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File Nos. 333-12197
811-4092
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. 2 [ X ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 27 [ X ]
FIRST VARIABLE ANNUITY FUND E
(Exact Name of Registrant)
FIRST VARIABLE LIFE INSURANCE COMPANY
(Name of Depositor)
2122 York Road
Oak Brook, IL 60523
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's telephone number including area code: (630)586-5000
Name and Address of Agent for Service
Arnold R. Bergman
Vice President, General Counsel and Secretary
First Variable Life Insurance Company
2122 York Road
Oak Brook, IL 60523
Copies to:
Raymond A. O'Hara III, Esq.
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866
It is proposed that this filing will become effective:
_____ immediately upon filing pursuant to paragraph (b) of Rule 485
X on May 1, 1998 pursuant to paragraph (b) of Rule 485 60 days
_____ after filing pursuant to paragraph (a)(1) of Rule 485
_____ on (date) pursuant to paragraph (a)(1) of Rule 485.
If appropriate, check the following:
_____ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Interests Under Variable Annuity
Contracts.
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FIRST VARIABLE ANNUITY FUND E
CROSS REFERENCE SHEET
(Pursuant to Rule 495(a))
Item No. in
Form N-4
PART A Location
- ------ --------
Item 1. Cover Page Cover Page
Item 2. Definitions Definitions
Item 3. Synopsis or Highlights Highlights
Item 4. Condensed Financial Accumulation Unit Data;
Information Financial Statements
Item 5. General Description of The Company; The Separate
Registrant, Depositor and Account; Variable Investors
Portfolio Companies Series Trust; Federated
Insurance Series
Item 6. Deductions Charges and Deductions
Item 7. General Description of The Contracts
Variable Annuity Contracts
Item 8. Annuity Period Annuity Provisions
Item 9. Death Benefit The Contracts; Annuity Provisions
Item 10. Purchases and Contract Value Purchase Payments; Contract Value
Item 11. Redemptions Withdrawals
Item 12. Taxes Tax Considerations
Item 13. Legal Proceedings Legal Proceedings
Item 14. Table of Contents of Statement Table of Contents of Statement
of Additional Information of Additional Information
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Item No. in
Form N-4 Location
PART B
Item 15. Cover Page......................................Cover Page
Item 16. Table of Contents...............................Table of Contents
Item 17. General Information and History.................Company
Item 18. Services........................................Not Applicable
Item 19. Purchase of Securities Being Offered............Not Applicable
Item 20. Underwriters....................................Distributor
Item 21. Calculation of Performance Data.................Performance Information
Item 22. Annuity Payment.................................Annuity Provisions
Item 23. Financial Statements............................Financial Statements
PART C
Information required to included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
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PART A
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Prospectus Dated: May 1, 1998
CAPITAL SIX VA
A VARIABLE ANNUITY CONTRACT
FUNDED IN
FIRST VARIABLE ANNUITY FUND E
BY
FIRST VARIABLE LIFE INSURANCE COMPANY
Marketing and Executive Office: Variable Service Center:
2122 York Road P.O. Box 1317
Oak Brook, IL 60523 Des Moines, IA 50305-1317
Automated Information Line: (800) 59-FUNDS (800) 228-1035
This prospectus describes the Capital 6 VA contract (the "Contract"), an
individual flexible payment deferred variable annuity contract issued by First
Variable Life Insurance Company (the "Company"). The Contract provides for
accumulation of Contract Values and payment of monthly annuity payments on a
fixed and variable basis. The Contract is designed for use by individuals in
tax-qualified retirement plans (a "Qualified Contract") or for other long-term
savings and retirement purposes (a "Non-Qualified Contract").
Purchase Payments for a Contract may be allocated to the Company's segregated
investment account called First Variable Annuity Fund E (the "Separate Account")
or to the Company's Fixed Account. The Separate Account invests in selected
Portfolios of two mutual funds: Variable Investors Series Trust ("VIST") and
Federated Insurance Series ("Federated"). The Portfolios currently available
under a Contract are: VIST Small Cap Growth, VIST World Equity, VIST Growth,
VIST Matrix Equity, VIST Growth & Income, VIST Multiple Strategies, VIST High
Income Bond, VIST U.S. Government Bond, and Federated Prime Money Fund II (the
"Portfolios"). (See "Investment Options.") The Company reserves the right, under
certain circumstances, to delay the investment of initial Purchase Payments in
VIST Portfolios, but does not currently do so. (See "Application and Issuance of
a Contract.")
An investment in a Contract is not a deposit or obligation of, or guaranteed or
endorsed by, any financial institution, nor is a Contract federally insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other agency. An investment in the Contract is subject to risk that may cause
the value of the Owner's investment to fluctuate, and when the Contract is
surrendered, the value may be higher or lower than the Purchase Payment.
This prospectus contains information that an investor should know before
investing. A Statement of Additional Information about the Contract and the
Separate Account, which has the same date as this prospectus, has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. The table of contents of the Statement of Additional Information can
be found on page ___ of this Prospectus. For a copy of the Statement of
Additional Information, which is available at no cost, write the Company at its
Variable Service Center or call the number shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
;OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS ACCOMPANIED BY THE CURRENT PROSPECTUSES OF THE VARIABLE
INVESTORS SERIES TRUST AND FEDERATED INSURANCE SERIES. ALL PROSPECTUSES SHOULD
BE READ AND RETAINED FOR FUTURE REFERENCE.
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TABLE OF CONTENTS
PAGE
DEFINITIONS................................................................
HIGHLIGHTS.................................................................
FEE TABLE AND EXAMPLES.....................................................
ACCUMULATION UNIT DATA.....................................................
THE COMPANY................................................................
THE SEPARATE ACCOUNT.......................................................
INVESTMENT OPTIONS.........................................................
Variable Investors Series Trust..........................................
Federated Insurance Series...............................................
Fixed Account Option.....................................................
Transfers Among Investment Options.......................................
Prior to the Annuity Date...........................................
During the Annuity Period...........................................
General Requirements................................................
Systematic Transfers - Dollar Cost Averaging........................
Asset Rebalancing Program...........................................
Restrictions on Transfers
Automatic Transfer of Small Accounts
Telephone Transactions.....................................................
Changes to Investment Options..............................................
CHARGES AND DEDUCTIONS.....................................................
Administrative Charge....................................................
Annual Contract Maintenance Charge.......................................
Mortality and Expense Risk Charge........................................
Optional Enhanced Death Benefit Charge...................................
Premium Taxes............................................................
Withdrawal Charge........................................................
Withdrawal Charge Percentages.......................................
Partial Withdrawals.................................................
Free Withdrawal Amount..............................................
Waiver of Withdrawal Charge.........................................
Purpose of Contract Charges..............................................
Other Charges and Expenses...............................................
Fund Expenses.......................................................
Income Taxes........................................................
Special Service Fees................................................
Elimination or Reduction of Charges and Expenses...................
THE CONTRACT...............................................................
Application and Issuance of a Contract...................................
Free Look Right.....................................................
Delayed Investment Allocation Date..................................
Purchase Payments........................................................
General Requirements................................................
Conversion to Accumulation Units....................................
Automatic Investment Plan...........................................
Contract Value...........................................................
Accumulation Unit Value.............................................
Reports..................................................................
Ownership................................................................
Assignment..........................................................
Change of Designations...................................................
Owner....................................................................
Annuitant...........................................................
Beneficiary.........................................................
Restrictions on Qualified Contracts.................................
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Minimum Value Requirements...............................................
Termination of Small Accounts.......................................
Transfer of Small Contract Value....................................
DEATH BENEFIT PROVISIONS...................................................
Death of the Annuitant..................................................
Death of the Owner......................................................
Basic Death Benefit.................................................
Bonus Death Benefit.................................................
Optional Enhanced Death Benefit.....................................
Payment of Death Benefit.................................................
Owners Other than a Single Person........................................
Beneficiaries............................................................
ANNUITY PROVISIONS.........................................................
Annuity Date ............................................................
Annuity Payments.........................................................
Allocation..........................................................
Amount..............................................................
Annuitization Bonus.................................................
Variable Annuity Payments...........................................
Annuity Options..........................................................
Option A. Life Annuity..............................................
Option B. Life Annuity with Periods Certain of 60, 120, 180 or 240
Months...........................................................
Option C. Joint and Survivor Annuity................................
Option D. Joint and Contingent Annuity..............................
Option E. Fixed Payments for a Period Certain.......................
Misstatement of Age or Sex...............................................
WITHDRAWALS................................................................
Partial Withdrawals......................................................
Systematic Withdrawals...................................................
Tax Penalties and
Restrictions.............................................................
Texas Optional Retirement Program........................................
Suspension of Payments or Transfers......................................
PERFORMANCE INFORMATION....................................................
Federated Prime Money Fund II Portfolio..................................
Other Portfolios.........................................................
TAX CONSIDERATIONS.........................................................
General..................................................................
Death Benefits...........................................................
Diversification..........................................................
Contracts Owned by Other than Natural Persons............................
Multiple Contracts.......................................................
Income Tax Withholding...................................................
Withdrawals from Non-Qualified Contracts.................................
Qualified Plans..........................................................
H.R. 10 Plans......................................................
403(b) Annuities....................................................
Traditional IRAs and Roth IRAs
Corporate Pension and Profit-Sharing Plans..........................
Section 457 Plans...................................................
Withdrawals from Qualified Contracts.....................................
Tax Sheltered Annuities - Withdrawal Limitations.........................
OTHER MATTERS..............................................................
Financial Statements....................................................
Distribution............................................................
Legal Proceedings.......................................................
Transfers by Company....................................................
Voting Rights...........................................................
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION...............
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DEFINITIONS
ACCOUNT - Fixed Account and/or one or more of the Sub-Accounts of the Separate
Account.
ACCUMULATION PERIOD - The period during which Purchase Payments may be made
prior to the Annuity Date.
ACCUMULATION UNIT - A unit of measure used to calculate the Contract Value of a
Sub-Account of the Separate Account prior to the Annuity Date.
ACCUMULATION UNIT VALUE or AUV - The value of an Accumulation Unit on a Business
Day.
ANNUITANT - The natural person on whose life Annuity Payments are based.
ANNUITY DATE - The date on which Annuity Payments begin.
ANNUITY PAYMENTS - The series of payments made to the Annuitant, or other payee
selected by the Owner, after the Annuity Date under the Annuity Option elected.
ANNUITY PERIOD -The period after the Annuity Date during which Annuity Payments
are made.
ANNUITY UNIT - A unit of measure used to calculate Variable Annuity Payments
after the Annuity Date.
BENEFICIARY - The person(s) or entity who will receive the death benefit.
BUSINESS DAY - Each day that the New York Stock Exchange is open for trading,
which is Monday through Friday, except for the following holidays: New Year's
Day, Martin Luther King Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, Christmas Day.
COMPANY - First Variable Life Insurance Company.
CONTRACT ANNIVERSARY - An anniversary of the Issue Date.
CONTRACT QUARTER - One quarter of a Contract Year. The first Contract Quarter
begins on the Issue Date and ends on the last Business Day of the third contract
month.
CONTRACT VALUE - The sum of the amounts attributable to a Contract that
are: (a) in the Separate Account; and (b) in the Fixed Account.
CONTRACT YEAR - One year from the Issue Date and from each Contract Anniversary.
DISTRIBUTOR - First Variable Capital Services, Inc., 2122 York Road, Oak Brook,
Illinois 60523.
FIXED ACCOUNT - The Fixed Account is the portion of the Contract Value that is
part of the Company's general account. The Fixed Account provides guarantees of
principal and interest and is not part of the Separate Account.
FIXED ACCOUNT VALUE - The Owner's interest in the Fixed Account during the
Accumulation Period.
FIXED ANNUITY PAYMENTS - A series of payments made during the Annuity Period
which are guaranteed as to dollar amount by the Company.
FUNDS - Variable Investors Series Trust and Federated Insurance Series, each of
which is an open-end management investment company in which the Separate Account
invests.
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INVESTMENT OPTION - The Fixed Account or any of the Sub-Accounts of the Separate
Account which can be selected by the Owner of a Contract.
ISSUE DATE - The date on which the first Contract Year begins.
NON-QUALIFIED CONTRACTS - Contracts issued under retirement plans, or for other
purposes, which do not receive favorable tax treatment under Sections 401,
403(b), 408, 408A or 457 of the Internal Revenue Code.
OWNER - The person, persons or entity entitled to all the ownership rights under
a Contract and in whose name a Contract has been issued.
PORTFOLIO - A Fund's separate and distinct class of shares that is available as
an underlying investment under a Contract.
PURCHASE PAYMENT - An amount paid to the Company to provide benefits under the
Contract.
QUALIFIED CONTRACTS - Contracts issued under retirement plans which receive
favorable tax treatment under Sections 401, 403(b), 408, 408A or 457 of the
Internal Revenue Code.
SEPARATE ACCOUNT - A separate investment account of the Company, designated as
First Variable Annuity Fund E, into which Purchase Payments or Contract Values
may be allocated.
SUB-ACCOUNT - A segment of the Separate Account which invests in a specified
Portfolio of one of the Funds.
VALUATION PERIOD - The period of time between the close of one Business Day and
the close of business for the next succeeding Business Day.
VARIABLE ACCOUNT VALUE - The Owner's interests in the Sub-Accounts of the
Separate Account during the Accumulation Period, which vary in amount with the
investment experience of each applicable Sub-Account.
VARIABLE ANNUITY PAYMENTS - A series of payments made during the Annuity Period
which varies in amount with the investment experience of each applicable
Sub-Account.
VARIABLE SERVICE CENTER - The Company's administrative service center for a
Contract is located at 1206 Mulberry Street, Des Moines, IA 50309. The mailing
address is P.O. Box 1317, Des Moines, IA 50305-1317.
WITHDRAWAL VALUE - The value of a Contract that is available during the
Accumulation Period upon withdrawal or surrender. The Withdrawal Value is also
used to determine Annuity Payments that begin during the first 2 Contract Years.
Withdrawal Value equals the Contract Value as of the date the Company prices the
transaction, less:
- - any applicable taxes not previously deducted; less the Withdrawal Charge,
if
- - any; less the Annual Contract Maintenance Charge, if any; less the
Optional
- - Enhanced Death Benefit Charge, if any.
HIGHLIGHTS
Capital Six VA is an individual flexible payment variable annuity contract (the
"Contract"). The Owner may allocate Purchase Payments among ten Investment
Options under a Contract issued by First Variable Life Insurance Company (the
"Company"). Nine of these options are Sub-Accounts of First Variable Annuity
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Fund E (the "Separate Account"), a segregated investment account of the Company.
Purchase Payments and Contract Value may also be allocated to the Fixed Account.
Each Sub-Account invests exclusively in shares of a corresponding Portfolio of a
selected mutual fund (a "Fund"). The selected Funds are Variable Investors
Series Trust ("VIST") and Federated Insurance Series ("Federated"). The
Portfolios currently available are: VIST Small Cap Growth, VIST World Equity,
VIST Growth, VIST Matrix Equity, VIST Growth & Income, VIST Multiple Strategies,
VIST High Income Bond, VIST U.S. Government Bond, and Federated Prime Money Fund
II (the "Portfolios"). (See "Investment Options.") Owners bear the investment
risk for any amounts allocated to a Sub-Account.
Owners have the right to return a Contract according to the terms of its
"free-look" right. The Company reserves the right to delay initial investments
of Purchase Payments in the VIST Portfolios in certain instances, but it does
not currently do so. (See "Application and Issuance of a Contract.")
Purchase Payments and other Contract Value allocated to the Fixed Account Option
are guaranteed by the Company as to safety of principal and are credited a
minimum 3% rate of interest on an annual basis. The Company, in its discretion,
may credit a higher "current" interest rate. (See "Fixed Account Option.")
The Contract is subject to the following charges and deductions:
Daily Deductions - composed of the following:
- - an administrative charge at an annualized rate of .25% of the average
daily net assets in each Sub-Account.
- - a mortality and expense risk charge at an annualized rate of 1.25% of the
average daily net assets in each Sub-Account.
Annual Deductions - composed of the following:
- - a contract maintenance charge of $30 if Contract Value is less than
$100,000.
- - an enhanced death benefit charge - if an Optional Enhanced Death Benefit
is elected, a charge is made each year until the earlier of surrender, the
Annuity Date or the Owner's 80th birthday at an annualized rate of 0.35%
of Contract Value.
Transaction Fees - a Withdrawal Charge of up to 7% of Purchase Payments may be
deducted during the first 6 Contract Years for a withdrawal or surrender of all
or a portion of the Contract Value. The Withdrawal Charge will also apply if
Contract Value is applied to an Annuity Option within the first 2 Contract
Years. (See "Annuity Provisions.") No Withdrawal Charge will be taken in any
Contract Year on a partial withdrawal unless the amount withdrawn exceeds the
annual Free Withdrawal Amount. The annual Free Withdrawal Amount is equal to 15%
of Purchase Payments. The Withdrawal Charge will vary in amount, depending upon
the Contract Year(s) in which the Purchase Payment(s) are made.
Premium Taxes - premium taxes or other taxes payable to a state or other
governmental entity will be charged against the Purchase Payments or Contract
Value.
For more information about each of these charges and deductions, see the
"Charges and Deductions" section of this prospectus.
Fund Expenses - other deductions and expenses are paid out of the assets of the
Portfolios of a Fund, which are described in the accompanying prospectuses for
the Funds.
A ten percent (10%) federal income tax penalty may be applied to the income
portion of any distribution from a Non-Qualified Contract before the Owner
reaches age 59 1/2, with certain exceptions. Separate tax withdrawal penalties
and restrictions apply to a Qualified Contract. Special restrictions apply to
distributions from a 403(b) annuity. (See "Tax Considerations--Withdrawals from
Non-Qualified Contracts," and "Withdrawals from Qualified Contracts," and
"Withdrawal Limitations on 403(b) Annuities.")
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For a further discussion on the taxation of a Contract, see "Tax Considerations"
and "Tax Considerations--Diversification" for a discussion of owner control of
the underlying investments in a variable
annuity contract.
VARIOUS CONTRACT RIGHTS, BENEFITS, AND INVESTMENT OPTIONS DESCRIBED IN THIS
PROSPECTUS MAY NOT BE AVAILABLE IN ALL JURISDICTIONS, OR MAY DIFFER BETWEEN
JURISDICTIONS TO MEET APPLICABLE LOCAL LAWS AND/OR REGULATIONS.
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FEE TABLE AND EXAMPLES
The charges and deductions under a Contract are summarized in the following
table. This table is designed to help an Owner understand direct and indirect
costs for a Contract, but should be read only in conjunction with the detailed
descriptions in the "Charges and Deductions" section of this prospectus. The
table assumes that the entire Contract Value is invested in the Separate
Account, and reflects expenses of the Separate Account as well as the
Portfolios. Owners should read the accompanying prospectuses of the Funds
carefully for further information concerning the expenses shown for each
Portfolio. In addition to the expenses listed below, a charge for premium taxes
may be applicable.
OWNER TRANSACTION EXPENSES
Withdrawal Charge (see Note 1 below) 7%, reducing by 1% each Contract Year
(as a percentage of Purchase Payment) after the Issue Date until the beginning
of the seventh Contract Year, when the
charge is 0%.
Annual Contract Maintenance Charge $30 per Contract Year if Contract Value
on a Contract Anniversary is less than
$100,000.
Optional Enhanced Death Benefit Charge .35% (as a percentage of Contract Value
(see Note 2 below) at the time the charge is taken each
Contract Year until earlier of
surrender, Annuity Date or the Owner's
80th birthday).
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average Variable Account Value)
Mortality and Expense Risk Charge 1.25%
Administrative Charge .25%
-----
Total Separate Account Annual 1.50%
Expenses
FUNDS' ANNUAL EXPENSES
(as a percentage of the average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
Other Operating
Management Expenses (After Total Annual
Portfolio Fees Reimbursement) Expenses
--------- ---- -------------- --------
<S> <C> <C> <C>
VIST Small Cap Growth .85% .50% 1.35%
VIST World Equity .70% .50% 1.20%
VIST Growth .70% .40% 1.10%
VIST Matrix Equity .65% .50% 1.15%
VIST Growth & Income .75% .50% 1.25%
VIST Multiple Strategies .70% .49% 1.19%
VIST High Income Bond .70% .50% 1.20%
VIST U.S. Government Bond .60% .25% .85%
Federated Prime Money Fund II .55% .25% .80%
</TABLE>
EXAMPLES
An Owner would pay the following expenses on a $1,000 investment in a Contract,
assuming a 5% annual return on assets and allocation of 100% of Contract Value
to the Portfolio shown:
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a) upon surrender at the end of each time period (or if the Contract is
annuitized during the first 2 Contract Years);
b) if the Contract is not surrendered: (or if the Contract is
annuitized after the first 2 Contract Years).
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
VIST Small Cap Growth a) $101 $145 $189 $328
b) $ 30 $ 91 $156 $328
VIST World Equity a) $100 $140 $181 $313
b) $ 28 $ 87 $148 $313
VIST Growth a) $ 99 $135 $175 $298
b) $ 27 $82 $140 $298
VIST Matrix Equity a) $ 99 $139 $179 $308
b) $ 28 $ 85 $145 $308
VIST Growth & Income a) $100 $142 $184 $318
b) $ 29 $ 88 $150 $318
VIST Multiple Strategies a) $100 $140 $181 $313
b) $ 28 $ 87 $148 $313
VIST High Income Bond a) $100 $140 $181 $313
b) $ 28 $ 87 $148 $313
VIST U.S. Government Bond a) $ 97 $130 $164 $278
b) $ 25 $ 76 $130 $278
Federated Prime Money Fund II a) $ 96 $129 $162 $272
b) $ 24 $ 75 $128 $272
</TABLE>
NOTES ON FEE TABLES AND EXAMPLES
1. After the second Contract Year, the entire Contract Value may be applied to
an Annuity Option and no Withdrawal Charge will be taken. In each Contract Year
during the Accumulation Period, an Owner may request a "partial withdrawal" of
an amount of up to 15% of Purchase Payments without a Withdrawal Charge. Amounts
so withdrawn do not reduce the Purchase Payments subject to a withdrawal charge.
