................... 97 139 184 282
Emerging Growth Series..................................... 96 136 180 272
Emerging Markets Equity Series............................. 104 162 223 357
Equity Income Series....................................... 98 144 193 299
Global Asset Allocation Series............................. 97 141 187 287
Global Governments Series.................................. 97 141 187 288
Global Growth Series....................................... 98 144 193 299
Global Total Return Series................................. 97 141 187 287
Government Securities Series............................... 94 132 173 258
High Yield Series.......................................... 96 138 183 279
International Growth Series................................ 101 151 204 321
International Growth and Income Series..................... 100 149 201 314
Managed Sectors Series..................................... 96 138 182 276
Massachusetts Investors Growth Stock Series................ 97 139 184 281
Massachusetts Investors Trust Series....................... 94 131 171 255
Money Market Series........................................ 94 131 170 253
New Discovery Series....................................... 99 146 196 304
Research Series............................................ 96 136 180 272
Research Growth and Income Series.......................... 97 140 185 284
Research International Series.............................. 103 159 218 348
Strategic Growth Series.................................... 98 144 193 298
Strategic Income Series.................................... 99 146 197 306
Total Return Series........................................ 95 134 177 266
Utilities Series........................................... 96 138 183 279
</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.
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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>
Bond Series................................................ $ 23 $ 72 $ 124 $ 269
Capital Appreciation Series................................ 24 74 126 273
Capital Opportunities Series............................... 25 76 130 282
Emerging Growth Series..................................... 24 73 126 272
Emerging Markets Equity Series............................. 32 99 169 357
Equity Income Series....................................... 26 81 139 299
Global Asset Allocation Series............................. 25 78 133 287
Global Governments Series.................................. 25 78 133 288
Global Growth Series....................................... 26 81 139 299
Global Total Return Series................................. 25 78 133 287
Government Securities Series............................... 22 69 119 258
High Yield Series.......................................... 24 75 129 279
International Growth Series................................ 29 88 150 321
International Growth and Income Series..................... 28 86 141 314
Managed Sectors Series..................................... 24 75 128 276
Massachusetts Investors Growth Stock Series................ 25 76 130 281
Massachusetts Investors Trust Series....................... 22 68 117 255
Money Market Series........................................ 22 68 116 253
New Discovery Series....................................... 27 83 142 304
Research Series............................................ 24 73 126 272
Research Growth and Income Series.......................... 25 77 131 284
Research International Series.............................. 31 96 164 348
Strategic Growth Income.................................... 26 81 139 298
Strategic Income Series.................................... 27 83 143 306
Total Return Series........................................ 23 71 123 266
Utilities Series........................................... 24 75 129 279
</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.
THE ANNUITY CONTRACT
Sun Life Assurance Company of Canada (U.S.) (the "Company", "we" or "us")
and Sun Life of Canada (U.S.) Variable Account F (the "Variable Account") offer
the Contract to groups and individuals for use in connection with their
retirement plans. The Contract is available on a group basis and, in certain
states, may be available on an individual basis. We issue an Individual Contract
directly to the individual owner of the Contract. We issue a Group Contract to
the Owner covering all individuals participating under the Group Contract; each
individual receives a Certificate that evidences his or her participation under
the Group Contract.
In this Prospectus, unless we state otherwise, we refer to both the owners
of Individual Contracts and participating individuals under Group Contracts as
"Participants" and we address all Participants as "you"; we use the term
"Contracts" to include Individual Contracts, Group Contracts, and Certificates
issued under Group Contracts. For the purpose of determining benefits under both
Individual Contracts and Group Contracts, we establish an Account for each
Participant, which we will refer to as "your" Account or a "Participant
Account."
Your Contract provides a number of important benefits for your retirement
planning. It has an Accumulation Phase, during which you make payments under the
Contract and allocate them to one or more Variable Account or Fixed Account
options, and an Income Phase, during which we make annuity payments based on the
amount you have accumulated. Your Contract provides tax deferral, so that you do
not pay taxes on your earnings under Your Contract until you withdraw them. It
provides a basic death benefit if you die during the Accumulation Phase. You may
enhance the basic death benefit by
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electing one or more optional death benefit riders and paying an additional
charge for each optional death benefit rider you elect. Finally, if you so
elect, during the Income Phase we will make annuity payments to you or someone
else for life or for another period that you choose.
You choose these benefits on a variable or fixed basis or a combination of
both. When you choose Variable Account investment options or a Variable Annuity
option, 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 variable options, you assume all
investment risk under your Contract. When you choose a Guarantee Period in our
Fixed Account or a Fixed Annuity option, we assume the investment risk, except
in the case of early withdrawals in the Accumulation Phase, 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 might not exceed our minimum guaranteed rate,
which is 3% per year, compounded annually.
The Contract is 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 or 408A of the Internal Revenue Code.
The Contract is also designed so that it 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 other Contracts as "Non-Qualified Contracts."
COMMUNICATING TO US ABOUT YOUR CONTRACT
All materials sent to us, including Purchase Payments, must be sent to our
Annuity Mailing Address as set forth on the first page of this Prospectus. For
all telephone communications, you must call (800) 752-7215.
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 our Annuity Mailing Address. However, we will consider
all financial transactions, including 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) completed its demutualization
on March 22, 2000. As a result of the demutualization, a new holding company,
Sun Life Financial Services of Canada Inc. ("Sun Life Financial"), is now the
ultimate parent of Sun Life (Canada) and the Company. Sun Life Financial, a
corporation organized in Canada, is a reporting company under the Securities
Exchange Act of 1934 with common shares listed on the Toronto, New York, London,
and Manila stock exchanges.
THE VARIABLE ACCOUNT
We established the Variable Account as a separate account on July 13,
1989, pursuant to a resolution of our Board of Directors. The Variable Account
funds the Contract and various other variable annuity and variable product
contracts which we offer. These other products may have features, benefits and
charges that are different from those under the Contract.
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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 shares of a specific Fund. All amounts
allocated to the Variable Account will be used to purchase Fund shares as
designated by you at their net asset value. Any and all distributions made by
the Funds with respect to the shares held by the Variable Account will be
reinvested to purchase additional Fund shares at their net asset value.
Deductions will be made from the Variable Account for cash withdrawals, 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. The Variable Account will be
fully invested in 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 27 independent portfolios of securities,
each of which has separate investment objectives and policies. Shares of the
Series Fund are issued in 27 series (each, a "Fund"), each corresponding to one
of the portfolios. The Contracts provide for investment by the Sub-Accounts in
shares of the 26 Funds described below. Additional portfolios may be added to
the Series Fund which may or may not be available for investment by the Variable
Account.
BOND SERIES will primarily seek as high a level of current income as is
believed to be consistent with prudent investment risk; its secondary
objective is to seek to protect shareholders' capital.
CAPITAL APPRECIATION SERIES will seek to maximize capital appreciation by
investing in securities of all types, with major emphasis on common stocks.
CAPITAL OPPORTUNITIES SERIES will seek capital appreciation.
EMERGING GROWTH SERIES will seek long-term growth of capital.
EMERGING MARKETS EQUITY SERIES will seek capital appreciation.
EQUITY INCOME SERIES will primarily seek reasonable income by investing
mainly in income producing securities; its secondary objective is to seek
capital appreciation.
GLOBAL ASSET ALLOCATION SERIES will seek total return over the long term
through investments in equity and fixed income securities and will also
seek to have low volatility of share price (I.E., net asset value per
share) and reduced risk (compared to an aggressive equity/fixed income
portfolio).
GLOBAL GOVERNMENTS SERIES will seek to provide moderate current income,
preservation of capital and growth of capital by investing in debt
obligations that are issued or guaranteed as to principal and interest by
either (i) the U.S. Government, its agencies, authorities, or
instrumentalities, or (ii) the governments of foreign countries (to the
extent that the Series' adviser believes that the higher yields available
from foreign government securities are sufficient to justify the risks of
investing in these securities).
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<PAGE>
GLOBAL GROWTH SERIES will seek capital appreciation by investing in
securities of companies worldwide growing at rates expected to be well
above the growth rate of the overall U.S. economy.
GLOBAL TOTAL RETURN SERIES will seek total return by investing in
securities which will provide above average current income (compared to a
portfolio invested entirely in equity securities) and opportunities for
long-term growth of capital and income.
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 or unrated securities (possibly
with equity features) of U.S. and foreign issuers (also known as "junk
bonds").
INTERNATIONAL GROWTH SERIES will seek capital appreciation.
INTERNATIONAL GROWTH AND INCOME SERIES will seek capital appreciation and
current income.
MANAGED SECTORS SERIES will seek capital appreciation by varying the
weighting of its portfolio among 13 industry sectors.
MASSACHUSETTS INVESTORS GROWTH STOCK SERIES will seek to provide long-term
growth of capital and future income rather than current income.
MASSACHUSETTS INVESTORS TRUST SERIES (FORMERLY, THE CONSERVATIVE GROWTH
SERIES) will seek long-term growth of capital and future income while
providing more current dividend income than is normally obtainable from a
portfolio of only growth stocks.
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.
NEW DISCOVERY SERIES will seek capital appreciation.
RESEARCH SERIES will seek to provide long-term growth of capital and future
income.
RESEARCH GROWTH AND INCOME SERIES will seek to provide long-term growth of
capital, current income and growth of income.
RESEARCH INTERNATIONAL SERIES will seek capital appreciation.
STRATEGIC GROWTH SERIES will seek capital appreciation.
STRATEGIC INCOME SERIES will seek to provide high current income by
investing in fixed income securities and will seek to take advantage of
opportunities to realize significant capital appreciation while maintaining
a high level of current income.
TOTAL RETURN SERIES will seek primarily to obtain above-average income
(compared to a portfolio entirely invested in equity securities) consistent
with prudent employment of capital; its secondary objective is to take
advantage of opportunities for growth of capital and income since many
securities offering a better than average yield may also possess growth
potential.
UTILITIES SERIES will seek capital growth and current income (income above
that available from a portfolio invested entirely in equity securities) by
investing, under normal market conditions, at least 65% of its assets in
equity and debt securities of both domestic and foreign companies in the
utilities industry.
The Series Fund pays fees to MFS for its services pursuant to investment
advisory agreements. MFS also serves as investment adviser to each of the 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-
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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 and
underwriting agreements (including supervision of the sub-advisers noted below)
is solely that of MFS. We undertake no obligation in this regard.
MFS may serve as the investment adviser to other mutual funds which have
similar investment goals and principal investment policies and risks as the
Series, and which may be managed by a Fund's portfolio manager(s). While a Fund
may have many similarities to these other funds, its investment performance will
differ from their investment performance. This is due to a number of differences
between a Fund and these similar products, including differences in sales
charges, expense ratios and cash flows.
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
Fund which is involved in the conflict or substitution of shares of other Funds
or other mutual funds.
MORE COMPREHENSIVE INFORMATION ABOUT THE SERIES FUND AND THE MANAGEMENT,
INVESTMENT OBJECTIVES, POLICIES, RESTRICTIONS, EXPENSES AND POTENTIAL RISKS OF
EACH FUND MAY BE FOUND IN THE ACCOMPANYING CURRENT PROSPECTUS OF THE
SERIES FUND. YOU SHOULD READ THE SERIES FUND PROSPECTUS CAREFULLY BEFORE
INVESTING. THE SERIES FUND'S STATEMENT OF ADDITIONAL INFORMATION IS AVAILABLE BY
CALLING 1-800-752-7215.
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 you allocate 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 4 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.
THE FIXED ACCOUNT OPTIONS:
THE GUARANTEE PERIODS
You may elect one or more Guarantee Period(s) from those we make available
from time to time. We publish Guaranteed Interest Rates for each 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 3% per year,
compounded annually. Also, once we have accepted your 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.
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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 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.
We may from time to time in our discretion offer interest rate specials
for new Purchase Payments that are higher than the rates we are then offering
for renewals or transfers.
Early withdrawals from your allocation to a Guarantee Period, including
cash withdrawals, transfers, and commencement of an annuity option, may be
subject to a Market Value Adjustment, which could decrease or increase the value
of your Account. See "Withdrawals, Withdrawal Charge, and Market Value
Adjustment."
THE ACCUMULATION PHASE
During the Accumulation Phase of your Contract, you make payments 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 you surrender your Contract or die before the Annuity
Commencement Date.
ISSUING YOUR CONTRACT
When you purchase a Contract, a completed Application and the initial
Purchase Payment are sent to us for acceptance. When we accept an Individual
Contract, we issue the Contract to you. When we accept a Group Contract, we
issue the Contract to the Owner; we issue a Certificate to you as a Participant.
We will credit your initial Purchase Payment to your Account within 2
business days of receiving your completed Application. If your Application is
not complete, we will notify you. If we do not have the necessary information to
complete the Application within 5 business days, we will send your money back to
you or ask your permission to retain your Purchase Payment until the Application
is made complete. Then we will apply the Purchase Payment within 2 business days
of when the Application is complete.
AMOUNT AND FREQUENCY OF PURCHASE PAYMENTS
The amount of Purchase Payments may vary; however, we will not accept an
initial Purchase Payment of less than $10,000, and each additional Purchase
Payment must be at least $1,000, unless we waive these limits. 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
You may allocate your Purchase Payments among the different Sub-Accounts
and Guarantee Periods we offer, but any allocation to a Guarantee Period must be
at least $1,000. Over the life of your Contract, you may allocate amounts among
as many as 18 of the available options.
In your Application, you may specify the percentage of each Purchase
Payment to be allocated to each Sub-Account or Guarantee Period. These
percentages are called your allocation factors. You may change the allocation
factors for future Payments by sending us written notice of the change, as
required. We will use your 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.
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Although it is currently not our practice, we may deduct applicable
premium taxes or similar taxes from your Purchase Payments. See "Contract
Charges -- Premium Taxes." In that case, we will credit your 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 Contract.
YOUR ACCOUNT VALUE
Your Account Value is the sum of the value of the 2 components of your
Contract: the Variable Account portion of your Contract ("Variable Account
Value") and the Fixed Account portion of your Contract ("Fixed Account Value").
These 2 components are calculated separately, as described under "Variable
Account Value" and "Fixed Account Value."
PURCHASE PAYMENT INTEREST
We will credit your Contract with interest at the rate you selected when
you applied for the Contract. Currently, we offer 2 interest rate options:
OPTION A: THE 2% FIVE-YEAR ANNIVERSARY INTEREST OPTION -- Under this
option we will credit your Contract with interest at a rate of 2% of each
Purchase Payment received prior to the first Account Anniversary. In
addition, if you chose this option, we will credit your Contract with
interest at a rate of 2% of the Account Value at the end of every
Fifth-Year Anniversary.
OPTION B: THE 3%, 4%, OR 5% INTEREST OPTION -- Under this option we will
credit your Contract with interest at the following rates:
- 3% of each Purchase Payment if the sum of all Purchase Payments, reduced
by the sum of all withdrawals (your "Net Purchase Payments"), is less than
$100,000 on the day we receive the Purchase Payment;
- 4% of each Purchase Payment if your Net Purchase Payments is $100,000 or
more but less than $500,000 on the day we receive the Purchase Payment;
and
- 5% of each Purchase Payment if your Net Purchase Payments are $500,000 or
more on the day we receive the Purchase Payment.
If you chose this Option B, there may be an additional credit paid at the
end of the first Account Year. If your Net Purchase Payments at the end of
your first Account Year are greater than or equal to $100,000, but less
than $500,000, and some of your Net Purchase Payment(s) received a credit
of 3% (rather than 4%), then an additional 1% will be paid on the amount
of Net Purchase Payments that received the 3% credit. Similarly, if your
Net Purchase Payments at the end of your first Account Year are greater
than or equal to $500,000 and some of your Purchase Payment(s) received a
credit of either 3% or 4% (rather than 5%), then an additional 2% or 1%
will be paid on the amount of Net Purchase Payments that received a 3%
credit or a 4% credit, respectively.
We credit Purchase Payment Interest during the same Valuation Period in
which we receive the Purchase Payment. We allocate the Purchase Payment Interest
to the Sub-Accounts and/or the Guarantee Periods in the same proportion as the
Net Purchase Payment is allocated. For any additional 1% or 2% interest credit
under Option B or any Five-Year Anniversary credit under Option A, we allocate
the credit on a pro rata basis to all Sub-Accounts and/or Guarantee Periods in
which you are invested, excluding any Guarantee Periods established to support a
dollar-cost averaging program. Any additional interest adjustments will be
credited on your Account Anniversary. We will deduct the "Adjusted" Purchase
Payment Interest if the Contract is returned during the "free look period." For
a description of the free look period and Adjusted Purchase Payment Interest,
see "Right to Return." For examples of how we calculate Purchase Payment
Interest, see Appendix F.
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<PAGE>
Because the Company does not recapture any Purchase Payment Interest on
the Contracts, there are no general circumstances in which a Participant would
be disadvantaged by purchasing one of the Contracts rather than purchasing a
similar contract without a bonus credit feature. However, the Contracts are
designed to give the most value to Participants with long-term investment goals.
We may credit Purchase Payment Interest at rates other than those
described above on Contracts sold to officers, directors and employees of the
Company or its affiliates, registered representatives, and employees of
broker-dealers with a current selling agreement with the Company and affiliates
of such representatives and broker-dealers, employees of affiliated asset
management firms, and persons who have retired from such positions ("Eligible
Employees") and immediate family members of Eligible Employees.
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. (The close of trading is
determined by the New York Stock Exchange.) 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. We calculate the Net Investment Factor by dividing
(1) the net asset value of a Fund share held in the Sub-Account at the end of
that Valuation Period, plus the per share amount of any dividend or capital
gains distribution made by that Fund during the Valuation Period, by (2) the net
asset value per share of the Fund share at the end of the previous Valuation
Period; we then deduct a factor representing the mortality and expense risk
charge and administrative expense charge for each day in the Valuation Period.
See "Contract Charges."
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 you transfer or withdraw amounts 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.
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<PAGE>
FIXED ACCOUNT VALUE
Your Fixed Account value is the sum of all amounts allocated to Guarantee
Periods, either from Net Purchase Payments, transfers or renewals, plus interest
credited on those amounts, and minus withdrawals, transfers out of Guarantee
Periods, and any deductions for charges under the Contract taken from your Fixed
Account Value.
A Guarantee Period begins the day we apply your allocation and ends when
the number of calendar years (or months if the Guarantee Period is less than one
year) in the Guarantee Period (measured from the end of the calendar month in
which the amount was allocated to the Guarantee Period) have elapsed. The last
day of the Guarantee Period is its Renewal Date.
Each additional Purchase Payment, transfer or renewal credited to your
Fixed Account Value will result in a new Guarantee Period with its own Renewal
Date. Amounts allocated at different times to Guarantee Periods of the same
duration may have different Renewal Dates.
CREDITING INTEREST
We credit interest on amounts allocated to a Guarantee Period at the
applicable Guaranteed Interest Rate for the duration of the Guarantee Period.
During the Guarantee Period, we credit interest daily at a rate that yields the
Guaranteed Interest Rate on an annual effective basis.
GUARANTEE AMOUNTS
Each separate allocation you make to a Guarantee Period, together with
interest credited thereon, is called a Guarantee Amount. Each Guarantee Amount
is treated separately for purposes of determining the Market Value Adjustment. A
Guarantee Period that will extend beyond your maximum Annuity Commencement Date
will result in an application of a Market Value Adjustment upon annuitization or
withdrawals. Each new allocation to a Guarantee Period must be at least $1,000.
RENEWALS
We will notify you in writing between 45 and 75 days before the Renewal
Date for any Guarantee Amount. A new Guarantee Period of the same duration will
begin automatically for that Guarantee Amount on the first day following the
Renewal Date, unless before the Renewal Date we receive:
1) written notice from you electing a different Guarantee Period from
among those we then offer, or
2) instructions to transfer the Guarantee Amount to one or more
Sub-Accounts, in accordance with the transfer privilege provisions of
the Contract described below. (See "Transfer Privilege.")
A Guarantee Amount will not renew into a Guarantee Period that will extend
beyond your Maximum Annuity Commencement Date. We will automatically renew your
amount into the next available Guarantee Period.
EARLY WITHDRAWALS
If you withdraw, transfer, or annuitize an allocation to a Guarantee
Period more than 30 days prior to the Renewal Date, we will apply a Market Value
Adjustment to the transaction. This could result in an increase or decrease of
your Account 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.
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<PAGE>
TRANSFER PRIVILEGE
PERMITTED TRANSFERS
During the Accumulation Phase, you may transfer all or part of your
Account Value to one or more Sub-Accounts or Guarantee Periods then available,
subject to the following restrictions:
- You may not make more than 12 transfers in any Account Year;
- The amount transferred from a Sub-Account must be at least $1,000, unless
you are transferring your entire balance in that Sub-Account;
- Your Account Value remaining in a Sub-Account must be at least $1,000;
- The amount transferred from a Guarantee Period must be the entire
Guarantee Amount, except for transfers of interest credited during the
current Account Year;
- At least 30 days must elapse between transfers to or from Guarantee
Periods;
- Transfers to or from Sub-Accounts are subject to terms and conditions that
may be imposed by the Funds; and
- We impose additional restrictions on market timers, which are further
described below.
These restrictions do not apply to transfers made under an approved
dollar-cost averaging program.
There is usually no charge imposed on transfers; however, we reserve the
right to impose a transfer charge of $15 for each transfer. Transfers out of a
Guarantee Period made more than 30 days before the Renewal Date will be subject
to the Market Value Adjustment described below. Under current law, there is no
tax liability for transfers.
REQUESTS FOR TRANSFERS
You may request transfers in writing or by telephone. The telephone
transfer privilege is available automatically, and does not require your written
election. We will require personal identifying information to process a request
for a transfer made by telephone. We will not be liable for following
instructions communicated by telephone that we reasonably believe are genuine.
If we receive your 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.