The 15% free withdrawal has not been factored into the Examples above, and is
not available on a full surrender.
2. If an Optional Enhanced Death Benefit is elected by the Owner at time of
application for a Contract, the Company deducts an annual charge on each
Contract Anniversary during the Accumulation Period until the earlier of the
Annuity Date or the Owner's 80th birthday. Also, the charge is taken if the
Annuity Date is other than a Contract Anniversary or if a Contract is
surrendered during a Contract Year, based on the Contract Value at that time.
The examples do not reflect this charge. If this charge were included, the
dollar amounts shown in the examples above would be higher. (See "Charges and
Deductions--Optional Enhanced Death Benefit Charge.")
3. First Variable Advisory Services Corp., the investment adviser to VIST, has
agreed through April 1, 1999 to reimburse VIST for operating expenses (exclusive
of management fees) in excess of .50% of a VIST Portfolio's average net assets
(.25% in the case of the VIST U.S. Government Bond Portfolio). Had this
investment adviser not reimbursed expenses of the VIST Portfolios, for the year
ended December 31, 1997, the VIST annual expenses, as a percentage of the
Portfolio's average daily net assets, would have been 1.79% for the VIST Small
Cap Growth Portfolio; 1.47% for the VIST World Equity Portfolio; 1.54% for the
VIST Matrix Equity Portfolio; 1.60% for the VIST Growth & Income Portfolio;
1.21% for the VIST Multiple Strategies Portfolio; 1.64% for the VIST High Income
Bond Portfolio; and 1.73% for the VIST U.S. Government Bond Portfolio. Federated
Advisors, the investment adviser for Federated, has voluntarily agreed to waive
any portion of its fee and/or reimburse certain operating expenses of Federated
in excess of .80% of the Federated Prime Money Fund II Portfolio's average net
assets, but can modify or terminate this voluntary agreement at any time at its
sole discretion. Had this investment adviser not waived expenses and/or
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reimbursed expenses of the Federated Prime Money Fund II Portfolio for the year
ended December 31, 1997, the annual expenses, as a percentage of the Portfolio's
average assets, would have been 1.00%.
4. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
ACCUMULATION UNIT DATA
(for a unit outstanding throughout the period)
The following condensed financial information is derived from the financial
statements of the Separate Account (Policy Form 20230). The information should
be read in conjunction with the financial statements, related notes and other
financial information for the Separate Account included in the Statement of
Additional Information. The financial statements and report of independent
auditors of the Company are also contained in the Statement of Additional
Information.
<TABLE>
<CAPTION>
PERIOD ENDED PERIOD ENDED PERIOD ENDED
12/31/97 12/31/96 12/31/95
-------- -------- --------
<S> <C> <C> <C>
GROWTH SUB-ACCOUNT (1)
Beginning of Period $ 12.57 $ 10.14 $ 10.00
End of Period $ 15.31 $ 12.57 $ 10.14
Number of Accum. Units Outstanding 106,746 30,672 6,026
GROWTH & INCOME SUB-ACCOUNT
Beginning of Period (5/31/95) $ 11.75 $ 10.63 $ 10.00
End of Period $ 14.84 $ 11.75 $ 10.63
Number of Accum. Units Outstanding 152,210 51,500 2,754
HIGH INCOME BOND SUB-ACCOUNT
Beginning of Period $ 11.45 $ 10.17 $ 10.00
End of Period $ 12.80 $ 11.45 $ 10.17
Number of Accum. Units Outstanding 114,612 30,956 1,905
MATRIX EQUITY SUB-ACCOUNT (2)
Beginning of Period $ 10.94 $ 10.62 $ 10.00
End of Period $ 13.16 $ 10.94 $ 10.62
Number of Accum. Units Outstanding 43,263 11,951 918
MULTIPLE STRATEGIES SUB-ACCOUNT
Beginning of Period $ 11.84 $ 10.15 $ 10.00
End of Period $ 14.10 $ 11.84 $ 10.15
Number of Accum. Units Outstanding 77,185 30,934 5,995
PRIME MONEY FUND II SUB-ACCOUNT (3)
Beginning of Period $ 10.39 $ 10.06 $ 10.00
End of Period $ 10.74 $ 10.39 $ 10.06
Number of Accum. Units Outstanding 89,012 39,582 0
SMALL CAP GROWTH SUB-ACCOUNT (4)
Beginning of Period (5/4/95) $ 13.01 $ 10.36 $ 10.00
End of Period $ 12.91 $ 13.01 $ 10.36
Number of Accum. Units Outstanding 112,393 25,465 2,212
U.S. GOVERNMENT BOND SUB-ACCOUNT
Beginning of Period $ 10.39 $ 10.30 $ 10.00
End of Period $ 11.19 $ 10.39 $ 10.30
Number of Accum. Units Outstanding 63,534 43,540 7,532
WORLD EQUITY SUB-ACCOUNT
Beginning of Period $ 11.33 $ 10.24 $ 10.00
End of Period $ 12.28 $ 11.33 $ 10.24
Number of Accum. Units Outstanding 75,105 37,590 3,989
</TABLE>
(1) Prior to May 1, 1997, the Growth Sub-Account was known as the "Common
Stock Sub-Account."
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<PAGE> 15
(2) Prior to May 1, 1997, the Matrix Equity Sub-Account was known as the "Tilt
Utility Sub-Account" and had different investment policies.
(3) On January 2, 1997, shares of Federated Prime Money Fund II were
substituted for shares of the VIST Cash Management Portfolio. Accumulation
Unit Values prior to that date are based on the value of VIST Cash
Management Portfolio shares held for the periods shown.
(4) Prior to May 1, 1997, the Small Cap Growth Sub-Account was known as the
"Small Cap Sub-Account."
THE COMPANY
First Variable Life Insurance Company (the "Company") is a stock life insurance
company which was organized under the laws of the State of Arkansas in 1968. The
Company is principally engaged in the business of variable life insurance,
variable annuities and fixed annuities. The Company is licensed in 49 states,
the District of Columbia and the U.S. Virgin Islands. The Company is a
wholly-owned subsidiary of Irish Life of North America, Inc. ("ILoNA") which, in
turn, is beneficially owned by Irish Life plc ("Irish Life"). ILoNA also owns
Interstate Assurance Company of Des Moines, Iowa and Guarantee Reserve Life
Insurance Company of Calumet City, Illinois. Irish Life was formed in 1939
through a consolidation of a number of Irish and British Life offices
transacting business in Ireland. In terms of assets, Irish Life controls over
50% of the Irish domestic life insurance market. As Ireland's leading
institutional investor, it owns in excess of 10% of the leading Irish publicly
traded stocks. Irish Life, through its international subsidiaries, conducts
business in Ireland, the United Kingdom, the United States, and France. As of
the end of 1997, the Irish Life consolidated group had in excess of $14 billion
in assets. ILoNA is a Delaware corporation, incorporated as Carrig
International, Inc. in 1986.
The Company has an A- (Excellent) rating from A.M. Best, an independent firm
that analyzes insurance carriers. This rating is assigned to companies that have
a strong ability to meet obligations to policy holders over a long period of
time. The Company also has an AA- rating from Standard and Poor's and an AA
rating from Duff & Phelps Credit Rating Co. on claims paying ability. The
financial strength of the Company may be relevant with respect to the Company's
ability to satisfy its obligations under the Contracts.
THE SEPARATE ACCOUNT
The Company authorized the establishment of First Variable Annuity Fund E
("Separate Account"), a segregated asset account, pursuant to Arkansas insurance
law on December 4, 1979. The Separate Account is registered with the Securities
and Exchange Commission as a unit investment trust under the Investment Company
Act of 1940, as amended.
The assets of the Separate Account are the property of the Company. However, the
assets of the Separate Account, equal to the reserves and other contract
liabilities with respect to the Separate Account, are not chargeable with
liabilities arising out of any other business the Company may conduct. Income,
gains and losses, whether or not realized, are, in accordance with the
Contracts, credited to or charged against the Separate Account without regard to
other income, gains or losses of the Company. The Company's general account also
supports all of the Company's obligations, including those arising under the
Contracts. The Separate Account meets the definition of a "separate account"
under the federal securities laws.
The Separate Account is divided into Sub-Accounts, with the assets of each
Sub-Account invested in one Portfolio of a selected Fund. Owners bear the
complete investment risk for Purchase Payments and Contract Value allocated or
transferred to a Sub-Account. Contract Values fluctuate in accordance with the
investment performance of the Sub-Account(s), and reflect the imposition of fees
and charges assessed under a Contract.
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<PAGE> 16
INVESTMENT OPTIONS
Owners of a Contract may allocate Purchase Payments and Contract Value to one or
more Sub-Accounts of the Separate Account and to the Fixed Account. Each
Sub-Account invests exclusively in a Portfolio of a selected Fund. A brief
summary of the Funds and the investment objectives of the currently available
Portfolios is set forth below. More comprehensive information, including a
discussion of potential risks, is found in the current prospectuses for the
Portfolios which are included with this prospectus. The prospectuses for the
Funds may describe other portfolios that are not available under a Contract.
THERE IS NO ASSURANCE THAT THE AVAILABLE PORTFOLIOS WILL ACHIEVE THEIR STATED
OBJECTIVES. Investors should read this prospectus and the prospectuses for the
Funds carefully before investing. To obtain prospectuses for the Funds, write
the Company at its Variable Service Center or call the number shown on the cover
page.
VARIABLE INVESTORS SERIES TRUST
Variable Investors Series Trust ("VIST") is an open-end management investment
company that was formed as a series trust to provide funding options for
variable life insurance and variable annuity contracts. Effective April 1, 1994,
VIST retained First Variable Advisory Services Corp. ("FVAS") to manage its
assets. FVAS is a wholly-owned subsidiary of the Company and retains the
services of sub-advisers under agreements to manage the assets of the VIST
Portfolios. The sub-advisers for the VIST Portfolios currently available under a
Contract are: Value Line, Inc. with respect to VIST Growth and Multiple
Strategies; Warburg Pincus Asset Management, Inc. with respect to VIST Growth &
Income; Federated Investment Counseling with respect to VIST High Income Bond;
Pilgrim Baxter & Associates, Ltd. with respect to VIST Small Cap Growth; State
Street Bank and Trust Company with respect to VIST Matrix Equity; Strong Capital
Management, Inc. with respect to VIST U.S. Government Bond; and Keystone
Investment Management Co. with respect to VIST World Equity.
Each Portfolio has a distinct investment objective and policy. The investment
objectives of the Portfolios available under a Contract are:
VIST Small Cap Growth. The investment objective of this Portfolio is to seek
capital appreciation. The Portfolio will invest, under normal conditions, at
least 65% of its total assets in securities of companies with small
capitalization (market capitalization or annual revenues under $1 billion at the
time of purchase).
VIST World Equity. The investment objective of this Portfolio is to maximize
long-term total return by investing primarily in common stocks, and securities
convertible into common stocks, traded in securities markets located in
countries around the world, including the United States. See "Foreign
Investments" under "Policies and Techniques Applicable to all Portfolios" in the
VIST prospectus for a discussion of the risks involved in investing in foreign
securities.
VIST Growth. The investment objective of this Portfolio is capital growth, which
it seeks to achieve through a policy of investing primarily in a diversified
portfolio of common stocks and securities convertible into or exchangeable for
common stock. The secondary objective is current income, when consistent with
its primary objective.
VIST Matrix Equity. The investment objective of this Portfolio is capital
appreciation and current income. The Portfolio will seek to achieve its
investment objective by investing in a diversified portfolio that is selected by
the Sub-Adviser on the basis of its proprietary analytical model. Sector weights
are normally maintained at a similar level to that of the S&P 500 Index. The
Portfolio will invest at least 65% of its total assets in equity securities.
VIST Growth & Income. The investment objectives of this Portfolio are to provide
current income and growth of capital. The Portfolio seeks to achieve its
objectives by investing in equity securities, fixed income securities and money
market instruments. The portion of the Portfolio invested at any given time in
each of
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<PAGE> 17
these asset classes will vary depending on market conditions, and there may be
extended periods when the Portfolio is primarily invested in one of them. In
addition, the amount of income derived from the Portfolio will fluctuate
depending on the composition of the Portfolio's holdings and will tend to be
lower when a higher portion of the Portfolio is invested in equity securities.
The Portfolio may also purchase without limitation dollar-denominated American
Depository Receipts ("ADRs"). ADRs are issued by domestic banks and evidence
ownership of underlying foreign securities.
VIST Multiple Strategies. The investment objective of this Portfolio is to seek
as high a level of total return over an extended period of time as is considered
consistent with prudent investment risk by investing in equity securities,
bonds, and money market instruments in varying proportions.
VIST High Income Bond. The investment objective of this Portfolio is to obtain
as high a level of current income as is believed to be consistent with prudent
investment management. As a secondary objective, the Portfolio seeks capital
appreciation when consistent with its primary objective. The Portfolio seeks to
achieve its investment objectives by investing primarily in fixed income
securities rated lower than A. Many of the high yield securities in which the
Portfolio may invest are commonly referred to as "junk bonds." For special risks
involved with investing in such securities (including among others, risk of
default and illiquidity) see "Investment Objectives and Policies of the
Portfolios -- High Income Bond Portfolio" in the VIST prospectus.
VIST U.S. Government Bond. The investment objective of this Portfolio is to seek
current income and preservation of capital through investment primarily in
securities issued or guaranteed as to principal and interest by the U.S.
Government or by its agencies, authorities, or instrumentalities.
FEDERATED INSURANCE SERIES
Federated Insurance Series ("Federated") is an open-end investment management
company that was formed as a series trust to provide funding options for
variable life insurance and variable annuity contracts. Pursuant to an
investment advisory contract with Federated, investment decisions for Federated
are made by Federated Advisers, an affiliate of Federated Investment Counseling.
Federated Prime Money Fund II. The investment objective of the Portfolio is to
provide current income consistent with stability of principal and liquidity. The
Fund pursues its investment objective by investing exclusively in a portfolio of
money market instruments maturing in 397 days or less. An investment in the
Federated Prime Money Fund II Portfolio is neither insured nor guaranteed by the
U.S. Government.
FIXED ACCOUNT OPTION
This Prospectus is generally intended to describe the Contract and Separate
Account. Because of certain exemptive and exclusionary provisions, interests in
the Fixed Account are not registered under the Securities Act of 1933 and the
Fixed Account is not registered as an investment company under the Investment
Company Act of 1940, as amended. Accordingly, neither the Fixed Account nor any
interests therein are subject to the provisions of these Acts, and the Company
has been advised that the staff of the Securities and Exchange Commission has
not reviewed the disclosures in the Prospectus relating to the Fixed Account.
The Company guarantees that it will credit interest to Contract Value in the
Fixed Account at a minimum rate of 3% per year. Additional amounts of "current"
interest may be credited by the Company in its sole discretion. The initial
current interest rate will be guaranteed for at least one year. New Purchase
Payments and transfers of Contract Value from the Separate Account allocated to
the Fixed Account may each receive different current interest rate(s) than the
current interest rate(s) credited to Contract Value existing in the Fixed
Account. The Company determines current interest rates in advance and credits
interest daily to Fixed Account Value.
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<PAGE> 18
TRANSFERS AMONG INVESTMENT OPTIONS
An Owner may transfer Contract Value among Investment Options each
Contract Year without a transfer fee. Transfers may be initiated by
either written or telephone request. (See "Telephone Transactions.")
Prior to the Annuity Date. Contract Value to be transferred from the Fixed
Account to other Investment Options in any Contract Year may not exceed:
- - 25% of the Fixed Account on the Issue Date for transfers during the first
Contract Year; or
- - for transfers after the first Contract Year, the greater of 25% of Fixed
Account Value on the immediately preceding Contract Anniversary or 100% of
the Fixed Account Value transferred to other Investment Options during the
immediately preceding Contract Year.
During the Annuity Period. The Owner may make a transfer once each Contract
Year: (i) from one or more Sub-Accounts to other Sub-Accounts; or (ii) to the
Fixed Account. No transfers will be permitted from the Fixed Account to the
Separate Account. Amounts transferred from a Sub-Account to the Fixed Account
are subject to certain procedures set out in the Contract.
General Requirements. All transfers are subject to the following:
- - The minimum amount which may be transferred is the lesser of (i) $1,000;
or (ii) the Owner's entire interest in the applicable Sub-Account or Fixed
Account.
- - Any transfer instruction must clearly specify the amount which is to be
transferred and the Accounts which are to be affected.
- - The Company reserves the right at any time and without prior notice to any
party to modify, suspend or terminate the transfer privileges, including,
but not limited to, the description in "Suspension of Payments or
Transfers."
Systematic Transfers - Dollar Cost Averaging. The Company permits systematic
transfers, such as a dollar cost averaging program, that an Owner may initiate
by telephone or by written request to the Company at its Variable Service
Center. Through systematic transfers, designated amounts are systematically
transferred on the last Business Day of each pre-selected period from a selected
Investment Option to other pre-selected Investment Options. The Owner may select
from among the following periods, or any other period acceptable to the Company:
monthly, quarterly, semi-annually or annually. The dollar cost averaging program
permits transfers from the Federated Prime Money Fund II Sub-Account or the
Fixed Account to other Sub-Account(s) on a regularly scheduled basis. Through
use of systematic transfers, instead of transfers of the total Contract Value at
one particular time, an Owner may be less susceptible to the impact of market
fluctuations. Systematic transfers may prevent investing too much when the price
of shares is high and too little when the price of shares is low. However, since
systematic transfers, such as dollar cost averaging, involve continuous
investment regardless of fluctuating price levels, the purchaser should consider
his ability to continue purchases through periods of low price levels. The
minimum amount which may be transferred is $100. The Company requires $1,200 of
Account Value to be in the Prime Money Fund II Sub-Account or the Fixed Account,
as applicable, before a "dollar cost averaging" program may begin. Transfers
from the Fixed Account are also subject to the restrictions above, except that
100% of amounts in the Fixed Account may be systematically transferred prior to
the Annuity Date if transfers are made monthly for a one year period. The
Company does not currently charge for enrolling in the dollar cost averaging
program, but reserves the right to do so. (See "Special Service Fees.")
Asset Rebalancing Program. The Company administers an asset rebalancing program
that an Owner may initiate by telephone or by written request to the Company at
its Variable Service Center. The asset rebalancing program enables the Owner to
indicate to the Company the percentage levels of Contract Value he or she would
like to maintain in particular Sub-Accounts. On the last Business Day of each
pre-selected period, the Contract Value will be automatically rebalanced to
maintain the indicated percentages by transfers among the Investment Options.
The Owner may select from among the following periods, or any other period
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<PAGE> 19
acceptable to the Company: quarterly, semi-annually or annually. All Contract
Value allocated to the Separate Account Investment Options must be included in
the asset rebalancing program. Asset rebalancing involving transfers from the
Fixed Account are subject to the restrictions described above. Other investment
programs, such as systematic transfers and systematic withdrawals, or other
transfers or withdrawals may not work in concert with the asset rebalancing
program. Therefore, Owners should monitor their use of these programs and other
transfers or withdrawals while the asset rebalancing program is being used.
The Company does not currently charge for enrolling in the asset rebalancing
program, but reserves the right to do so. (See "Special Service Fees.")
Restrictions on Transfers. Programmed or other frequent requests to transfer
Investment Options by, or on behalf of, an Owner may have a detrimental effect
on the Fund share values held in the Separate Account. The Company may,
therefore, limit the number of permitted transfers in any Contract Year, or
refuse to honor any transfer request on behalf of an Owner or a group of Owners
if it is informed that the purchase or redemption of shares of one or more of
the Portfolios is to be restricted because of excessive trading, or if a
specific transfer or group of transfers is deemed to have a detrimental effect
on AUV or Portfolio share prices.
The Company may also at any time suspend or cancel its acceptance of third party
authorizations on behalf of an Owner or restrict the Investment Options that
will be available for transfers. Notice will be provided to the third party in
advance of the restrictions. The restrictions will not be imposed, however, if
the Company is given satisfactory evidence that: (a) the third party has been
appointed by the Owner to act on the Owner's behalf for all financial affairs;
or (b) the third party has been appointed by a court of competent jurisdiction
to act on the Owner's behalf.
Automatic Transfer of Small Accounts. The Company reserves the right, to the
extent permitted by law, on any Business Day to transfer Contract Value held in
any Investment Option if the Contract Value in that Investment Option is less
than $250, to the Investment Option with the then highest Contract Value. (See
"The Contract--Minimum Value Requirements.")
TELEPHONE TRANSACTIONS
An Owner may initiate various transactions by telephone. The Variable Service
Center (1-800-228-1035) is available for telephone transfers of Account Value,
notification of change of address, change of premium allocations among
Investment Options, partial withdrawal requests and systematic withdrawals.
The Company's automated information line (1-800-59-FUNDS) is available for
current information on Accumulation Unit Values, current Account Value, and for
telephone transfers of Account Value.
If there are joint owners of a Contract, unless the Company is informed to the
contrary, instructions will be accepted from either one of the joint owners.
Requests for transfers or reallocations by telephone will be automatically
permitted. The Company will use reasonable procedures such as requiring certain
identifying information from the caller, tape recording the telephone
instructions, and providing written confirmation of the transaction, in order to
confirm that instructions communicated by telephone are genuine. Any telephone
instructions reasonably believed by the Company to be genuine will be the
Owner's responsibility, including losses arising from any errors in the
communication of instructions. As a result of this, the Owner will bear the risk
of loss. If the Company does not employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, the Company may be liable
for any losses due to dishonored or fraudulent instructions.
CHANGES TO INVESTMENT OPTIONS
New Sub-Accounts may be established and additional Portfolios or mutual funds
may be made available by the Company when, in its sole discretion, it determines
that conditions so warrant. Any new Sub-Accounts
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<PAGE> 20
may be made available to existing Owners on a basis to be determined by the
Company. Each additional Sub-Account will purchase shares in a Portfolio of a
Fund, or in another mutual fund or investment vehicle.
The Company does not guarantee that continued purchase of Portfolio shares will
remain appropriate in view of the purposes of the Separate Account. If shares of
a Portfolio are no longer available for investment by the Separate Account, or,
if in the judgment of the Company, further investment in the shares should
become inappropriate in view of the purpose of the Contracts, the Company may
limit further purchase of these shares or may substitute shares of another
Portfolio, or mutual fund or other investment option for shares already
purchased or to be purchased in the future. No substitution of securities may
take place without prior approval of the Securities and Exchange Commission and
under the requirements it may impose. The Company will send prior notice of any
substitution to Contract Owners.
CHARGES AND DEDUCTIONS
Various charges and deductions are made from Contract Value and the Separate
Account. These are:
ADMINISTRATIVE CHARGE
The Company deducts on each Business Day, both prior to and during the Annuity
Period, an Administrative Charge which is equal to a percentage of the daily net
assets in each Sub-Account for this class of Contract. The annual rate for this
charge is .25%.
ANNUAL CONTRACT MAINTENANCE CHARGE
During the Accumulation Period, the Company deducts an Annual Contract
Maintenance Charge of $30 from the Contract Value on each Contract Anniversary.
However, if the Contract Value on a Contract Anniversary is at least $100,000,
then no Annual Contract Maintenance Charge will be deducted. If a total
withdrawal is made on other than a Contract Anniversary, and the Contract Value
at the time is less than $100,000, then the Annual Contract Maintenance Charge
will be deducted.
This charge is deducted by subtracting values from the Fixed Account and/or
canceling Accumulation Units from each applicable Sub-Account in the ratio that
the value of each Account bears to the total Contract Value. If the Annuity Date
is not a Contract Anniversary, the Annual Contract Maintenance Charge will be
deducted on the Annuity Date. After the Annuity Date, no Annual Contract
Maintenance Charge is taken.
MORTALITY AND EXPENSE RISK CHARGE
The Company deducts on each Business Day, both prior to and during the Annuity
Period, a Mortality and Expense Risk Charge which is equal to a percentage of
the daily net assets in each Sub-Account of the Separate Account for this class
of Contract. The annual rate for this charge is 1.25%.
The mortality and expense risk charge is guaranteed by the Company and cannot be
increased.
OPTIONAL ENHANCED DEATH BENEFIT CHARGE
An Owner may elect an enhanced death benefit at the time of application for a
Contract. This benefit guarantees that upon death of the Owner while the
enhanced death benefit is in effect, the death benefit payable under the
Contract will be at least equal to the sum of Purchase Payments less amounts
attributable to Withdrawals (including applicable charges), accumulated at an
annual rate of 4.5% up to a maximum amount equal to twice the sum of Purchase
Payments. The enhanced death benefit ends on the earliest of: (a) the date of
the Owner's death; (b) the Owner's 80th birthday; or (c) the Annuity Date. The
enhanced death benefit may also end if a new owner is designated. If this option
is elected, the Company deducts an Enhanced Death Benefit Charge on each
Contract Anniversary prior to the earlier of the Annuity Date or the Owner's
80th
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<PAGE> 21
birthday based on the Contract Value on the Contract Anniversary. The charge is
also deducted on the Annuity Date if the Annuity Date is on a date other than a
Contract Anniversary, at the time of surrender, or if the Contract is
surrendered based on the Contract Value at that time. The Enhanced Death Benefit
Charge is equal to .35% of the Contract Value at the time the charge is taken.
The charge is assessed pro-rata among the Investment Options under a Contract,
and will result in a cancellation of Accumulation Units credited to a Contract
and reduction in Fixed Account Value. (See "Death of the Owner.")
PREMIUM TAXES
Premium taxes or other taxes payable to a state or other governmental entity
will be charged against the Contract Values. The Company currently intends to
deduct premium taxes when incurred. Some states assess premium taxes at the time
Purchase Payments are made; others assess premium taxes at the time annuity
payments begin. Premium taxes generally range from 0% to 4%.
WITHDRAWAL CHARGE
The Company imposes a Withdrawal Charge on the withdrawal or surrender of
Contract Value during the first 6 Contract Years. (See "Withdrawals.") The
Withdrawal Charge is also imposed on the Annuity Date if the Annuity Date is
within the first 2 Contract Years. (See "Annuity Provisions--Annuity Date.")
The Withdrawal Charge is determined by applying the Withdrawal Charge
percentages shown below to the Purchase Payments deemed withdrawn, surrendered
or applied to an Annuity Option. The charge will vary depending on the Contract
Year. Purchase Payments are deemed withdrawn in the order in which they are
made. The amount deducted from the Contract Value will be determined by
subtracting values from the Fixed Account and/or canceling Accumulation Units
from each applicable Sub-Account in the ratio that the value of each Account
bears to the total Contract Value, unless another method is requested and the
Company approves the request.
Withdrawal Charge Percentages. The Withdrawal Charge percentages are:
Contract Year 1 2 3 4 5 6 7+
Withdrawal Charge Percentage 7% 6% 5% 4% 3% 2% 0%
Partial Withdrawals. Prior to the Annuity Date, an Owner may make partial
withdrawals each Contract Year provided that the minimum Contract Value after
each partial withdrawal is $1,000. A partial withdrawal may be requested by
either written or telephone request. (See "Telephone Transactions.") A partial
withdrawal must be for at least $1,000 or, if less, the Owner's entire interest
in the Investment Option from which the partial withdrawal is requested to be
taken. (See "Withdrawals--Systematic Withdrawals.") The Withdrawal Charge on a
partial withdrawal is deducted from the remaining Contract Value, if sufficient;
otherwise it is deducted from the amount withdrawn. Unless the Owner requests
otherwise, partial withdrawals will ordinarily result in the cancellation of
Accumulation Units from each Sub-Account and a reduction in Fixed Account Value
in the ratio that each Sub-Account and the Fixed Account bears to the total
Contract Value. (See "Withdrawals.")
Withdrawal requests that would result in remaining Withdrawal Value of less than
$1,000 may be deemed a surrender and termination of the Contract. (See "Minimum
Value Requirements - Termination of Small Accounts.")
Free Withdrawal Amount. No Withdrawal Charge will be taken on a partial
withdrawal unless the amount withdrawn exceeds the Free Withdrawal Amount. In
any Contract Year, the annual Free Withdrawal Amount for partial withdrawals is
equal to 15% of Purchase Payments. These 15% withdrawals do not reduce Purchase
Payments for purposes of computing the Withdrawal Charge. The Withdrawal Charge
will apply to the amount withdrawn or surrendered during any of the first 6
Contract Years that exceeds 15% of Purchase
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<PAGE> 22
Payments. The unused portion of the Free Withdrawal Amount for one Contract Year
will not carry over to the next Contract Year. The Free Withdrawal Amount is not
available on a total surrender or on withdrawal requests that fail to meet the
minimum remaining Contract Value requirement for a partial withdrawal. (See
"Minimum Value Requirements - Termination of Small Accounts.")
Waiver of Withdrawal Charge. The Company will waive the Withdrawal Charge:
- - If any death benefits are paid; or
- - If the Contract Value is applied after the first 2 Contract Years to an
Annuity Option. (See "Annuity Provisions.")
Subject to state availability, the Company will also waive the Withdrawal
Charge:
- - If the Owner or Owner's spouse is diagnosed with a terminal illness. The
Company may require evidence of such illness, including an examination by
a licensed physician of the Company's choice; or
- - After the first Contract Year if the Owner or the Owner's spouse is
confined for the immediately preceding 90 consecutive days in a qualifying
nursing home.
To qualify for a waiver of charges based on confinement in a qualifying nursing
home, the Owner or the Owner's spouse, as the case may be, must never have been
confined in a qualifying nursing home on or before the date of application for
the Contract.
Owners should review their Contracts carefully for a complete description of the
terminal illness and nursing home waiver of charges requirements.
PURPOSE OF CONTRACT CHARGES
The charges under the Contracts are designed to cover, in the aggregate, the
Company's direct and indirect costs of selling, administering and providing
benefits under the Contracts. They are also designed, in the aggregate, to
compensate the Company for the risks it assumes pursuant to the Contracts. These
include mortality risks (such as the risk that Annuitants or Owners may, on
average, cause the guaranteed death benefit to be greater than the Company
expects, thereby increasing the amount of claims the Company must pay);
investment risks (such as the risk that adverse investment performance will make
it more costly to provide guaranteed death benefits under the Contracts or
reduce the amount of the Company's asset-based fee revenues below what the
Company anticipates); sales risks (such as the risk that the number of Contracts
sold and the premiums received (net of withdrawals) are less than the Company
expects thereby depriving the Company of expected economies of scale);
regulatory risks (such as the risk that tax or other regulations may be changed
in ways adverse to issuers of variable annuity contracts); and expense risks
(such as the risk that the costs of administrative services that the Company
must provide will exceed what the Company currently projects).
If, as expected, the charges that the Company collects from the Contracts exceed
its total costs in connection with the Contracts, the Company will earn a
profit. Otherwise it will incur a loss. The rates of certain of the Company's
charges have been set with reference to estimates of the amount of specific
types of expenses or risks that the Company will incur. In some cases, this
prospectus identifies such expenses or risks in the name of the charge: e.g.,
the administrative charge, optional enhanced death benefit charge, and mortality
and expense risk charge. However, the fact that any charge bears the name of a
particular expense or risk does not mean that the amount the Company collects
from that charge will never be more than the amount of such expense or risk, or
that the Company may not also be compensated for such expense or risk out of any
other charges the Company is permitted to deduct by the terms of the Contracts.
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<PAGE> 23
OTHER CHARGES AND EXPENSES
Fund Expenses. There are other deductions from, and expenses paid out of, the
assets of the Portfolios of a Fund which are described in the accompanying
prospectuses for the Funds.
Income Taxes. While the Company is not currently reducing Contract Value for
federal income taxes of the Separate Account, the Company reserves the right to
do so if it determines, in its sole discretion, that it will incur a tax as a
result of the operation of the Separate Account. The Company will deduct for any
income taxes incurred by it as a result of the operation of the Separate Account
whether or not there was a Company reserve for taxes and whether or not it was
sufficient.
The Company will deduct any withholding taxes required by applicable law when
amounts are distributed from a Contract. (See "Tax Status--Income Tax
Withholding.")
Special Service Fees. The Company may charge Owners for special services, such
as additional reports, systematic withdrawals, dollar cost averaging, the asset
rebalancing program and minimum distributions. As of the date of this
Prospectus, it does not charge for these special services.
Elimination or Reduction of Charges and Expenses. The charges and expenses on a
Contract may be reduced or eliminated, in whole or in part, when sales of a
Contract are made to individuals or to a group of individuals in a manner that
results in savings of sales or administration expenses. Any reduction will be
determined by the Company after examination of relevant factors such as:
- - the size and type of group to which sales are to be made because the
expenses for a larger group are generally less than for a smaller group
since large numbers of Contracts may be implemented with fewer contacts;
- - the total amount of Purchase Payments to be received because expenses are
likely to be less on larger Purchase Payments than on smaller ones;
- - any prior or existing relationship with the Company because of the
likelihood of implementing the Contract with fewer contacts; and
- - other circumstances, of which the Company is not presently aware, which
could result in reduced expenses.
Charges may also be eliminated when a Contract is issued to an officer, director
or employee of the Company or any of its affiliates. In no event will reductions
or elimination of the charges be permitted where reductions or elimination will
be unfairly discriminatory to any person.
THE CONTRACT
APPLICATION AND ISSUANCE OF A CONTRACT
An application, or other request form acceptable to the Company, must be
completed and submitted to the Company to purchase a Contract, together with the
minimum required initial Purchase Payment. (See "Purchase Payments - General
Requirements.") A Contract ordinarily will be issued with respect to Owners and
Annuitants up to Age 85. Investors in Qualified Contracts for Owners and
Annuitants beyond Age 70 1/2 should consult with qualified tax advisers on the
impact of minimum distribution requirements under their retirement plans. Any
required annual minimum distribution amount should be withdrawn from an existing
retirement plan before amounts are transferred to purchase a Qualified Contract.
(See "Tax Considerations - Withdrawals from Qualified Contracts.")
The Owner, Annuitant and Beneficiary on a Contract are initially designated by
the applicant and subject to the Company's underwriting rules. If the
application for a Contract is in good order, the Company will apply the Purchase
Payment within 2 business days of receipt: (a) to the Separate Account and
credit the Contract
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with Accumulation Units; and/or (b) to the Fixed Account and credit the Contract
with dollars. If the application for a Contract is not in good order, the
Company will attempt to get it in good order or the Company will return the
application and the Purchase Payment within 5 business days. The Company will
not retain a Purchase Payment for more than 5 business days while processing an
incomplete application unless it has been authorized by the purchaser. The
Company may decline any application.
Free Look Right. An Owner has the right to review a Contract during an initial
inspection period specified in the Contract and, if dissatisfied, to return it
to the Company or to the agent through whom it was purchased. When the Contract
is returned to the Company during the permitted period, it will be voided as if
it had never been in force. The Company will ordinarily refund the Contract
Value (which may be greater or less than the Purchase Payments received) on a
Contract returned during the permitted period, unless a different amount is
required. The "free look" period is typically 10 days and may be greater
depending on state requirements.
Delayed Investment Allocation Date. Initial Purchase Payments are allocated to
the Sub-Accounts or to the Fixed Account as selected by the Owner. As of the
date of this Prospectus, the Company does not delay investment start dates and
will allocate Purchase Payments to the selected Investment Options upon issuance
of a Contract. The Company reserves the right, however, to allocate initial
Purchase Payments to the Prime Money Fund II Sub-Account for an investment delay
period before they will be invested (together with any investment gain) in any
other Sub-Account(s) designated by the Owner. If the Company elects to delay
such initial investments in Sub-Accounts, the delay would apply where a Contract
is issued subject to a requirement that Purchase Payments be refunded upon the
exercise of the Free Look Right. Allocation to the Sub-Account(s) designated by
the Owner would be made at the end of the "free look" inspection period. The
investment delay period would be measured from the date a Contract is issued
from the Variable Service Center. It would include up to 5 days to provide time
for mail or other delivery of the Contract to the Owner in addition to the
applicable "free look" inspection period. Should the Company elect to delay
investment start dates, it will so advise prospective investors in a Contract.
PURCHASE PAYMENTS
General Requirements. The initial Purchase Payment is due on the Issue Date.
Unless the Owner participates in the automatic investment plan described below,
the minimum initial Purchase Payment is $5,000 for Non-Qualified Contracts and
$2,000 for Qualified Contracts. The minimum amount for each subsequent Purchase
Payment is $200, unless an automatic investment plan is in effect. The Company
reserves the right to decline any Purchase Payment. Unless the Company consents
otherwise, the maximum amount of cumulative Purchase Payments is $1,000,000.
Conversion to Accumulation Units. Purchase Payments allocated to the
Sub-Account(s) of the Separate Account are converted into Accumulation Units and
credited to a Contract on the basis of Accumulation Unit Value next determined
after receipt of a Purchase Payment. Calculations of Accumulation Unit Value for
each Sub-Account are made as of the end of each Business Day. This is done by
dividing each Purchase Payment allocated to a Sub-Account by the dollar value of
an Accumulation Unit of that Sub-Account as of the end of the Business Day.
Initial Purchase Payments are converted into Accumulation Units when a Contract
is issued.
Automatic Investment Plan. An Owner may elect to make Purchase Payments to a
Contract by pre-authorized transfers from a checking account. The checking
account must be with a bank that is a member of the Automated Clearing House
(ACH). Purchase Payments under this method may be allocated to a Sub-Account,
but not to the Fixed Account. (See "Investment Options.") If an automatic
investment plan is elected, the Company will lower its Purchase Payment
requirements as follows:
- - For a Non-Qualified Contract, the initial Purchase Payment may be as low
as $1,000 if the applicant furnishes bank draft instructions for
subsequent Purchase Payments of at least $100 each.
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- - For a Qualified Contract, the initial Purchase Payment may be as low as
$500 if the applicant furnishes bank draft instructions for subsequent
Purchase Payments of at least $100 each.
The Company may further reduce the minimum Purchase Payment requirement on
automatic investment plans for a Contract issued under certain group sponsored
arrangements. Participation in the automatic investment plan may be suspended or
terminated if there are insufficient funds in the checking account to cover any
transfer.
CONTRACT VALUE
The Contract Value on any Business Day is the sum of the Owner's interest in the
Sub-Accounts of the Separate Account and in the Fixed Account. The Owner's
interest in a Sub-Account is determined by multiplying the number of that
Sub-Account's Accumulation Units credited to a Contract by the Accumulation Unit
Value, or "AUV," for the Sub-Account.
Accumulation Unit Value. AUVs for each Valuation Period fluctuate to reflect the
performance of the Sub-Accounts. The AUV for a Sub-Account on any Business Day
is priced by the Company as follows:
- - The Accumulation Unit Value of the Sub-Account is based on the net asset
value per share of the underlying Portfolio.
- - Any applicable charge (or credit) for federal and state taxes attributable
to the Sub-Account is subtracted (or added).
- - The cumulative unpaid Mortality and Expense Risk Charge, and the
cumulative unpaid Administrative Charge is subtracted.
- - The result is divided by the total number of Accumulation Units held in
the Sub-Account, before the purchase or redemption of any Accumulation
Units at the end of the current Business Day.
The AUV for one Sub-Account may differ from the AUV of a different Sub-Account
and may increase or decrease from Business Day to Business Day.
Reports. The Company will provide the Owner with reports on Contract Value at
least annually. Additional reports may be requested by the Owner. The Company
reserves the right to impose a charge for the cost of providing any additional
reports, but does not currently do so.
OWNERSHIP
The Owner has all rights and may receive all benefits under the Contract. The
Owner is the person designated by the applicant, unless changed. Upon the death
of the Owner, the Beneficiary is the Owner.
Assignment. The Owner may, at any time during his or her lifetime, assign his or
her rights under the Contract. The Company will not be bound by any assignment
until written notice is received by the Company at its Variable Service Center.
The Company is not responsible for the validity or tax consequences of any
assignment. The Company will not be liable as to any payment or other settlement
made by the Company before receipt of the assignment. Assignment of a
Non-Qualified Contract may be considered a distribution subject to federal
income taxes including, with certain exceptions, a 10% penalty tax before age 59
1/2. Owners of Qualified Contracts should consult a competent tax adviser as to
any mandatory restrictions on assignment in their retirement plans and the
impact of income taxes on permitted assignments. (See "Tax Considerations.")
CHANGE OF DESIGNATIONS
A request to change the designated Owner, Annuitant, or Beneficiary must be made
in writing and received by the Company at the Variable Service Center. The
change will become effective as of the date the written
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request is signed. A new designation will not apply to any payment made or
action taken by the Company prior to the time it records the change.
A permitted change of a designation will automatically revoke any prior
designation of the same type (e.g., a change of Owner revokes a prior change of
Owner; a change of Annuitant revokes a prior change of Annuitant; a change of
Beneficiary revokes a prior change of Beneficiary).
Owner. The Owner may change the Owner at any time prior to the Annuity Date.
Annuitant. A new Annuitant may be designated by the Owner prior to the Annuity
Date, but not if the Contract is owned by a non-natural person. The Owner may
automatically become the Annuitant if a new Annuitant is not designated within
30 days of the death of the Annuitant prior to the Annuity Date. (See "Death of
Annuitant.")
Beneficiary. Subject to the rights of any irrevocable Beneficiary(ies), the
Owner may change the primary Beneficiary(ies) or contingent Beneficiary(ies).
Restrictions on Qualified Contracts. Any Qualified Contract may have
restrictions on changes of Owner, Annuitant or Beneficiary. An Owner should
consult a competent tax adviser as to the tax consequences which may result.
MINIMUM VALUE REQUIREMENTS
Termination of Small Accounts. A withdrawal request that would cause the
remaining Withdrawal Value to be less than $1,000 may be deemed a surrender of
the Contract by the Company. The Company reserves the right to terminate the
Contract. In such event, the Company will pay the Withdrawal Value to the Owner.
The Company also reserves the right to terminate a Contract if the Withdrawal
Value on any Business Day falls below $1,000 and no Purchase Payments were
received by the Company during the current Contract Year and the preceding 2
Contract Years. Prior to terminating small accounts for failure to pay Purchase
Payments, the Company will provide Owners with 30 days notice, and an
opportunity to make an additional Purchase Payment to increase the Contract
Value above the minimum amount during this period.
Payments resulting from the termination of a Contract may be considered a
taxable distribution and may be subject, with certain exceptions, to a 10%
penalty tax for distributions before age 59 1/2. (See "Tax Considerations.")
Transfer of Small Contract Value. The Company reserves the right, to the extent
permitted by law, to transfer the amount of Contract Value held in a particular
Investment Option if, on any Business Day, the Contract Value in that Investment
Option is less than $250, to the Investment Option under a Contract that has the
highest Contract Value.
DEATH BENEFIT PROVISIONS
DEATH OF THE ANNUITANT
Upon the death of the Annuitant prior to the Annuity Date, the Owner may
designate a new Annuitant. If no designation is made within 30 days of the death
of the Annuitant, the Owner will become the Annuitant. However, if the Owner is
a non-natural person, then the death of the Annuitant will be treated as the
death of the Owner and a new Annuitant may not be designated. (See "Death of the
Owner.")
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Upon the death of the Annuitant after the Annuity Date, the Death Benefit, if
any, will be as specified in the Annuity Option elected and will be paid at
least as rapidly as under the method in effect prior to the Owner's death. (See
"Annuity Provisions --Annuity Options.")
DEATH OF THE OWNER
The Contract provides for a Death Benefit to be paid to the Beneficiary upon the
death of an Owner prior to the Annuity Date. Subject to state availability, the
Death Benefit is:
- - the Basic Death Benefit; or
- - if greater and if no withdrawals of Contract Value have been taken during
the Owner's lifetime, the Bonus Death Benefit; or
- - if greater and if elected, the Enhanced Death Benefit.