MARKET TIMERS
The Contracts are not designed for professional market timing
organizations or other entities using programmed and frequent transfers. If you
wish to employ such strategies, you should not purchase a Contract. Accordingly,
transfers may be subject to restrictions if exercised by a market timing firm or
any other third party authorized to initiate transfer transactions on behalf of
multiple Participants. In imposing such restrictions, we may, among other
things, not accept (1) the transfer instructions of any agent acting under a
power of attorney on behalf of more than one Participant, or (2) the transfer
instructions of individual Participants who have executed pre-authorized
transfer forms that are submitted at the same time by market timing firms or
other third parties on behalf of more than one Participant. We will not impose
these restrictions unless our actions are reasonably intended to prevent the use
of such transfers in a manner that will disadvantage or potentially impair the
Contract rights of other Participants.
In addition, the Series Funds has reserved the right to temporarily or
permanently refuse exchange requests from the Variable Account if, in the MFS'
judgment, a Fund would be unable to invest effectively in accordance with its
investment objective and policies, or would otherwise potentially be adversely
affected. In particular, a pattern of exchanges that coincide with a market
timing strategy may be disruptive to a Fund and therefore may be refused.
Accordingly, the Variable Account may not be in a position to effectuate
transfers and may refuse transfer requests without prior notice. We also
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<PAGE>
reserve the right, for similar reasons, to refuse or delay exchange requests
involving transfers to or from the Fixed Account.
WAIVERS; REDUCED CHARGES; CREDITS; BONUS GUARANTEED INTEREST RATES
We may reduce or waive the withdrawal charge the mortality and expense
risk charges, the administrative services charge, or the annual Account Fee,
credit additional amounts, or grant bonus Guaranteed Interest Rates in certain
situations. These situations may include sales of Contracts (1) where selling
and/or maintenance costs associated with the Contracts are reduced, such as the
sale of several Contracts to the same Participant, sales of large Contracts, and
certain group sales, and (2) to officers, directors and employees of the Company
or its affiliates, registered representatives and employees of broker-dealers
with a current selling agreement with the Company and affiliates of such
representatives and broker-dealers, employees of affiliated asset management
firms, and persons who have retired from such positions ("Eligible Employees")
and immediate family members of Eligible Employees. Eligible Employees and their
immediate family members may also purchase a Contract without regard to minimum
Purchase Payment requirements. For other situations in which withdrawal charges
may be waived, see "Withdrawals, Withdrawal Charge and Market Value Adjustment."
OPTIONAL PROGRAMS
DOLLAR-COST AVERAGING
Dollar-cost averaging allows you to invest gradually, over time, in up to
12 Sub-Accounts. You may select a dollar-cost averaging program at no extra
charge by allocating a minimum of $1,000 to a designated Sub-Account or to a
Guarantee Period we make available in connection with the program. Amounts
allocated to the Fixed Account under the program will earn interest at a rate
declared by the Company for the Guarantee Period you select. Previously applied
amounts may not be transferred to a Guarantee Period made available in
connection with this program. Each month or quarter, as you select, we will
transfer the same amount automatically (including a portion of the Purchase
Payment Interest) to one or more Sub-Accounts that you choose, up to a maximum
of 12 Sub-Accounts. The program continues until your Account Value allocated to
the program is depleted or you elect to stop the program. The final amount
transferred from the Fixed Account will include all interest earned (excluding
Purchase Payment Interest).
No Market Value Adjustment (either positive or negative) will apply to
amounts automatically transferred from the Fixed Account under the dollar-cost
averaging program. However, if you discontinue or alter the program prior to
completion, amounts remaining in the Fixed Account will be transferred to the
Series Trust's Money Market Sub-Account, unless you instruct us otherwise, and
the Market Value Adjustment will be applied. Any new allocation of a Purchase
Payment to the program is treated as commencing a new dollar-cost averaging
program and is subject to the $1,000 minimum.
The main objective of a dollar-cost averaging program is to minimize the
impact of short-term price fluctuations on Account Value. In general, since you
transfer the same dollar amount to the variable investment options at set
intervals, dollar-cost averaging allows you to purchase more Variable
Accumulation Units (and, indirectly, more Fund shares) when prices are low and
fewer Variable Accumulation Units (and, indirectly, fewer Fund shares) when
prices are high. Therefore, you may achieve a lower average cost per Variable
Accumulation Unit over the long term. A dollar-cost averaging program allows you
to take advantage of market fluctuations. However, it is important to understand
that a dollar-cost averaging program does not assure a profit or protect against
loss in a declining market. We do not allow transfers into any of the Guarantee
Periods.
ASSET ALLOCATION
One or more asset allocation programs may be available in connection with
the Contracts, at no extra charge. Asset allocation is the process of investing
in different asset classes -- such as equity funds, fixed income funds, and
money market funds -- depending on your personal investment goals, tolerance for
risk, and investment time horizon. By spreading your money among a variety of
asset
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<PAGE>
classes, you may be able to reduce the risk and volatility of investing,
although there are no guarantees, and asset allocation does not insure a profit
or protect against loss in a declining market.
Currently, you may select one of three asset allocation models, each of
which represents a combination of Sub-Accounts with a different level of risk.
The available models are: the conservative asset allocation model, the moderate
asset allocation model, and the aggressive asset allocation model. Each model
allocates a different percentage of Account Value to Sub-Accounts investing in
the various asset classes, with the conservative model allocating the lowest
percentage to Sub-Accounts investing in the equity asset class and the
aggressive model allocating the highest percentage to the equity asset class.
These models, as well as the terms and conditions of the asset allocation
program, are fully described in a separate brochure. Additional programs may be
available in the future.
If you elect an asset allocation program, we will automatically allocate
your Purchase Payments among the Sub-Accounts represented in the model you
choose. [Sun Capital Advisers' Asset Allocation Committee will direct the
allocations.] By your election of an asset allocation program, you thereby
authorize us to automatically reallocate your Account Value on a quarterly
basis, or as determined by the terms of the Asset Allocation Program, to reflect
the current composition of the model you have selected, without further
instruction, until we receive notification that you wish to terminate the
program, or choose a different model.
SYSTEMATIC WITHDRAWAL AND INTEREST OUT PROGRAMS
If you have an Account Value of $10,000 or more, you may select our
Systematic Withdrawal Program or our Interest Out Program.
Under the Systematic Withdrawal Program, you determine the amount and
frequency of regular withdrawals you would like to receive from your Fixed
Account Value and/or Variable Account Value and we will effect them
automatically; a Market Value Adjustment may be applicable upon withdrawal.
Under the Interest Out Program, we automatically pay you or reinvest interest
credited for all Guarantee Periods you have chosen. The withdrawals under these
programs are subject to surrender charges. They may also be included as income
and subject to a 10% federal tax penalty. You should consult your adviser before
choosing these options.
You may change or stop either program at any time, by written notice to
us.
PORTFOLIO REBALANCING PROGRAM
Under the Portfolio Rebalancing Program, we transfer funds among the
Sub-Accounts to maintain the percentage allocation you have selected among these
Sub-Accounts. At your election, we will make these transfers on a quarterly,
semi-annual or annual basis.
Portfolio Rebalancing does not permit transfers to or from any Guarantee
Period.
SECURED FUTURES PROGRAM
Under the Secured Futures Program, we divide your Purchase Payments and
Purchase Payment Interest between the Fixed Account and the Variable Account.
For the Fixed Account portion, you choose a Guarantee Period from among those we
offer. We then allocate to that Guarantee Period the portion of your Purchase
Payment and Purchase Payment Interest necessary so that, at the end of the
Guarantee Period, your Fixed Account allocation, including interest, will equal
the entire amount of your original Purchase Payment. The remainder of the
original Purchase Payment and Purchase Payment Interest will be invested in the
Sub-Accounts of your choice. At the end of the Guarantee Period, you will be
guaranteed the amount of your Purchase Payment and Purchase Payment Interest
(assuming no withdrawals), plus you will have the benefit, if any, of the
investment performance of the Sub-Accounts you have chosen.
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<PAGE>
WITHDRAWALS, WITHDRAWAL CHARGE AND MARKET VALUE ADJUSTMENT
CASH WITHDRAWALS
REQUESTING A WITHDRAWAL
At any time during the Accumulation Phase you may withdraw in cash all or
any portion of your Account Value. To make a withdrawal, you must send us a
written request at our Annuity Mailing Address. Your request must specify
whether you want to withdraw the entire amount of your Account or, if less, the
amount you wish to receive.
All withdrawals may be subject to a withdrawal charge (see "Withdrawal
Charge," below), and withdrawals from your 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 "Tax Considerations." You should carefully consider these
tax consequences before requesting a cash withdrawal.
FULL WITHDRAWALS
If you request a full withdrawal, we calculate the amount we will pay you
as follows: We start with the total value of your Account at the end of the
Valuation Period during which we receive your withdrawal request; we deduct the
Account Fee for the Account Year in which the withdrawal is made; we add or
subtract the amount of any Market Value Adjustment applicable to your Fixed
Account Value; and finally, we deduct any applicable withdrawal charge.
A full withdrawal results in the surrender of your Contract, and
cancellation of all rights and privileges under your Contract.
PARTIAL WITHDRAWALS
If you request a partial withdrawal, we will pay you the actual amount
specified in your request and then adjust the value of your Account by deducting
the amount paid, adding or deducting any Market Value Adjustment applicable to
amounts withdrawn from the Fixed Account, and deducting any applicable
withdrawal charge.
You may specify the amount you want withdrawn from each Sub-Account and/or
Guarantee Amount to which your Account is allocated. If you do not so specify,
we will deduct the total amount you request pro rata, based on your Account
Value at the end of the Valuation Period during which we receive your request.
If you request a partial withdrawal that would result in your Account
Value being reduced to an amount less than the Account Fee for the Account Year
in which you make the withdrawal, we will treat it as a request for a full
withdrawal.
TIME OF PAYMENT
We will pay you the applicable amount of any full or partial withdrawal
within 7 days after we receive your withdrawal request, except in cases where we
are permitted, and choose, to defer payment under the Investment Company Act of
1940 and applicable state insurance law. Currently, we may defer payment of
amounts you withdraw from the Variable Account only for the 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 a
Fund or to determine the value of the net assets of a 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 you withdraw from the Fixed Account
for up to 6 months from the date we receive your withdrawal request. We do not
pay interest on the amount of any payments we defer.
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<PAGE>
WITHDRAWAL RESTRICTIONS FOR QUALIFIED PLANS
If your Contract is a Qualified Contract, you should carefully check the
terms of your retirement plan for limitations and restrictions on cash
withdrawals.
Special restrictions apply to withdrawals from Contracts used for Section
403(b) annuities. See "Tax Considerations -- Tax Sheltered Annuities."
WITHDRAWAL CHARGE
We do not deduct any sales charge from your Purchase Payments when they
are made. However, we may impose a withdrawal charge (known as a "contingent
deferred sales charge") on certain amounts you withdraw. 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.
FREE WITHDRAWAL AMOUNT
In each Account Year you may withdraw a portion of your Account Value --
which we call the "free withdrawal amount" -- before incurring the withdrawal
charge. For any year, the free withdrawal amount is equal to the amount of all
Purchase Payments made before the last 7 Account Years that you have not
previously withdrawn, PLUS the greater of:
(1) your Contract's earnings (defined below) during the prior Account
Year; and
(2) 10% of the amount of all Purchase Payments you have made during the
last 7 Account Years, including the current Account Year.
Any portion of the "free withdrawal amount" that you do not use in an
Account Year is not cumulative; that is, it will not be carried forward or
available for use in future years.
Your Contract's earnings during the prior Account Year are equal to:
(a) the difference between your Account Value at the end of the prior
Account Year and your Account Value at the beginning of the prior
Account Year, minus
(b) any Purchase Payments made during the prior Account Year, plus
(c) any partial withdrawals and charges taken during the prior Account
Year.
For an example of how we calculate the "free withdrawal amount", see
Appendix B.
WITHDRAWAL CHARGE ON PURCHASE PAYMENTS
If you withdraw more than the free withdrawal amount in any Account Year,
we consider the excess amount to be withdrawn first from Payments that you have
not previously withdrawn. We impose the withdrawal charge on the amount of these
Payments. Thus, the maximum amount on which we will impose the withdrawal charge
in any year will never be more than the total of all Payments that you have not
previously withdrawn.
The amount of your withdrawal, if any, that exceeds the total of the free
withdrawal amount plus the aggregate amount of all Payments not previously
withdrawn, is not subject to the withdrawal charge.
ORDER OF WITHDRAWAL
When you make a withdrawal, we consider the oldest Purchase Payment that
you have not already withdrawn to be withdrawn first, then the next oldest, and
so forth. Once all Purchase Payments are withdrawn, the balance withdrawn is
considered to be accumulated value.
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<PAGE>
CALCULATION OF WITHDRAWAL CHARGE
We calculate the amount of the withdrawal charge by multiplying the
Purchase Payments you withdraw by a percentage. The percentage varies according
to the number of Account Years the Purchase Payment has been held in your
Account, including the Account Year in which you made the Payment, but not the
Account Year in which you withdraw it. Each Payment begins a new 7 year period
and moves down a declining surrender charge scale as shown below at each Account
Anniversary. Payments received during the current Account Year will be charged
8%, if withdrawn. On your next scheduled Account Anniversary, that Payment,
along with any other Payments made during that Account Year, will be considered
to be in their second Account Year and will have an 8% withdrawal charge. On the
next Account Anniversary, these Payments will move into their third Account Year
and will have a withdrawal charge of 7%, if withdrawn. This withdrawal charge
decreases according to the number of Account Years the Purchase Payment has been
held in your Account.
<TABLE>
<CAPTION>
NUMBER OF
ACCOUNT YEARS
PAYMENT HAS BEEN WITHDRAWAL
IN YOUR CONTRACT CHARGE
- ---------------- ----------
<S> <C>
0-1 8%
1-2 8%
2-3 7%
3-4 7%
4-5 6%
5-6 5%
6-7 4%
7+ 0%
</TABLE>
For example, the percentage applicable to withdrawals of a Payment that
has been in an Account for more than 2 Account Years but less than 3 will be 7%
regardless of the issue date of the Contract.
The withdrawal charge will never be greater than 8% of the excess of
Purchase Payments you make under your Contract over the "free withdrawal
amount," as defined above.
For a Group Contract, we may modify the withdrawal charges and limits,
upon notice to the Owner of the Group Contract. However, any modification will
apply only to Accounts established after the date of the modification.
For additional examples of how we calculate withdrawal charges, see
Appendix B.
TYPES OF WITHDRAWALS NOT SUBJECT TO WITHDRAWAL CHARGE
If approved by your state, we will waive the withdrawal charge for a full
or partial withdrawal if:
- at least one year has passed since we issued your Contract, and
- you are confined to an eligible nursing home and have been confined there
for at least the preceding 180 days, or any shorter period required by
your state.
An "eligible nursing home" means a licensed hospital or licensed skilled
or intermediate care nursing facility at which medical treatment is available on
a daily basis and daily medical records are kept for each patient. You must
provide us with evidence of confinement in the form we determine.
For each Qualified Contract, the free withdrawal amount in any Account
Year will be the greater of the free withdrawal amount described above and any
amounts required to be withdrawn to comply with the minimum distribution
requirement of the Internal Revenue Code. This waiver of the withdrawal charge
applies only to the portion of the required minimum distribution attributable to
that Qualified Contract.
We do not impose the withdrawal charge on amounts you apply to provide an
annuity, amounts we pay as a death benefit (except under the Cash Surrender
method), or amounts you transfer among the Sub-Accounts, between the
Sub-Accounts and the Fixed Account, or within the Fixed Account.
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MARKET VALUE ADJUSTMENT
We will apply a Market Value Adjustment if you withdraw or transfer
amounts from your Fixed Account Value more than 30 days before the end of the
applicable Guarantee Period. For this purpose, using Fixed Account Value to
provide an annuity is considered a withdrawal, and the Market Value Adjustment
will apply. However, we will not apply the Market Value Adjustment to automatic
transfers to a Sub-Account from a Guarantee Period as part of our dollar-cost
averaging program.
We apply the Market Value Adjustment separately to each Guarantee Amount
in the Fixed Account, that is to each separate allocation you have made to a
Guarantee Period together with interest credited on that allocation. However, we
do not apply the adjustment to the amount of interest credited during your
current Account Year. Any withdrawal from a Guarantee Amount is attributed first
to such interest.
A Market Value Adjustment may decrease, increase or have no effect on your
Account Value. This will depend on changes in interest rates since you made your
allocation to the Guarantee Period and the length of time remaining in the
Guarantee Period. In general, if the Guaranteed Interest Rate we currently
declare for Guarantee Periods equal to the balance of your Guarantee Period (or
your entire Guarantee Period for Guarantee Periods of less than one year) is
higher than your Guaranteed Interest Rate, the Market Value Adjustment is likely
to decrease your Account Value. If our current Guaranteed Interest Rate is
lower, the Market Value Adjustment is likely to 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:
<TABLE>
<C> <S> <C> <C> <C>
N/12
1 + I
( --------- ) - 1
1 + J + b
</TABLE>
where:
I is the Guaranteed Interest Rate applicable to the Guarantee Amount from
which you withdraw, transfer or annuitize;
J is the Guaranteed Interest Rate we declare at the time of your
withdrawal, transfer or annuitization for Guarantee Periods equal to the length
of time remaining in the Guarantee Period applicable to your Guarantee Amount,
rounded to the next higher number of complete years, for Guarantee Periods of
one year or more. For any Guarantee Periods of less than one year, J is the
Guaranteed Interest Rate we declare at the time of your withdrawal, transfer or
annuitization for a Guarantee Period of the same length as your Guarantee
Period. If, at that time, we do not offer the applicable Guarantee Period we
will use an interest rate determined by straight-line interpolation of the
Guaranteed Interest Rates for the Guarantee Periods we do offer;
N is the number of complete months remaining in your Guarantee Period; and
b is a factor that currently is 0% but that in the future we may increase
to up to 0.25%. Any increase would be applicable only to Participants who
purchase their Contracts after the date of that increase.
We will apply the Market Value Adjustment to the amount being withdrawn
after deduction of any Account Fee, if applicable, but before we impose any
withdrawal charge on the amount withdrawn.
For examples of how we calculate the Market Value Adjustment, see Appendix
B.
No Market Value Adjustment will apply to Contracts issued in the states of
California, Maryland, Oregon, Texas and Washington.
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<PAGE>
CONTRACT CHARGES
ACCOUNT FEE
During the Accumulation Phase of your Contract, we will deduct from your
Account an annual Account Fee of $35 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. In Account Years 1
through 5, the Account Fee is $35. After Account Year 5, we may change the
Account Fee each year, but the Account Fee will never exceed $50. 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.
We will not charge the Account Fee if:
(1) your Account has been allocated only to the Fixed Account during the
applicable Account Year; or
(2) your Account Value is more than $100,000 on your Account Anniversary.
If you make a full withdrawal of your Account, 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 an annual Account Fee
of $35 in the aggregate in equal amounts from each Variable Annuity payment we
make during the year. We do not deduct any fee from Fixed Annuity payments.
ADMINISTRATIVE EXPENSE CHARGE
We deduct an administrative expense charge from the assets of the Variable
Account at an annual effective rate equal to 0.15% during both the Accumulation
Phase and the Income Phase. This charge is designed to reimburse us for expenses
we incur in administering the Contracts, the Accounts and the Variable Account
that are not covered by the annual Account Fee.
MORTALITY AND EXPENSE RISK CHARGE
During both the Accumulation Phase and the Income Phase, we deduct a
mortality and expense risk charge from the assets of the Variable Account at an
effective annual rate equal to 1.30%. 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 mortality risk also arises from our contractual
obligation to pay a death benefit upon the death of the Participant prior to the
Annuity Commencement Date. The expense risk we assume is the risk that the
Account Fee and administrative expense charge 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 expect to
make a profit on the excess expense charge associated with the purchase payment
interest. We may use this profit for any proper corporate purpose, including the
payment of marketing and distribution expenses for the Contracts.
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CHARGES FOR OPTIONAL DEATH BENEFIT RIDERS
If you elect an optional death benefit rider, we will deduct a charge from
the assets of the Variable Account based upon the number of optional death
benefit riders you elect, as follows:
<TABLE>
<CAPTION>
NUMBER OF % OF
RIDERS YOU AVERAGE
ELECT DAILY VALUE
- ---------- -----------
<S> <C>
1 0.15%
2 0.25%
3 0.40%
</TABLE>
PREMIUM TAXES
Some states and local jurisdictions impose a premium tax on us that is
equal to a specified percentage of the Purchase Payments you make. 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 you
apply 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 you make a Purchase Payment or make a full or
partial withdrawal. We do not make any profit on the deductions we make to
reimburse premium taxes.
FUND EXPENSES
There are fees and charges deducted from each Fund. These fees and
expenses are described in the Fund prospectus(es) and related Statements of
Additional Information.
MODIFICATION IN THE CASE OF GROUP CONTRACTS
For Group Contracts, we may modify the annual Account Fee, the
administrative expense charge 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 your date of death,
we will pay the death benefit in one sum to your estate. We do not 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 your death benefit, we use a "Death Benefit
Date." The Death Benefit Date is the date we receive proof of your death in an
acceptable form ("Due Proof of Death") if you have elected a death benefit
payment method before your death and it remains effective. Otherwise, the Death
Benefit Date is the later of the date we receive Due Proof of Death or the date
we receive the Beneficiary's election of either payment method or, if the
Beneficiary is your spouse, Contract continuation. If we do not receive the
Beneficiary's election within 60 days after we receive Due Proof of Death, we
reserve the right to provide a lump sum to your Beneficiary.
The amount of the death benefit is determined as of the Death Benefit
Date.