Upon the death of an Owner on or after the Annuity Date, any remaining payments
under the Contract will be distributed at least as rapidly as under the method
of distribution being used as of the date of the Owner's death.
Basic Death Benefit. The Basic Death Benefit is the greater of:
- - Purchase Payments less the sum of any reductions in Contract Value
attributable to partial withdrawals during the Owner's lifetime (including
applicable charges); or
- - the Contract Value
Bonus Death Benefit. The Bonus Death Benefit is the greater of:
- - The Basic Death Benefit on the date of the Owner's death; or
- - The Step Up Amount in effect on the date of the Owner's death.
A Step Up Amount is determined at the start of each Bonus Period while a
Contract is in force. The first Bonus Period begins on the Issue Date and ends
on the earlier of the sixth Contract Anniversary or the day on which the Owner
attains Age 80. Each succeeding Bonus Period is for the next 6 Contract Years
or, if earlier, until the Owner attains Age 80.
The Step Up Amount at the start of the first Bonus Period is the initial
Purchase Payment. The Step Up Amount at the start of each succeeding Bonus
Period is the greater of:
- The Step Up Amount at the end of the preceding Bonus Period; or
- The Contract Value at the end of the preceding Bonus Period.
The Step Up Amount during any Bonus Period is increased by the amount of
Purchase Payments received by the Company during that Bonus Period.
The Step Up Amount on and after the day the Owner attains Age 80 is zero. Unless
the Company consents otherwise, the Bonus Death Benefit will end if the Owner is
changed.
Optional Enhanced Death Benefit. The Owner may elect an Enhanced Death Benefit
at the time a Contract is purchased. The Enhanced Death Benefit, up to the
Owner's 80th birthday, is an amount equal to:
- Purchase Payments, less the sum of any reductions in Contract Value
attributable to partial withdrawals during the Owner's lifetime
(including applicable charges); and
- interest accumulated at an annual rate of 4.5%.
up to a maximum amount equal to two (2) times the sum of Purchase Payments.
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The Enhanced Death Benefit on and after the day the Owner attains Age 80 is
zero. Unless the Company consents otherwise, the Enhanced Death Benefit will end
if the Owner is changed.
If the Enhanced Death Benefit is elected by the Owner, the Company deducts an
Enhanced Death Benefit Charge on each Contract Anniversary prior to the Annuity
Date or the Owner's 80th birthday, if earlier. The charge is also deducted if
the Annuity Date is on a date other than a Contract Anniversary or if the
Contract is surrendered, based on the Contract Value at that time. The Enhanced
Death Benefit Charge is equal to .35% of the Contract Value at the time the
charge is taken. (See "Charges and Deductions - Optional Enhanced Death Benefit
Charge.")
In the case of Joint Owners, the Bonus Death Benefit and the Enhanced Death
Benefit are not available.
If the Owner is a non-natural person, the Annuitant will be considered the Owner
for purposes of determining the Basic Death Benefit, the Bonus Death Benefit and
the Enhanced Death Benefit.
Owners should refer to their Contract for the applicable Death Benefit
provisions.
PAYMENT OF DEATH BENEFIT
In the event of an Owner's death prior to the Annuity Date, the Death Benefit
will be determined by the Company as of the date of an Owner's death. The Death
Benefit will be paid as of the Valuation Period next following the date of
receipt by the Company of both due proof of death and, if no election of payment
method was previously made by the Owner, an election by the Beneficiary for the
payment method.
If a single sum payment is requested, the proceeds will be paid within seven (7)
days of receipt of proof of death and the election. Payment under an Annuity
Option may only be elected by a Beneficiary during the sixty-day period
beginning with the date of receipt of proof of death or a single sum payment
will be made to the Beneficiary at the end of the sixty-day period.
The entire Death Benefit must be paid within five (5) years of the date of death
unless:
1. the Beneficiary elects to have the Death Benefit payable under an Annuity
Option over the life of the Beneficiary or over a period not extending
beyond the life expectancy of the Beneficiary with distribution beginning
within one year of the date of death; or
2. if the Beneficiary is the spouse of the Owner, the Beneficiary may elect
to become the Owner of the Contract. If this election is made, the
Contract will continue in effect and no determination of Death Benefit
will then be made.
The dollar amount of each Death Benefit payment made under an Annuity Option
will depend on a number of factors, such as the Annuity Option elected, the type
of Contract (i.e., Qualified Contract or Non-Qualified Contract), the frequency
of payments elected and, for certain Annuity Options, the Age of the
Beneficiary. The Contract contains Annuity Option Tables. These tables show the
dollar amount of periodic Annuity Payments for each $1,000 applied to an Annuity
Option. For example, if a Beneficiary is Age 55 when $100,000 of Death Benefits
becomes payable, and elects Annuity Option A (lifetime with a minimum of 10
years guaranteed), the monthly Fixed Annuity Payment would be calculated as
follows:
Annuity Option A x No. of $1,000's = Minimum
Rate of Death Proceeds Monthly Payment
4.44 x 100 = $444
If, however, a Beneficiary is Age 75 when $100,000 of Death Benefits first
becomes payable, and elects the same Annuity Option, the monthly payment would
be calculated as follows:
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Annuity Option A x No. of $1,000's = Minimum
Rate of Death Proceeds Monthly Payment
7.20 x 100 = $720
See "Annuity Options" for a description of other payment options available under
a Contract, including Variable Annuity Payments. Available Annuity Options may
be limited to the extent required by law. Because individual circumstances vary,
Owners and Beneficiaries under the Contracts should seek competent tax advice
about the tax consequences of any distribution of Death Benefits. (See "Tax
Considerations.")
OWNERS OTHER THAN A SINGLE PERSON
If there are Joint Owners, any reference to the death of the Owner shall mean
the death of the Owner who dies first. Any Joint Owner must be the spouse of the
other Owner. Upon the death of either Owner, the surviving spouse will be the
primary Beneficiary. Any other Beneficiary designated by the applicant, or as
subsequently changed, will be treated as a contingent Beneficiary unless
otherwise indicated in writing to the Company.
If the Owner is a non-natural person, then for purposes of the Death Benefit the
Annuitant shall be treated as the Owner and the death of the Annuitant shall be
treated as the death of the Owner.
BENEFICIARIES
Unless the Owner provides otherwise, the Death Benefit will be paid in equal
shares to the survivor(s) as follows: (a) to the primary Beneficiary(ies) who
survive the Owner or Annuitant's death, as applicable; or if there are none, (b)
to the contingent Beneficiary(ies) who survive the Owner or Annuitant's death as
applicable; or if there are none, (c) to the estate of the Owner.
ANNUITY PROVISIONS
ANNUITY DATE
The Owner selects an Annuity Date at the time of application, and may later
change it by written request at least 30 days prior to the existing Annuity
Date. If the Annuity Date selected is less than 2 Contract Years from the Issue
Date, a Withdrawal Charge will be deducted from Contract Value before the first
annuity payment is made. (See "Charges and Deductions--Withdrawal Charge.") If
the selected Annuity Date occurs when the Annuitant is at an advanced age, such
as over Age 85, it is possible that the Contract will not be considered an
annuity for federal tax purposes. Investors in a Qualified Contract should
select an Annuity Date that is consistent with the requirements of their
retirement plans. (See "Tax Considerations--Withdrawals from Qualified
Contracts.") A qualified tax advisor should be consulted for further
information.
ANNUITY PAYMENTS
Allocation. The Owner may elect by written request to the Company at its
Variable Service Center no later than seven (7) calendar days prior to the
Annuity Date, to receive Fixed Annuity Payments, Variable Annuity Payments or a
combination of Fixed Annuity Payments and Variable Annuity Payments. The
Annuitant is the payee, unless a different payee is selected by the Owner by
written request to the Company at its Variable Service Center at least 30 days
prior to the Annuity Date. If all of the Contract Value on the seventh calendar
day before the Annuity Date is allocated to the Fixed Account, Fixed Annuity
Payments will be made. If all of the Contract Value on that date is allocated to
the Separate Account, Variable Annuity Payments will be made. If the Contract
Value on that date is allocated to both the Fixed Account and the Separate
Account, a combination of Fixed Annuity Payments and Variable Annuity Payments
will be made to reflect the allocation between the Accounts.
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Amount. The total dollar amount of each payment is the sum of the Variable
Annuity Payment and the Fixed Annuity Payment. The Company reserves the right to
pay Annuity Payments in one sum when the remaining payments are less than $2,000
or other minimum amount established by the Company from time to time, or when
the Annuity Option elected would result in periodic payments of less than $100.
Annuitization Bonus. Subject to state availability, the Company intends to
increase the Contract Value on the Annuity Date by an "Annuitization Bonus" if
Contract Value is applied to an Annuity Option. The increase in Contract Value
will be calculated by the Company with respect to Contract Value as of the
immediately preceding Business Day. The increase in Contract Value will be
allocated pro-rata to the Investment Options to which Contract Value is then
allocated, and will be deemed "income" on a Contract for federal income tax
purposes. (See "Tax Considerations.")
The Annuitization Bonus for a Contract will be determined by the Company at the
time of issuance of a Contract, but may be modified, reduced or eliminated for
Contracts subsequently issued. On the date of this Prospectus, the Annuitization
Bonus is 3% of Contract Value.
Variable Annuity Payments. The actual dollar amount of Variable Annuity Payments
is dependent upon (a) the Contract Value (plus any Annuitization Bonus) on the
Annuity Date, (b) the annuity table specified in the Contract for the Annuity
Option selected, and (c) the investment performance of the Sub-Account selected.
The annuity tables contained in the Contract for Variable Annuity Payments are
based on a 3% assumed investment rate. If the actual net investment rate exceeds
3%, Variable Annuity Payments will increase. Conversely, if the actual rate is
less than 3%, Variable Annuity Payments will decrease.
Variable Annuity Payments will initially reflect the investment performance of
the Separate Account in accordance with the allocation of the Contract Value to
the Sub-Account(s) on the Annuity Date. After the Annuity Date, allocations may
be changed among Sub-Account Investment Options once each Contract Year. (See
"Changes Among Investment Options.")
ANNUITY OPTIONS
The Annuity Option is elected by the Owner and may be changed by written request
at least 30 days prior to the Annuity Date. If no Annuity Option election is in
effect at least 30 days before the Annuity Date, Annuity Payments will be made
under Option B. Life Annuity with a Period Certain of 120 Months, as described
below.
The Annuity Payments payable under the Contract may be made under one of the
following options or any other option acceptable to the Company:
Option A. Life Annuity. An annuity payable monthly during the lifetime of the
Annuitant. Annuity Payments cease at the death of the Annuitant.
Option B. Life Annuity with Periods Certain of 60, 120, 180 or 240 Months. An
annuity payable monthly during the lifetime of the Annuitant and in any event
for 60, 120,180 or 240 months certain as selected.
Option C. Joint and Survivor Annuity. An annuity payable monthly during the
joint lifetime of the Annuitant and a designated second person. At the death of
either Payee, Annuity Payments will continue to be made to the survivor Payee.
The survivor's Annuity Payments will be equal to 100%, 75%, 662/3% or 50% of the
amount payable during the joint lifetime, as chosen.
Option D. Joint and Contingent Annuity. An annuity payable monthly during the
lifetime of the Annuitant and continuing during the lifetime of a designated
second person after the Annuitant's death. The second person's Annuity Payments
will be equal to 100%, 75%, 662/3% or 50% of the amount payable, as chosen.
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Option E. Fixed Payments for a Period Certain. An annuity payable monthly for a
fixed amount for any specified period (at least 5 years but not exceeding 30
years), as chosen.
Annuity Options A, B, C & D are available for Fixed Annuity Payments, Variable
Annuity Payments or a combination of both. Annuity Option E is available for
Fixed Annuity Payments only.
If the Annuitant dies during a period certain (Annuity Options B or E), the
remaining Annuity Payments will be made to the Beneficiary. The Beneficiary may
elect to receive the commuted value of the remaining Annuity Payments in a
single sum instead. The Company will determine the commuted value by discounting
the remaining Annuity Payments at its then current interest rate used for
commutation.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Annuitant has been misstated, the Company may change
the annuity benefits to those which the Contract Value would have provided had
the correct age and sex been stated. If the misstatement is discovered after the
Annuity Date: (a) the Company will add interest to any overpayments at the rate
of 6% per year, compounded annually, and deduct the amount against remaining
annuity payments; and (b) the Company will add interest to any underpayments at
the rate of 6% per year, compounded annually, and pay the amount in a single sum
with the next Annuity Payment.
WITHDRAWALS
Before the Annuity Date, the Owner may make a written request to the Company at
its Variable Service Center to surrender the Contract or may request a partial
withdrawal of Withdrawal Value by written or telephone request. (See "Telephone
Transactions.") Contract Value available upon surrender or withdrawal may be
reduced by any applicable: (a) Withdrawal Charge; (b) taxes not previously
deducted; (c) Annual Contract Maintenance Charge; and (d) Optional Enhanced
Death Benefit Charge. (See "Charges and Deductions"). Partial withdrawals and
surrenders will ordinarily result in the cancellation of Accumulation Units from
each applicable Sub-Account of the Separate Account or a reduction in the Fixed
Account Value in the ratio that the Sub-Account Value and/or the Fixed Account
Value bears to the total Contract Value. The Owner may request in writing in
advance if a different method of cancellation of units and reduction of Fixed
Account Value is desired. The Company will pay the amount of any withdrawal from
the Separate Account within 7 days of receipt of a request in good order, unless
the "Suspension of Payments or Transfers" provision is in effect. (See
"Suspension of Payments or Transfers.")
PARTIAL WITHDRAWALS
Each partial withdrawal must be for an amount which is not less than $1,000. If
a partial withdrawal request is made which would reduce the remaining Withdrawal
Value below $1,000, the Company may deem the Contract surrendered. In such
event, the Contract will terminate and the Company will pay an Owner the
Withdrawal Value of a Contract. (See "The Contract--Minimum Value
Requirements.")
SYSTEMATIC WITHDRAWALS
Subject to any conditions and fees the Company may impose, an Owner may elect to
take partial withdrawals under a systematic withdrawal program by either written
or telephone request. (See "Telephone Transactions.") The Company does not
currently impose a fee for systematic withdrawals. Amounts withdrawn under the
program will be subject to a Withdrawal Charge to the extent that total amounts
withdrawn during a Contract Year exceed the Free Withdrawal Amount. (See
"Withdrawal Charge--Free Withdrawal Amount.")
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Under the program, systematic withdrawals are made on the same day (or next
Business Day) of each month or quarter. Systematic withdrawals are transferred
automatically to an Owner's bank account, provided the account is maintained at
a bank that is a member of the Automated Clearing House (ACH). Systematic
withdrawals are not allowed simultaneously with the dollar cost averaging
program. (See "Systematic Transfers--Dollar Cost Averaging.") Owners less than
59-1/2 who participate in this program may be subject to a 10% penalty tax
surcharge. (See "Tax Considerations -- Withdrawals from Non-Qualified Contracts"
and "Tax Considerations -- Withdrawals from Qualified Contracts.")
The Company reserves the right to modify, suspend or eliminate the program at
any time.
TAX PENALTIES AND RESTRICTIONS
Certain tax withdrawal penalties and restrictions may apply to withdrawals from
a Contract. The withdrawal penalties and restrictions differ between a
Non-Qualified Contract and a Qualified Contract. (See "Tax Considerations.")
Special restrictions apply to a Qualified Contract issued as a 403(b) annuity.
(See "Tax Considerations--Withdrawal Limitations on 403(b) Annuities.")
Owners should consult their own tax counsel or other tax adviser before
requesting any withdrawals.
TEXAS OPTIONAL RETIREMENT PROGRAM
A Contract issued to a participant in the Texas Optional Retirement Program
("ORP") will contain an ORP endorsement that will amend the Contract to provide:
(a) if for any reason a second year of ORP participation is not begun, the total
amount of the State of Texas' first-year contribution will be returned to the
appropriate institute of higher education upon its request; and (b) no benefits
will be payable, through surrender of the Contract or otherwise, until the
participant dies, accepts retirement, terminates employment in all Texas
institutions of higher education or attains the age of 70 1/2. The value of the
Contract may, however, be transferred to other contracts or carriers during the
period of ORP participation. A participant in the ORP is required to obtain a
certificate of termination from the participant's employer before the value of a
Contract can be withdrawn.
SUSPENSION OF PAYMENTS OR TRANSFERS
The Company reserves the right to suspend or postpone payments for withdrawals
or transfers from the Sub-Accounts for any period when:
- - the New York Stock Exchange is closed;
- - trading on the New York Stock Exchange is restricted;
- - an emergency exists as a result of which disposal of securities held in
the Separate Account is not reasonably practicable or it is not reasonably
practicable to determine the value of the Separate Account's net assets;
or
- - during any other period when the Securities and Exchange Commission, by
order, so permits for the protection of Owners.
The Company reserves the right to defer payment for a withdrawal or transfer
from the Fixed Account for the period permitted by law but not for more than six
months after a transaction request is received by the Company.
PERFORMANCE INFORMATION
FEDERATED PRIME MONEY FUND II PORTFOLIO
From time to time, the Federated Prime Money Fund II sub-Account of the
Separate Account may advertise its "yield" and "effective yield." Both yield
figures are based on historical earnings and are not intended to indicate
future performance. The "yield" of the Federated Prime Money Fund II
sub-Account refers to the income generated by Contract Values in the Federated
Prime Money Fund II Sub-Account over a seven-day period (which period will be
stated in the advertisement). This income is "annualized." That is, the amount
of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
Contract Values in the Federated Prime Money Fund II sub-Account. The
"effective yield" is calculated similarly. However, when annualized, the income
earned by Contract Values is assumed to be reinvested. This results in the
"effective yield" being slightly higher than the "yield" because of the
compounding effect of the assumed reinvestment. The yield figure will reflect
the deduction of any asset-based charges and any applicable annual contract
maintenance charge.
OTHER PORTFOLIOS
From time to time, the Company may advertise performance data for the various
other Portfolios under the Contract. Such data will show the percentage change
in the value of an Accumulation Unit based on the performance of an investment
medium over a period of time, usually a calendar year, determined by dividing
the increase (decrease) in value for that Unit by the Accumulation Unit value
at the beginning of the period. This percentage figure will reflect the
deduction of any asset-based charges and any applicable annual contract
maintenance charges under the Contracts.
Any advertisement will also include total return figures calculated as
described in the Statement of Additional Information. The total return figures
reflect the deduction of any applicable annual contract maintenance charges, as
well as any asset-based charges.
The Company may make available yield information with respect to some of the
Portfolios. Such yield information will be calculated as described in the
Statement of Additional Information. The yield information will reflect the
deduction of any applicable annual contract maintenance charge as well as any
asset-based charges.
The Company may also show historical Accumulation Unit values in certain
advertisements containing illustrations. These illustrations will be based on
actual Accumulation Unit values.
Quotations of standardized total return for any Sub-Account will be expressed
in terms of the average annual compounded rate of return on a hypothetical
investment in a Contract over a period of one, five and ten years (or, if less,
up to the life of the Sub-Account), and will reflect the deduction of the
applicable Withdrawal Charge, the Administrative Charge, the Annual Contract
Maintenance Charge, the Mortality and Expense Risk
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Charge and deductions for the fees and expenses of the underlying Portfolio.
Quotations of non-standardized total return may simultaneously be shown for the
time periods indicated in the advertisement that may not reflect some or all of
these deductions.
Total return performance information for Sub-Accounts may also be advertised
based on the historical performance of the Portfolio underlying a Sub-Account
for periods beginning prior to the date Accumulation Unit Values were first
calculated for Contracts funded in that Sub-Account. Any such performance
calculation will be based on the assumption that the Sub-Account corresponding
to the applicable Portfolio was in existence throughout the stated period and
that contractual charges and expenses of the Sub-Account during the period were
equal to those currently assessed under the Contract.
In addition, the Company may distribute sales literature which compares the
percentage change in Accumulation Unit values for any of the Portfolios against
established market indices such as the Standard & Poor's 500 Composite Stock
Price Index, the Dow Jones Industrial Average or other management investment
companies which have investment objectives similar to the Portfolio being
compared. The Standard & Poor's 500 Stock Index is an unmanaged, unweighted
average of 500 stocks, the majority of which are listed on the New York Stock
Exchange. The Dow Jones Industrial Average is an unmanaged, weighted average of
thirty blue chip industrial corporations listed on the New York Stock Exchange.
Both the Standard & Poor's 500 Stock Index and the Dow Jones Industrial Average
assume quarterly reinvestment of dividends.
The Company may also distribute sales literature which compares the performance
of the Accumulation Unit values of the Contracts issued through the Separate
Account with the unit values of variable annuities issued through the separate
accounts of other insurance companies. Such information will be derived from
the Lipper Variable Insurance Products Performance Analysis Service,
Morningstar or from the VARDS Report.
The Lipper Variable Insurance Products Performance Analysis Service is
published by Lipper Analytical Services, Inc., a publisher of statistical data
which tracks the performance of investment companies. The rankings compiled by
Lipper may or may not reflect the deduction of asset-based insurance charges.
The Company's sales literature utilizing these rankings will indicate whether
or not such charges have been deducted. Where the charges have not been
deducted, the sales literature will indicate that if the charges had been
deducted, the ranking might have been lower.
The VARDS Report is a monthly variable annuity industry analysis compiled by
Variable Annuity Research & Data Service of Roswell, Georgia and published by
Financial Planning Resources, Inc. The VARDS rankings may or may not reflect
the deduction of asset-based insurance charges.
Morningstar rates a variable annuity sub-account against its peers with similar
investment objectives. Morningstar does not rate any Sub-Account that has less
than three years of performance data.
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TAX CONSIDERATIONS
GENERAL
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING OF
CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE COMPANY
CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE.
PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE POSSIBILITY
OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF THE CONTRACTS.
PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE TREATED AS
"ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE FURTHER
UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT SPECIAL
RULES NOT DESCRIBED IN THIS PROSPECTUS MAY BE APPLICABLE IN CERTAIN SITUATIONS.
MOREOVER, NO ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER TAX
LAWS.
Section 72 of the Code governs taxation of annuities in general. An Owner is not
taxed on increases in the value of a Contract until distribution occurs, either
in the form of a lump sum payment or as annuity payments under the Annuity
Option selected. For a lump sum payment received as a total withdrawal (total
surrender), the recipient is taxed on the portion of the payment that exceeds
the cost basis of the Contract. For Non-Qualified Contracts, this cost basis is
generally the Purchase Payments, while for Qualified Contracts there may be no
cost basis. The taxable portion of the lump sum payment is taxed at ordinary
income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion amount
is includible in taxable income. The exclusion amount for payments based on a
fixed annuity option is determined by multiplying the payment by the ratio that
the cost basis of the Contract (adjusted for any period certain or refund
feature) bears to the expected return under the Contract. The exclusion amount
for payments based on a variable annuity option is determined by dividing the
cost basis of the Contract (adjusted for any period certain or refund guarantee)
by the number of years over which the annuity is expected to be paid. Payments
received after the investment in the Contract has been recovered (i.e., when the
total of the excludable amounts equals the investment in the Contract) are fully
taxable. The taxable portion is taxed at ordinary income tax rates. For certain
types of Qualified Plans, there may be no cost basis in the Contract within the
meaning of Section 72 of the Code. Owners, Annuitants and Beneficiaries under a
Contract should seek competent financial advice about the tax consequences of
any distributions.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Separate Account is not a separate entity from the
Company, and its operations form a part of the Company.
DEATH BENEFITS
For Death Benefits under the Contract, the Beneficiary will be taxed on the
portion of the Death Benefit which exceeds the cost basis of the Contract.
However, if the Beneficiary elects to receive the Death Benefit under an Annuity
Option, the payments made to the Beneficiary will be taxed as annuity payments
as discussed above.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury Department
("Treasury Department"), adequately diversified. Disqualification of the
Contract as an annuity contract would result in imposition of federal income tax
to the Owner with respect to earnings allocable to the Contract prior to the
receipt of payments under the Contract.
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The Company intends that all Portfolios of a Fund underlying a Contract will be
managed by the Fund or its investment adviser to comply with the diversification
requirements set forth in Section 817(h) of the Code and Treas. Reg. 1.817-5
promulgated thereunder.
The Treasury Department has indicated that the diversification regulations do
not provide guidance regarding the circumstances in which Owner control of the
investments of the Separate Account will cause the Owner to be treated as the
owner of the assets of the Separate Account, thereby resulting in the loss of
favorable tax treatment for the Contract. At this time, it cannot be determined
whether additional guidance will be provided and what standards may be contained
in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the Separate Account. It is unknown
whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available, would
cause the Owner to be considered the owner of the assets of the Separate Account
resulting in the imposition of federal income tax to the Owner with respect to
earnings allocable to the Contract prior to receipt of payments under the
Contract.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in the Owners being
retroactively determined to be the owners of the assets of the Separate Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the Contract in an attempt to maintain favorable tax treatment.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on premiums for the
Contracts will be taxed currently to the Owner if the owner is a non-natural
person, e.g., a corporation, or certain other entities. Such Contracts generally
will not be treated as annuities for federal income tax purposes. However, this
treatment is not applied to Contracts held by a trust or other entity as an
agent for a natural person or to Contracts held by a tax-qualified retirement
plan described in sections 401, 403(a), 403(b), 408, 408A or 457 of the Code.
Purchasers should consult their own tax counsel or other tax adviser before
purchasing a Contract to be owned by a non-natural person.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts which are issued
within a calendar year to the same contract owner by one company or its
affiliates are treated as one annuity contract for purposes of determining the
tax consequences of any distribution. Such treatment may result in adverse tax
consequences including more rapid taxation of the distributed amounts from such
combination of contracts. Owners should consult a tax adviser prior to
purchasing more than one non-qualified annuity contract in any calendar year.
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross income
of the Owner are subject to federal income tax withholding. Generally, amounts
are withheld from periodic payments at the same rate as wages and at the rate of
10% from non- periodic payments. However, the Owner, in most cases, may elect
not to have taxes withheld or to have withholding done at a different rate.
Effective January 1, 1993, certain distributions from retirement plans qualified
under Section 401 or Section 403(b) of the Code, which are not directly rolled
over to another eligible retirement plan or individual retirement account or
individual retirement annuity, are subject to a mandatory 20% withholding for
federal
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income tax. The 20% withholding requirement generally does not apply to: (a) a
series of substantially equal payments made at least annually for the life or
life expectancy of the participant or joint and last survivor expectancy of the
participant and a designated beneficiary, or distributions for a specified
period of 10 years or more; or (b) distributions which are required minimum
distributions; or (c) the portion of the distributions not includible in gross
income (i.e., return of after-tax contributions). Participants should consult
their own tax counsel or other tax adviser regarding withholding requirements.
WITHDRAWALS FROM NON-QUALIFIED CONTRACTS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the Contract Value exceeds the aggregate purchase
payments made, any amount withdrawn will be treated as coming first from the
earnings and then, only after the income portion is exhausted, as coming from
the principal. Withdrawn earnings are includible in gross income. It further
provides that a ten percent (10%) penalty will apply to the income portion of
any distribution. However, the penalty is not imposed on amounts received: (a)
after the taxpayer reaches age 59 1/2; (b) after the death of the Owner; (c) if
the taxpayer is totally disabled (for this purpose disability is as defined in
Section 72(m)(7) of the Code); (d) in a series of substantially equal periodic
payments made not less frequently than annually for the life (or life
expectancy) of the taxpayer or for the joint lives (or joint life expectancies)
of the taxpayer and his or her Beneficiary; (e) under an immediate annuity; or
(f) which are allocable to purchase payments made prior to August 14, 1982.
QUALIFIED PLANS
A Contract offered by this Prospectus is designed to be suitable for use under
various types of Qualified Plans. Taxation of participants in each Qualified
Plan varies with the type of plan and terms and conditions of each specific
plan. Owners, Annuitants and Beneficiaries are cautioned that contributions and
benefits under a Qualified Plan may be subject to the terms and conditions of
the plan regardless of the terms and conditions of a Contract issued pursuant to
the plan. Some retirement plans are subject to distribution and other
requirements that are not incorporated into the Company's administrative
procedures. Contract Owners, participants and beneficiaries are responsible for
determining that contributions, distributions and other transactions with
respect to the Contract comply with applicable law. Following are general
descriptions of the types of Qualified Plans with which the Contracts may be
used. Such descriptions are not exhaustive and are for general informational
purposes only. The tax rules regarding Qualified Plans are very complex and will
have differing applications depending on individual facts and circumstances.
Each purchaser should obtain competent tax advice prior to purchasing a Contract
issued under a Qualified Plan.
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available as described in
this Prospectus. Generally, Contracts issued pursuant to Qualified Plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts. (See "Tax
Treatment of Withdrawals--Qualified Contracts," below.)
On July 6, 1983, the Supreme Court decided in Arizona Governing Committee v.
Norris that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. The Contracts sold by the Company in connection with
Qualified Plans will utilize annuity tables which do not differentiate on the
basis of sex. Such annuity tables will also be available for use in connection
with certain non-qualified deferred compensation plans.
H.R. 10 Plans. Section 401 of the Code permits self-employed individuals to
establish Qualified Plans for themselves and their employees, commonly referred
to as "H.R. 10" or "Keogh" plans. Contributions made to the Plan for the benefit
of the employees will not be included in the gross income of the employees until
distributed from the Plan. The tax consequences to participants may vary
depending upon the particular plan design. However, the Code places limitations
and restrictions on all Plans including on such items as: amount
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of allowable contributions; form, manner and timing of distributions;
transferability of benefits; vesting and nonforfeitability of interests;
nondiscrimination in eligibility and participation; and the tax treatment of
distributions, withdrawals and surrenders. (See "Tax Treatment of
Withdrawals--Qualified Contracts" below.) Purchasers of Contracts for use with
an H.R. 10 Plan should obtain competent tax advice as to the tax treatment and
suitability of such an investment.
403(b) Annuities. Section 403(b) of the Code permits the purchase of "403(b)" or
"tax-sheltered annuities" by public schools and certain charitable, educational
and scientific organizations described in Section 501(c)(3) of the Code. These
qualifying employers may make contributions to a Contract for the benefit of
their employees. Such contributions are not includible in the gross income of
the employees until the employees receive distributions from the Contracts. The
amount of contributions to the tax-sheltered annuity is limited to certain
maximums imposed by the Code. Furthermore, the Code sets forth additional
restrictions governing such items as transferability, distributions,
nondiscrimination and withdrawals. (See "Tax Treatment of Withdrawals--Qualified
Contracts" and "Tax Sheltered Annuities--Withdrawal Limitations" below.) Any
employee should obtain competent tax advice as to the tax treatment and
suitability of such an investment.
Traditional IRAs and Roth IRAs. Eligible individuals may maintain: (a) an
individual retirement account or individual retirement annuity under section 408
of the Code ("Traditional IRA"); and (b) for tax years starting after 1997, a
non-tax deductible individual retirement account or individual retirement
annuity under section 408A of the Code ("Roth IRA"). Under applicable
limitations, amounts may be contributed to a Traditional IRA which will be
deductible from the individual's gross income. The amounts permitted to be
contributed to a Traditional IRA may be reduced if an individual also
contributes to a Roth IRA.
Traditional IRAs and Roth IRAs are subject to limitations on eligibility,
contributions, transferability and distributions. Under certain conditions,
distributions from other IRAs and other Qualified Plans may be rolled over or
transferred on a tax-deferred basis into a Traditional IRA. Rollovers may also
be made to a Roth IRA, but only from a Traditional IRA or from another Roth IRA.
Rollovers from a Traditional IRA to a Roth IRA are subject to immediate federal
income taxation, but may qualify for special four year income recognition rules
if the transaction occurs in 1998.
Additional informational disclosure will be given by the Company for sales of
Contracts intended to be used with either a Traditional IRA or a Roth IRA, as
required by the Code. Purchasers of a Contracts intended to be qualified as
either a Traditional IRA or a Roth IRA should obtain competent tax advice as to
the tax treatment and suitability of such an investment.
Corporate Pension and Profit-Sharing Plans. Sections 401(a) and 401(k) of the
Code permit corporate employers to establish various types of retirement plans
for employees. These retirement plans may permit the purchase of a Contract to
provide benefits under the Plan. Contributions to the Plan for the benefit of
employees will not be includible in the gross income of the employees until
distributed from the Plan. The tax consequences to participants may vary
depending upon the particular plan design. However, the Code places limitations
and restrictions on all plans including on such items as: amount of allowable
contributions; form, manner and timing of distributions; transferability of
benefits; vesting and nonforfeitability of interests; nondiscrimination in
eligibility and participation; and the tax treatment of distributions,
withdrawals and surrenders. Purchasers of Contracts for use with Corporate
Pension or Profit-Sharing Plans should obtain competent tax advice as to the tax
treatment and suitability of such an investment. Unless the Company otherwise
permits, participant loans are not allowed in connection with Contracts
purchased in connection with these plans.
Section 457 Plans. Under Section 457 of the Code, governmental and certain other
tax-exempt employers may establish deferred compensation plans for the benefit
of their employees which may invest in annuity contracts. The Code, as in the
case of Qualified Plans, establishes limitations and restrictions on
eligibility, contributions and distributions. Under these Plans, contributions
made for the benefit of the employees will not be includible in the employee's
gross income until distributed from the Plan.
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WITHDRAWALS FROM QUALIFIED CONTRACTS
In the case of a withdrawal under a Qualified Contract (other than a "qualified
distribution" from a Roth IRA), a ratable portion of the amount received is
taxable, generally based on the ratio of the individual's cost basis to the
individual's total accrued benefit under the retirement plan. A "qualified
distribution" from a Roth IRA is generally not subject to federal income
taxation, but can only be made after the assets have been in the Roth IRA for 5
years and the Owner: (a) reaches age 59 1/2; (b) dies or is disabled (as defined
in section 72(m)(7) of the Code); or (c) takes a qualified first-time homebuyer
distribution (as defined in section 72(t)(8) of the Code). Special tax rules may
be available for certain other distributions from a Qualified Contract.
The taxable portion of any distribution from a qualified retirement plan may be
subject to a 10% penalty tax under section 72(t) of the Code. This penalty tax
could apply to withdrawals from a Contract issued and qualified under Code
sections 401 (H.R. 10 and Corporate Pension and Profit-Sharing Plans), 403(b)
(Tax-Sheltered Annuities), 408 (Traditional IRAs) or 408A (Roth IRAs -
"nonqualified distributions" only). It is not imposed on: (a) qualified
rollovers or permitted direct transfers to a Traditional IRA, a Roth IRA, or to
another eligible qualified plan; (b) distributions made on or after the date on
which the Owner or Annuitant (as applicable) reaches age 59 1/2; (c)
distributions following the death or disability (as defined in section 72(m)(7)
of the Code) of the Owner or Annuitant (as applicable); (d) distributions that
are part of substantially equal periodic payments made not less frequently than
annually for the life (or life expectancy) of the Owner or Annuitant (as
applicable) or the joint lives (or joint life expectancies) of such Owner or
Annuitant (as applicable) and his or her designated Beneficiary (Qualified Plans
other than Traditional IRAs and Roth IRAs require the employee to be separated
from service for this exception to apply); (e) distributions to an Owner or
Annuitant (as applicable) who has separated from service after he has attained
age 55; (f) distributions made to the Owner or Annuitant (as applicable) for
payment of medical expenses which exceed 7.5% of adjusted gross income; (g)
distributions made to an alternate payee pursuant to a qualified domestic
relations order; (h) distributions from a Traditional IRA or from a Roth IRA for
payment of health insurance premiums while unemployed if certain conditions are
met; (i) amounts paid from a Traditional IRA and Roth IRA for qualified higher
education expenses (as defined in section 72(t)(7) of the Code); and (j) amounts
paid from a Traditional IRA or Roth IRA as a qualified first-time homebuyer
distribution (as defined in section 72(t)(8) of the Code). The exceptions stated
in (e) and (g) above do not apply to a Traditional IRA or to a Roth IRA.
Generally, distributions from a qualified plan (other than a Roth IRA) are
required to start no later than April 1 of the calendar year, following the year
in which the employee attains age 70 1/2 or retires, whichever is later. These
required distributions must be over a period not exceeding the life expectancy
of the individual or the joint lives or life expectancies of the individual and
his or her designated beneficiary. If any required minimum distributions are not
made, a 50% penalty tax is imposed on the amount not distributed.
TAX-SHELTERED ANNUITIES--WITHDRAWAL LIMITATIONS
The Code limits the withdrawal of amounts attributable to contributions made
pursuant to a salary reduction agreement (as defined in Section 403(b)(11) of
the Code) to circumstances only when the Owner: (a) attains age 59 1/2; (b)
separates from service; (c) dies; (d) becomes disabled (within the meaning of
Section 72(m)(7) of the Code); or (e) in the case of hardship. However,
withdrawals for hardship are restricted to the portion of the Owner's Contract
Value which represents contributions made by the Owner and does not include any
investment results. The limitations on withdrawals became effective on January
1, 1989 and apply only to salary reduction contributions made after December 31,
1988, to income attributable to such contributions and to income attributable to
amounts held as of December 31, 1988. The limitations on withdrawals do not
affect rollovers or transfer between certain Qualified Plans. Owners should
consult their own tax counsel or other tax adviser regarding any distributions.
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OTHER MATTERS
FINANCIAL STATEMENTS
Financial statements of the Separate Account and the Company are included in the
Statement of Additional Information.
DISTRIBUTION
First Variable Capital Services, Inc. ("FVCS"), 2122 York Road, Oak Brook, IL
60523, acts as the distributor of the Contracts. FVCS is a wholly-owned
subsidiary of the Company. The Contracts are offered on a continuous basis
through FVCS and approved broker-dealers who are members of the National
Association of Securities Dealers, Inc.
The Company and FVCS have agreements with various broker-dealers under which the
Contracts will be sold by registered representatives of the broker-dealers. The
registered representatives are required to be authorized under applicable state
regulations to sell variable annuity contracts. The commissions payable to a
broker-dealer for sales of the Contract may vary with the sales agreement, but
are not expected to exceed 7.00% of first year Purchase Payments and annual
renewal compensation of up to 1.00% of Contract Value in later Contract Years.
Broker-dealers may also receive expense allowances, wholesaler fees, bonuses and
training fees.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Separate Account,
the Distributor or the Company is a party.
TRANSFERS BY THE COMPANY
The Company may, subject to applicable regulatory approvals, transfer its
obligations under a Contract to another qualified life insurance company under
an assumption reinsurance arrangement without the prior consent of the Owner.
VOTING RIGHTS
In accordance with its view of present applicable law, the Company will vote the
shares of a Fund held in the Separate Account at regular or special meetings of
the shareholders in accordance with instructions received from Owners having the
voting interest in the affected Portfolio(s) held in the Separate Account. The
number of votes that an Owner has the right to instruct for a particular
Sub-Account is determined by dividing the Contract Value in the Sub-Account by
the net asset value per share of the corresponding Portfolio in which the
Sub-Account invests. The Company will vote shares for which it has not received
instructions, as well as shares attributable to it, in the same proportion as it
votes shares for which it has received instructions. The Funds do not intend to
hold routine annual meetings of shareholders.
The Funds' shares are used as the investment vehicle for separate accounts of
insurance companies offering variable annuity contracts and variable life
insurance policies. The use of Funds' shares as investments for both variable
annuity contracts and variable life insurance policies is referred to as "mixed
funding." The use of Funds' shares as investments by separate accounts of
unaffiliated life insurance companies is referred to as "shared funding."
The Funds intend to engage in mixed funding and/or shared funding. Although the
Funds do not currently foresee any disadvantage to Contract owners due to
differences in redemption rates, tax treatment, or other considerations
resulting from mixed funding or shared funding, the Trustees of the Funds will
closely monitor
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the operation of mixed funding and shared funding and will consider appropriate
action to avoid material conflict and take appropriate action in response to any
material conflicts which occur.
The number of shares which an Owner has a right to vote will be determined as of
a date to be chosen by the Company not more than sixty (60) days prior to a
shareholder meeting of a Fund. Each Owner having a voting interest will receive
proxy material, reports, and other materials relating to the appropriate
Portfolio.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
ITEM PAGE
Company.....................................................................
Independent Auditors........................................................
Legal Counsel...............................................................
Distributor.................................................................
Yield Calculation for the Federated Prime Money Fund II Sub-Account.........
Performance Information.....................................................
Annuity Provisions..........................................................
Variable Annuity..........................................................
Fixed Annuity.............................................................
Annuity Unit..............................................................
Mortality and Expense Guarantee...........................................
Financial Statements........................................................
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PART B
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STATEMENT OF ADDITIONAL INFORMATION
CAPITAL SIX VA
INDIVIDUAL FLEXIBLE PAYMENT DEFERRED
VARIABLE ANNUITY CONTRACTS
issued by
FIRST VARIABLE ANNUITY FUND E
AND
FIRST VARIABLE LIFE INSURANCE COMPANY
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS DATED May 1, 1998 FOR THE INDIVIDUAL
FLEXIBLE PURCHASE PAYMENT DEFERRED VARIABLE ANNUITY CONTRACTS WHICH ARE REFERRED
TO HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. FOR COPY OF THE PROSPECTUS CALL OR WRITE THE
COMPANY AT 2122 YORK ROAD, OAK BROOK, IL 60523, (800)228-1035.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED May 1, 1998
TABLE OF CONTENTS
Page
Company.....................................................................
Independent Auditors........................................................
Legal Counsel...............................................................
Distributor.................................................................
Yield Calculation for the Federated Prime Fund II Sub-Account...............
Performance Information.....................................................
Annuity Provisions..........................................................
Variable Annuity......................................................
Fixed Annuity.........................................................
Annuity Unit..........................................................
Mortality and Expense Guarantee.......................................
Financial Statements
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COMPANY
Information regarding the Company and its ownership is contained in the
Prospectus.
INDEPENDENT AUDITORS
The consolidated financial statements of First Variable Life Insurance Company
at December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997 and the financial statements of First Variable Life
Insurance Company--First Variable Annuity Fund E at December 31, 1997 and 1996
and for each of the years then ended appearing in this Statement of Additional
Information have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
LEGAL COUNSEL
Legal matters in connection with the Contracts have been reviewed by the
Company's Legal Department. Blazzard, Grodd & Hasenauer, P.C., Westport,
Connecticut, has advised the Company on certain matters relating to the federal
securities and tax laws.
DISTRIBUTOR
First Variable Capital Services, Inc. ("FVCS") acts as the distributor. FVCS is
a wholly-owned subsidiary of the Company. The offering is on a continuous basis.
YIELD CALCULATION FOR FEDERATED PRIME MONEY FUND II SUB-ACCOUNT
The Federated Prime Money Fund II Sub-Account of the Separate Account will
calculate its current yield based upon the seven days ended on the date
calculation. For the seven calendar days ended December 31, 1997, the
annualized yield for the Federated Prime Money Fund II Sub-Account was 3.89%
and the effective yield was 3.96%.
The current yield of the Federated Prime Money Fund II Sub-Account is computed
by determining the net change (exclusive of capital changes) in the value of a
hypothetical pre-existing Owner account having a balance of one Accumulation
Unit of the Sub-Account at the beginning of the period, subtracting the Annual
Contract Maintenance Charge, dividing the difference by the value of the
account at the beginning of the same period to obtain the base period return
and multiplying the result by (365/7).
The Federated Prime Money Fund II Sub-Account computes its effective compound
yield according to the method prescribed by the Securities and Exchange
Commission. The effective yield reflects the reinvestment of net income earned
daily on Federated Prime Money Fund II Sub-Account assets.