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THE BASIC DEATH BENEFIT
In general, if you were 85 or younger on your Contract Date (the date we
accepted your first Purchase Payment), the death benefit will be the greatest of
the following amounts:
1. Your Account Value for the Valuation Period during which the Death
Benefit Date occurs;
2. The amount we would pay if you had surrendered your entire Account on
the Death Benefit Date; and
3. Your total Purchase Payments (adjusted for partial withdrawals as
described in "Calculating the Death Benefit") as of the Death Benefit
Date.
For examples of how to calculate this basic death benefit, see
Appendix C.
If you were 86 or older on your Contract Date, the death benefit is equal
to amount (2) above. Because this amount will reflect any applicable withdrawal
charges and Market Value Adjustment, the basic death benefit may be less than
your Account Value.
OPTIONAL DEATH BENEFIT RIDERS
Subject to availability in your state, you may enhance the basic death
benefit by electing one or more of the following optional death benefit riders.
You must make your election before the date on which your Contract becomes
effective. You will pay a charge for each optional death benefit rider you
elect. (For a description of these charges, see "Charges for Optional Death
Benefit Riders.") The Maximum Anniversary Account Value Rider, the 5% Premium
Roll-Up Rider, and the Earnings Enhancement Riders are available only if you are
younger than 80 on the Contract Date. Any optional death benefit rider election
may not be changed after the Contract is issued. For a complete description of
how the death benefits under the optional death benefit riders are calculated,
see "Calculating the Death Benefit."
MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER
Under this rider, the death benefit will be the greater of:
- any of the death benefit amounts payable under options (1), (2) or
(3) under the basic death benefit, above, or
- your highest Account Value on any Account Anniversary before your 81st
birthday, adjusted for any subsequent Purchase Payments, partial
withdrawals and charges made between that Account Anniversary and the
Death Benefit Date.
5% PREMIUM ROLL-UP RIDER
Under this rider, the death benefit will be the greater of:
- any of the death benefit amounts payable under options (1), (2) or
(3) under the basic death benefit, or
- the sum of your total Purchase Payments plus interest accruals,
adjusted for partial withdrawals.
Under this rider, interest accrues at 5% per year on Purchase Payments and
transfers to the Variable Account while they remain in the Variable Account. The
5% interest accruals will continue until the earlier of:
- the first day of the month following your 80th birthday, or
- the day the death benefit amount under this rider equals twice the
total of your Purchase Payments and transferred amounts, adjusted for
withdrawals.
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EARNINGS ENHANCEMENT RIDER
Under this rider, if you are 69 or younger on your Contract Date, the
death benefit will be:
- the greatest of any of the death benefit amounts payable under options
(1), (2) or (3) under the basic death benefit, above, plus
- 40% of the lesser of your net Purchase Payments or your Account Value
minus net Purchase Payments, calculated as of the Death Benefit Date.
If you are between the ages of 70 and 79 on your Contract Date, the death
benefit will be:
- the greatest of any of the death benefit amounts payable under options
(1), (2) or (3) under the basic death benefit, above, plus
- 25% of the lesser of your net Purchase Payments or your Account Value
minus net Purchase Payments, calculated as of the Death Benefit Date.
Net Purchase Payments under this rider will be adjusted for all partial
withdrawals as described in "Calculating the Death Benefit." For examples of how
the death benefit is calculated under the Earnings Enhancement Rider, see
Appendix D.
SELECTING MULTIPLE DEATH BENEFIT RIDERS
If you elect more than one death benefit rider, the death benefit will be
calculated as follows:
1) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH 5% PREMIUM
ROLL-UP RIDER: The death benefit will equal the greater of the death
benefit under the Maximum Anniversary Account Value Rider or the
death benefit under the 5% Premium Roll-Up Rider.
2) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER COMBINED WITH EARNINGS
ENHANCEMENT RIDER: The death benefit will equal the death benefit
under the Maximum Anniversary Account Value Rider, PLUS the amount
calculated under the Earnings Enhancement Rider. The death benefit
under the Earnings Enhancement Rider is calculated using the Account
Value before the application of the Maximum Anniversary Account
Rider.
3) EARNINGS ENHANCEMENT RIDER COMBINED WITH 5% PREMIUM ROLL-UP
RIDER: The death benefit will equal the death benefit under the 5%
Premium Roll-Up Rider, PLUS the amount calculated under the Earnings
Enhancement Rider. The death benefit under the Earnings Enhancement
Rider is calculated using the Account Value before the application
of the 5% Premium Roll-Up Rider.
4) MAXIMUM ANNIVERSARY ACCOUNT VALUE RIDER, THE 5% PREMIUM ROLL-UP
RIDER AND THE EARNINGS ENHANCEMENT RIDER: The death benefit will
equal the GREATER of the death benefit under the Maximum Anniversary
Account Value Rider or the death benefit under the 5% Premium
Roll-Up Rider, PLUS the amount calculated under the Earnings
Enhancement Rider. The death benefit under the Earnings Enhancement
Rider is calculated using the Account Value before the application
of the 5% Premium Roll-Up Rider and the Maximum Anniversary Account
Value Rider.
SPOUSAL CONTINUANCE
If your spouse is your Beneficiary, upon your death your spouse may elect to
continue the Contract as the Participant, rather than receive the death benefit
amount. In that case, we will not pay a death benefit, but the Contract's
Account Value will be equal to your Contract's death benefit amount, as defined
under the basic death benefit or any rider you have selected. All Contract
provisions, including any riders you have selected, will continue as if your
spouse had purchased the Contract on the Death Benefit Date with a value equal
to the death benefit amount. For purposes of calculating death benefits and
expenses from that date forward, the surviving spouse's age on the original
effective date of the Contract will be used.
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CALCULATING THE DEATH BENEFIT
In calculating the death benefit amount payable under option (3) of the
basic death benefit or any of the optional death benefit riders, any partial
withdrawals will reduce the death benefit amount to an amount equal to the death
benefit amount immediately before the withdrawal multiplied by the ratio of the
Account Value immediately after the withdrawal to the Account Value immediately
before the withdrawal.
If the death benefit is the amount payable under options (2) or (3) of the
basic death benefit or under any of the optional death benefit riders, your
Account Value will be increased by the excess, if any, of that amount over
option (1) of the basic death benefit. Any such increase will be allocated to
the Sub-Accounts in proportion to your Account Value in those Sub-Accounts on
the Death Benefit Date. Also, any portion of this new Account Value attributed
to the Fixed Account will be transferred to the Series Fund's Money Market
Sub-Account (without the application of a Market Value Adjustment). If your
spouse, as the named Beneficiary, elects to continue the Contract after your
death, your spouse may transfer any such Fixed Account portion back to the Fixed
Account and begin a new Guarantee Period.
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, you 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. If the
Beneficiary is the Owner's spouse, the Beneficiary may elect to continue the
Contract. 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/Payee under the terms of that Annuity Option.
NON-QUALIFIED CONTRACTS
If your Contract is 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 you have named as Beneficiary under your Contract, if any, will
be the "designated beneficiary." If the named Beneficiary is not living and no
contingent beneficiary has been named, the Annuitant automatically becomes the
designated beneficiary.
If the designated beneficiary is your surviving spouse, your spouse may
continue the Contract 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. The special distribution rules will then apply on
the death of your spouse. To understand what happens when your spouse continues
the Contract, see "Spousal Continuance," above.
During the Income Phase, if the Annuitant dies, the remaining value of the
Annuity Option(s) in place must be distributed at least as rapidly as the method
of distribution under that option.
If the Participant is not a natural person, these distribution
rules apply on a change in, or the death of, either the Annuitant or the
Co-Annuitant.
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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.
SELECTION AND CHANGE OF BENEFICIARY
You select your Beneficiary in your Application. You may change your
Beneficiary at any time by sending us written notice on our required form,
unless you previously made an irrevocable Beneficiary designation. 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 any of 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 annuity payments to the
Annuitant.
The Income Phase of your Contract begins with the Annuity Commencement
Date. On that date, we apply your Account Value, adjusted as described below,
under the Annuity Option(s) you have selected, and we make the first payment.
Once the Income Phase begins, no lump sum settlement option or cash
withdrawals are permitted, except pursuant to Annuity Option D, Monthly Payments
for a Specified Period Certain, as described below under the heading "Annuity
Options," and you cannot change the Annuity Option selected. You may request a
full withdrawal before the Annuity Commencement Date, which will be subject to
all charges applicable on withdrawals. See "Withdrawals, Withdrawal Charge and
Market Value Adjustment."
SELECTION OF THE ANNUITANT OR CO-ANNUITANT
You select the Annuitant in your Application. The Annuitant is the person
who receives annuity payments during the Income Phase and on whose life these
payments are based. In your Contract, the Annuity Option(s) refer to the
Annuitant as the "Payee." If you name someone other than yourself as Annuitant
and the Annuitant dies before the Income Phase, you become the Annuitant.
In a Non-Qualified Contract, if you name someone other than yourself as
Annuitant, you may also select a Co-Annuitant, who will become the new Annuitant
if the original Annuitant dies before the Income Phase. If both the Annuitant
and Co-Annuitant die before the Income Phase, you become the Annuitant. If you
have named both an Annuitant and a Co-Annuitant, you may designate one of them
to become the sole Annuitant as of the Annuity Commencement Date, if both are
living at that time. If you have not made that designation on the 30th day
before the Annuity Commencement Date, and both the Annuitant and the
Co-Annuitant are still living, the Co-Annuitant will become the Annuitant.
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When an Annuity Option has been selected as the method of paying the death
benefit, the Beneficiary is the Payee of the annuity payment.
SELECTION OF THE ANNUITY COMMENCEMENT DATE
You select the Annuity Commencement Date in your Application. The
following restrictions apply to the date you may select:
- The earliest possible Annuity Commencement Date is the first day of the
first month following your first Account Anniversary.
- The latest possible Annuity Commencement Date is the first day of the
month following the Annuitant's 95th birthday or, if there is a
Co-Annuitant, the 95th birthday of the younger of the Annuitant and
Co-Annuitant.
- The Annuity Commencement Date must always be the first day of a month.
You may change the Annuity Commencement Date from time to time by sending
us written notice, with the following additional limitations:
- We must receive your 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.
There may be other restrictions on your selection of the Annuity
Commencement Date imposed by your retirement plan or applicable law. In most
situations, current law requires that for a Qualified Contract, certain minimum
distributions must commence 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).
ANNUITY OPTIONS
We offer the following Annuity Options for payments during the Income
Phase. Each Annuity Option may be selected for a Variable Annuity, a Fixed
Annuity, or a combination of both. 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
a Variable Annuity will be the assumed interest rate in effect; 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
person you designate and during the lifetime of the survivor of the two. We stop
making payments when the survivor dies. There is no provision for continuance of
any payments to a Beneficiary.
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ANNUITY OPTION D -- MONTHLY PAYMENTS FOR A SPECIFIED PERIOD CERTAIN
We make monthly payments for a specified period of time from 10 to 30
years, as you elect. If payments under this option are paid on a variable
annuity basis, the Annuitant may elect to receive in one sum the discounted
value of the remaining payments, less any applicable withdrawal charge; the
discount rate for this purpose will be the assumed interest rate in effect. If
the Annuitant dies during the period selected, the remaining income payments are
made as described under Annuity Option B. The election of this Annuity Option
may result in the imposition of a penalty tax.
SELECTION OF ANNUITY OPTION
You select one or more of the Annuity Options, which you may change from
time to time during the Accumulation Phase, as long as we receive your selection
or change in writing at least 30 days before the Annuity Commencement Date. If
we have not received your 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.
You may specify the proportion of your Adjusted Account Value you wish to
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 you do not specify a Variable
Annuity or a Fixed Annuity, 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. You may allocate your Adjusted Account Value applied to a
Variable Annuity among the Sub-Accounts, or we will use your existing
allocations.
There may be additional limitations on the options you may elect 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 apply the Market Value Adjustment to your Account
Value in the Fixed Account, which may result in a deduction, an
addition, or no change.
- We deduct any applicable premium tax or similar tax if not previously
deducted.
- On the Annuity Commencement Date, we will exchange your Account's
Variable Annuity Units for Annuitization Units which have an annual
mortality and expense risk charge of 1.45% of your average daily net
assets.
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 3% 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
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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 3%, 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.
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 3% 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."
MINIMUM PAYMENTS
If your Adjusted Account Value is less than $2,000, or the first annuity
payment for any Annuity Option is less than $20, we will pay the Adjusted
Account Value to the Annuitant in one payment.
EXCHANGE OF VARIABLE ANNUITY UNITS
During the Income Phase, the Annuitant may exchange Annuity Units in one
Sub-Account for Annuity Units in another Sub-Account, up to 12 times each
Account Year. To make an exchange, the Annuitant sends us, at our Annuity
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.
Before exchanging Annuity Units in one Sub-Account for those in another,
the Annuitant should carefully review the Fund prospectus(es) for the investment
objectives and risk disclosure of the Funds in which the Sub-Accounts invest.
During the Income Phase, 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 annual Account Fee of $35 in equal
amounts from each Variable Annuity payment. We do not deduct the annual Account
Fee from Fixed Annuity payments.
ANNUITY PAYMENT RATES
The Contracts contain 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 3% per
year, compounded annually); and (b) the monthly Fixed Annuity payment, when this
payment is
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based on the minimum guaranteed interest rate specified in the Contract (at
least 3% per year, compounded annually). We may change these rates under Group
Contracts 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 Options
elected and the adjusted age of the Annuitant. The Contracts also describe 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 1983
Individual Annuitant Mortality Table.
ANNUITY OPTIONS AS METHOD OF PAYMENT FOR DEATH BENEFIT
You or your Beneficiary may also select one or more Annuity Options to be
used in the event of the Annuitant's 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
An Individual Contract belongs to the individual to whom the Contract is
issued. A Group Contract belongs to the Owner. In the case of a Group Contract,
the Owner may expressly reserve all Contract rights and privileges; otherwise,
each Annuitant will be entitled to exercise such rights and privileges. In any
case, such rights and privileges can be exercised without the consent of the
Beneficiary (other than an irrevocably designated Beneficiary) or any other
person. Such rights and privileges may be exercised only during the lifetime of
the Annuitant 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 Annuitant; (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 or custodian 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 prior to the Annuity Commencement Date; and each Participant, in like
manner, may change the ownership interest in a Contract. 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. If you change the Owner of a
Non-Qualified Contract, you will become immediately liable for the payment of
taxes on any gain realized under the Contract prior to the change of ownership,
including possible liability for a 10% federal excise tax.
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VOTING OF FUND SHARES
We will vote Fund shares held by the Sub-Accounts at meetings of
shareholders of the 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, you will have the right to give
voting instructions, except in the case of a Group Contract where the Owner has
reserved this right. 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 Fund shares for which no
timely voting instructions are received in the same proportion as the shares for
which we receive instructions from Owners, Participants and Payees, as
applicable.
Owners of Qualified Contracts issued on a group basis 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 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 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 Fund shares. Except as the Variable Account or the Company has actual
knowledge to the contrary, the instructions given by Owners under Group
Contracts 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.
All 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 Fund. We will determine the number of Fund shares as to
which each such person is entitled to give instructions as of the record date
set by the Fund for such meeting, which is expected to be not more than 90 days
prior to each such meeting. Prior to the Annuity Commencement Date, the number
of 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 Fund share as of the same date. On or after the Annuity
Commencement Date, the number of 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 a
Fund share as of the same date. After the Annuity Commencement Date, the number
of 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, or such other person
having voting rights, 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 shall
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 and the Series Fund as may be
required by the Investment Company Act of
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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.
Upon request, we will provide you with information regarding fixed and
variable accumulation values.
SUBSTITUTION OF SECURITIES
Shares of any or all Funds may not always be available for investment
under the Contracts. We may add or delete Funds or other investment companies as
variable investment options under the Contracts. We may also substitute shares
of another Fund or shares of another registered open-end investment company or
unit investment trust for the shares held in any Sub-Account, 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 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.
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 Participant, in the case of an Individual Contract, and
the Owner and Participant(s), in the case of a Group Contract (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"); (iv) provides additional Variable
Account and/or fixed accumulation options; or (v) as may otherwise be in the
best interests of Owners, Participants, or Payees, as applicable. 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 Group Contract to
change the withdrawal charges, Account Fees, mortality and expense risk charges,
administrative expense 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 Group 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.
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DISCONTINUANCE OF NEW PARTICIPANTS
We may limit or discontinue the acceptance of new Applications and the
issuance of new Certificates under a Group 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 Group Contract prior
to the effective date of such limitation or discontinuance.
RESERVATION OF RIGHTS
We reserve the right, to the extent permitted by law, to: (1) combine any
2 or more variable accounts; (2) add or delete Funds, sub-series thereof or
other investment companies and corresponding Sub-Accounts; (3) add or remove
Guarantee Periods available at any time for election by a Participant; and
(4) restrict or eliminate any of the voting rights of Participants (or Owners)
or other persons who have voting rights as to the Variable Account. Where
required by law, we will obtain approval of changes from Participants or any
appropriate regulatory authority. In the event of any change pursuant to this
provision, we may make appropriate endorsement to the Contract to reflect the
change.
RIGHT TO RETURN
If you are not satisfied with your Contract, you may return it by mailing
or delivering it to us at our Annuity Mailing Address, as shown on the cover of
this Prospectus, within 10 days after it was delivered to you. When we receive
the returned Contract, it will be cancelled and we will refund to you your
Account Value less the Adjusted Purchase Payment Interest. The Adjusted Purchase
Payment Interest that maybe deducted is equal to the lesser of:
- the portion of the Account Value that is attributable to any Purchase
Payment Interest, and
- all Purchase Payment Interest.
This means you receive any gain on Purchase Payment Interest and we bear any
loss. However, if applicable state law requires, we will return the full amount
of any Purchase Payment(s) we received. State law may also require us to give
you a longer "free look" period or allow you to return the Contract to your
sales representative.
If you are establishing an Individual Retirement Account ("IRA"), the
Internal Revenue Code requires that we give you a disclosure statement
containing certain information about the Contract and applicable legal
requirements. We must give you this statement on or before the date the IRA is
established. If we give you the disclosure statement before the seventh day
preceding the date the IRA is established, you will not have any right of
revocation under the Code. If we give you the disclosure statement at a later
date, then you may give us a notice of revocation at any time within 7 days
after your Contract Date. Upon such revocation, we will refund your Purchase
Payment(s). This right of revocation with respect to an IRA is in addition to
the return privilege set forth in the preceding paragraph. We allow a
Participant establishing an IRA a "ten day free-look," notwithstanding the
provisions of the Internal Revenue Code.
TAX CONSIDERATIONS
This section describes general federal income tax consequences based upon
our understanding of current federal tax laws. Actual federal tax consequences
may vary depending on, among other things, the type of retirement plan with
which you use the Contract and the site where your Contract was issued. Also,
legislation affecting the current tax treatment of annuity contracts could be
enacted in the future and could apply retroactively to Contracts that you
purchased before the date of enactment. We do not make any guarantee regarding
the federal, state, or local tax status of any Contract or any transaction
involving any Contract. You should consult a qualified tax professional for
advice before purchasing a Contract or executing any other transaction (such as
a rollover, distribution, withdrawal or payment) involving a Contract.
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U.S. FEDERAL TAX CONSIDERATIONS
The following discussion applies only to those Contracts issued in the
United States. For a discussion of tax considerations effecting Contracts issued
in Puerto Rico, see "Puerto Rico Tax Considerations," below.
DEDUCTIBILITY OF PURCHASE PAYMENTS
For federal income tax purposes, Purchase Payments made under
Non-Qualified Contracts are not deductible.
PRE-DISTRIBUTION TAXATION OF CONTRACTS
Generally, an increase in the value of a Contract will not give rise to
tax, prior to distribution.
However, corporate (or other non-natural person) Owners of, and
Participants under, a Non-Qualified Contract incur current tax, regardless of
distribution, on Contract value increases. Such current taxation does not apply,
though, to (i) immediate annuities, which the Internal Revenue Code (the "Code")
defines as a single premium contract with an annuity commencement date within
one year of the date of purchase, or (ii) any Contract that the non-natural
person holds as agent for a natural person (such as where a bank or other entity
holds a Contract as trustee under a trust agreement).
You should note that qualified retirement investments generally provide
tax deferral regardless of whether the underlying contract is an annuity.
DISTRIBUTIONS AND WITHDRAWALS FROM NON-QUALIFIED CONTRACTS
The Account Value will include an amount attributable to Purchase
Payments, the return of which is not taxable, and an amount attributable to
investment earnings, the return of which is taxable at ordinary income rates.
The relative portions of a distribution that derive from nontaxable Purchase
Payments and taxable investment earnings depend upon the timing of the
distribution.
If you withdraw less than your entire Account Value under a Non-Qualified
Contract before the Annuity Commencement Date, you must treat the withdrawal
first as a return of investment earnings. You may treat only withdrawals in
excess of the amount of the Account Value attributable to investment earnings as
a return of Purchase Payments. Account Value amounts assigned or pledged as
collateral for a loan will be treated as if withdrawn from the Contract.
If a Payee receives annuity payments under a Non-Qualified Contract after
the Annuity Commencement Date, however, the Payee treats a portion of each
payment as a nontaxable return of Purchase Payments. In general, the nontaxable
portion of such a payment bears the same ratio to the total payment as the
Purchase Payments bear to the Payee's expected return under the Contract. The
remainder of the payment constitutes a taxable return of investment earnings.
Once the Payee has received nontaxable payments in an amount equal to total
Purchase Payments, all future distributions constitute fully taxable ordinary
income. If the Annuitant dies before the Payee recovers the full amount of
Purchase Payments, the Payee may deduct an amount equal to unrecovered Purchase
Payments.
Upon the transfer of a Non-Qualified Contract by gift (other than to the
Participant's spouse), the Participant must treat an amount equal to the Account
Value minus the total amount paid for the Contract as income.
A penalty tax of 10% may apply to taxable cash withdrawals and lump- sum
payments from Non-Qualified Contracts. This penalty will not apply in certain
circumstances, such as distributions pursuant to the death of the Participant or
distributions under an immediate annuity (as defined above), or after age
59 1/2.