Net investment income for yield quotation purposes will not include either
realized capital gains and losses or unrealized appreciation and depreciation,
whether reinvested or not.
The yields quoted should not be considered a representation of the yield of the
Federated Prime Money Fund II Sub-Account in the future since the yield is not
fixed. Actual yields will depend not only on the type, quality and maturities
of the investments held by the Federated Prime Money Fund II Sub-Account and
changes in the interest rates on such investments, but also on changes in the
Federated Prime Money Fund II Sub-Account
s expenses during the period.
Yield information may be useful in reviewing the performance of the Federated
Prime Money Fund II Sub-Account and for providing a basis for comparison with
other investment alternatives. However, the Federated Prime Money Fund II
Sub-Account's yield fluctuates, unlike bank deposits or other investments which
typically pay a fixed yield for a stated period of time.
PERFORMANCE INFORMATION
From time to time, the Company may advertise standardized performance data as
described in the Prospectus. Any such advertisement will include total return
figures for the time periods indicated in the advertisement. Such total return
figures will reflect the deductions of a 1.25% Mortality and Expense Risk
Charge, a .25% Administrative Charge, the investment advisory for the underlying
Portfolio being advertised and any applicable Withdrawal Charges Annual Contract
Maintenance Charges.
The hypothetical value of a Contract purchased for the time periods described in
the advertisement will be determined by using the Accumulation Unit Values for
an initial $1,000 purchase payment, and deducting any applicable Annual Contract
Maintenance Charges and Withdrawal Charges to arrive at the ending hypothetical
value. For periods before the date that actual Accumulation Unit Values were
first computed for the Contracts, the Company has prepared Accumulation Unit
Value performance which is derived from the historical performance of the
Portfolios. The average annual total return is then determined by computing the
fixed interest rate that a $1,000 purchase payment would have to earn annually,
compounded annually, to grow to the hypothetical value at the end of time
periods described.
The formula used in these calculations is:
[P x (1+T)(n)] = ERV
43
<PAGE> 44
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1, 5, or 10 year periods at the end of
the 1, 5 or 10 year periods (or fractional portion thereof).
The standardized average annualized total returns as of December 31, 1997 for 1
year, for 5 years and for the life of the Sub-Account (or 10 years if the
Portfolio has been in existence for more than 10 years) are listed below:
<TABLE>
<CAPTION>
LIFE OF
1 YEAR 5 YEARS SUB-ACCOUNT
------ ------- -----------
<S> <C> <C> <C>
Small Cap Growth (inception 5/4/95) (5.88%) N/A 17.93%
World Equity (inception 6/10/88) 3.25% 12.97% 6.75%
Growth (inception 5/1/87) 16.68% 16.53% 14.37%
Matrix Equity (inception 6/16/88) 15.14% 13.02% 12.06%
Growth & Income (inception 5/31/95) 21.19% N/A 17.35%
Multiple Strategies (inception 5/5/87) 14.06% 13.45% 11.97%
High Income Bond (inception 6/1/87) 6.75% 8.76% 9.65%
US Govt Bond (inception 5/27/87) 2.64% 5.67% 7.05%
Federated Prime Money Fund II 3.33% 3.29%
</TABLE>
On January 2, 1997, shares of Federated Prime Money Fund II were substituted
for shares of the VIST Cash Management Portfolio. Calculations prior to that
date are based on the value of VIST Cash Management Portfolio shares held for
the periods shown.
The Company may also advertise non-standardized performance information which
does not include all charges.
In addition to total return data, the Company may include yield information in
its advertisements. For each Sub-Account (other than the Federated Prime Money
Fund II Sub-Account) for which the Company will advertise yield, it will show a
yield quotation based on a 30 day (or one month) period ended on the date of
the most recent balance sheet of the Separate Account included in the
registration statement, computed by dividing the net investment income per
Accumulation Unit earned during the period by the maximum offering price per
Unit on the last day of the period, according to the following formula:
[( a-b ) ]
Yield = 2[(----- + 1) to the sixth power - 1]
[( cd ) ]
Where:
a = Net investment income earned during the period by the
Portfolio attributable to shares owned by the Sub-
Account.
b = Expenses accrued for the period (net of reimbursements).
c = The average daily number of Accumulation Units outstanding
during the period.
d = The maximum offering price per Accumulation Unit on the
last day of the period.
The US Government Bond Sub-Account of the Separate Account yield for the period
ended December 31, 1997 was 6.45%.
The High Income Bond Sub-Account of the Separate Account yield for the period
ended December 31, 1997 was 7.42%.
Owners should note that the investment results of each Sub-Account will
fluctuate over time, and any presentation of the Sub-Account's total return for
any period should not be considered as a representation of what an investment
may earn or what an Owner's total return may be in any future period.
ANNUITY PROVISIONS
VARIABLE ANNUITY
A variable annuity is an annuity with payments which: (1) are not predetermined
as to dollar amount: and (2) will vary in amount with the net investment results
of the applicable Sub-Account(s) of the Separate Account. At the Annuity Date,
the Contract Value in each Sub-Account will be applied to the applicable Annuity
Tables. The Annuity Table used will depend upon the Annuity Option chosen. If,
as of the Annuity Date, the then current Annuity Option rates applicable to this
class of Contracts provide a first Annuity Payment greater than guaranteed under
the same Annuity Option under this Contract, the greater payment will be made.
The dollar amount of Annuity Payments after the first is determined as follows:
(1) the dollar amount of the first Annuity Payment is divided by the value of an
Annuity Unit as of the Annuity Date. This establishes the number of Annuity
Units for each monthly payment. The number of Annuity Units remains fixed during
the Annuity Payment period.
44
<PAGE> 45
(2) the fixed number of Annuity Units is multiplied by the Annuity Unit value
for the last Valuation Period of the month preceding the month for which the
payment is due. This result is the dollar amount of the payment.
The total dollar amount of each Variable Annuity Payment is the sum of all
Sub-Account Variable Annuity Payments.
FIXED ANNUITY
A fixed annuity is a series of payments made during the Annuity Period which are
guaranteed as to dollar amount by the Company and do not vary with the
investment experience of the Separate Account. The Fixed Account Value on the
day immediately preceding the Annuity Date will be used to determine the Fixed
Annuity monthly payment. The first monthly Annuity Payment will be based upon
the Annuity Option elected and the appropriate Annuity Option Table.
ANNUITY UNIT
The value of an Annuity Unit for each Sub-Account was arbitrarily set initially
at $10.
The Sub-Account Annuity Unit Value at the end of any subsequent Valuation Period
is determined by subtracting (2) from (1) and dividing the result by (3) and
multiplying the result by a factor which neutralizes the assumed investment rate
of 3% contained in the Annuity Tables where:
1. is the net result of:
a. the assets of the Sub-Account attributable to the Annuity Units;
plus or minus
b. the cumulative charge or credit for taxes reserved which is
determined by the Company to have resulted from the operation or
maintenance of the Sub-Account;
2. is the cumulative unpaid charge for the Mortality and Expense Risk Charge
and for the Administrative Charge.
3. is the number of Annuity Units outstanding at the end of the Valuation
Period.
The value of an Annuity Unit may increase or decrease from Valuation Period to
Valuation Period.
MORTALITY AND EXPENSE GUARANTEE
The Company guarantees that the dollar amount of each Annuity Payment after the
first Annuity Payment will not be affected by variations in mortality or expense
experience.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company included herein should be
considered only as bearing upon the ability of the Company to meet its
obligations under the Contracts.
45
<PAGE> 46
FINANCIAL STATEMENTS
FIRST VARIABLE LIFE INSURANCE COMPANY--FIRST VARIABLE ANNUITY FUND E
Year ended December 31, 1997
46
<PAGE> 47
Report of Independent Auditors
To the Board of Directors of First Variable Life Insurance Company and Contract
Owners of First Variable Annuity Fund E
We have audited the accompanying statement of assets, liabilities and contract
owners' equity of First Variable Life Insurance Company--First Variable Annuity
Fund E as of December 31, 1997, and the related statement of operations for the
year then ended, and the statements of changes in contract owners' equity for
each of the two years in the period then ended. These financial statements are
the responsibility of First Variable Life Insurance 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.
Our procedures included confirmation of the securities owned as of December 31,
1997 by correspondence with Variable Investors Series Trust and Federated
Investors. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Variable Life Insurance
Company--First Variable Annuity Fund E at December 31, 1997, the results of its
operations for the year then ended, and the changes in its contract owners'
equity for each of the two years in the period then ended, in conformity with
generally accepted accounting principles.
/s/Ernst & Young LLP
Boston, Massachusetts
January 30, 1998
47
<PAGE> 48
First Variable Life Insurance Company--
First Variable Annuity Fund E
Statement of Assets, Liabilities and Contract Owners' Equity
December 31, 1997
<TABLE>
<CAPTION>
HIGH
FEDERATED INCOME MULTIPLE MATRIX
PRIME MONEY GROWTH BOND STRATEGIES EQUITY
TOTAL FUND II DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in Variable
Investors Series Trust, at value
(cost $157,495,300) $160,779,198 $32,327,329 $16,447,907 $31,246,423 $13,234,079
Investments in Federated Prime
Money Fund II, at value (cost
$9,770,610) 9,770,610 $9,770,610
Receivable from First Variable
Life Insurance Company 249,590 7,993 9,466 2,665
-----------------------------------------------------------------------------
Total $170,799,398 $9,770,610 $32,335,322 $16,457,373 $31,246,423 $13,236,744
=============================================================================
LIABILITIES
Payable to First Variable Life
Insurance Company $ 478,193 $ 433,783 $ 5,947
CONTRACT OWNERS' EQUITY
Annuity contracts in payment
period 225,801 208,420 $ 17,381
Variable annuity contract
owners' equity 170,095,404 9,128,407 32,317,941 $16,457,373 31,240,476 $13,236,744
-----------------------------------------------------------------------------
Total contract owners' equity 170,321,205 9,336,827 32,335,322 16,457,373 31,240,476 13,236,744
-----------------------------------------------------------------------------
Total liabilities and contract
owners' equity $170,799,398 $9,770,610 $32,335,322 $16,457,373 $31,246,423 $13,236,744
=============================================================================
<CAPTION>
U.S.
GOVERNMENT WORLD GROWTH & SMALL CAP
BOND EQUITY INCOME GROWTH
DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in Variable
Investors Series Trust, at value
(cost $157,495,300) $7,664,271 $22,731,833 $19,997,892 $17,129,464
Investments in Federated Prime
Money Fund II, at value (cost
$9,770,610)
Receivable from First Variable
Life Insurance Company 104,296 33,359 91,811
-------------------------------------------------
Total $7,768,567 $22,765,192 $19,997,892 $17,221,275
=================================================
LIABILITIES
Payable to First Variable Life
Insurance Company $ 38,463
CONTRACT OWNERS' EQUITY
Annuity contracts in payment
period
Variable annuity contract
owners' equity $7,768,567 $22,765,192 19,959,429 $17,221,275
-------------------------------------------------
Total contract owners' equity 7,768,567 22,765,192 19,959,429 17,221,275
-------------------------------------------------
Total liabilities and contract
owners' equity $7,768,567 $22,765,192 $19,997,892 $17,221,275
=================================================
See accompanying notes.
</TABLE>
48
<PAGE> 49
First Variable Life Insurance Company--
First Variable Annuity Fund E
Statement of Operations
Year ended December 31, 1997
<TABLE>
<CAPTION>
HIGH
FEDERATED INCOME MULTIPLE MATRIX
PRIME MONEY GROWTH BOND STRATEGIES EQUITY
TOTAL FUND II DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Dividends $ 16,128,261 $ 549,817 $ 2,681,583 $ 1,089,150 $ 2,555,548 $ 3,066,563
Expenses:
Fees paid to First Variable Life
Insurance Company:
Risk and administrative
charges 2,281,170 135,461 432,735 209,175 422,962 181,787
-----------------------------------------------------------------------------
Net investment income 13,847,091 414,356 2,248,848 879,975 2,132,586 2,884,776
Realized and unrealized gain (loss)
on investments:
Realized gain on Variable
Investors Series Trust
shares redeemed 8,899,088 3,302,662 472,791 2,381,747 686,314
Net unrealized appreciation
(depreciation) on
investments during the year (1,368,372) 219,193 222,004 635,135 (1,296,817)
-----------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments 7,530,716 3,521,855 694,795 3,016,882 (610,503)
-----------------------------------------------------------------------------
Net increase in contract owners'
equity resulting from operations $ 21,377,807 $ 414,356 $ 5,770,703 $ 1,574,770 $ 5,149,468 $ 2,274,273
=============================================================================
<CAPTION>
U.S.
GOVERNMENT WORLD GROWTH & SMALL CAP
BOND EQUITY INCOME GROWTH
DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:
Dividends $ 498,552 $ 3,418,816 $ 1,670,966 $ 597,266
Expenses:
Fees paid to First Variable Life
Insurance Company:
Risk and administrative
charges 101,837 329,434 227,411 240,368
-------------------------------------------------
Net investment income 396,715 3,089,382 1,443,555 356,898
Realized and unrealized gain (loss)
on investments:
Realized gain on Variable
Investors Series Trust
shares redeemed 15,441 978,969 585,338 475,826
Net unrealized appreciation
(depreciation) on
investments during the year 115,355 (2,246,616) 1,514,112 (530,738)
-------------------------------------------------
Net realized and unrealized gain
(loss) on investments 130,796 (1,267,647) 2,099,450 (54,912)
-------------------------------------------------
Net increase in contract owners'
equity resulting from operations $ 527,511 $ 1,821,735 $ 3,543,005 $ 301,986
=================================================
</TABLE>
See accompanying notes.
49
<PAGE> 50
First Variable Life Insurance Company--
First Variable Annuity Fund E
Statements of Changes in Contract Owners' Equity
Periods ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
FEDERATED
PRIME MONEY CASH MANAGEMENT
TOTAL FUND II DIVISION
1997 1996 1997(1) 1997 1996
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) $ 13,847,091 $ 6,267,369 $ 414,356 $ $ 344,963
---------------------------------------------------------------------
Realized gain (loss) on Variable
Investors Series Trust shares
redeemed 8,899,088 8,170,635
Net unrealized depreciation
(appreciation) on investments
during the period (1,368,372) (1,058,566)
---------------------------------------------------------------------
Net increase in contract owners'
equity resulting from operations 21,377,807 13,379,438 414,356 0 344,963
FROM CONTRACT OWNER TRANSACTIONS
Net proceeds from sale and transfer
of accumulation units 29,757,747 34,399,440 12,489,583 (6,961,706) 10,564,557
Cost of accumulation units
terminated and exchanged (18,690,446) (7,267,908) (3,567,112) 0 (12,228,761)
---------------------------------------------------------------------
Increase (decrease) in contract
owners' equity from contract
owner transactions 11,067,301 27,131,532 8,922,471 (6,961,706) (1,664,204)
---------------------------------------------------------------------
Increase (decrease) in contract
owners' equity 32,445,108 40,510,970 9,336,827 (6,961,706) (1,319,241)
Contract owners' equity at
beginning of period 137,876,097 97,365,127 0 6,961,706 8,280,947
---------------------------------------------------------------------
Contract owners' equity at end of
period $170,321,205 $137,876,097 $9,336,827 $ 0 $ 6,961,706
=====================================================================
<CAPTION>
GROWTH HIGH INCOME MULTIPLE STRATEGIES
DIVISION BOND DIVISION DIVISION
1997 1996 1997 1996 1997 1996
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) $ 2,248,848 $ 1,228,358 $ 879,975 $ 631,296 $ 2,132,586 $ 2,634,292
Realized gain (loss) on Variable
Investors Series Trust shares
redeemed 3,302,662 2,738,627 472,791 390,298 2,381,747 2,254,416
Net unrealized depreciation
(appreciation) on investments
during the period 219,193 335,516 222,004 42,516 635,135 (1,259,021)
------------------------------------------------------------------------------------
Net increase in contract owners'
equity resulting from operations 5,770,703 4,302,501 1,574,770 1,064,110 5,149,468 3,629,687
FROM CONTRACT OWNER TRANSACTIONS
Net proceeds from sale and transfer
of accumulation units 4,963,450 3,593,917 2,901,716 2,454,662 3,127,507 3,358,539
Cost of accumulation units
terminated and exchanged (4,311,406) 2,067,637 82,682 804,489 (4,191,961) (1,446,981)
------------------------------------------------------------------------------------
Increase (decrease) in contract
owners' equity from contract
owner transactions 652,044 5,661,554 2,984,398 3,259,151 (1,064,454) 1,911,558
------------------------------------------------------------------------------------
Increase (decrease) in contract
owners' equity 6,422,747 9,964,055 4,559,168 4,323,261 4,085,014 5,541,245
Contract owners' equity at
beginning of period 25,912,575 15,948,520 11,898,205 7,574,944 27,155,462 21,614,217
------------------------------------------------------------------------------------
Contract owners' equity at end of
period $32,335,322 $25,912,575 $16,457,373 $11,898,205 $31,240,476 $27,155,462
====================================================================================
</TABLE>
(1) From commencement of operations, January 2, 1997
50
<PAGE> 51
First Variable Life Insurance Company--
First Variable Annuity Fund E
Statements of Changes in Contract Owners' Equity (continued)
Periods ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
MATRIX EQUITY U.S. GOVERNMENT WORLD EQUITY
DIVISION BOND DIVISION DIVISION
1997 1996 1997 1996 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) $ 2,884,776 $ 735,082 $ 396,715 $ 478,323 $ 3,089,382 $ 313,885
Realized gain (loss) on Variable
Investors Series Trust shares
redeemed 686,314 227,868 15,441 (80,014) 978,969 1,545,356
Net unrealized appreciation
(depreciation) on investments
during the period (1,296,817) (600,941) 115,355 (320,136) (2,246,616) 26,985
-----------------------------------------------------------------------------
Net increase in contract owners'
equity resulting from operations 2,274,273 362,009 527,511 78,173 1,821,735 1,886,226
FROM CONTRACT OWNER TRANSACTIONS
Net proceeds from sale and transfer
of accumulation units 1,033,568 1,335,852 664,812 816,878 2,087,308 3,279,713
Cost of accumulation units
terminated and exchanged (2,700,078) (2,515,452) (1,034,432) (1,357,965) (2,919,066) 1,330,357
-----------------------------------------------------------------------------
(Decrease) increase in contract
owners' equity from contract
owner transactions (1,666,510) (1,179,600) (369,620) (541,087) (831,758) 4,610,070
-----------------------------------------------------------------------------
Increase (decrease) in contract
owners' equity 607,763 (817,591) 157,891 (462,914) 989,977 6,496,296
Contract owners' equity at
beginning of period 12,628,981 13,446,572 7,610,676 8,073,590 21,775,215 15,278,919
-----------------------------------------------------------------------------
Contract owners' equity at end of
period $13,236,744 $12,628,981 $ 7,768,567 $ 7,610,676 $22,765,192 $21,775,215
=============================================================================
</TABLE>
51
<PAGE> 52
First Variable Life Insurance Company--
First Variable Annuity Fund E
Statements of Changes in Contract Owners' Equity (continued)
Periods ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
GROWTH & SMALL CAP GROWTH
INCOME DIVISION DIVISION
1997 1996 1997 1996
----------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) $ 1,443,555 $ (14,266) $ 356,898 $ (84,564)
Realized gain (loss) on Variable Investors Series
Trust shares redeemed 585,338 208,000 475,826 886,084
Net unrealized appreciation (depreciation) on
investments during the period 1,514,112 133,352 (530,738) 583,163
----------------------------------------------------------------
Net increase in contract owners' equity resulting
from operations 3,543,005 327,086 301,986 1,384,683
FROM CONTRACT OWNER TRANSACTIONS
Net proceeds from sale and transfer of accumulation
units 4,199,159 3,544,556 5,252,350 5,450,766
Cost of accumulation units terminated and exchanged 1,942,466 3,068,222 (1,991,539) 3,010,546
----------------------------------------------------------------
Increase (decrease) in contract owners' equity from
contract owner transactions 6,141,625 6,612,778 3,260,811 8,461,312
----------------------------------------------------------------
Increase (decrease) in contract owners' equity 9,684,630 6,939,864 3,562,797 9,845,995
Contract owners' equity at beginning of period 10,274,799 3,334,935 13,658,478 3,812,483
----------------------------------------------------------------
Contract owners' equity at end of period $19,959,429 $10,274,799 $17,221,275 $13,658,478
================================================================
</TABLE>
See accompanying notes.
52
<PAGE> 53
First Variable Life Insurance Company--
First Variable Annuity Fund E
Notes to Financial Statements
December 31, 1997
1. ORGANIZATION
First Variable Annuity Fund E (the Fund) is a segregated account of First
Variable Life Insurance Company (First Variable Life) and is registered as a
unit investment trust under the Investment Company Act of 1940, as amended (the
1940 Act). Eight of the nine investment divisions of the Fund are invested
solely in the shares of the eight corresponding portfolios of the Variable
Investors Series Trust (the Trust), a no-load, diversified, open-end, series
management investment company registered under the 1940 Act. The remaining
investment division, formerly the Cash Management Division of the Trust, is
invested in the Federated Prime Money Fund II (Federated), a portfolio of
Federated Insurance Series Trust, an open end management investment company.
First Variable Life liquidated its investment in the Cash Management Division on
January 2, 1997. Under applicable insurance law, the assets and liabilities of
the Fund are clearly identified and distinguished from the other assets and
liabilities of First Variable Life. The Fund cannot be charged with liabilities
arising out of any other business of First Variable Life.
First Variable Life is a wholly-owned subsidiary of Irish Life of North America,
Inc. (ILoNA), which is a wholly-owned subsidiary of Irish Life, plc. (Irish
Life) of Dublin, Ireland. First Variable Life is domiciled in the State of
Arkansas.
The assets of the Fund are not available to meet the general obligations of
First Variable Life or ILoNA and are held for the exclusive benefit of the
contract owners participating in the Fund.
During 1997, the Tilt Utility Division, the Common Stock Division and the Small
Cap Division were renamed the Matrix Equity Division, the Growth Division and
the Small Cap Growth Division, respectively.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in preparation of its financial statements. The policies
are in conformity with generally accepted accounting principles.
INVESTMENTS
The investments in shares of the Trust and Federated are stated at the net asset
value per share of the respective portfolios of the Trust and Federated.
Investment transactions are accounted for on the date the shares are purchased
or sold. The cost of shares sold and redeemed is determined on the first-in,
first-out method. Dividends and capital gain distributions received from the
Trust and Federated are reinvested in additional shares of the Trust and
Federated and are recorded as income by the Fund on the ex-dividend date.
FEDERAL INCOME TAXES
For federal income tax purposes, operations of the Fund are combined with those
of First Variable Life, which is taxed as a life insurance company. First
Variable Life anticipates no tax liability resulting from the operations of the
Fund. Therefore, no provision for income taxes has been charged against the
Fund.
53
<PAGE> 54
First Variable Life Insurance Company--
First Variable Annuity Fund E
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
3. INVESTMENTS
The following table presents selected data for investments in each of the
Portfolios of the Trust and Federated at December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF NET ASSET
SHARES COST VALUE
-------------------------------------------------
<S> <C> <C> <C>
Federated Prime Money Fund II 9,770,610 $ 9,770,610 $ 9,770,610
Growth Portfolio 931,561 29,804,530 32,327,329
High Income Bond Portfolio 1,692,156 16,256,299 16,447,907
Multiple Strategies Portfolio 2,207,044 30,620,573 31,246,423
Matrix Equity Portfolio 927,053 13,803,283 13,234,079
U.S. Government Bond Portfolio 754,283 7,858,059 7,664,271
World Equity Portfolio 1,613,971 23,841,255 22,731,833
Growth & Income Portfolio 1,372,792 18,306,052 19,997,892
Small Cap Growth Portfolio 1,099,591 17,005,249 17,129,464
--------------------------------
Totals $167,265,910 $170,549,808
================================
</TABLE>
54
<PAGE> 55
First Variable Life Insurance Company--
First Variable Annuity Fund E
Notes to Financial Statements (continued)
4. VARIABLE ANNUITY CONTRACT OWNERS' EQUITY
Variable annuity contract owners' equity at December 31, 1997 consists of the
following:
<TABLE>
<CAPTION>
ACCUMULATION UNIT
ACCUMULATION UNITS VALUE EQUITY
---------------------------------------------------
<S> <C> <C> <C>
POLICY FORMS 7500.1, 7600.1, 7700 AND 7750
Federated Prime Money Fund II Division 147,093 15.411 $ 2,271,265
Growth Division 215,323 33.180 7,144,422
High Income Bond Division 74,227 25.666 1,905,106
Multiple Strategies Division 247,419 29.142 7,210,174
Matrix Equity Division 82,498 31.478 2,596,877
U.S. Government Bond Division 165,909 20.490 3,399,484
World Equity Division 147,145 19.575 2,880,366
Growth & Income Division 37,311 15.748 587,580
Small Cap Growth Division 26,117 16.207 423,282
------------
Subtotal 28,418,556
POLICY FORMS 7800 AND 20224
Federated Prime Money Fund II Division 473,138 12.473 5,901,446
Growth Division 912,776 25.789 23,539,580
High Income Bond Division 638,293 20.500 13,085,001
Multiple Strategies Division 945,042 24.276 22,941,833
Matrix Equity Division 419,489 24.007 10,070,670
U.S. Government Bond Division 21,356 16.677 3,658,196
World Equity Division 1,075,464 17.632 18,962,586
Growth & Income Division 1,090,951 15.687 17,113,746
Small Cap Growth Division 950,578 16.145 15,347,075
------------
Subtotal 130,620,133
</TABLE>
55
<PAGE> 56
First Variable Life Insurance Company--
First Variable Annuity Fund E
Notes to Financial Statements (continued)
4. VARIABLE ANNUITY CONTRACT OWNERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
ACCUMULATION UNIT
ACCUMULATION UNITS VALUE EQUITY
-----------------------------------------------------
<S> <C> <C> <C>
POLICY FORM 20230
Federated Prime Money Fund II Division 89,012 10.737 $ 955,696
Growth Division 106,747 15.307 1,633,939
High Income Bond Division 114,612 12.802 1,467,266
Multiple Strategies Division 77,185 14.102 1,088,469
Matrix Equity Division 43,262 13.157 569,197
U.S. Government Bond Division 63,534 11.189 710,887
World Equity Division 75,107 12.279 922,240
Growth & Income Division 152,215 14.835 2,258,103
Small Cap Growth Division 112,396 12.909 1,450,918
------------
Subtotal 11,056,715
------------
Total $170,095,404
============
</TABLE>
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of Trust and Federated shares by the
Fund during the year ended December 31, 1997 are shown below:
<TABLE>
<CAPTION>
PURCHASES SALES
------------------------------
<S> <C> <C>
Federated Prime Money Fund II Portfolio $ 43,340,570 $ 40,543,123
Growth Portfolio 16,166,022 13,273,239
High Income Bond Portfolio 12,889,027 9,034,988
Multiple Strategies Portfolio 12,747,892 11,675,350
Matrix Equity Portfolio 5,001,635 3,786,195
U.S. Government Bond Portfolio 2,224,927 2,302,372
World Equity Portfolio 9,908,153 7,685,634
Growth & Income Portfolio 10,933,908 3,311,117
Small Cap Growth Portfolio 12,808,151 9,279,273
------------------------------
Totals $126,020,285 $100,891,291
============ ============
</TABLE>
56
<PAGE> 57
First Variable Life Insurance Company--
First Variable Annuity Fund E
Notes to Financial Statements (continued)
6. EXPENSES
First Variable Life charges the Fund, based on the value of the Fund, at an
annual rate of 0.6% for mortality risks, 0.15% for distribution expense risks
and .40% for administrative expense risks on policies issued prior to May 1,
1987 which were not exchanged from policy form 7500.1 to policy form 7600.1.
First Variable Life charges the Fund, based on the value of the Fund, at an
annual rate of 0.75% for mortality expense risks and 0.50% for administrative
expense risks on policies issued after April 30, 1987 and on policies exchanged
for policy form 7600.1. First Variable Life charges the Fund, based on the value
of the Fund, at an annual rate of 0.85% for mortality risks, 0.40% for expense
risks and 0.15% for administrative charges on policies issued under policy forms
7800 and 20224. First Variable Life charges the Fund, based on the value of the
Fund, at an annual value of 0.85% for mortality risks, 0.40% for expense risks
and 0.25% for administrative charges on policies issued under policy form 20230.
Total charges to the Fund for all the policy forms for the year ended December
31, 1997 was $2,281,170.
7. DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code, a variable
annuity contract, other than a contract issued in connection with certain types
of employee benefits plans, will not be treated as an annuity contract for
federal tax purposes for any period for which the investments of the segregated
asset account on which the contract is based are not adequately diversified. The
Code provides that the "adequately diversified" requirement may be met if the
underlying investments satisfy either a statutory safe harbor test or
diversification requirements set forth in regulations issued by the Secretary of
Treasury.
The Internal Revenue Service has issued regulations under section 817(h) of the
Code. First Variable Life believes that the Fund satisfies the current
requirements of the regulations, and it intends that the Fund will continue to
meet such requirements.
8. PRINCIPAL UNDERWRITER AND GENERAL DISTRIBUTOR
First Variable Capital Services, Inc., a wholly-owned subsidiary of First
Variable Life, is principal underwriter and general distributor of the contracts
issued through the Fund.
9. YEAR 2000 ISSUES (UNAUDITED)
Like other investment funds and financial and business organizations around the
world, the Fund could be adversely affected if the computer systems of First
Variable Life and those of its service providers do not properly process and
calculate date-related information and data from and after January 1, 2000.
First Variable Life has completed an assessment of the Year 2000 impact on its
systems, procedures, customers and business processes. At December 31, 1997,
management of First Variable Life is satisfied that their main operating systems
are Year 2000 compliant. First Variable Life is reviewing its general office
systems and will be contacting its service providers during 1998. First Variable
Life believes it will complete the Year 2000 project not later than December 31,
1998, which is prior to any anticipated impact on its operating systems.
The date on which First Variable Life believes it will complete the Year 2000
project is based on its management's best estimates. Although there can be no
guarantee that these estimates will be achieved, its management does not at this
time believe that actual results will differ materially from those anticipated.
Specific factors that might cause such material differences would most likely
result from First Variable Life's service providers.
57
<PAGE> 58
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
First Variable Life Insurance Company
We have audited the accompanying consolidated balance sheets of First Variable
Life Insurance Company (the Company) as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholder's equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Variable Life Insurance Company at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 6, 1998
58
<PAGE> 59
First Variable Life Insurance Company
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------
<S> <C> <C>
ASSETS
Investments (Note 3):
Fixed maturities-available-for-sale, at
fair value (amortized cost:
1997-$274,439,000; 1996-$278,305,000) $294,961,000 $294,195,000
Option contracts 1,057,000 94,000
Equity securities-available-for-sale, at
fair value (cost: $684,000 in 1997 and 1996) 825,000 691,000
Policy loans 267,000 --
------------------------------
Total investments 297,110,000 294,980,000
Cash and cash equivalents 3,029,000 2,433,000
Accrued investment income 5,744,000 5,636,000
Deferred policy acquisition costs 7,520,000 5,486,000
Value of insurance in force acquired (Note 4) 16,939,000 19,494,000
Property and equipment, less allowances for depreciation
of $773,000 in 1997 and $508,000 in 1996 445,000 649,000
Goodwill, less accumulated amortization of $475,000
in 1997 and $329,000 in 1996 2,448,000 2,594,000
Other assets 732,000 2,273,000
Assets held in separate accounts 219,807,000 176,306,000
------------------------------
Total assets $553,774,000 $509,851,000
==============================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits for annuity and life products $233,988,000 $239,509,000
Unearned revenue reserve 282,000 52,000
Supplementary contracts without life contingencies 21,711,000 21,008,000
Deferred income tax liability (Note 5) 6,692,000 5,642,000
Other liabilities 2,837,000 938,000
Liabilities related to separate accounts 219,807,000 176,306,000
------------------------------
Total liabilities 485,317,000 443,455,000
Commitments and contingencies (Note 8)
Stockholder's equity:
Capital stock, par value $1.00 per share-authorized
3,500,000 shares, issued and outstanding
2,500,000 shares 2,500,000 2,500,000
Additional paid-in capital 53,104,000 53,104,000
Net unrealized investment gains (Note 3) 9,066,000 7,324,000
Retained earnings 3,787,000 3,468,000
------------------------------
Total stockholder's equity 68,457,000 66,396,000
------------------------------
Total liabilities and stockholder's equity $553,774,000 $509,851,000
==============================
</TABLE>
See accompanying notes.
56
<PAGE> 60
First Variable Life Insurance Company
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Revenues:
Annuity and life product charges $ 3,141,000 $ 2,408,000 $ 1,786,000
Net investment income 22,597,000 23,458,000 23,465,000
Realized gains on investments 1,227,000 972,000 900,000
Other income 1,368,000 1,114,000 829,000
---------------------------------------------
Total revenues 28,333,000 27,952,000 26,980,000
Benefits and expenses:
Annuity and life benefits 14,856,000 16,336,000 16,694,000
Underwriting, acquisition and insurance
expenses 9,915,000 7,275,000 6,600,000
Management fee paid to parent 480,000 480,000 480,000
Other expenses 2,610,000 1,421,000 1,269,000
---------------------------------------------
Total benefits and expenses 27,861,000 25,512,000 25,043,000
---------------------------------------------
Income before income taxes 472,000 2,440,000 1,937,000
Income taxes 153,000 836,000 666,000
---------------------------------------------
Net income $ 319,000 $ 1,604,000 $ 1,271,000
=============================================
</TABLE>
See accompanying notes.
60
<PAGE> 61
First Variable Life Insurance Company
Consolidated Statements of Changes in Stockholder's Equity
<TABLE>
<CAPTION>
NET
UNREALIZED
ADDITIONAL INVESTMENT TOTAL
CAPITAL PAID-IN GAINS RETAINED STOCKHOLDER'S
STOCK CAPITAL (LOSSES) EARNINGS EQUITY
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $2,500,000 $48,104,000 $(3,308,000) $ 593,000 $47,889,000
Contribution from parent -- 5,000,000 -- -- 5,000,000
Net income for 1995 -- -- -- 1,271,000 1,271,000
Change in net unrealized
investment gains/losses -- -- 16,497,000 -- 16,497,000
---------------------------------------------------------------------------------
Balance at December 31, 1995 2,500,000 53,104,000 13,189,000 1,864,000 70,657,000
Net income for 1996 -- -- -- 1,604,000 1,604,000
Change in net unrealized
investment gains/losses -- -- (5,865,000) -- (5,865,000)
---------------------------------------------------------------------------------
Balance at December 31, 1996 2,500,000 53,104,000 7,324,000 3,468,000 66,396,000
Net income for 1997 -- -- -- 319,000 319,000
Change in net unrealized
investment gains/losses -- -- 1,742,000 -- 1,742,000
---------------------------------------------------------------------------------
Balance at December 31, 1997 $2,500,000 $53,104,000 $ 9,066,000 $ 3,787,000 $68,457,000
=================================================================================
</TABLE>
See accompanying notes.
61
<PAGE> 62
First Variable Life Insurance Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 319,000 $ 1,604,000 $ 1,271,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Adjustments related to interest-sensitive
products:
Annuity benefits 14,856,000 16,336,000 16,694,000
Annuity product charges (3,141,000) (2,408,000) (1,786,000)
Realized gains on investments (1,227,000) (972,000) (900,000)
Policy acquisition costs deferred (3,208,000) (2,800,000) (3,693,000)
Amortization of deferred policy acquisition costs 594,000 360,000 132,000
Provision for depreciation and other amortization 937,000 524,000 481,000
Provision for deferred income taxes 153,000 836,000 666,000
Other 3,560,000 (1,949,000) (6,765,000)
-----------------------------------------------
Net cash provided by operating activities 12,843,000 11,531,000 6,100,000
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities-available-for-sale 24,657,000 21,770,000 19,378,000
Equity securities -- -- 1,807,000
-----------------------------------------------
24,657,000 21,770,000 21,185,000
Acquisition of investments:
Fixed maturities-available-for-sale (19,142,000) (7,517,000) (74,567,000)
Equity securities -- -- (1,500,000)
Option contracts (963,000) (94,000) --
-----------------------------------------------
(20,105,000) (7,611,000) (76,067,000)
Policy loans and other (267,000) (193,000) (252,000)
-----------------------------------------------
Net cash provided (used) by investing activities 4,285,000 13,966,000 (55,134,000)
</TABLE>
62
<PAGE> 63
First Variable Life Insurance Company
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Receipts from interest-sensitive products credited
to policyholder account balances $ 64,181,000 $ 58,175,000 $ 67,063,000
Return of policyholder account balances on
interest-sensitive products (80,713,000) (86,824,000) (72,196,000)
Contribution from parent -- -- 5,000,000
--------------------------------------------------
Net cash used in financing activities (16,532,000) (28,649,000) (133,000)
--------------------------------------------------
Net increase (decrease) in cash and cash equivalents 596,000 (3,152,000) (49,167,000)
Cash and cash equivalents at beginning of year 2,433,000 5,585,000 54,752,000
--------------------------------------------------
Cash and cash equivalents at end of year $ 3,029,000 $ 2,433,000 $ 5,585,000
==================================================
</TABLE>
See accompanying notes.
63
<PAGE> 64
First Variable Life Insurance Company
Notes to Consolidated Financial Statements
December 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS
First Variable Life Insurance Company (the Company), a life insurance company
domiciled in the State of Arkansas, is a wholly-owned subsidiary of Irish Life
of North America, Inc. (ILoNA), which is owned by Irish Life, plc (Irish Life)
of Dublin, Ireland. The Company is licensed in 49 states and sells variable and
fixed annuity products and variable universal life products through regional
wholesalers and insurance brokers.
CONSOLIDATION
The consolidated financial statements include the Company and its wholly-owned
subsidiaries, First Variable Advisory Services Corp. and First Variable Capital
Services, Inc. All significant intercompany transactions have been eliminated.
INVESTMENTS
Fixed Maturities and Equity Securities
Fixed-maturity securities (bonds) may be categorized as "available-for-sale,"
"held for investment" or "trading." Fixed-maturity securities which may be sold
are designated as "available-for-sale." Available-for-sale securities are
reported at market value, and unrealized gains and losses on these securities
are included directly in stockholder's equity, net of certain adjustments (see
Note 3). Fixed-maturity securities that the Company has the positive intent and
ability to hold to maturity are designated as "held-for-investment."
Held-for-investment securities are reported at cost adjusted for amortization of
premiums and discounts. Changes in the market value of these securities, except
for declines that are other than temporary, are not reflected in the Company's
financial statements. Securities that are bought and held principally for the
purpose of selling them in the near term are designated as "trading securities."
Unrealized gains and losses on trading securities are included in current
earnings. At December 31, 1997 and 1996, all of the Company's fixed-maturity
securities are designated as available-for-sale, although the Company is not
precluded from designating fixed-maturity securities as held-for-investment or
trading at some future date.
64
<PAGE> 65
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Option contracts are carried at unamortized premium paid for the contract
adjusted for increases in their intrinsic value from increases in the S&P 500
index.
Policy loans are carried at unpaid principal balances.
Premiums and discounts on investments are amortized/accrued using methods which
result in a constant yield over the securities' expected lives.
Amortization/accrual of premiums and discounts on mortgage and asset-backed
securities incorporates a prepayment assumption to estimate the securities'
expected lives.
Equity securities (common stocks) are designated as available for sale and are
reported at fair value. The change in unrealized gain and loss of equity
securities (net of related deferred income taxes, if any) is included directly
in stockholder's equity.
REALIZED GAINS AND LOSSES ON INVESTMENTS
The carrying values of all the Company's investments are reviewed on an ongoing
basis for credit deterioration, and if this review indicates a decline in market
value that is other than temporary, the Company's carrying value in the
investment is reduced to its estimated realizable value (the sum of the
estimated nondiscounted cash flows) and a specific write-down is taken. Such
reductions in carrying value are recognized as realized losses and charged to
income. Realized gains and losses on sales are determined on the basis of
specific identification of investments. If the Company expects that an issuer of
a security will modify its payment pattern from contractual terms but no
write-down is required, future investment income is recognized at the rate
implicit in the calculation of net realizable value under the expected payment
pattern.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
65
<PAGE> 66
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED POLICY ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE ACQUIRED
To the extent recoverable from future policy revenues and gross profits, certain
costs of acquiring new insurance business, principally commissions and other
expenses related to the production of new business, have been deferred. The
value of insurance in force acquired is an asset that arose at the date the
Company was acquired by ILoNA. The initial value was determined by an actuarial
study using expected future gross profits as a measurement of the net present
value of the insurance acquired. Interest accrues on the current unamortized
balance at 7%.
For variable universal life insurance and investment products, these costs are
being amortized generally in proportion to expected gross profits from surrender
charges and investment, mortality and expense margins. That amortization is
adjusted retrospectively when estimates of current or future gross profits
(including the impact of investment gains and losses) to be realized from a
group of products are revised.
PROPERTY AND EQUIPMENT
Property and equipment are reported at cost less allowances for depreciation.
Depreciation expense is computed primarily using the straight-line method over
the estimated useful lives of the assets.
GOODWILL
Goodwill represents the excess of the fair value of assets exchanged over the
net assets acquired. Goodwill is being amortized on a straight-line basis over a
period of twenty years.
The carrying value of goodwill is regularly reviewed for indications of
impairment in value which, in the view of management, are other than temporary.
If facts and circumstances suggest that goodwill is impaired, the Company
assesses the fair value of the underlying business and reduces goodwill to an
amount that results in the book value of the underlying business approximating
fair value. The Company has not recorded any such write-downs during the periods
ended December 31, 1997, 1996 or 1995.
66
<PAGE> 67
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FUTURE POLICY BENEFITS
Future policy benefit reserves for annuity and variable universal life products
are computed under a retrospective deposit method and represent policy account
balances before applicable surrender charges. Policy benefits and claims that
are charged to expense include benefit claims incurred in the period in excess
of related policy account balances. Interest crediting rates for annuity
products ranged from 4.5% to 6.5% in 1997 and 1996, and 4.5% to 6.8% in 1995.
DEFERRED INCOME TAXES
Deferred income tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. Deferred income tax expenses or credits are
based on the changes in the related asset or liability from period to period.
SEPARATE ACCOUNTS
The separate account assets and liabilities reported in the accompanying
consolidated balance sheets represent funds that are separately administered,
principally for the benefit of certain policyholders who bear the investment
risk. The separate account assets and liabilities are carried at fair value.
Revenues and expenses related to the separate account assets and liabilities, to
the extent of benefits paid or provided to the separate account policyholders,
are excluded from the amounts reported in the accompanying consolidated
statements of income.
RECOGNITION OF PREMIUM REVENUES AND COSTS
Revenues for annuity and variable universal life products consist of policy
charges for the cost of insurance, administration charges and surrender charges
assessed against policyholder account balances during the period. Expenses
related to these products include interest credited to policyholder account
balances and benefit claims incurred in excess of policyholder account balances.
67
<PAGE> 68
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Approximately 42%, 68% and 49% of the direct business written (as measured by
premiums received) during the periods ended December 31, 1997, 1996 and 1995,
respectively, were written through three wholesalers. The Company's management
believes that other broker/dealers could generate the same level of sales on
comparable terms. Direct premiums are not concentrated in any geographical area.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities, at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Significant estimates and assumptions are utilized in the calculation of
deferred policy acquisition costs, policyholder liabilities and accruals,
postretirement benefits, guaranty fund assessment accruals and valuation
allowances on investments. It is reasonably possible that actual experience
could differ from the estimates and assumptions utilized which could have a
material impact on the consolidated financial statements.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" (SFAS 130), which is effective for years beginning after December 15,
1997. SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS 130 will require that enterprises (a) classify items
of other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of the
balance sheet. SFAS 130 will not have any impact on the Company's consolidated
results of operations, financial position or cash flows.