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DISTRIBUTIONS AND WITHDRAWALS FROM QUALIFIED CONTRACTS
Generally, distributions from a Qualified Contract will constitute fully
taxable ordinary income. Also, a 10% penalty tax will, except in certain
circumstances, apply to distributions prior to age 59 1/2.
Distributions from a Qualified Contract are not subject to current
taxation or a 10% penalty, however, if:
- the distribution is a hardship distribution or part of a series of
payments for life or for a specified period of 10 years or more (an
"eligible rollover distribution"), and
- the Participant or Payee rolls over the distribution (with or without
actually receiving the distribution) into a qualified retirement plan
eligible to receive the rollover.
Only you or your spouse may elect to roll over a distribution to an
eligible retirement plan.
WITHHOLDING
In the case of an eligible rollover distribution (as defined above) from a
Qualified Contract (other than from a Contract issued for use with an individual
retirement account), we (or the plan administrator) must withhold and remit to
the U.S. Government 20% of the distribution, 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; however, only you or
your spouse may elect a direct rollover. In the case of a distribution from (i)
a Non-Qualified Contract, (ii) a Qualified Contract issued for use with an
individual retirement account, or (iii) a Qualified Contract where the
distribution is not an eligible rollover distribution, we will withhold and
remit to the U.S. Government a part of the taxable portion of each distribution
unless, prior to the distribution, the Participant or Payee provides us his or
her taxpayer identification number and instructs us (in the manner prescribed)
not to withhold. The Participant or Payee may credit against his or her federal
income tax liability for the year of distribution any amounts that we (or the
plan administrator) withhold.
INVESTMENT DIVERSIFICATION AND CONTROL
The Treasury Department has issued regulations that prescribe investment
diversification requirements for mutual fund series underlying nonqualified
variable contracts. Contracts must comply with these regulations to qualify as
annuities for federal income tax purposes. Contracts that do not meet the
guidelines are subject to current taxation on annual increases in value. We
believe that each Fund complies with these regulations. The preamble to the
regulations states that the Internal Revenue Service may promulgate guidelines
under which an owner's excessive control over investments underlying the
contract will preclude the contract from qualifying as an annuity for federal
tax purposes. We cannot predict whether such guidelines, if in fact promulgated,
will be retroactive. We reserve the right to modify the Contract and/or the
Variable Account to the extent necessary to comply with any such guidelines, but
cannot assure that such modifications would satisfy any retroactive guidelines.
TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT
As a life insurance company under the Code, we will record and report
operations of the Variable Account separately from other operations. The
Variable Account will not, however, constitute a regulated investment company or
any other type of taxable entity distinct from our other operations. We will not
incur tax on the income of the Variable Account (consisting primarily of
interest, dividends, and net capital gains) if we use this income to increase
reserves under Contracts participating in the Variable Account.
QUALIFIED RETIREMENT PLANS
You may use Qualified Contracts with several types of qualified retirement
plans. Because tax consequences will vary with the type of qualified retirement
plan and the plan's specific terms and conditions, we provide below only brief,
general descriptions of the consequences that follow from using Qualified
Contracts in connection with various types of qualified retirement plans. We
stress that
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the rights of any person to any benefits under these plans may be subject to the
terms and conditions of the plans themselves, regardless of the terms of the
Qualified Contracts that you are using. These terms and conditions may include
restrictions on, among other things, ownership, transferability, assignability,
contributions and distributions.
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. Self-employed persons may therefore use Qualified
Contracts as a funding vehicle for their retirement plans, as a general rule.
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. Such IRAs are subject to
limitations on contribution levels, 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 in an IRA on a tax-deferred
basis. If we sell Contracts for use with IRAs, the Internal Revenue Service or
other agency may impose supplementary information requirements. We will provide
purchasers of the Contracts for such purposes with any necessary information.
You will have the right to revoke the Contract under certain circumstances, as
described in the section of this Prospectus entitled "Right to Return."
ROTH IRAS
Section 408A of the Code permits an individual to contribute to an
individual retirement program called a Roth IRA. Unlike contributions to a
traditional IRA under Section 408 of the Code,
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contributions to a Roth IRA are not tax-deductible. Provided certain conditions
are satisfied, distributions are generally tax-free. Like traditional IRAs, Roth
IRAs are subject to limitations on contribution amounts and the timing of
distributions. If an individual converts a traditional IRA into a Roth IRA the
full amount of the IRA is included in taxable income. The Internal Revenue
Service and other agencies may impose special information requirements with
respect to Roth IRAs. If and when we make Contracts available for use with Roth
IRAs, we will provide any necessary information.
PUERTO RICO TAX CONSIDERATIONS
Puerto Rico tax laws with respect to qualified retirement plans described
in this Prospectus vary significantly from those discussed above under "U.S.
Federal Tax Considerations." Although we currently offer the Contract in Puerto
Rico in connection with qualified retirement plans, the text of this Prospectus
under the heading "U.S. Federal Tax Considerations" dealing with such qualified
retirement plans is inapplicable to Puerto Rico and should be disregarded.
The following discussion applies if your Contract is issued in Puerto
Rico:
Under Section 1022 of the Puerto Rico Internal Revenue Code of 1994, as
amended (the "1994 Code"), the Contract offered by this Prospectus is considered
an annuity contract. The 1994 Code provides that no income tax is payable on
increases in value of accumulation shares of annuity units credited to a
variable annuity contract until payments are made to the annuitant or other
payee under such contract.
If any annuity distributions are made under an annuity contract, the
annuitant or other payee will be required to include as gross income the portion
of each payment equal to 3% of the aggregate premiums or other consideration
paid for the annuity. The amount, if any, in excess of the included amount is
excluded from gross income. After an amount equal to the aggregate amount
excluded from gross income has been received, all of the annuity payments are
considered to be taxable income.
In the event payment under a Contract is made in a lump sum, the amount of
the payment would be included in the gross income of the Annuitant or other
Payee to the extent of the Annuitant's aggregate premiums or other consideration
paid.
For further information regarding the income tax consequences of owning a
Contract, you should consult a qualified tax adviser.
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 Applications,
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.
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Commissions and other distribution compensation will be paid by the
Company to the selling agents and will not be more than 6.50% of Purchase
Payments. In addition, after the first Account Year, broker-dealers who have
entered into distribution agreements with the Company may receive an annual
renewal commission of no more than 0.50% of the Participant's Account Value. In
addition to commissions, the Company may, from time to time, pay or allow
additional promotional incentives, in the form of cash or other compensation. We
reserve the right to offer these additional incentives only to certain
broker-dealers that sell or are expected to sell during specified time periods
certain minimum amounts of the Contracts or Certificates or other contracts
offered by the Company. Promotional incentives may change at any time.
Commissions may be waived or reduced in connection with certain transactions
described in this Prospectus under the heading "Waivers; Reduced Charges;
Credits; Bonus Guaranteed Interest Rates."
PERFORMANCE INFORMATION
From time to time the Variable Account may publish reports to
shareholders, sales literature and advertisements containing performance
information relating to the Sub-Accounts. This information may include
standardized and non-standardized "Average Annual Total Return," "Cumulative
Growth Rate" and "Compound Growth Rate." We may also advertise "yield" and
"effective yield" for some Sub-Accounts.
Average Annual Total Return measures the net income of the Sub-Account and
any realized or unrealized gains or losses of the Funds in which it invests,
over the period stated. Average Annual Total Return figures are annualized and
represent the average annual percentage change in the value of an investment in
a Sub-Account over that period. Standardized Average Annual Total Return
information covers the period since we started offering the Sub-Accounts under
the Futurity products or, if shorter, the life of the Sub-Account.
Non-standardized Average Annual Total Return covers the life of each Fund, which
may predate the Futurity products. Cumulative Growth Rate represents the
cumulative change in the value of an investment in the Sub-Account for the
period stated, and is arrived at by calculating the change in the Accumulation
Unit Value of a Sub-Account between the first and the last day of the period
being measured. The difference is expressed as a percentage of the Accumulation
Unit Value at the beginning of the base period. "Compound Growth Rate" is an
annualized measure, calculated by applying a formula that determines the level
of return which, if earned over the entire period, would produce the cumulative
return.
Average Annual Total Return figures assume an initial Purchase Payment of
$1,000 and reflect all applicable withdrawal and Contract charges. The
Cumulative Growth Rate and Compound Growth Rate figures that we advertise do not
reflect withdrawal charges, the annual Account Fee, or any Purchase Payment
Interest, although such figures do reflect all recurring charges. If such
figures were calculated to reflect Purchase Payment Interest credited, the
calculation would also reflect any withdrawal charges made. Results calculated
without withdrawal and/or certain Contract charges will be higher. We may also
use other types of rates of return that do not reflect withdrawal and Contract
charges.
The performance figures used by the Variable Account are based on the
actual historical performance of the Funds for the specified periods, and the
figures are not intended to indicate future performance. For periods before the
date the Contracts became available, we calculate the performance information
for the Sub-Accounts on a hypothetical basis. To do this, we reflect deductions
of the current Contract fees and charges from the historical performance of the
corresponding Fund.
Yield is a measure of the net dividend and interest income earned over a
specific one month or 30-day period (7-day period for the Sun Capital Money
Market Sub-Account), expressed as a percentage of the value of the Sub-Account's
Accumulation Units. Yield is an annualized figure, which means that we assume
that the Sub-Account generates the same level of net income over a one-year
period and compound that income on a semi-annual basis. We calculate the
effective yield for the Money Market Sub-Account similarly, but include the
increase due to assumed compounding. The Money Market Sub-Account's effective
yield will be slightly higher than its yield as a result of its compounding
effect.
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The Variable Account may also from time to time compare its investment
performance to various unmanaged indices or other variable annuities and may
refer to certain rating and other organizations in its marketing materials. More
information on performance and our computations is set forth in the Statement of
Additional Information.
The Company may also advertise the ratings and other information assigned
to it by independent industry ratings organizations. Some of these organizations
are A.M. Best, Moody's Investor's Service, Standard and Poor's Insurance Rating
Services, and Duff and Phelps. Each year A.M. Best reviews the financial status
of thousands of insurers, culminating in the assignment of Best's rating. These
ratings reflect A.M. Best's current opinion of the relevant financial strength
and operating performance of an insurance company in comparison to the norms of
the life/health industry. Best's ratings range from A++ to F. Standard and
Poor's and Duff and Phelps' ratings measure the ability of an insurance company
to meet its obligations under insurance policies it issues. These two ratings do
not measure the insurance company's ability to meet non-policy obligations.
Ratings in general do not relate to the performance of the Sub-Accounts.
We may also advertise endorsements from organizations, individuals or
other parties that recommend the Company or the Contracts. We may occasionally
include in advertisements (1) comparisons of currently taxable and tax deferred
investment programs, based on selected tax brackets; or (2) discussions of
alternative investment vehicles and general economic conditions.
AVAILABLE INFORMATION
The Company and the Variable Account have filed with the SEC registration
statements under the Securities Act of 1933 relating to the Contract. 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 Contract, 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,
1999 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.
41
<PAGE>
ADDITIONAL INFORMATION ABOUT THE COMPANY
GENERAL
The Company is engaged in the sale of individual variable life insurance
and individual and group fixed and variable annuities. These contracts are sold
in both the tax-qualified and non-tax-qualified markets. These products are
distributed through individual insurance agents, insurance brokers and
broker-dealers.
The following table sets forth premiums and deposits by major product
categories for each of the last 3 years. See the Notes to the Statutory
Financial Statements of the Company included in this Prospectus for industry
segment information.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(IN $ THOUSANDS)
<S> <C> <C> <C>
Protection $ 16,509 $ 155,907 $ 204,671
Wealth Management $2,651,247 $2,194,895 $2,204,693
---------- ---------- ----------
$2,667,756 $2,350,802 $2,409,364
========== ========== ==========
</TABLE>
SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the Statutory Financial Statements and the Notes thereto
included in this Prospectus beginning on page .
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(IN $ THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues
Premiums, annuity deposits
and other revenue $ 2,869,250 $ 2,581,463 $ 2,623,629 $ 2,215,322 $ 1,883,901
Net investment income and
realized gains 190,844 187,208 298,121 310,172 315,966
----------- ----------- ----------- ----------- -----------
3,060,094 2,768,671 2,921,750 2,525,494 2,199,867
----------- ----------- ----------- ----------- -----------
Benefits and expenses
Policyholder benefits 2,706,121 2,416,950 2,579,104 2,232,528 1,995,208
Other expenses 239,136 214,607 206,065 175,342 150,937
----------- ----------- ----------- ----------- -----------
2,945,257 2,631,557 2,785,169 2,407,870 2,146,145
----------- ----------- ----------- ----------- -----------
Operating gain 114,837 137,114 136,581 117,624 53,722
Federal income tax expense
(benefit) 24,479 11,713 7,339 (5,400) 17,807
----------- ----------- ----------- ----------- -----------
Net income $ 90,358 $ 125,401 $ 129,242 $ 123,024 $ 35,915
=========== =========== =========== =========== ===========
Assets $19,948,155 $16,902,621 $15,925,357 $13,621,952 $12,359,683
=========== =========== =========== =========== ===========
Surplus notes $ 565,000 $ 565,000 $ 565,000 $ 315,000 $ 650,000
=========== =========== =========== =========== ===========
</TABLE>
See "Reinsurance," below, for the effect of the reinsurance agreements on 1999
net income.
See Note 1 to the Statutory Financial Statements for changes in accounting
principles and reporting.
See discussion in "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAUTIONARY STATEMENT
This Prospectus includes forward-looking statements by the Company under
the Private Securities Litigation Reform Act of 1995. These statements are not
matters of historical fact; they relate to such topics as future product sales,
volume growth, market share, market risk and financial goals. It is important to
understand that these forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those that the statements anticipate. These risks and uncertainties may concern,
among other things:
- Heightened competition, particularly in terms of price, product features,
and distribution capability, which could constrain the Company's growth
and profitability.
- Changes in interest rates and market conditions.
- Regulatory and legislative developments.
- Developments in consumer preferences and behavior patterns.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998:
NET INCOME
Net income decreased by $35.0 million to $90.4 million in 1999, reflecting
a decrease of $54.7 million in income from operations and an increase of
$19.7 million in net realized capital gains. (In the following discussion,
"income from operations" refers to the statutory statements of operations line
item, "net gain from operations after dividends to policyholders and federal
income tax and before realized capital gains.")
Income from operations decreased from $125.0 million in 1998 to
$70.3 million in 1999, mainly as a result of the following factors:
- A $32.3 million increase, to $63.7 million in 1999, in the income from
operations from the Company's Wealth Management segment. (See "1999
Compared to 1998 -- Wealth Management Segment," below.)
- The effect of terminating certain reinsurance agreements with the
Company's ultimate parent in 1998. The termination of these agreements was
the predominant factor in the $94.2 million decrease in income from
operations for the Company's Protection segment. (See "1999 Compared to
1998 -- Protection Segment," below.)
- An increase of $7.2 million in income from operations from the Corporate
segment, mainly reflecting dividends from a subsidiary. (See "1999
Compared to 1998 -- Corporate Segment," below.)
INCOME FROM OPERATIONS BY SEGMENT
The Company's income from operations reflects the operations of its 3
business segments: the Wealth Management segment, the Protection segment and the
Corporate segment.
43
<PAGE>
The following table provides a summary of income from operations by
segment, which is discussed more fully below.
INCOME FROM OPERATIONS BY SEGMENT*
($ IN MILLIONS)
<TABLE>
<CAPTION>
% CHANGE
---------------------
1999 1998 1997 1999/1998 1998/1997
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Wealth Management 63.7 31.4 14.7 102.9% 113.6%
Protection (5.1) 89.1 18.0 (105.7)% 395.0%
Corporate 11.7 4.5 69.8 160.0% (93.6)%
---- ----- ----- ------ -----
70.3 125.0 102.5 (43.8)% 22.0%
==== ===== ===== ====== =====
</TABLE>
* Before net realized capital gains
WEALTH MANAGEMENT SEGMENT
The Wealth Management segment focuses on the savings and retirement needs
of individuals preparing for retirement or who have already retired. It
primarily markets to upscale consumers in the U.S., selling individual and group
fixed and variable annuities. Its major product lines, "Regatta" and "Futurity,"
are combination fixed/variable annuities. In these combination annuities,
contract holders have the choice of allocating payments either to a fixed
account, which provides a guaranteed rate of return, or to variable accounts.
Withdrawals from the fixed account are subject to market value adjustment. In
the variable accounts, the contract holder can choose from a range of investment
options and styles. The return depends upon investment performance of the
options selected. Investment funds available under Regatta products are managed
by Massachusetts Financial Services Company ("MFS"), an affiliate of the
Company. Investment funds available under Futurity products are managed by
several investment managers, including MFS and Sun Capital Advisers, Inc., a
subsidiary of the Company.
The Company distributes its annuity products through a variety of
channels. For the Regatta products, about half are sold through securities
brokers; a further one-fourth through financial institutions, and the remainder
through insurance agents and financial planners. The Futurity products,
introduced in February 1998, are primarily distributed through a dedicated
wholesaler network, including Sun Life of Canada (U.S.) Distributors, Inc., a
subsidiary of the Company.
Although new pension products are not currently sold, there has been a
substantial block of group retirement business in-force, including guaranteed
investment contracts ("GICs"), pension plans and group annuities. A significant
portion of these pension contracts are non-surrenderable, with the result that
the Company's liquidity exposure is limited. GICs were marketed directly in the
U.S. through independent managers. In 1997, the Company decided to no longer
market group pension and GIC products.
Following are the major factors affecting this segment's results in 1999
as compared to 1998.
- - Deposit-type funds, which primarily comprised annuity deposits, increased by
$457.7 million, or 21%, to $2,598.3 million in 1999. Fixed annuity account
deposits were higher by approximately $625 million in 1999, which management
believes is mainly a result of the success of the Company's introduction,
during the fourth quarter of 1998, of a higher Dollar Cost Averaging ("DCA")
rate and a new 6-month DCA program. Under these programs, which were
redesigned in late 1996, deposits are made into the fixed portion of the
annuity contract and receive a bonus rate of interest for the policy year.
During the year, the fixed deposit is systematically transferred to the
variable portion of the contract in equal periodic installments. While fixed
annuity account deposits increased, deposits directly into variable accounts
declined by approximately 13% in 1999. The Company believes this decline was a
consequence of the heightened interest in the DCA programs in 1999.
Sales of the Futurity line of products, introduced in February 1998,
represented approximately 9% of total annuity deposits in 1999. The Company
expects that sales of the Futurity products will continue to increase in the
future, based on management's beliefs that market demand is growing for multi-
44
<PAGE>
manager variable annuity products, such as Futurity; that the productivity of
Futurity's wholesale distribution network, established in 1998, will continue
to grow; and that the marketplace will respond favorably to introductions of
new Futurity products and product enhancements.
- - Fee income increased as a result of higher variable annuity account balances.
Fee income was higher by approximately $32 million in 1999. The factors
driving this growth in account balances have been market appreciation and net
deposit activity. This growth has generated corresponding increases in fee
income, since fees are determined based on the average assets held in these
accounts. Other income increased by approximately $5 million in 1999, mainly
reflecting a reinsurance agreement entered into in July 1999 with an unrelated
company, which provides reinsurance on certain fixed group annuity contracts.
The net effect of this agreement was to increase income from operations by
approximately $3.4 million.
- - The net year-over-year change in aggregate reserves on policies and contracts
for the Wealth Management segment had the effect of increasing income from
operations for this segment. This change reflected lower reserves related to
minimum guaranteed death benefit product features as well as a variety of
other factors.
- - There has been a shift in demand to variable account products from general
account products. As a consequence, there has been a decline in average
general account invested assets and, in turn, net investment income has
declined. Net investment income reflects only income earned on invested assets
of the general account. In 1999, net investment income for the Wealth
Management segment decreased by $44.0 million, to $114.0 million. This decline
in average general account assets primarily reflects the Company's decision in
1997 to no longer market group pension and GIC products and as a consequence,
a declining block of in-force business as GICs mature and are surrendered.
- - Policyholder benefits (the major elements of which are surrenders and
withdrawals, changes in the liability for premium and other deposit funds, and
related separate account transfers) were higher by approximately $430 million
in 1999, mainly as a result of higher variable annuity surrenders. The
increase in variable annuity surrenders primarily related to a block of
separate account contracts that had been issued seven or more years previously
and for which the surrender charge periods had expired. The Company expects
that as the separate account block of business continues to grow and as an
increasing number of accounts are no longer subject to surrender charges,
surrenders will tend to increase. The Company is implementing a conservation
program with the aim of improving asset retention.
- - Operational expenses, which include general insurance expenses and insurance
taxes, licenses and fees, excluding federal income taxes, increased by
$5.4 million, or 9%, in 1999. This increase reflected costs associated with
operations and technology improvements to support the growth of the Company's
in-force business. Commissions of $153.6 million were higher by $17.7 million
in 1999, mainly as a result of higher sales.
PROTECTION SEGMENT
The Protection Segment comprises two main elements, internal reinsurance
and variable life products.
INTERNAL REINSURANCE
In recent years, the Company has had various reinsurance agreements with
Sun Life (Canada). In some of these arrangements, Sun Life (Canada) has
reinsured the mortality risks of individual life policies sold in prior years by
the Company. These agreements, in the aggregate, had an immaterial effect on net
income in the years 1998 and 1999. Under another reinsurance agreement, which
became effective January 1, 1991 and terminated October 1, 1998, the Company
reinsured certain individual life insurance contracts issued by Sun Life
(Canada). This agreement had the effect of increasing income from operations by
$24.6 million in 1998. In addition, the effect of terminating this agreement was
to further increase 1998 net income by $65.7 million as the termination payment
was less than the
45
<PAGE>
reserves held under the agreement. Because this agreement terminated in 1998, it
had no effect on income from operations in 1999.
VARIABLE LIFE PRODUCTS
The Company's primary individual variable life insurance product is its
variable universal life product marketed to the company-owned life insurance
("COLI") market. This product was introduced in late 1997. The Company's
management expects that the Company's variable life business will grow and
become more significant in the future. In September 1999, the Company introduced
a new variable universal life product as part of the Futurity product portfolio.
Costs related to developing this product were primarily responsible for the
decrease of approximately $4 million in income from operations for this portion
of the Protection segment.
CORPORATE SEGMENT
The Corporate segment includes the capital of the Company, its investments
in subsidiaries and items not otherwise attributable to either the Wealth
Management segment or the Protection segment.
In 1999, income from operations for this segment increased by
$7.2 million to $11.7 million. This increase reflected higher net investment
income, mainly from dividends of $19.3 million received during the 4th quarter
from a subsidiary, New London Trust, F.S.B. Partially offsetting this change in
net investment income were higher operational expenses and higher federal income
taxes attributable to this segment.
1998 COMPARED TO 1997:
NET INCOME
Net income decreased by $3.8 million to $125.4 million in 1998, reflecting
an increase of $22.5 million in income from operations and a decrease of
$26.3 million in net realized capital gains.
Income from operations increased from $102.5 million in 1997 to
$125.0 million in 1998, mainly as a result of the following factors:
- - A $16.7 million increase, to $31.4 million in 1998, in the income from
operations from the Company's Wealth Management segment. (See "1998 Compared
to 1997 -- Wealth Management Segment," below.)
- - The effect of terminating certain reinsurance agreements with Sun Life
(Canada). The termination of these agreements was the predominant factor in
the $71.1 million increase in income from operations for the Company's
Protection segment.
- - The effects of the Company's December 1997 reorganization (described in
"Corporate Segment," below), as a result of which MFS is no longer a
subsidiary of the Company. As a result of this reorganization, dividends from
subsidiaries were lower in 1998 than in 1997 and certain subsidiary tax
benefits were no longer available to the Company. Also affecting income from
operations for the Corporate segment in 1998 was that income earned on the
proceeds of a December 1997 issuance of a $250 million surplus note was lower
than the related interest expense.
Net realized capital gains decreased from $26.7 million in 1997 to
$0.4 million in 1998. This decrease was also due to the Company's December
1997 reorganization which resulted in a realized capital gain of
$21.2 million in 1997.
46
<PAGE>
INCOME FROM OPERATIONS BY SEGMENT
WEALTH MANAGEMENT SEGMENT
Following are the major factors affecting the Wealth Management segment's
results in 1998 as compared to 1997:
- Annuity deposits declined by about $27 million, or 1%, to $2.2 billion in
1998. Fixed annuity account deposits were lower by approximately 7% in
1998, while deposits into variable annuity accounts increased in total and
as a proportion of total annuity deposits. These trends reflected market
conditions and competitive factors.
Deposits into the DCA programs, a feature of the Company's combination
fixed/variable annuity products, were a significant element of account
deposits. Under these programs, which were redesigned in late 1996,
deposits are made into the fixed portion of the annuity contract and
receive a bonus rate of interest for the policy year. During the year, the
fixed deposit is systematically transferred to the variable portion of the
contract in equal periodic installments. DCA deposits overall were flat in
1998 compared to 1997. This pattern resulted, in part, from heightened
competition, as other companies introduced similar DCA programs within in
1998. During the fourth quarter of 1998, the Company introduced a higher
DCA rate and a new six-month DCA program. DCA deposits for that quarter
were higher, compared to the preceding 1998 quarters.
An increase in variable account deposits in 1998 reflected both the
continuing strong growth in equity markets generally and the continuing
strong performance of the investment funds underlying the Company's
variable annuity products. The continuing strong equity markets, low
interest rate environment, and demographic trends, among other factors,
increased the demand and market for wealth accumulation products in the
U.S., particularly for variable annuities. These factors contributed to the
growth in the Company's variable account deposits in 1998, despite
heightened competition.
The Company introduced its Futurity line of products in February 1998.
Related deposits represented about 6% of the total for the Wealth
Management segment in 1998.
- Fee income increased as a result of higher variable annuity account
balances. The main factors driving this growth in account balances were
market appreciation and net deposit activity. This growth generated
corresponding increases in fee income, since fees are determined based on
the average assets held in these accounts. Fee income increased by
approximately $43 million, or 39%, in 1998.
- Because there was a shift to variable accounts from the general account,
net investment income declined. Net investment income reflects only income
earned on invested assets of the general account. In 1998, net investment
income for the Wealth Management segment decreased by about $40 million,
or 20%, compared to 1997, mainly as a result of the decline in average
invested assets in the Company's general account. This decline in average
general account assets mainly reflected the shift in deposits in recent
years from the fixed account to variable accounts. It also reflected the
Company's decision in 1997 to no longer market group pension and GICs.
- Policyholder benefits were lower, mainly reflecting lower surrender
activity compared to 1997. During 1997 and into the first half of 1998,
surrender and withdrawal activity had been high. This activity primarily
related to a block of separate account contracts that had been issued 7 or
more years previously and for which the surrender charge periods had
expired. While variable account surrenders continued to rise, general
account surrenders declined in 1998. As a result of this pattern of
activity, policyholder benefits (of which surrenders and withdrawals, the
related changes in the liability for premium and other deposit funds, and
related separate account transfers are the major elements) increased in
1997 and were lower in 1998.
47
<PAGE>
- As a result of investments in technology and infrastructure to enhance
annuity operations, operational expenses increased by approximately $12
million, or 25%, in 1998 compared to 1997. These increases reflected 3
main factors:
- Higher volumes of annuity business, requiring greater administrative
support.
- Improvements to the computer systems and technology that support the
annuity business. These improvements involved information systems
supporting the growth of the Company's in-force business, particularly
its combination fixed/variable annuities.
- Costs associated with the product design and implementation of the new
Futurity multi-manager annuity product and the development of a new
product within the Regatta product line.
PROTECTION SEGMENT
The reinsurance arrangements in which Sun Life (Canada) has reinsured the
mortality risks of individual life policies sold in prior years by the Company
had an immaterial effect, in the aggregate, on net income in 1997 and 1998.
Under another agreement, which became effective January 1, 1991 and terminated
October 1, 1998, the Company reinsured certain individual life insurance
contracts issued by Sun Life (Canada). This agreement had the effect of
increasing income from operations by $37.1 million in 1997. Income from
operations decreased to $24.6 million in 1998, because the agreement was in
place only through the first 9 months of 1998. In addition, the effect of
terminating this agreement was to further increase 1998 net income by $65.7
million. This termination-related increase in 1998 represented a reasonable
approximation of the value of the stream of future earnings that the agreement
would have generated had it remained in effect.
The Company's primary individual variable life insurance product is its
variable universal life product marketed to the company-owned life insurance
("COLI") market. This product was introduced in late 1997.
CORPORATE SEGMENT
In 1998, income from operations decreased by $65.3 million to
$4.5 million for the Corporate segment. This decrease reflected 2 main factors:
- Dividends from subsidiaries were lower than in 1997 by $37.5 million. This
decrease mainly resulted from a December 1997 reorganization, in which the
Company transferred its ownership of MFS to its parent company, Sun Life
of Canada (U.S.) Holdings, Inc. ("Sun Life (U.S.) Holdings.") As a result
of this reorganization, the Company received no dividends from MFS in
1998. By comparison, it received $33.1 million of MFS dividends in 1997.
- Net investment income, other than dividends from subsidiaries, decreased
by $5.9 million in 1998 over 1997, reflecting the effect of the Company's
December 1997 issuance of a $250 million surplus note to Sun Life (U.S.)
Holdings. Interest expense exceeded investment earnings on the related
funds.
FINANCIAL CONDITION AND LIQUIDITY
ASSETS
The Company's total assets comprise those held in its general account and
those held in its separate accounts. General account assets support general
account liabilities. Separate accounts and their assets are of 2 main types:
- Those assets held in a "fixed" separate account, which the Company
established for amounts that contract holders allocate to the fixed
portion of their combination fixed/variable deferred annuity contracts.
Fixed separate account assets are available to fund general account
liabilities and general account assets are available to fund the
liabilities of this fixed separate account. The
48
<PAGE>
Company manages the assets of this fixed separate account according to
general account investment policy guidelines.
- Those assets held in a number of registered and non-registered "variable"
separate accounts as investment vehicles for the Company's variable life
and annuity contracts. Policyholders may choose from among various
investment options offered under these contracts according to their
individual needs and preferences. Policyholders assume the investment
risks associated with these choices. General account and fixed separate
account assets are not available to fund the liabilities of these variable
accounts.
The following table summarizes significant changes in asset balances
during 1999, 1998 and 1997. The changes are discussed below.
<TABLE>
<CAPTION>
ASSETS % CHANGE
1999 1998 1997 1999/1998 1998/1997
--------- --------- --------- --------- ---------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
General account assets.................. $ 2,377.1 $ 2,932.2 $ 4,513.5 (18.9)% (35.0)%
Fixed separate account assets........... 2,080.7 2,195.6 2,343.9 (5.2)% (6.3)%
--------- --------- --------- ----- -----
$ 4,457.8 $ 5,127.8 $ 6,857.4 (13.1)% (25.2)%
Variable separate account assets........ 15,490.3 11,774.8 9,068.0 31.6% 29.9%
--------- --------- --------- ----- -----
Total assets............................ $19,948.1 $16,902.6 $15,925.4 18.0% 6.1%
========= ========= ========= ===== =====
</TABLE>
General account and fixed separate account assets, taken together,
decreased by 13.2% in 1999; but variable separate account assets increased by
31.6%. In 1998, the combined general account and fixed separate account
decreased by 25.2%, while variable separate account assets increased by 29.9%.
This growth in variable accounts relative to the general and fixed accounts
reflects 2 main factors: (1) appreciation of the funds held in the variable
separate accounts has exceeded that of the funds held in the general and fixed
separate accounts; and (2) annuity deposits and exchanges into variable accounts
have increased, while annuity deposits into fixed accounts have slowed. The
Company believes this pattern has reflected a shift in the preferences of
policyholders, which is largely attributable to the strong performance of equity
markets in general and of the Company's variable account funds in particular.
The assets of the general account are available to support general account
liabilities. For management purposes, it is the Company's practice to segment
its general account to facilitate the matching of assets and liabilities.
General account assets primarily comprise cash and invested assets, which
represented essentially all of general account assets at year-end 1999. Major
types of invested asset holdings included bonds, mortgages, real estate and
common stock. The Company's bond holdings comprised 51.5% of the Company's
portfolio at year-end 1999. Bonds included both public and private issues. It is
the Company's policy to acquire only investment-grade securities. As a result,
the overall quality of the bond portfolio is high. At year-end 1999, only 0.5%
were rated below-investment-grade; i.e., they had National Association of
Insurance Commissioners ("NAIC") ratings lower than "1" or "2." The Company's
mortgage holdings amounted to $528.9 million at year-end 1999, representing
22.3% of the total portfolio. All mortgage holdings at year-end 1999 were in
good standing. The Company believes that the high quality of its mortgage
portfolio is largely attributable to its stringent underwriting standards. At
year-end 1999, investment real estate amounted to $79.2 million, representing
about 3.3% of the total portfolio. The Company invests in real estate to enhance
yields and, because of the long-term nature of these investments, the Company
uses them for purposes of matching with products having long-term liability
durations. Common stock holdings amounted to $75.3 million, representing about
3.2% of the portfolio. These holdings comprised the Company's ownership shares
in subsidiaries.
49
<PAGE>
LIABILITIES
As with assets, the proportion of variable separate account liabilities to
total liabilities has been increasing. Most of the Company's liabilities
comprise reserves for life insurance and for annuity contracts and deposit
funds. The Company expects the declining trend in general account liabilities to
continue, because it believes that net maturities will continue to exceed sales
for the fixed contracts associated with these liabilities. This trend stems
mainly from the Company's 1997 decision to discontinue selling group pension and
GIC contracts and to focus its marketing efforts on its combination
fixed/variable annuity products.
CAPITAL MARKETS RISK MANAGEMENT
See "Quantitative and Qualitative Disclosures About Market Risk," below,
for a discussion of the Company's capital markets risk management.
CAPITAL RESOURCES
CAPITAL ADEQUACY
The National Association of Insurance Commissioners ("NAIC") adopted
regulations at the end of 1993 that established minimum capitalization
requirements for insurance companies, based on risk-based capital ("RBC")
formulas. These requirements are intended to identify undercapitalized
companies, so that specific regulatory actions can be taken on a timely basis.
The RBC formula for life insurance companies calculates capital requirements
related to asset, insurance, interest rate, and business risks. According to the
RBC calculation, the Company's capital was well in excess of its required
capital at year-end 1999.
LIQUIDITY
The Company's liquidity requirements are generally met by funds from
operations. The Company's main uses of funds are to pay out death benefits and
other maturing insurance and annuity contract obligations; to make pay-outs on
contract terminations; to purchase new investments; to fund new business
ventures; and to pay normal operating expenditures and taxes. The Company's main
sources of funds are premiums and deposits on insurance and annuity products;
proceeds from the sale of investments; income from investments; and repayments
of investment principal.
In managing its general account and fixed separate account assets in
relation to its liabilities, the Company has segmented these assets by product
or by groups of products. The Company manages each segment's assets based on an
investment policy that it has established for that segment. Among other matters,
this investment policy considers liquidity requirements and provides cash flow
estimates. The Company reviews these policies quarterly.
The Company's liquidity targets are intended to enable it to meet its
day-to-day cash requirements. On a quarterly basis, the Company compares its
total "liquifiable" assets to its total demand liabilities. Liquifiable assets
comprise cash and assets that could quickly be converted to cash should the need
arise. These assets include short-term investments and other current assets and
investment-grade bonds. The Company's policy is to maintain a liquidity ratio in
excess of 100%, and it did so throughout 1999. Based on its ongoing liquidity
analyses, the Company believes that its available liquidity is more than
sufficient to meet its liquidity needs.
OTHER MATTERS
DEMUTUALIZATION
On January 27, 1998, Sun Life (Canada) announced that its Board of
Directors had requested that management develop a plan to demutualize.
Demutualization would involve converting from a mutual structure, with ownership
by policyholders, to a shareholder-owned company. It would provide that the
ownership interest currently held by policyholders be distributed to them in the
form of shares, without affecting their interests as policyholders. In
June 1999, the Sun Life (Canada)'s Board of
50
<PAGE>
Directors approved the demutualization timetable recommended by management, and
on September 28, 1999, Sun Life (Canada)'s Board of Directors approved the
demutualization plan. On December 6, 1999, Sun Life (Canada) received approval
for its demutualization plan from the Michigan Commissioner of Insurance. At a
Special Meeting on December 15, 1999, eligible policyholders of Sun Life
(Canada) voted in favor of the Company's plans to demutualize. Sun Life (Canada)
completed its demutualization on March 22, 2000 and its Initial Public Offering
("IPO") on March 29, 2000. The demutualization of Sun Life (Canada) is not
expected to have any significant impact on the Company.
SALE OF SUBSIDIARIES
On February 5, 1999, the Company sold Massachusetts Casualty Insurance
Company ("MCIC"), a disability insurance company, to an unaffiliated party. The
net proceeds of this sale were $34.0 million and the Company realized a post tax
gain of $4.9 million.
On October 29, 1999, the Company completed the sale of its wholly-owned
subsidiary, New London Trust F.S.B. ("NLT"), for approximately $30.3 million to
an unaffiliated party. The Company realized a post-tax gain of $13.2 million
from this sale. This transaction is not expected to have a significant effect on
the ongoing operations of the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This discussion covers market risks associated with investment portfolios
that support the Company's general account liabilities. This discussion does not
cover market risks associated with those investment portfolios that support
separate account products. For these products, the policyholder, rather than the
Company, assumes these market risks.
GENERAL
The assets of the general account are available to support general account
liabilities. For purposes of managing these assets in relation to these
liabilities, the Company notionally segments these assets by product or by
groups of products. The Company manages each segment's assets based on an
investment policy that it has established for that segment. The policy covers
the segment's liability characteristics and liquidity requirements, provides
cash flow estimates, and sets targets for asset mix, duration, and quality. Each
quarter, investment and business unit managers review these policies to ensure
that the policies remain appropriate, taking into account each segment's
liability characteristics.
TYPES OF MARKET RISKS
The Company's stringent underwriting standards and practices have resulted
in high-quality portfolios and have the effect of limiting credit risk. It is
the Company's policy, for example, not to purchase below-investment-grade
securities. Also, as a matter of investment policy, the Company assumes no
foreign currency or commodity risk; nor does it assume equity price risk except
to the extent that it holds real estate in its portfolios. (At year-end 1999,
investment real estate holdings represented less than 4% of its total general
account portfolio.) The management of interest rate risk exposure is discussed
below.
INTEREST RATE RISK MANAGEMENT
The Company's fixed interest rate liabilities are primarily supported by
well-diversified portfolios of fixed interest investments. They are also
supported by holdings of real estate and floating rate notes. All of these fixed
interest investments are held for other than trading purposes and can include
publicly issued and privately placed bonds and commercial mortgage loans. Public
bonds can include Treasury bonds, corporate bonds, and money market instruments.
The Company's fixed income portfolios also hold securitized assets, including
mortgage-backed securities ("MBS") and asset-backed securities. These securities
are subject to the same standards applied to other portfolio investments,
including relative value criteria and diversification guidelines. In portfolios
backing interest-sensitive liabilities, the Company's policy is to limit MBS
holdings to less than 10% of total portfolio assets. In all portfolios, the
Company restricts MBS investments to pass-through securities issued by U.S.
government agencies
51
<PAGE>
and to collateralized mortgage obligations, which are expected to exhibit
relatively low volatility. The Company does not engage in lever-aged
transactions and it does not invest in the more speculative forms of these
instruments such as the interest-only, principal-only, inverse floater, or
residual tranches.
Changes in the level of domestic interest rates affect the market value of
fixed interest assets and liabilities. Segments whose liabilities mainly arise
from the sale of products containing interest rate guarantees for certain terms
are sensitive to changes in interest rates. In these segments, the Company uses
"immunization" strategies, which are specifically designed to minimize the loss
from wide fluctuations in interest rates. The Company supports these strategies
using analytical and modeling software acquired from outside vendors.
Significant features of the Company's immunization models include:
- an economic or market value basis for both assets and liabilities;
- an option pricing methodology;
- the use of effective duration and convexity to measure interest rate
sensitivity;
- the use of key rate durations to estimate interest rate exposure at
different parts of the yield curve and to estimate the exposure to
non-parallel shifts in the yield curve.
The Company's Interest Rate Risk Committee meets monthly. After reviewing
duration analyses, market conditions and forecasts, the Committee develops
specific asset management strategies for the interest-sensitive portfolios.
These strategies may involve managing to achieve small intentional mismatches,
either in terms of total effective duration or for certain key rate durations,
between the liabilities and related assets of particular segments. The Company
manages these mismatches to a tolerance range of plus or minus 0.5.
Asset strategies may include the use of Treasury futures or interest rate
swaps to adjust the duration profiles for particular portfolios. All derivative
transactions are conducted under written operating guidelines and are marked to
market. Total positions and exposures are reported to the Board of Directors on
a monthly basis. The counterparties to hedging transactions are major highly
rated financial institutions, with respect to which the risk of the Company's
incurring losses related to credit exposures is considered remote.
Liabilities categorized as financial instruments and held in the Company's
general account at December 31, 1999 had a fair value of $1,024.6 million. Fixed
income investments supporting those liabilities had a fair value of $2,072.1
million at that date. The Company performed a sensitivity analysis on these
interest-sensitive liabilities and assets at December 31, 1999. The analysis
showed that if there were an immediate increase of 100 basis points in interest
rates, the fair value of the liabilities would show a net decrease of $30.6
million and the corresponding assets would show a net decrease of $80.5 million.
By comparison, liabilities categorized as financial instruments and held
in the Company's general account at December 31, 1998 had a fair value of
$1,538.3 million. Fixed income investments supporting those liabilities had a
fair value of $2,710.1 million at that date. The Company performed a sensitivity
analysis on these interest-sensitive liabilities and assets at December 31,
1998. The analysis showed that if there were an immediate increase of 100 basis
points in interest rates, the fair value of the liabilities would show a net
decrease of $46.3 million and the corresponding assets would show a net decrease
of $113.2 million.
The Company produced these estimates using computer models. Since these
models reflect assumptions about the future, they contain an element of
uncertainty. For example, the models contain assumptions about future
policyholder behavior and asset cash flows. Actual policyholder behavior and
asset cash flows could differ from what the models show. As a result, the
models' estimates of duration and market values may not reflect what actually
will occur. The models are further limited by the fact that they do not provide
for the possibility that management action could be taken to mitigate adverse
results. The Company believes that this limitation is one of conservatism; that
is, it will tend to cause
52
<PAGE>
the models to produce estimates that are generally worse than one might actually
expect, all other things being equal.
Based on its processes for analyzing and managing interest rate risk, the
Company believes its exposure to interest rate changes will not materially
affect its near-term financial position, results of operations, or cash flows.
REINSURANCE
The Company has agreements with Sun Life (Canada) which provide that Sun
Life (Canada) 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
in 1999 had the effect of decreasing net income from operations by approximately
$1,527,000.
Effective January 1, 1991, the Company entered into an agreement with Sun
Life (Canada) under which certain individual life insurance contracts issued by
Sun Life (Canada) were reinsured by the Company on a 90% coinsurance basis. Also
effective January 1, 1991 the Company entered into an agreement with Sun Life
(Canada) which provides that Sun Life (Canada) will reinsure the mortality risks
in excess of $500,000 per policy for the individual life insurance contracts
assumed by the Company in the reinsurance agreement described above. Such death
benefits are reinsured on a yearly renewable term basis. The life reinsurance
assumed agreement requires 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 for the year ended December 31, 1998.
The Company terminated these agreements effective October 1, 1998, resulting in
an increase in income from operations in 1998 of $65,679,000 which included a
cash settlement.
The Company has also executed reinsurance agreements with unrelated
companies which provide reinsurance of certain individual life insurance
contracts on a modified coinsurance basis under which all deficiency reserves
are ceded. Reinsurance transactions under this agreement had the effect of
increasing income from operations by $193,000 in 1999.
During 1999, the Company entered into an agreement with an unrelated
company which provides reinsurance on certain fixed group annuity contracts. The
net effect of this agreement was to increase income from operations by
approximately $3,400,000. Also during 1999, the Company entered into three
agreements with two unrelated companies for the purpose of obtaining stop-loss
coverage of guaranteed minimum death benefit exposure with respect to the
Company's variable annuity business. The net effect of these agreements was to
increase income from operations by approximately $157,000.
RESERVES
In accordance with the life insurance laws and regulations under which the
Company operates, it is obligated to carry on its books, as liabilities,
actuarially determined reserves to meet its obligations on its outstanding
contracts. Reserves are based on mortality tables in general use in the United
States and are computed to equal amounts that, with additions from premiums to
be received, and with interest on such reserves compounded annually at certain
assumed rates, will be sufficient to meet the Company's policy obligations at
their maturities or in the event of an insured's death. In the accompanying
Financial Statements, these reserves are determined in accordance with statutory
regulations.
INVESTMENTS
Of the Company's total assets of $19.9 billion at December 31, 1999, 88.1%
($17.6 billion) consisted of unitized and non-unitized separate account assets,
6.1% ($1.2 billion) was invested in bonds and similar securities, 2.7%
($528 million) was invested in mortgages, 0.4% ($75.3 million) was invested in
subsidiaries, 0.4% ($94.8 million) was invested in real estate, and the
remaining 2.3% ($456.1 million) was invested in cash and other assets.
53
<PAGE>
COMPETITION
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other entities
marketing insurance products. According to a 1999 statistical study published by
A.M. Best, the Company ranked 36th among North American life insurance companies
based upon total assets as of December 31, 1998.
EMPLOYEES
The Company and Sun Life (Canada) have entered into a service agreement
which provides that the latter will furnish the Company, as required, with
personnel as well as certain services and facilities on a cost reimbursement
basis. As of March 31, 2000, the Company had direct employees who are
employed at its Principal Executive Office in Wellesley Hills, Massachusetts and
at its Retirement Products and Services Division in Boston, Massachusetts.
PROPERTIES
The Company occupies office space owned by it and leased to Sun Life
(Canada), and certain unrelated parties for lease terms not exceeding 5 years.
The Company also occupies office space which it leases from unaffiliated parties
for various lease terms.
STATE REGULATION
The Company is subject to the laws of the State of Delaware governing life
insurance companies and to regulation by the Commissioner of Insurance of
Delaware. An annual statement is filed with the Commissioner of Insurance on or
before March lst in each year relating to the operations of the Company for the
preceding year and its financial condition on December 31st of such year. Its
books and records are subject to review or examination by the Commissioner or
his agents at any time and a full examination of its operations is conducted at
periodic intervals.
The Company is also subject to the insurance laws and regulations of the
other states and jurisdictions in which it is licensed to operate. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative powers with respect to licensing to transact business, overseeing
trade practices, licensing agents, approving policy forms, establishing reserve
requirements, fixing maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. Each insurance company is required to file detailed
annual reports with supervisory agencies in each of the fire jurisdictions in
which it does business and its operations and accounts are subject to
examination by such agencies at regular intervals.
In addition, many states regulate affiliated groups of insurers, such as
the Company, Sun Life (Canada) and its affiliates, under insurance holding
company legislation. Under such laws, inter-company transfers of assets and
dividend payments from insurance subsidiaries may be subject to prior notice or
approval, depending on the size of such transfers and payments in relation to
the financial positions of the companies involved. Under insurance guaranty fund
laws in most states, insurers doing business therein can be assessed (up to
prescribed limits) for policyholder losses incurred by insolvent companies. The
amount of any future assessments of the Company under these laws cannot be
reasonably estimated. However, most of these laws do provide that an assessment
may be excused or deferred if it would threaten an insurer's own financial
strength and many permit the deduction of all or a portion of any such
assessment from any future premium or similar taxes payable.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies, the tax treatment
of insurance products and its impact on the relative desirability of various
personal investment vehicles.
------------------------
54
<PAGE>
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, 1999 included in the Statement of Additional Information and the
statutory financial statements of the Company for the years ended December 31,
1999, 1998 and 1997 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 Fund shares held in the Sub-Accounts of the Variable Account.
The financial statements of the Variable Account for the year ended
December 31, 1999 are included in the Statement of Additional Information.
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
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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 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"), a mutual insurance company.
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
19 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 mortgage backed securities are generally carried at
amortized cost. Changes in prepayment assumptions and resulting cash flows are
confirmed retrospectively. 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 the Interest
Maintenance Reserve (IMR). Investments in non-insurance subsidiaries are carried
on the equity basis. 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.
61
<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, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
POLICY AND CONTRACT RESERVES
The reserves for life insurance and annuity contracts are computed in accordance
with presently accepted actuarial standards, and are based on actuarial
assumptions and methods (including use of published mortality tables and
prescribed interest rates) which produce 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.
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.
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.
Gains (losses) from mortality experience and investment experience of the
separate accounts, not applicable to contract owners, and accrued expense
allowances recognized in reserves are receivable from or payable to the general
account. Accumulated amounts 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 $467,619,000 in 1999 and $361,863,000 in
1998.
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.
62
<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, 1999, 1998 AND 1997
2. INVESTMENTS IN SUBSIDIARIES
The Company owns all of the outstanding shares of the following subsidiaries:
Sun Life Insurance and Annuity Company of New York ("Sun Life (N.Y.)") is
engaged in the sale of individual fixed and variable annuity contracts and group
life and group long term disability insurance contracts in the State of New
York;
Sun Life of Canada (U.S.) Distributors, Inc. (formerly Sun Investment Services
Company) ("Sundisco"), is a registered broker-dealer;
Sun Life Financial Services Limited ("SLFSL"), serves as the marketing
administrator for the distribution of the offshore products of SLOC (Bermuda
branch), an affiliate;
Sun Benefit Services Company, Inc. ("Sunbesco") receives renewal commissions on
a disability product and is currently inactive;
Sun Capital Advisers, Inc. ("Sun Capital") is a registered investment adviser;
Sun Life Finance Corporation ("Sunfinco") is a finance company and currently
inactive;
Sun Life of Canada (U.S.) SPE 97-1, Inc. ("SPE 97-1") is a special purpose
corporation engaging in activities incidental to securitizing mortgage loans;
Clarendon Insurance Agency, Inc. ("Clarendon") is a registered broker-dealer
that acts as the general distributor of certain annuity and life insurance
contracts issued by the Company and its affiliates;
Sun Life Information Services Ireland Limited ("SLISL") is an offshore
technology services center for affiliates.
On October 29,1999, the Company sold New London Trust F.S.B. ("NLT") to an
unaffiliated party for $30,254,000. The Company realized a post tax gain of
$13,170,000.
On February 5, 1999, the Company sold Massachusetts Casualty Insurance Company
("MCIC"), a disability insurance company, to an unaffiliated party. The net
proceeds of this sale were $33,965,000. The Company realized a post tax gain of
$4,900,000.
The impact of the sales of NLT and MCIC on continuing operations of the Company
is not expected to be material.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding shares of
Massachusetts Financial Services Company ("MFS"), a registered investment
adviser. 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.
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<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, 1999, 1998 AND 1997
2. INVESTMENTS IN SUBSIDIARIES (CONTINUED)
During 1999, 1998, and 1997, the Company contributed capital in the following
amounts to its subsidiaries:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
MCIC $ -- $ -- $ 2,000
SLFSL 1,000 750 1,000
SPE 97-1 -- -- 20,377
Sundisco 19,000 10,000 --
Sun Capital -- 500 --
Clarendon -- 10 --
SLISL -- 502 --
</TABLE>
During 1999, 1998, and 1997, the Company received dividends from the following
subsidiaries:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
SUN Life (N.Y.) $ 6,500 $ 3,000 $ --
NLT 19,319 -- 7,500
MFS -- -- 33,110
SPE 97-1 -- 675 --
SUNDISCO -- -- 571
</TABLE>
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1999, 1998 and 1997 and for the years then ended, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Assets $ 877,939 $ 1,315,317 $ 1,190,951
Liabilities (802,656) (1,186,872) (1,073,966)
----------- ----------- -----------
Total net assets $ 75,283 $ 128,445 $ 116,985
=========== =========== ===========
Total revenues $ 82,443 $ 222,853 $ 750,364
Operating expenses (90,318) (221,933) (646,896)
Income tax expense 3,249 (1,222) (43,987)
----------- ----------- -----------
Net income (loss) $ (4,626) $ (302) $ 59,481
=========== =========== ===========
</TABLE>
64
<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, 1999, 1998 AND 1997
3. BONDS
Investments in debt securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------
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 $ 78,161 $ 2,091 $ (2,454) $ 77,798
States, provinces and political subdivisions 20,428 69 (57) 20,440
Public utilities 181,466 6,854 (5,907) 182,413
Transportation 188,285 7,689 (2,709) 193,265
Finance 88,517 4,631 (518) 92,630
All other corporate bonds 665,113 18,353 (17,152) 666,314
---------- -------- -------- ----------
Total long-term bonds 1,221,970 39,687 (28,797) 1,232,860
---------- -------- -------- ----------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and
commercial paper 312,585 -- -- 312,585
---------- -------- -------- ----------
Total short-term bonds 312,585 -- -- 312,585
---------- -------- -------- ----------
Total bonds $1,534,555 $ 39,687 $(28,797) $1,545,445
========== ======== ======== ==========
</TABLE>
<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>
65
<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, 1999, 1998 AND 1997
3. BONDS (CONTINUED)
The amortized cost and estimated fair value of bonds at December 31, 1999 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, 1999
-----------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
---- ----------
(IN THOUSANDS)
<S> <C> <C>
Maturities:
Due in one year or less $ 376,761 $ 376,823
Due after one year through five years 184,077 182,788
Due after five years through ten years 259,042 263,321
Due after ten years 542,678 543,301
---------- ----------
1,362,558 1,366,233
Mortgage-backed securities 171,997 179,212
---------- ----------
Total bonds $1,534,555 $1,545,445
========== ==========
</TABLE>
Proceeds from sales and maturities of investments in debt securities during
1999, 1998, and 1997 were $740,081,000, $1,016,811,000 and $980,264,000, gross
gains were $7,688,000, $17,025,000, and $10,732,000 and gross losses were
$4,477,000, $866,000, and $2,446,000, respectively.
Bonds included above with an amortized cost of approximately $2,604,000,
$2,572,000, and $2,578,000 at December 31, 1999, 1998 and 1997, 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 concentrations 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 on loan as of December 31, 1999, 1998 or 1997. Income resulting from
this program was $20,000, $94,000, and $200,000 for the years ended
December 31, 1999, 1998 and 1997, 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.
66
<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, 1999, 1998 AND 1997
5. MORTGAGE LOANS (CONTINUED)
The following table shows the geographical distribution of the mortgage loan
portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
California $ 72,693 $ 82,397
Massachusetts 38,083 53,528
Michigan 32,941 34,357
New York 22,912 21,190
Ohio 31,914 36,171
Pennsylvania 92,825 93,587
Washington 30,265 36,548
All other 207,278 177,225
-------- --------
$528,911 $535,003
======== ========
</TABLE>
The Company has restructured mortgage loans totaling $15,644,000 and $30,743,000
and corresponding allowances for losses of $1,043,000 and $2,120,000 at December
31, 1999 and 1998, respectively.
On December 22, 1999, the Company acquired 28 mortgages from SLOC at a cost of
$118,091,637. The Company in turn sold a 90% participation in these 28 plus an
additional 11 existing mortgage loans to a third party as part of two mortgage
participation agreements, for which the Company received proceeds of
$146,974,851.
The Company has outstanding mortgage loan commitments on real estate totaling
$2,384,000 and $18,005,000 at December 31, 1999 and 1998, respectively.
6. INVESTMENT GAINS AND LOSSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Net realized gains (losses):
Bonds $ 70 $ 5,659 $ 2,882
Common stock of affiliates 15,290 -- 21,195
Common stocks -- 48 --
Mortgage loans 787 2,374 3,837
Real estate (481) 955 2,912
Other invested assets -- (3,827) (717)
-------- ------- -------
Subtotal 15,666 5,209 30,109
Capital gains tax expense (benefit) (4,442) 4,815 3,403
-------- ------- -------
Total $ 20,108 $ 394 $26,706
======== ======= =======
Changes in unrealized gains (losses):
Bonds $ (6,689) $ -- $ --
Common stock of affiliates (30,966) (302) (2,894)
Mortgage loans 83 (1,312) 1,524
Real estate 1,461 403 3,377
Other invested assets -- 827 (855)
-------- ------- -------
Total $(36,111) $ (384) $ 1,152
======== ======= =======
</TABLE>
67
<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, 1999, 1998 AND 1997
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 $4,965,000 in 1999, $8,943,000
in 1998, and $6,321,000 in 1997. 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,
------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income from bonds $128,992 $167,436 $188,924
Income from investment in common stock of affiliates 25,819 3,675 41,181
Interest income from mortgage loans 50,327 53,269 76,073
Real estate investment income 15,696 15,932 17,161
Interest income from policy loans 3,118 2,881 3,582
Other investment income (loss) (1,700) (641) (193)
-------- -------- --------
Gross investment income 222,252 242,552 326,728
-------- -------- --------
Interest on surplus notes and notes payable (43,266) (44,903) (42,481)
Investment expenses (11,951) (13,117) (13,998)
-------- -------- --------
Net investment income $167,035 $184,532 $270,249
======== ======== ========
</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 and foreign currency
exchange rates. The Company's use of derivatives has included U.S. Treasury
futures, conventional interest rate swaps, and currency and interest rate swap
agreements structured as 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, 1999 and 1998, 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 IMR and amortized over the shorter of the remaining life of the
hedged asset 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.
68
<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, 1999, 1998 AND 1997
8. DERIVATIVES (CONTINUED)
The Company's open positions are as follows:
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1999
--------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
----------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Conventional interest rate swaps $20,000 $249
Foreign currency swap 648 113
</TABLE>
<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>
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 creditworthiness 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.
The Company's net investment in leveraged leases is composed of the following
elements:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Lease contracts receivable $ 69,766 $ 78,937
Less non-recourse debt (69,749) (78,920)
-------- --------
Net receivable 17 17
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (7,808) (8,932)
-------- --------
Investment in leveraged leases 33,359 32,235
Less fees (113) (138)
-------- --------
Net investment in leveraged leases $ 33,246 $ 32,097
======== ========
</TABLE>
The net investment is included in "Other invested assets" on the balance sheet.
69
<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, 1999, 1998 AND 1997
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 $1,527,000, $2,128,000 and $1,381,000
for the years ended December 31, 1999, 1998 and 1997, 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, and $37,050,000 for the years ended December 31, 1998 and 1997,
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.
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1999, 1998 and 1997 before the effect of
reinsurance transactions with SLOC:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $2,874,513 $2,377,364 $2,340,733
Net investment income and realized gains 190,845 187,208 298,120
---------- ---------- ----------
Subtotal 3,065,358 2,564,572 2,638,853
---------- ---------- ----------
Benefits and Expenses:
Policyholder benefits 2,709,712 2,312,247 2,350,354
Other expenses 239,282 203,238 187,591
---------- ---------- ----------
Subtotal 2,948,994 2,515,485 2,537,945
---------- ---------- ----------
Income from operations $ 116,364 $ 49,087 $ 100,908
========== ========== ==========
</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 $193,000 in 1999, $3,008,000 in
1998, and decreasing income from operations by $2,658,000 in 1997.
During 1999 the Company entered into an agreement with an unrelated company
which provides reinsurance on certain fixed group annuity contracts. The net
effect of this agreement was to increase income from operations by approximately
$3,400,000. Also during 1999, the Company entered into three agreements with two
unrelated companies for the purpose of obtaining stop-loss coverage of
guaranteed minimum death benefit exposure with respect to the Company's variable
annuity business. The net effect of these agreements was to increase income from
operations by approximately $157,000.
70
<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, 1999, 1998 AND 1997
10. REINSURANCE (CONTINUED)
The Company is contingently liable for the portion of the policies reinsured
under each of its existing reinsurance agreements in the event the reinsurance
companies are unable to pay their portion of any reinsured claim. Management
believes that any liability from this contingency is unlikely. However, to limit
the possibility of such losses, the Company evaluates the financial condition of
its reinsurers and monitors concentration of credit risk.
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, 1999
------------------------
AMOUNT % OF TOTAL
------ ----------
(IN THOUSANDS)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 2,346,853 13
At market value 15,010,696 81
At book value less surrender charges (surrender charge
>5%) 45,722 --
At book value (minimal or no charge or adjustment) 104,539 1
Not subject to discretionary withdrawal provision 1,015,108 5
----------- ---
Total annuity actuarial reserves and deposit liabilities $18,522,918 100
=========== ===
</TABLE>
<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 market value 11,368,059 73
At book value less surrender charges (surrender charge
>5%) 62,404 --
At book value (minimal or no charge or adjustment) 111,757 1
Not subject to discretionary withdrawal provision 1,055,642 7
----------- ---
Total annuity actuarial reserves and deposit liabilities $15,494,391 100
=========== ===
</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 Protection 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
Wealth Management 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.
71
<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, 1999, 1998 AND 1997
12. SEGMENT INFORMATION (CONTINUED)
The following amounts pertain to the various business segments:
<TABLE>
<CAPTION>
FEDERAL
TOTAL TOTAL PRETAX INCOME TOTAL
REVENUES EXPENDITURES* INCOME TAX ASSETS
---------- ------------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1999
Protection $ 33,236 $ 41,030 $ (7,794) $ (2,661) $ 136,127
Wealth Management 2,979,450 2,898,158 81,292 18,593 19,015,394
Corporate 27,301 6,070 21,231 8,547 796,634
---------- ---------- -------- -------- -----------
Total $3,039,987 $2,945,258 $ 94,729 $ 24,479 $19,948,155
---------- ---------- -------- -------- -----------
1998
Protection $ 229,710 $ 144,800 $ 84,910 $ (4,148) $ 199,683
Wealth Management 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
Protection $ 304,141 $ 272,333 $ 31,808 $ 13,825 $ 1,143,697
Wealth Management 2,533,006 2,507,592 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
---------- ---------- -------- -------- -----------
</TABLE>
- ------------------------
* Total expenditures includes dividends to policyholders of $0 for 1999,
$(5,981) for 1998, and $33,316 for 1997.
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 obligation was $1,914,000,
and $1,178,000 at December 31, 1999 and 1998, respectively. The Company's share
of net periodic pension cost was $736,000, $586,000, and $146,000 for 1999, 1998
and 1997, 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 $284,000, $231,000, and $259,000 for the years ended
December 31, 1999, 1998 and 1997, 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.
72
<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, 1999, 1998 AND 1997
13. RETIREMENT PLANS (CONTINUED)
The Company records an accrual of the estimated cost of retiree benefit payments
during the years the employee provides services, and amortizes an obligation of
approximately $400,000 over a period of ten years. The Company's cash flows are
not affected by this method, however the net effect decreased income by
$185,000, $95,000, and $117,000, for the years ended December 31, 1999, 1998,
and 1997, respectively. The Company's post-retirement health, dental and life
insurance benefits currently are not funded.
The following table sets forth the change in the pension and other
post-retirement 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
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $110,792 $ 79,684 $ 10,419 $ 9,845
Service cost 5,632 4,506 413 240
Interest cost 6,952 6,452 845 673
Actuarial loss (gain) (21,480) 21,975 1,048 308
Benefits paid (2,376) (1,825) (508) (647)
-------- -------- -------- --------
Benefit obligation at end of year $ 99,520 $110,792 $ 12,217 $ 10,419
======== ======== ======== ========
The Company's share:
Benefit obligation at beginning of year $ 9,125 $ 5,094 $ 416 $ 385
Benefit obligation at end of year $ 8,816 $ 9,125 $ 743 $ 416
Change in plan assets:
Fair value of plan assets at beginning of year $151,575 $136,610 $ -- $ --
Actual return on plan assets 9,072 16,790 -- --
Employer contribution -- -- 508 647
Benefits paid (2,376) (1,825) (508) (647)
-------- -------- -------- --------
Fair value of plan assets at end of year $158,271 $151,575 $ -- $ --
======== ======== ======== ========
Funded status $ 58,752 $ 40,783 $(12,217) $(10,419)
Unrecognized net actuarial gain (loss) (20,071) (2,113) 1,469 586
Unrecognized transition obligation (asset) (22,617) (24,674) 140 185
Unrecognized prior service cost 7,081 7,661 -- --
-------- -------- -------- --------
Prepaid (accrued) benefit cost $ 23,145 $ 21,657 $(10,608) $ (9,648)
======== ======== ======== ========
The Company's share of accrued benefit cost $ (1,914) $ (1,178) $ (381) $ (195)
Weighted-average assumptions as of December 31:
Discount rate 7.50% 6.75% 7.50% 6.75%
Expected return on plan assets 8.75% 8.00% N/A N/A
Rate of compensation increase 4.50% 4.50% N/A N/A
</TABLE>
73
<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, 1999, 1998 AND 1997
13. RETIREMENT PLANS (CONTINUED)
For measurement purposes, a 10.9% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1999 (5.6% for dental benefits).
The rates were assumed to decrease gradually to 5% for 2005 and remain at that
level thereafter.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 5,632 $ 4,506 $ 413 $ 240
Interest cost 6,952 6,452 845 673
Expected return on plan assets (12,041) (10,172) -- --
Amortization of transition obligation (asset) (2,056) (2,056) 45 45
Amortization of prior service cost 580 580 -- --
Recognized net actuarial (gain) loss (554) (677) 164 (20)
-------- ------- ------ ------
Net periodic benefit cost $ (1,487) $(1,367) $1,467 $ 938
======== ======= ====== ======
The Company's share of net periodic benefit cost $ 736 $ 586 $ 185 $ 95
======== ======= ====== ======
</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 $ 288 $ (518)
Effect on postretirement benefit obligation 2,754 (2,279)
</TABLE>
74
<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, 1999, 1998 AND 1997
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:
<TABLE>
<CAPTION>
1999
--------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
--------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Bonds (including short-term) $1,534,555 $1,545,445
Mortgages 528,911 526,608
Derivatives -- 362
Other Invested Assets 67,938 67,938
Policy loans 40,095 40,095
LIABILITIES:
Insurance reserves $ 120,536 $ 120,536
Individual annuities 247,619 238,229
Pension products 661,806 665,830
<CAPTION>
1998
--------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
--------------- --------------------
(IN THOUSANDS)
ASSETS:
<S> <C> <C>
Bonds (including short-term) $2,026,868 $2,153,953
Mortgages 535,003 556,143
Derivatives -- 771
Policy loans 41,944 41,944
LIABILITIES:
Insurance reserves $ 121,100 $ 121,100
Individual annuities 274,448 271,849
Pension products 1,104,489 1,145,351
</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 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 policy loans approximate carrying amounts.
The fair values of derivative financial instruments are estimated using the
process described in Note 8.
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 fair value.
75
<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, 1999, 1998 AND 1997
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 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,
1999 1998
------------------- -------------------
AVR IMR AVR IMR
--- --- --- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of year $44,392 $40,490 $47,605 $33,830
Net realized investment gains, net of tax 9,950 4,983 256 8,942
Amortization of net investment gains -- (3,702) -- (2,282)
Unrealized investment losses (9,705) -- (6,550) --
Required by formula (566) -- 3,081 --
------- ------- ------- -------
Balance, end of year $44,071 $41,771 $44,392 $40,490
======= ======= ======= =======
</TABLE>
16. FEDERAL INCOME TAXES
The Company, its subsidiaries and certain other affiliates 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 $3,000,000,
$48,144,000, and $31,000,000 for the years ended December 31, 1999, 1998 and
1997, 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. RELATED PARTY TRANSACTIONS
A. 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.
The Company accrued $4,259,000 and $4,259,000 for interest on surplus notes for
the years ended December 31, 1999 and 1998, respectively.
76
<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, 1999, 1998 AND 1997
17. RELATED PARTY TRANSACTIONS
A. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE) (CONTINUED)
The Company expensed $43,266,000, $44,903,000, and $42,481,000 for interest on
surplus notes and notes payable for the years ended December 31, 1999, 1998 and
1997, respectively.
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 on December 22, 1998 at an interest rate of 5.55% due
February 11, 1999. These two notes and an additional $10,000,000 were combined
into a new note of $230,000,000 with a floating interest rate based on the six
month LIBOR rate plus 25 basis points. The $230,000,000 note was repaid to the
Company on December 21, 1999.
On January 14, 2000, the Company purchased $200,000,000 of notes from MFS.
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, the Company had an additional $20,000,000 in notes issued
by MFS, scheduled to mature in 2000. These notes were repaid to the Company on
December 21,1999.
B. STOCKHOLDER DIVIDENDS
The maximum amount of dividends which can be paid by the Company without prior
approval of the Insurance Commissioner of the State of Delaware is subject to
restrictions relating to statutory surplus. In 1999, a dividend in the amount of
$80,000,000 was declared and paid by the Company to its parent, Life Holdco.
This dividend was approved by the Board of Directors, but did not require
approval of the Insurance Commissioner. In 1998, a dividend in the amount of
$50,000,000 was declared and paid by the Company to its parent, Life Holdco.
This dividend was approved by the Insurance Commissioner and the Board of
Directors. 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. This dividend
was approved by the Insurance Commissioner and the Board of Directors.
C. SERVICE AGREEMENTS
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 $28,700,000 in 1999, $16,344,000 in 1998, and $15,997,000 in 1997.
The Company leases office space to SLOC under lease agreements with terms
expiring in December, 2004 and options to extend the terms for each of twelve
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 1999 amounted to approximately $6,943,000.
18. 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
77
<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, 1999, 1998 AND 1997
18. RISK-BASED CAPITAL (CONTINUED)
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, 1999, 1998 and 1997.
19. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in pending and threatened litigation in the normal
course of its business in which claims for monetary and punitive damages have
been asserted. Although there can be no assurances, at the present time the
Company does not anticipate that the ultimate liability arising from such
pending or threatened litigation, after consideration of provisions made for
potential losses and costs of defense, will have a material adverse effect on
the financial condition or operating results of the Company.
Under insurance guaranty fund laws in each state, the District of Columbia and
Puerto Rico, insurers licensed to do business can be assessed by state insurance
guaranty associations for certain obligations of insolvent insurance companies
to policyholders and claimants. Recent regulatory actions against certain large
life insurers encountering financial difficulty have prompted various state
insurance guaranty associations to begin assessing life insurance companies for
the deemed losses. Most of these laws do provide, however, that an assessment
may be excused or deferred it it would threaten an insurer's solvency and
further provide annual limits on such assessments. Part of the assessments paid
by the Company and its subsidiaries pursuant to these laws may be used as
credits for a portion of the associated premium taxes. The Company incurred
guaranty fund assessments of approximately $3,500,000, $3,500,000, and
$3,083,000 in 1999, 1998 and 1997, respectively.
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 items. 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 life and investment-type products are recognized as income for
statutory purposes and as deposits to policyholders' accounts for GAAP.
Investments in fixed maturity securities classified as available-for-sale are
carried at aggregate fair value with changes in unrealized gains and losses
reported net of taxes in a separate component of stockholder's equity for GAAP
and generally at amortized cost under statutory accounting practices.
78
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Calculation of Performance Data.............................
Tax Deferred Accumulation...................................
Advertising and Sales Literature............................
Calculations................................................
Example of Variable Accumulation Unit Value Calculation...
Example of Variable Annuity Unit Calculation..............
Example of Variable Annuity Payment Calculation...........
Distribution of the Contracts...............................
Designation and Change of Beneficiary.......................
Custodian...................................................
Financial Statements........................................
</TABLE>
80
<PAGE>
This Prospectus sets forth information about the Contract and the Variable
Account that a prospective purchaser should know before investing. Additional
information about the Contract and the Variable Account has been filed with the
Securities and Exchange Commission in a Statement of Additional Information
dated April 10, 2000 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 (800) 752-7215.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
To: Sun Life Assurance Company of Canada (U.S.)
c/o Retirement Products and Services
P.O. Box 1024
Boston, Massachusetts 02103
Please send me a Statement of Additional Information for
MFS Regatta Extra Variable and Fixed Annuity
Sun Life of Canada (U.S.) Variable Account F.
</TABLE>
<TABLE>
<S> <C>
Name ------------------------------------------------------------
Address ------------------------------------------------------------
------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
City -------------------------------- State -------------- Zip -------
</TABLE>
<TABLE>
<S> <C>
Telephone ------------------------------------------------------------
</TABLE>
81
<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 365 days from the date on which we issued your Contract. Your Account
Anniversary is the last day of an Account Year. Each Account Year after the
first is the 365-day period that begins on your Account Anniversary. For
example, if the Contract Date is on March 12, the first Account Year is
determined from the Contract Date and ends on March 12 of the following year.
Your Account Anniversary is March 12 and all Account Years after the first are
measured from March 12. (If the Anniversary Date falls on a non-Business Day,
the previous Business Day will be used.)
ACCUMULATION PHASE: The period before the Annuity Commencement Date and
during the lifetime of the Annuitant during which you make Purchase Payments
under the Contract. This is called the "Accumulation Period" in the Contract.
*ANNUITANT: The person or persons to whom the first annuity payment is
made. If the Annuitant dies prior to the Annuity Commencement Date, the
Co-Annuitant will become the sole Annuitant. If the Co-Annuitant dies or if no
Co-Annuitant is named, the Participant becomes the Annuitant upon the
Annuitant's death prior to the Annuity Commencement Date. If you have not named
a sole Annuitant on the 30th day before the Annuity Commencement Date and both
the Annuitant and Co-Annuitant are living, the Co-Annuitant will be the sole
Annuitant/Payee during the Income Phase.
ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment
under each Contract is to be made.
ANNUITY OPTION: The method you choose for receiving 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 you or other evidence acceptable to
us that serves as your application for participation under a Group Contract or
purchase of an Individual 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.
CERTIFICATE: The document for each Participant which evidences the
coverage of the Participant under a Group Contract.
COMPANY: Sun Life Assurance Company of Canada (U.S.).
CONTRACT: Any Individual Contract, Group Contract or Certificate issued
under a Group Contract.
CONTRACT DATE: The date on which we issue your Contract. This is called
the "Date of Coverage" in the Contract.
*You specify these items on the Application, and may change them, as we describe
in this Prospectus.
82
<PAGE>
DEATH BENEFIT DATE: If you have elected a death benefit payment option
before the Annuitant's death that remains in effect, the date on which we
receive Due Proof of Death. 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 one lump sum.
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.
FIFTH-YEAR ANNIVERSARY: The fifth Account Anniversary and each succeeding
Account Anniversary occurring at any five year interval thereafter; for example,
the 10th, 15th, and 20th Account Anniversaries.
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 ANNUITY: An annuity with payments which do not vary as to dollar
amount.
FUND: A series of the Series Fund in which assets of a Sub-Account may be
invested.
GROUP CONTRACT: A Contract issued by the Company on a group basis.
GUARANTEE AMOUNT: Each separate allocation of Account Value to a
particular Guarantee Period (including interest earned thereon).
GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is
credited.
GUARANTEED INTEREST RATE: The rate of interest we credit on a compound
annual basis during any 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.
INDIVIDUAL CONTRACT: A Contract issued by the Company on an individual
basis.
NET INVESTMENT FACTOR: An index applied to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The Net
Investment Factor may be greater or less than or equal to one.
NET PURCHASE PAYMENT (NET PAYMENTS): The portion of a Purchase Payment
which remains after the deduction of any applicable premium tax or similar tax.
This is also the term used to describe the total contribution made to the
Contract minus the total withdrawals.
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, 408, or 408A of the Internal Revenue Code. The Participant's interest
in the Contract must be owned by a natural person or agent for a natural person
for the Contract to receive income tax treatment as an annuity.
*OWNER: The person, persons or entity entitled to the ownership rights
stated in a Group Contract and in whose name or names the Group 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), Section 408(k),
Section 408(p) or Section 408A 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 Group Contract.
*PARTICIPANT: In the case of an Individual Contract, the owner of the
Contract. In the case of a Group Contract, the person named in the Contract who
is entitled to exercise all rights and privileges
*You specify these items on the Application, and may change them, as we describe
in this Prospectus.
83
<PAGE>
of ownership under the Contract, except as reserved by the Owner. If there are 2
Participants, the death benefit is paid upon the death of either Participant.
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, or on the Annuity Commencement Date.
PURCHASE PAYMENT (PAYMENT): An amount paid to the Company as
consideration for the benefits provided by a Contract.
PURCHASE PAYMENT INTEREST: The amount of extra interest the Company
credits to a Contract at a rate of 2% to 5% of each purchase payment based upon
the size of the investment or Account Value or the interest rate option chosen
at the time of application.
QUALIFIED CONTRACT: A Contract used in connection with a retirement plan
which may receive favorable federal income tax treatment under Sections 401,
403, 408 or 408A of the Internal Revenue Code of 1986, as amended.
RENEWAL DATE: The last day of a Guarantee Period.
SUB-ACCOUNT: That portion of the Variable Account which invests in shares
of a specific Fund.
VALUATION PERIOD: The period of time from one determination of Variable
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.
VARIABLE ACCOUNT: Variable Account F 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.
84
<PAGE>
APPENDIX B
WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: VARIABLE ACCOUNT (THE MARKET VALUE ADJUSTMENT DOES NOT APPLY TO THE
VARIABLE ACCOUNT)
WITHDRAWAL CHARGE CALCULATION:
FULL WITHDRAWAL:
Assume a Purchase Payment of $40,000 is made on the Contract Date, no
additional Purchase Payments are made and there are no partial withdrawals. The
table below presents three examples of the withdrawal charge resulting from a
full withdrawal of your Account, based on hypothetical Account Values.
<TABLE>
<CAPTION>
PAYMENT
HYPOTHETICAL CUMULATIVE FREE SUBJECT TO WITHDRAWAL WITHDRAWAL
ACCOUNT ACCOUNT ANNUAL ANNUAL WITHDRAWAL WITHDRAWAL CHARGE CHARGE
YEAR VALUE EARNINGS EARNINGS AMOUNT CHARGE PERCENTAGE AMOUNT
--------------- ------------ ----------- ----------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(a) 1 $ 41,000 $ 1,000 $ 1,000 $ 4,000 $ 36,000 8.00% $ 2,880
2 $ 45,100 $ 4,100 $ 5,100 $ 4,000 $ 36,000 8.00% $ 2,880
3 $ 49,600 $ 4,500 $ 9,600 $ 4,100 $ 35,900 7.00% $ 2,513
(b) 4 $ 52,100 $ 2,500 $ 12,100 $ 4,500 $ 35,500 7.00% $ 2,485
5 $ 57,300 $ 5,200 $ 17,300 $ 4,000 $ 36,000 6.00% $ 2,160
6 $ 63,000 $ 5,700 $ 23,000 $ 5,200 $ 34,800 5.00% $ 1,740
7 $ 66,200 $ 3,200 $ 26,200 $ 5,700 $ 34,300 4.00% $ 1,372
(c) 8 $ 72,800 $ 6,600 $ 32,800 $ 4,000 $ 0 0.00% $ 0
</TABLE>
(a) The free withdrawal amount in any year is equal to the amount of any
Purchase Payments made prior to the last 7 Account Years ("Old Payments")
that were not previously withdrawn plus the greater of (1) the Contract's
earnings during the prior Account Year, and (2) 10% of any Purchase
Payments made in the last 7 Account Years ("New Payments"). In Account Year
1, the free withdrawal amount is $4,000, which equals 10% of the Purchase
Payment of $40,000. On a full withdrawal of $41,000, the amount subject to
a withdrawal charge is $36,000, which equals the New Payments of $40,000
minus the free withdrawal amount of $4,000.
(b) In Account Year 4, the free withdrawal amount is $4,500, which equals the
prior Account Year's earnings. On a full withdrawal of $52,100, the amount
subject to a withdrawal charge is $35,500.
(c) In Account Year 8, the free withdrawal amount is $4,000, which equals 10% of
the Purchase Payment of $40,000. On a full withdrawal of $72,800, the
amount subject to a withdrawal charge is $0, since equals the New Payments
equal $0.
PARTIAL WITHDRAWAL
Assume a single Purchase Payment of $40,000 is made on the Contract Date,
no additional Purchase Payments are made, no partial withdrawals have been taken
prior to the fourth Account Year, and there are a series of 4 partial
withdrawals made during the fourth Account Year of $4,100, $9,000, $12,000, and
$20,000.
<TABLE>
<CAPTION>
REMAINING
HYPOTHETICAL FREE AMOUNT OF
ACCOUNT WITHDRAWAL WITHDRAWAL
VALUE AMOUNT SUBJECT TO WITHDRAWAL
ACCOUNT BEFORE CUMULATIVE AMOUNT OF BEFORE WITHDRAWAL CHARGE
YEAR WITHDRAWAL EARNINGS EARNINGS WITHDRAWAL WITHDRAWAL CHARGE PERCENTAGE
--------------- ------------ ----------- ----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 41,000 $ 1,000 $ 1,000 $ 0 $ 4,000 $ 0 8.00%
2 $ 45,100 $ 4,100 $ 5,100 $ 0 $ 4,000 $ 0 8.00%
3 $ 49,600 $ 4,500 $ 9,600 $ 0 $ 4,100 $ 0 7.00%
(a) 4 $ 50,100 $ 500 $ 10,100 $ 4,100 $ 4,500 $ 0 7.00%
(b) 4 $ 46,800 $ 800 $ 10,900 $ 9,000 $ 400 $ 8,600 7.00%
(c) 4 $ 38,400 $ 600 $ 11,500 $ 12,000 $ 0 $ 12,000 7.00%
(d) 4 $ 26,800 $ 400 $ 11,900 $ 20,000 $ 0 $ 14,900 7.00%
<CAPTION>
WITHDRAWAL
CHARGE
AMOUNT
-----------
<S> <C>
$ 0
$ 0
$ 0
(a) $ 0
(b) $ 602
(c) $ 840
(d) $ 1,043
</TABLE>
85
<PAGE>
(a) In Account Year 4, the free withdrawal amount is $4,500, which equals the
prior Account Year's earnings. The partial withdrawal amount of $4,100 is
less than the free withdrawal amount, so there is no withdrawal charge.
(b) Since a partial withdrawal of $4,100 was taken, the remaining free
withdrawal amount in Account Year 4 is $4,500 - $4,000 = $400. Therefore,
$400 of the $9,000 withdrawal is not subject to a withdrawal charge, and
$8,600 is subject to a withdrawal charge.
(c) Since the total of the two prior Account Year 4 partial withdrawals
($13,100) is greater than the free withdrawal amount of $4,500, there is no
remaining free withdrawal amount. The entire withdrawal amount of $12,000
is subject to a withdrawal charge.
(d) Since the total of the three prior Account Year 4 partial withdrawals
($25,100) is greater than the free withdrawal amount of $4,500, there is no
remaining free withdrawal amount. Since the total amount of New Purchase
Payments was $40,000 and $25,100 of New Payments has already been assessed
a surrender charge, only $14,900 of this $20,000 withdrawal comes from
liquidating Purchase Payments. The remaining $5,100 of this withdrawal
comes from liquidating earnings and is not subject to a withdrawal charge.
Note that since all of the Purchase Payments were liquidated by the final
withdrawal of $20,000, the total withdrawal charge for the four Account Year 4
withdrawals is $2,485, which is the same amount that was assessed for a full
liquidation in Account Year 4 in the example on the previous page. Any
additional Account Year 4 withdrawals in the example shown on this page would
come from the liquidating of earnings and would not be subject to a withdrawal
charge.
PART 2 -- FIXED ACCOUNT -- EXAMPLES OF THE MARKET VALUE ADJUSTMENT ("MVA")
The MVA Factor is:
<TABLE>
<C> <C> <S> <C> <C>
N/12
1 + I
( ---------- ) - 1
1 + J + b
</TABLE>
These examples assume the following:
1) The Guarantee Amount was allocated to a 5-year Guarantee Period with
a Guaranteed Interest Rate of 6% or .06.
2) The date of surrender is 2 years from the Expiration Date (N = 24).
3) The value of the Guarantee Amount on the date of surrender is
$11,910.16.
4) The interest earned in the current Account Year is $674.16.
5) No transfers or partial withdrawals affecting this Guarantee Amount
have been made.
6) Withdrawal charges, if any, are calculated in the same manner as
shown in the examples in Part 1.
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of surrender, the current rate (J) is 8% or .08
and the b factor is zero.
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
N/12
1 + I
The MVA factor = ( ---------- ) - 1
1 + J + b
</TABLE>
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
24/12
1 + .06
= ( -------- ) - 1
1 + .08
2
= (.981) - 1
= .963 - 1
= - .037
</TABLE>
86
<PAGE>
The value of the Guarantee Amount less interest credited to the Guarantee
Amount in the current Account Year is multiplied by the MVA factor to determine
the MVA:
($11,910.16 - $674.16) X -.037 = -$415.73
-$415.73 represents the MVA that will be deducted from the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA
would be ($2,000.00 - $674.16) X -.037 = -$49.06. -$49.06 represents the MVA
that will be deducted from the partial withdrawal amount before the deduction of
any withdrawal charge.
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of surrender, the current rate (J) is 5% or .05
and the b factor is zero.
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
N/12
1 + I
The MVA factor = ( ---------- ) -1
1 + J + b
</TABLE>
<TABLE>
<C> <C> <S> <C> <C> <C> <C>
24/12
1 + .06
= ( -------- ) -1
1 + .05
2
= (1.010) -1
= 1.019 -1
= .019
</TABLE>
The value of the Guarantee Amount less interested credit to the Guarantee
Amount in the current Account Year is multiplied by the MVA factor to determine
the MVA:
($11,910.16 - $674.16) X .019 = $213.48
$213.48 represents the MVA that would be added to the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA
would be ($2,000.00 - $674.16) X .019 = $25.19.
$25.19 represents the MVA that would be added to the value of the partial
withdrawal amount before the deduction of any withdrawal charge.
87
<PAGE>
APPENDIX C
CALCULATION OF BASIC DEATH BENEFIT
EXAMPLE 1:
Assume a Purchase Payment of $60,000.00 is made on the Contract Date and
an additional Purchase Payment of $40,000.00 is made one year later. Assume that
all of the money is invested in the Variable Sub-Accounts, that no Withdrawals
are made and that the Account Value on the Death Benefit Date is $80,000.00. The
calculation of the Death Benefit to be paid is as follows:
<TABLE>
<CAPTION>
The Basic Death Benefit is the greatest of:
<S> <C> <C>
Account Value = $ 80,000.00
Cash Surrender Value = $ 74,400.00
Purchase Payments = $ 100,000.00
The Basic Death Benefit would therefore be: $ 100,000.00
</TABLE>
EXAMPLE 2:
Assume a Purchase Payment of $60,000.00 is made on the Contract Date and
an additional Purchase Payment of $40,000.00 is made one year later. Assume that
all of the money is invested in the Variable Sub-Accounts and that the Account
Value is $80,000.00 just prior to a $20,000.00 withdrawal. The Account Value on
the Death Benefit Date is $60,000.00.
<TABLE>
<S> <C> <C>
The Basic Death Benefit is the greatest of:
Account Value = $60,000.00
Cash Surrender Value = $55,200.00
Adjusted Purchase Payments* = $75,000.00
The Basic Death Benefit would therefore be: $75,000.00
*Adjusted Purchase Payments can be calculated as follows:
Payments X (Account Value after withdrawal / Account Value before withdrawal)
$100,000.00 X ($60,000.00/$80,000.00)
</TABLE>
88
<PAGE>
APPENDIX D
CALCULATION OF EARNINGS ENHANCEMENT OPTIONAL DEATH BENEFIT
EXAMPLE 1:
Assume a Purchase Payment of $60,000.00 is made on the Contract Date and
an additional Purchase Payment of $40,000.00 is made one year later. Assume that
all of the money is invested into the Variable Sub-Accounts, no withdrawals are
made and the Account Value on the Death Benefit Date is $150,000.00. In
addition, this Contract was issued prior to the owner's 70th birthday. The
calculation of the Basic Death Benefit to be paid is as follows:
<TABLE>
<CAPTION>
The Basic Death Benefit is the greatest of:
<S> <C> <C>
Account Value = $ 150,000.00
Cash Surrender Value = $ 72,800.00
Adjusted Purchase Payments = $ 100,000.00
The Basic Death Benefit would therefore be: $ 150,000.00
The rider benefit can be calculated as follows:
The lesser of:
Adjusted Purchase payments = $ 100,000.00
Account Value - adjusted Purchase Payments $ 50,000.00
Amount to use to determine rider benefit: $ 50,000.00
The amount to be paid on the rider benefit = $ 50,000.00 X 40% = $20,000.00
</TABLE>
The total Death Benefit would be the Basic Benefit plus the Optional
Death Benefit Rider a Purchase Payment of $60,000.00 is made on the Contract
Date and an additional Purchase Payment of $40,000.00 is made one year later.
Assume that all of the money is invested into the Variable Sub-Accounts, no
withdrawals are made and the Account Value on the Death Benefit Date is
$150,000.00. In addition, this Contract was issued prior to the owner's 70th
birthday. The calculation of the Basic Death Benefit to be paid is as follows:
<TABLE>
<S> <C>
The total Death Benefit would be the Basic Benefit plus the Optional.
$150,000.00 + $20,000.00 = $170,000.00
</TABLE>
EXAMPLE 2:
Assume a Purchase Payment of $60,000.00 is made on the Contract Date and
an additional Purchase Payment of $40,000.00 is made one year later. Assume that
all of the money is invested in the Variable Sub-Accounts and that the Account
Value is $150,000.00 just prior to a $20,000.00 withdrawal. The Account Value on
the Death Benefit Date is $130,000.00.
<TABLE>
<S> <C> <C>
The Basic Death Benefit is the greatest of:
Account Value = $ 130,000.00
Cash Surrender Value = $ 123,600.00
Adjusted Purchase Payments* = $ 86,666.67
The Basic Death Benefit would therefore be: $ 130,000.00
*Adjusted Purchase Payments can be calculated as follows:
Payments X (Account Value after withdrawal / Account Value before withdrawal)
$100,000.00 X ($130,000.00/$150,000.00)
The rider benefit can be calculated as follows:
The lesser of:
Adjusted Purchase payments = $ 86,666.67
Account Value - adjusted Purchase Payments $ 43,333.33
Amount to use to determine rider benefit: $ 43,333.33
The amount to be paid on the rider benefit = $ 43,333.33 X 40% = $17,333.33
</TABLE>
The total Death Benefit would be the amount paid on the Basic Death
Benefit plus the amount paid on the Earnings Enhancement Optional Death Benefit
Rider: $130,000.00 + $17,333.33 = $147,333.33
89
<PAGE>
APPENDIX E
CALCULATION OF DEATH BENEFIT WHEN ALL THREE DEATH BENEFITS RIDERS ARE SELECTED
Assume a Purchase Payment of $100,000.00 is made on the Contract Date, no
additional Purchase Payments or withdrawals are made and all of the money is
invested in the Variable Sub-Accounts. In addition, on the Death Benefit Date
the Account Value is $150,000.00, the value of the Purchase Payment accumulated
at 5% until the Death Benefit Date is $160,000.00 and that the Maximum Account
Anniversary Value is $170,000.00. The calculation of the death benefit to be
paid is as follows:
<TABLE>
<S> <C> <C>
The Death Benefit Amount will be the greatest of:
Account Value = $ 150,000.00
Cash Surrender Value = $ 142,800.00
Total of adjusted Purchase Payments = $ 100,000.00
5% Premium Roll-Up Rider = $ 160,000.00
Maximum Account Anniversary Value Rider = $ 170,000.00
The Death Benefit Amount would therefore be: $ 170,000.00
~ plus ~
The Earnings Enhancement Rider benefit is calculated as follows:
The lesser of:
Adjusted Purchase payments = $ 100,000.00
Account Value - adjusted Purchase Payments $ 50,000.00
Amount to use to determine this rider benefit: $ 50,000.00
The amount to be paid on the rider benefit = $ 50,000.00 X 40% = $20,000.00
</TABLE>
The total Death Benefit would be the amount paid on the Maximum Account
Anniversary Rider plus the amount paid on the Earnings Enhancement Rider:
$170,000.00 + $20,000.00 = $190,000.00
90
<PAGE>
APPENDIX F
CALCULATION FOR PURCHASE PAYMENT INTEREST (BONUS CREDIT)
EXAMPLE 1:
IF YOU SELECT OPTION A, the 2% Bonus Option, we will credit Purchase
Payment Interest on all Purchase Payments made during the first Account Year. On
each fifth Account Anniversary, we will credit additional Purchase Payment
Interest of 2% based on your Account Value, illustrated below:
Initial Purchase Payment of $50,000.00 receives 2% Purchase Payment
Interest of $1,000.00.
Subsequent Purchase Payment in the first Account Year of $20,000.00
receives 2% Purchase Payment Interest of $400.00.
Suppose the Account had not gained any earnings or interest during the
first 5 Account Years and the Account Value is $71,400.00 (sum of all Purchase
Payments and Purchase Payment Interest), we will credit your Account with an
additional 2% ($1,428.00).
Using the same Purchase Payments as above, suppose your value on the
fifth Account Anniversary is $74,970.00. We will credit your account with an
additional 2% of Purchase Payment Interest (equal to $1,499.40).
This 2% Purchase Payment Interest will occur on every fifth Account
Anniversary (i.e., 5th, 10th, 15th).
EXAMPLE 2: OPTION B WITH NO WITHDRAWALS
IF YOU SELECT OPTION B, the 3% Bonus Option the amount we will credit to
your Contract depends on the size of your Net Purchase Payments. The scale is as
follow:
<TABLE>
<S> <C>
Net Purchase Payments less than $100,000.00 will receive 3%
Net Purchase Payments between $100,000.00 through $499,999.99 will receive 4%
Net Purchase Payments greater than or equal to $500,000.00 will receive 5%
</TABLE>
Therefore, if your initial investment is $50,000.00, your Purchase
Payment Interest will equal 3% of $50,000, or $1500.00.
If you make additional Payments that cause your total Net Purchase
Payments to exceed $100,000.00, these Purchase Payments will receive either a 4%
or 5% bonus, using the above scale. As an example:
Initial Purchase Payment of $50,000.00 will receive 3% Purchase Payment
Interest. A second Purchase Payment of $80,000.00 will result in Net
Purchase Payments of $130,000.00. Thus, the $80,000.00 will receive
Purchase Payment Interest of 4% equal to $3,200.00.
Suppose a third Purchase Payment of $400,000.00 is made. This will bring
the Net Purchase Payments to $530,000.00. This $400,000.00 will receive
Purchase Payment Interest of 5% equal to $20,000.00.
This Account now has total Net Purchase Payments of $530,000.00 and total
Purchase Payment Interest of $24,700.00.
In addition to the Purchase Payment Interest paid at the time of each
Payment, we will review your first Account Anniversary to ensure that all Net
Purchase Payments received the Purchase Payment Interest as described in the
above scale. Using the above scenario as an example, upon the first Account
Anniversary, we will credit your Account an additional $1800.00, which is equal
to:
<TABLE>
<S> <C> <C>
Total Net Purchase Payments of $530,000.00 X 5% = $ 26,500.00
Total Purchase Payment Interest received = $ 24,700.00
------------
First Account Anniversary Adjustment = $ 1,800.00
</TABLE>
91
<PAGE>
EXAMPLE 3: OPTION B WITH A WITHDRAWAL
Using the same example as above, suppose that before the first Account
Anniversary you make a withdrawal of $20,000.00. The annual Purchase Payment
Interest adjustment would be calculated as follows:
Because your Net Purchase Payments are $510,000.00 ($530,000.00 -
$20,000.00 withdrawal), your Purchase Payment Interest on all Net Purchase
Payments should be 5%.
<TABLE>
<S> <C>
Your initial Payment of $50,000.00 received 3%
Your second Payment of $80,000.00 received 4%
Your third Payment of $400,000.00 received the 5%
</TABLE>
Your first two Payments minus the withdrawal will receive additional
Purchase Payment Interest. This will bring your total Net Purchase Payments up
to 5%.
<TABLE>
<S> <C> <C>
$50,000.00 X 2% = $ 1,000.00
$80,000.00 - $20,000.00 = $60,000.00 X 1% = $ 600.00
Total credit due = $ 1,600.00
</TABLE>
On your First Account Anniversary we will credit your Account with an
additional Purchase Payment Interest of $1600.00.
92
<PAGE>
<TABLE>
<S> <C>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
TELEPHONE:
Toll Free (800) 752-7215
GENERAL DISTRIBUTOR
Clarendon Insurance Agency, Inc.
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
AUDITORS
Deloitte & Touche LLP
200 Berkeley Street
Boston, Massachusetts 02116
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS.
Item 14. Other Expenses of Issuance and Distribution
Not applicable.
The expenses incurred by the registrant in connection with the issuance
and distribution of the securities registered hereby, other than underwriting
discounts and commissions, are as follows*:
<TABLE>
<S> <C>
SEC Registration Fee.................. $ 0**
Printing and Engraving................ 75,000
Accounting Fees and Expenses.......... 10,000
Legal Fees and Expenses............... 25,000
--------
$110,000
</TABLE>
- ----------------
*All expenses are estimates.
**No new SEC Registration Fees for 2000 are due.
Item 15. Indemnification of Directors and Officers
Article 8 of the By-Laws of Sun Life Assurance Company of Canada (U.S.)
provides for indemnification of directors and officers as follows:
"Section 8.01 (a). Every person who is or was a director, officer or
employee of this corporation or of any other corporation which he served at
the request of this corporation and in which this corporation owns or owned
shares of capital stock or of which it is or was a creditor shall have a
right to be indemnified by this corporation against all liability and
reasonable expenses incurred by him in connection with or resulting from any
claim, action, suit or proceeding in which he may become involved as a party
or otherwise by reason of his being or having been a director, officer or
employee of this corporation or such other corporation, provided (1) said
claim, action, suit or proceeding shall be prosecuted to a final
determination and he shall be vindicated on the merits, or (2) in the absence
of such a final determination vindicating him on the merits, the board of
directors shall determine that he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; said determination to
be made by the board of directors acting through a quorum of disinterested
directors, or in its absence on the opinion of counsel.
(b) For purposes of the preceding subsection: (1) "liability and
reasonable expenses" shall include but not be limited to reasonable counsel
fees and disbursements, amounts of any judgment, fine or penalty, and
reasonable amounts paid in settlement; (2) "claim, action, suit or
proceeding" shall include every such claim, action, suit or proceeding,
whether civil or criminal, derivative or otherwise, administrative, judicial
or legislative, any appeal relating thereto, and shall include any reasonable
apprehension or threat of such a claim, action, suit or proceeding; (3) a
settlement, plea of nolo contendere, consent judgment, adverse civil
judgment, or conviction shall not of itself create a presumption that the
conduct of the person seeking indemnification did not meet the standard of
conduct set forth in subsection (a)(2) hereof.
II-1
<PAGE>
(c) Notwithstanding the foregoing, the following limitations shall
apply with respect to any action by or in the right of the Corporation: (1)
no indemnification shall be made in respect of any claim, issue or matter as
to which the person seeking indemnification shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
corporation unless and only to the extent that the Court of Chancery of the
State of Delaware or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper; and (2) indemnification shall
extend only to reasonable expenses, including reasonable counsel's fees and
disbursements.
(d) The right of indemnification shall extend to any person otherwise
entitled to it under this by-law whether or not that person continues to be a
director, officer or employee of this corporation or such other corporation
at the time such liability or expense shall be incurred. The right of
indemnification shall extend to the legal representative and heirs of any
person otherwise entitled to indemnification. If a person meets the
requirements of this by-law with respect to some matters in a claim, action,
suit or proceeding, but not with respect to others, he shall be entitled to
indemnification as the former. Advances against liability and expenses may
be made by the corporation on terms fixed by the board of directors subject
to an obligation to repay if indemnification proves unwarranted.
(e) This by-law shall not exclude any other rights of indemnification or
other rights to which any director, officer or employee may be entitled to by
contract, vote of the stockholders or as a matter of law. If any clause,
provision or application of this section shall be determined to be invalid,
the other clauses, provisions or applications of this section shall not be
affected but shall remain in full force and effect. The provisions of this
by-law shall be applicable to claims, actions, suits or proceedings made or
commenced after the adoption hereof, whether arising from acts or omissions
to act occurring before or after the adoption hereof.
(f) Nothing contained in this by-law shall be construed to protect any
director or officer of the corporation against any liability to the
corporation or its security holders to which he would otherwise be subject by
reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office."
II-2
<PAGE>
Item 16. Exhibits
Exhibits:
Exhibit
Number Description
1 Form of Underwriting Agreement (Incorporated by
reference from Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-4, File No. 333-37907,
filed on January 16, 1998.)
4(a) Form of Flexible Payment Combination
Fixed/Variable Group Annuity
Contract (Incorporated by reference from
Pre-Effective Amendment No.1 to the
Registration Statement on Form N-4.
File No. 333-82957, filed on
September 29, 1999.)
4(b) Form of Certificate to be issued in
connection with Contract filed as
Exhibit 4(a) (Incorporated by reference from
Pre-Effective Amendment No.1 to the
Registration Statement on Form N-4.
File No. 333-82957, filed on
September 29, 1999.)
4(c) Form of Flexible Payment Combination Fixed/
Variable Individual Annuity
Contract (Incorporated by reference from
Pre-Effective Amendment No.1 to the
Registration Statement on Form N-4.
File No. 333-82957, filed on
September 29, 1999.)
5 Legality Opinion (Incorporated by reference from Post-Effective
Amendment No.1 to the Registration Statement on Form N-4,
File No. 333-82957, filed February 3, 2000.)
(10)(a) Form of Participation Agreement by and between The Alger
American Fund, the Depositor, and Fred Alger and Company,
Incorporated (Incorporated by reference to Post-Effective
Amendment No. 13 to the Registration Statement on Form N-4,
File No. 33-41628, filed April 23, 1999.)
(b)(i) Form of Participation Agreement dated February 17, 1998 by
and between Goldman Sachs Variable, Insurance Trust, Goldman
Sachs & Co. and the Depositor (Incorporated by reference to
Post-Effective Amendment No. 13 to the Registration
Statement on Form N-4, File No. 33-41628, filed
April 23, 1999.)
(ii) Form of Amendment No. 1 dated December 14, 1998 to
Participation Agreement filed as Exhibit 8(b)(i)
(Incorporated by reference to Post-Effective Amendment No. 13
to the Registration Statement on Form N-4, File
No. 33-41628, filed April 23, 1999.)
(iii) Form of Amendment No. 2 dated as of March 15, 1999 to
Participation Agreement filed as Exhibit 8(b)(i)
(Incorporated by reference to Post-Effective Amendment No.
13 to the Registration Statement on Form N-4, File
No. 33-41628, filed April 23, 1999.)
(c) Form of Fund Participation Agreement between Depositor and
J.P. Morgan Services Trust II (Incorporated by reference to
Post-Effective Amendment No. 13 to the Registration
Statement on Form N-4, File No. 33-41628, filed April 23,
1999.)
(d) Form of Participation Agreement dated February 17, 1998 by
and among MFS/Sun Life Services Trust, the Depositor and
Massachusetts Financial Services Company (Incorporated by
reference to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-4, File No. 33-41628,
filed April 23, 1999.)
(e) Form of Participation Agreement dated February 17, 1998 by
and among OCC Accumulation Trust, the Depositor and OCC
Distributors (Incorporated by reference to Post-Effective
Amendment No. 13 to the Registration Statement on Form
N-4, File No. 33-41628, filed April 23, 1999.)
(f) Form of Participation Agreement dated February, 1998 by and
among the Depositor, Warburg Pincus Trust, Warburg Pincus
Asset Management, Inc. and Counsellors Securities, Inc.
(Incorporated by reference to Post-Effective Amendment No.
13 to the Registration Statement on Form N-4, File
No. 33-41628, filed April 23, 1999.)
(g) Form of Participation Agreement dated February 17, 1998 by
and amomg the Depositor, AIM Variable Insurance Funds, Inc.,
AIM Distributors, Inc., and Claredon Insurance Agency, Inc.
(Incorporated by reference to Post-Effective Amendment No. 1
to the Registration Statement on Form N-4, File No.
333-82957, filed February 3, 2000.)
(h) Form of Participation Agreement dated August 18, 1999 by and
among the Depositor, Sun Capital Advisers Trust and Sun
Capital Advisers, Inc. (Incorporated by reference to
Post-Effective Amendment No. 1 to the Registration
Statement on Form N-4, File No. 333-82957, filed February 3,
2000.)
23 Independent Auditors' Consent *
24(a) Powers of Attorney (Incorporated by reference from the Registration
Statement on Form S-6, File No. 333-94359, filed January 10, 2000.)
(b) Power of Attorney of David D. Horn (Incorporated by reference from
Post-Effective Amendment No.1 to the Registration Statement on Form
N-4, File No. 333-8295; filed February 3, 2000.)
* Filed herewith.
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement;
II-3
<PAGE>
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (a)(1)(i) and a(1)(ii) do
not apply if the registration statement is on Form S-3 or Form S-8,
and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in
the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, Sun Life Assurance Company of Canada (U.S.), certifies that it
has reasonable grounds to believe that it meets all of the requirements for
filing on Form S-2 and has duly caused this Registration Statement on Form
S-2 to be signed on its behalf by the undersigned, thereunto duly authorized,
in the Town of Wellesley Hills, Commonwealth of Massachusetts, on the 31st
day of March, 2000.
Sun Life Assurance Company of
Canada (U.S.)
(Registrant)
By: /s/ JAMES A. MCNULTY, III
-------------------------
James A McNulty, III
President
Pursuant to the requirements of the Securities Act of 1933, this Form S-2
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ JAMES A. MCNULTY, III President and Director
- ---------------------------- (Principal Executive Officer) March 31, 2000
James A. McNulty, III
/s/ DAVEY S. SCOON Vice President, Finance,
- ---------------------------- and Treasurer
Davey S. Scoon (Principal Financial &
Accounting Officer) March 31, 2000
* /s/ DONALD A. STEWART Chairman and March 31, 2000
- ---------------------------- Director
Donald A. Stewart
* /s/ C. JAMES PRIEUR Vice President and March 31, 2000
- ---------------------------- Director
C. James Prieur
Director
- ----------------------------
Richard B. Bailey
- ----------------------------
* By Edward M. Shea pursuant to Power of Attorney filed as an Exhibit to the
Registration Statement on Form S-6, File No. 333-94359, filed January 10, 2000.
II-5
<PAGE>
SIGNATURE TITLE DATE
** /s/ DAVID D. HORN Director March 31, 2000
- --------------------------------
David D. Horn
* /s/ GREGORY W. GEE Director March 31, 2000
- --------------------------------
Gregory W. Gee
* /s/ ANGUS A. MACNAUGHTON Director March 31, 2000
- --------------------------------
Angus A. MacNaughton
* /s/ S. CAESAR RABOY Director March 31, 2000
- --------------------------------
S. Caesar Raboy
- -------------------------------- Director
William W. Stinson
- -----------------------
* By Edward M. Shea pursuant to Power of Attorney filed as an Exhibit to the
Registration Statement on Form S-6, File No. 333-94359, filed January 10, 2000.
** By Edward M. Shea pursuant to Power of Attorney filed as an Exhibit to
Post-Effective Amendment No. 1 to the Registration Statement on Form N-4, File
No. 333-82957, filed February 3, 2000.
II-6
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to the Registration Statement
(Reg. No. 333-88069) of Sun Life Assurance Company of Canada (U.S.) on Form S-2
of our report dated February 10, 2000 accompanying the statutory financial
statements of Sun Life Assurance Company of Canada (U.S.), which includes
explanatory paragraphs relating to the use of statutory accounting practices
which differ from generally accepted accounting principles, appearing in the
Prospectus for Futurity Accolade Variable and Fixed Annuity and in the
Prospectus for MFS Regatta Extra Variable and Fixed Annuity, which are part of
such Registration Statement, and to the incorporation by reference of our report
dated February 10, 2000 appearing in the Annual Report on Form 10-K of Sun Life
Assurance Company of Canada (U.S.) for the year ended December 31, 1999, which
includes explanatory paragraphs relating to the use of statutory accounting
practices which differ from generally accepted accounting principles.
We also consent to the references to us under the headings "Accountants" and
"Appendix B -- Condensed Financial Information -- Accumulation Unit Values" in
such Prospectus for Futurity Accolade Variable and Fixed Annuity and under the
heading "Accountants" in such Prospectus for MFS Regatta Variable and Fixed
Annuity.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 31, 2000