68
<PAGE> 69
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures About
Fair Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
consolidated balance sheet, for which it is practicable to estimate that value.
In cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
SFAS No. 107 also excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements and allows companies to forego the
disclosures when those estimates can only be made at excessive cost.
Accordingly, the aggregate fair value amounts presented herein are limited by
each of these factors and do not purport to represent the underlying value of
the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Fixed-Maturity Securities: Fair values for fixed-maturity securities have
been determined by the Company's outside investment manager and are based
on quoted market prices, when available, or price matrices for securities
which are not actively traded, developed using yield data and other
factors relating to instruments or securities with similar
characteristics.
Option Contracts: The fair values for option contracts are based on
settlement values, quoted market prices of comparable instruments and
fees currently charged to enter into similar loans offered to borrowers
with similar credit ratings. Similar characteristics are aggregated for
the purposes of the calculations.
Equity Securities: The fair values for equity securities are based on
quoted market prices.
Policy Loans and Other Loans Receivable: The Company has not determined
the fair values associated with its policy loans and other loans
receivable as management believes any differences between the Company's
carrying value and the fair values afforded these instruments are
immaterial to the Company's financial position and, accordingly, the cost
to provide such disclosure would exceed the benefit derived. At December
31, 1997, the interest rate related to the outstanding policy loans is
5%.
69
<PAGE> 70
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Cash and Cash Equivalents: The carrying amounts reported in the
consolidated balance sheets for these instruments approximate their fair
values.
Assets and Liabilities of Separate Accounts: Separate account assets and
liabilities are reported at estimated fair value in the Company's
consolidated balance sheets.
Future Policy Benefits for Annuity and Life Products and Supplementary
Contracts Without Life Contingencies: Fair values of the Company's
liabilities under contracts not involving significant mortality or
morbidity risks (principally deferred annuities) are stated at the cost
the Company would incur to extinguish the liability; i.e., the cash
surrender value. The Company is not required to and has not estimated
fair value of its liabilities under other contracts.
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of SFAS No. 107 at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------------------ ------------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities-
available-for-sale $294,961,000 $294,961,000 $294,195,000 $294,195,000
Option contracts 1,057,000 1,057,000 94,000 94,000
Equity securities 825,000 825,000 691,000 691,000
Policy loans 267,000 267,000 -- --
Cash and cash equivalents 3,029,000 3,029,000 2,433,000 2,433,000
Assets held in separate
accounts 219,807,000 219,807,000 176,306,000 176,306,000
LIABILITIES
Future policy benefits for
annuity and life products 233,988,000 233,988,000 239,509,000 239,562,000
Supplementary contracts
without life
contingencies 21,711,000 21,711,000 21,008,000 21,008,000
Liabilities related to
separate accounts 219,807,000 219,807,000 176,306,000 176,306,000
</TABLE>
70
<PAGE> 71
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT OPERATIONS
FIXED MATURITIES AND EQUITY SECURITIES
The following tables contain amortized cost and market value information on
fixed maturities (bonds) and equity securities (common stocks) at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
---------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Fixed maturities-available-for-sale:
United States Government and agencies:
Mortgage and asset-backed securities $ 24,133,000 $ 730,000 $(283,000) $ 24,580,000
Other 23,546,000 1,391,000 (138,000) 24,799,000
State, municipal and other governments 3,991,000 250,000 -- 4,241,000
Public utilities 69,972,000 8,299,000 (303,000) 77,968,000
Industrial and miscellaneous 152,797,000 10,758,000 (182,000) 163,373,000
---------------------------------------------------------------
Total fixed maturities-available-for-sale $274,439,000 $21,428,000 $(906,000) $294,961,000
===============================================================
Equity securities $ 684,000 $ 141,000 $ -- $ 825,000
===============================================================
DECEMBER 31, 1996
Fixed maturities-available-for-sale:
United States Government and agencies:
Mortgage and asset-backed securities $ 25,641,000 $ 1,315,000 $(105,000) $ 26,851,000
Other 22,483,000 1,109,000 (20,000) 23,572,000
State, municipal and other governments 3,994,000 270,000 -- 4,264,000
Public utilities 81,053,000 6,224,000 (44,000) 87,233,000
Industrial and miscellaneous 145,134,000 7,406,000 (265,000) 152,275,000
---------------------------------------------------------------
Total fixed maturities-available-for-sale $278,305,000 $16,324,000 $(434,000) $294,195,000
===============================================================
Equity securities $ 684,000 $ 7,000 $ -- $ 691,000
===============================================================
</TABLE>
71
<PAGE> 72
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investment Operations (continued)
The amortized cost and estimated market value of the Company's portfolio of
fixed-maturity securities at December 31, 1997, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
MARKET
AMORTIZED COST VALUE
-------------------------------
<S> <C> <C>
Due in one year or less $ 4,969,000 $ 4,999,000
Due after one year through five years 71,798,000 74,535,000
Due after five years through ten years 97,448,000 104,134,000
Due after ten years 76,091,000 86,713,000
Mortgage and asset-backed securities 24,133,000 24,580,000
-------------------------------
$274,439,000 $294,961,000
===============================
</TABLE>
The unrealized gain or loss on fixed-maturity and equity securities
available-for-sale is reported as a separate component of stockholder's equity,
reduced by adjustments to deferred policy acquisition costs and value of
insurance in force acquired that would have been required as a charge or credit
to income had such amounts been realized and a provision for deferred income
taxes. Net unrealized investment gains (losses) as reported were comprised of
the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------
<S> <C> <C>
Unrealized appreciation on fixed-maturity and equity
securities available-for-sale $20,663,000 $15,897,000
Adjustments for assumed changes in amortization pattern of:
Deferred policy acquisition costs (1,780,000) (1,200,000)
Value of insurance in force acquired (5,157,000) (3,600,000)
Provision for deferred income tax benefit (4,660,000) (3,773,000)
--------------------------
Net unrealized investment gains $ 9,066,000 $ 7,324,000
==========================
</TABLE>
72
<PAGE> 73
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT OPERATIONS (CONTINUED)
NET INVESTMENT INCOME
Components of net investment income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Income from:
Fixed maturities-available-for-sale $22,183,000 $23,364,000 $22,635,000
Cash and cash equivalents 225,000 288,000 1,051,000
Option contracts 474,000 -- --
---------------------------------------------
22,882,000 23,652,000 23,686,000
Less investment expenses (285,000) (194,000) (221,000)
-----------------------------------------------
Net investment income $22,597,000 $23,458,000 $23,465,000
===============================================
REALIZED AND UNREALIZED GAINS AND LOSSES
Realized gains (losses) and the change in unrealized gain (loss) on investments
are summarized below:
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
REALIZED
Fixed maturities-available-for-sale $1,227,000 $ 972,000 $ 593,000
Equity securities -- -- 307,000
----------------------------------------------
Realized gains on investments $1,227,000 $ 972,000 $ 900,000
UNREALIZED
Fixed maturities-available-for-sale $4,632,000 $(12,756,000) $33,437,000
Equity securities 134,000 369,000 (133,000)
----------------------------------------------
Change in unrealized
appreciation/depreciation of investments $4,766,000 $(12,387,000) $33,304,000
==============================================
</TABLE>
73
<PAGE> 74
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT OPERATIONS (CONTINUED)
An analysis of sales, maturities and principal repayments of the Company's fixed
maturities portfolio (all classified as available-for-sale) for the periods
ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED REALIZED REALIZED
COST GAINS LOSSES PROCEEDS
----------------------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1997
Scheduled principal repayments
and calls $11,636,000 $ 447,000 -- $12,083,000
Sales 11,795,000 851,000 $ (72,000) 12,574,000
----------------------------------------------------------------
Total $23,431,000 $1,298,000 $ (72,000) $24,657,000
================================================================
Year ended December 31, 1996
Scheduled principal repayments
and calls $13,416,000 $ 329,000 $ (8,000) $13,737,000
Sales 7,382,000 715,000 (64,000) 8,033,000
----------------------------------------------------------------
Total $20,798,000 $1,044,000 $ (72,000) $21,770,000
================================================================
December 31, 1995
Scheduled principal repayments
and ca!Is $ 6,448,000 $ 117,000 $ (38,000) $ 6,527,000
Sales 12,337,000 635,000 (121,000) 12,851,000
----------------------------------------------------------------
Total $18,785,000 $ 752,000 $(159,000) $19,378,000
================================================================
</TABLE>
Income taxes during the periods ended December 31, 1997, 1996 and 1995 include a
provision of $416,000, $331,000 and $306,000, respectively, for the tax effect
of realized gains.
74
<PAGE> 75
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. INVESTMENT OPERATIONS (CONTINUED)
OTHER
At December 31, 1997, fixed maturities with a carrying value of $8,281,000 were
held on deposit with state agencies to meet regulatory requirements.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States Government) exceeded 10% of stockholder's equity
at December 31, 1997.
The Company has acquired call option contracts relating to its equity-indexed
annuity product to hedge increases in the S&P 500 index. The options are
purchased concurrently with the issuance of these annuity contracts and expire,
if not utilized, at the end of the annuities' term. The Company pays, at the
beginning of the option contract, a premium for transferring the risk of
unfavorable changes in the S&P 500 index. The carrying value of the option
contracts is based upon the unamortized premium paid for the contract adjusted
for increases in its intrinsic value from increases in the S&P 500 index. The
carrying value of these contracts was $1,057,000 and $94,000 at December 31,
1997 and 1996, respectively.
CONCENTRATIONS OF CREDIT RISK
The Company's investment in public utility bonds at December 31, 1997 represents
26% of total investments and 14% of total assets. The holdings of public utility
bonds are widely diversified and all issues met the Company's investment
policies and credit standards when purchased.
75
<PAGE> 76
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. VALUE OF INSURANCE IN FORCE ACQUIRED
The value of insurance in force acquired is an asset that represents the present
value of future profits on business acquired. An analysis of the value of
insurance in force acquired for the periods ended December 31, 1997 and 1996 is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
-----------------------------
<S> <C> <C>
Excluding impact on net unrealized investment gains
and losses:
Balance at beginning of period $23,094,000 $23,833,000
Accretion of interest during the period 1,582,000 1,642,000
Amortization of asset (2,580,000) (2,381,000)
-----------------------------
Balance prior to impact of net unrealized investment
gains and losses 22,096,000 23,094,000
Offset against net unrealized investment gains and
losses (5,157,000) (3,600,000)
-----------------------------
Balance at end of period $16,939,000 $19,494,000
=============================
</TABLE>
Amortization of the value of insurance in force acquired for the next five years
ending December 31 is expected to be as follows: 1998-$1,113,000;
1999-$1,280,000; 2000-$1,430,000; 2001-$1,384,000 and 2002-$1,340,000.
5. FEDERAL INCOME TAXES
The Company and its subsidiaries each file separate federal income tax returns.
Deferred income taxes have been established by the Company and its subsidiaries
based upon the temporary differences, the reversal of which will result in
taxable or deductible amounts in future years when the related asset or
liability is recovered or settled, within each entity.
76
<PAGE> 77
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. FEDERAL INCOME TAXES (CONTINUED)
Income tax expenses (credits) are included in the consolidated financial
statements as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Taxes provided in consolidated
statements of income on income
before income taxes-deferred $ 153,000 $ 836,000 $ 666,000
---------------------------------------------
153,000 836,000 666,000
Taxes provided in consolidated
statements of changes in
stockholder's equity:
Amounts attributable to change in
net unrealized investment
gains/losses during year-deferred 897,000 (3,022,000) 8,499,000
---------------------------------------------
$1,050,000 $(2,186,000) $9,165,000
=============================================
</TABLE>
The effective tax rate on income before income taxes is different from the
prevailing federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Income before income taxes $ 472,000 $2,440,000 $1,937,000
==========================================
Income tax at federal statutory rate (34%) $ 160,000 $ 830,000 $ 659,000
Tax effect (decrease) off:
Other (7,000) 6,000 7,000
------------------------------------------
Income tax expense $ 153,000 $ 836,000 $ 666,000
==========================================
</TABLE>
77
<PAGE> 78
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. FEDERAL INCOME TAXES (CONTINUED)
The tax effect of temporary differences giving rise to the Company's deferred
income tax assets and liabilities at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------
<S> <C> <C>
Deferred tax assets:
Future policy benefits $ 1,969,000 $ 1,524,000
Operating loss carryforwards 2,590,000 2,245,000
Other 124,000 20,000
------------------------------
4,683,000 3,789,000
Deferred tax liabilities:
Fixed-maturity and equity securities (5,946,000) (4,702,000)
Deferred policy acquisition costs (2,523,000) (1,908,000)
Value of insurance in force acquired (2,533,000) (2,453,000)
Other (373,000) (368,000)
------------------------------
(11,375,000) (9,431,000)
------------------------------
Deferred income tax liability $ (6,692,000) $(5,642,000)
==============================
</TABLE>
The Company has federal net operating loss carryforwards reportable on its
federal tax return aggregating $7,619,000 at December 31, 1997 which expire from
2009 to 2012.
6. RETIREMENT AND COMPENSATION PLANS
Substantially all full-time employees of the Company are covered by a
non-contributory defined benefit pension plan sponsored by ILoNA. The benefits
are based on years of service and the employee's compensation. In addition,
effective January 1, 1996, ILoNA adopted a nonqualified supplemental plan to
provide benefits in excess of limitations established by the Internal Revenue
Code. The Company records its required contributions as pension expense related
to these plans. There were no material contributions to the plan during the
periods ended December 31, 1997, 1996 or 1995.
78
<PAGE> 79
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. RETIREMENT AND COMPENSATION PLANS (CONTINUED)
Employees of the Company also are eligible to participate in a contributory
defined contribution plan sponsored by ILoNA which is qualified under section
401(k) of the Internal Revenue Code. The plan covers substantially all full-time
employees of the Company. Employees can contribute up to 15% of their annual
salary (with a maximum contribution of $9,500 in 1997) to the plan. The Company
contributes an additional amount, subject to limitations, based on the voluntary
contribution of the employee. Further, the plan provides for additional employer
contributions based on the discretion of the Board of Directors of ILoNA.
Pension expense related to this plan was $37,000, $27,000 and $24,000 for the
periods ended December 31, 1997, 1996 and 1995, respectively.
The Company also has certain other benefit and incentive plans. These plans are
considered immaterial to the consolidated financial statements.
7. STOCKHOLDER'S EQUITY
STATUTORY LIMITATIONS ON DIVIDENDS
The ability of the Company to pay dividends to ILoNA is restricted because prior
approval of insurance regulatory authorities is normally required for payment of
dividends to the stockholder which exceed an annual limitation. During 1998,
this annual limitation aggregates $3,360,000; however, pursuant to a directive
received from the Arkansas Insurance Department in 1991, any proposed payment of
a dividend currently requires its approval. Also, the amount ($34,900,000 at
December 31, 1997) by which stockholder's equity stated in conformity with
generally accepted accounting principles exceeds statutory capital and surplus
as reported is restricted and cannot be distributed.
STATUTORY ACCOUNTING POLICIES
The financial statements of the Company included herein differ from related
statutory-basis financial statements principally as follows: (a) the bond
portfolio is designated as available-for-sale and carried at fair value rather
than generally being carried at amortized cost; (b) acquisition costs of
acquiring new business are deferred and amortized over the life of the policies
rather than charged to operations as incurred; (c) future policy benefit
reserves on certain annuity products are based on full account values, rather
than
79
<PAGE> 80
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. STOCKHOLDER'S EQUITY (CONTINUED)
discounting methodologies utilizing statutory interest rates; (d) deferred
income taxes are provided for the differences between the financial statement
and income tax bases of assets and liabilities; (e) net realized gains or losses
attributed to changes in the level of interest rates in the market are
recognized as gains or losses in the consolidated statements of income when the
sale is completed rather than deferred and amortized over the remaining life of
the fixed maturity security; (f) declines in the estimated realizable value of
investments are charged to the consolidated statements of income for declines in
value, when such declines in value are judged to be other than temporary rather
than through the establishment of a formula-determined statutory investment
reserve (carried as a liability), changes in which are charged directly to
surplus; (g) agents' balances and certain other assets designated as
"nonadmitted assets" for statutory purposes are reported as assets rather than
being charged to surplus; (h) revenues for annuity products consist of policy
charges for the cost of insurance, policy administration charges and surrender
charges assessed rather than premiums received; (i) pension expense is
recognized in accordance with SFAS No. 87, Employers' Accounting for Pensions,
rather than in accordance with rules and regulations permitted by the Employee
Retirement Income Security Act of 1974; (j) the financial statements of
subsidiaries are consolidated with those of the Company and (k) assets and
liabilities are restated to fair values when a change in ownership occurs that
is accounted for as a purchase, with provisions for goodwill and other
intangible assets, rather than continuing to be presented at historical cost.
Net loss for the Company, as determined in accordance with statutory accounting
practices, was $1,240,000, $1,507,000 and $1,460,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. Total statutory capital and
surplus was $33,556,000 at December 31, 1997 and $33,096,000 at December 31,
1996.
The National Association of Insurance Commissioners currently is in the process
of codifying statutory accounting practices, the result of which is expected to
constitute the only source of "prescribed" statutory accounting practices. That
project, which is expected to be completed in 1998, will likely change, to some
extent, statutory accounting practices. The codification may result in changes
to the permitted or prescribed accounting practices that the Company uses to
prepare its statutory-basis Financial statements.
80
<PAGE> 81
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES
The Company leases its home office space and certain other equipment under
operating leases which expire through 2001. During the periods ended
December 31, 1997, 1996 and 1995, rent expense totaled $228,000, $206,000 and
$419,000, respectively. At December 31, 1997, minimum rental payments due under
all noncancelable operating leases with initial terms of one year or more are:
<TABLE>
<S> <C>
Year ending December 31:
1998 $230,000
1999 238,000
2000 241,000
2001 61,000
--------
$770,000
========
</TABLE>
The Company is involved in litigation where amounts are alleged that are
substantially in excess of contractual policy benefits or certain other
agreements. Management and its legal counsel do not believe any of these claims
will result in a material loss to the Company.
Assessments are, from time to time, levied on the Company by life and health
guaranty associations in most states in which the Company is licensed to cover
losses of policyholders of insolvent or rehabilitated companies. In some states,
these assessments can be partially recovered through a reduction in future
premium taxes. Assessments have not been material to the Company's financial
statements in the past. However, the economy and other factors have caused a
number of failures of substantially larger companies since that time. At
December 31, 1997 and 1996, the Company has accrued $0 and $180,000,
respectively, for guaranty fund assessments based on its historical experience
and information available from those making guaranty fund assessments.
9. RELOCATION OF COMPANY
In December 1997, management decided to relocate the operations of the Company
from Boston to Illinois. As a result, at December 31, 1997, the Company accrued
a liability of $1,200,000, which relates to benefits for involuntarily
terminated employees, and certain other costs, including office and other lease
cancellations and write-down of furniture and equipment. The relocation is
expected to be completed by June 1998.
81
<PAGE> 82
First Variable Life Insurance Company
Notes to Consolidated Financial Statements (continued)
10. YEAR 2000 ISSUES (UNAUDITED)
Like other financial and business organizations around the world, the Company
could be adversely affected if its computer systems and those of its service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. The Company has completed an assessment of
the Year 2000 impact on its systems, procedures, customers and business
processes. At December 31, 1997, management is satisfied that their main
operating systems are Year 2000 compliant. The Company is reviewing its general
office systems and will be contacting its service providers during 1998. The
Company believes it will complete the Year 2000 project not later than
December 31, 1998, which is prior to any anticipated impact on its operating
systems.
The date on which the Company believes it will complete the Year 2000 project is
based on management's best estimates. Although there can be no guarantee that
these estimates will be achieved, management does not at this time believe that
actual results will differ materially from those anticipated. Specific factors
that might cause such material differences would most likely result from the
Company's service providers.
82
<PAGE> 83
PART C
83
<PAGE> 84
FIRST VARIABLE ANNUITY FUND E
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements
The following financial statements of Fund E are contained in Part B
hereof:
1. Report of Independent Auditors.
2. Statement of Assets, Liabilities and Contract Owners' Equity.
3. Statement of Operations.
4. Statements of Changes in Contract Owners' Equity.
5. Notes to Financial Statements.
The following financial statements of the Company are included in Part B
hereof:
1. Report of Independent Auditors.
2. Consolidated Balance Sheets.
3. Consolidated Statements of Income.
4. Consolidated Statements of Changes in Stockholder's Equity
5. Consolidated Statements of Cash Flows.
6. Notes to Consolidated Financial Statements.
(b) Exhibits
1. Resolution of Board of Directors for the Company authorizing the
establishment of the Separate Account*
2. Not Applicable
3(a). Form of Principal Underwriter's Agreement**
(b). Form of Broker-Dealer Agreement**
(c). Specimen Broker-Dealer Supervisory and Selling Agreement ***
4. Individual Flexible Purchase Payment Deferred Variable Annuity
Contract#
5. Application for Variable Annuity#
6(a). Articles of Incorporation of First Variable Life Insurance Company*
84
<PAGE> 85
(b) By-laws of First Variable Life Insurance Company**
7. Not Applicable
8.(a) Form of Fund Participation Agreements
9.(a) Consent of Arnold R. Bergman, Vice President-Legal First Variable
Life Insurance Company #
(b) Consent of Blazzard, Grodd & Hasenauer, P.C. #
10. Consent of Ernst & Young LLP, Independent Auditors #
11. Not Applicable
12. Not Applicable
13. Calculation of Performance Information #
14. Not Applicable
15. Powers of Attorney ## - of the following individuals appointing John
M. Soukup or Arnold R. Bergman their attorney-in-fact to act for
them in their capacities as Directors of the Company or otherwise,
to do all things necessary to comply with the provisions and intent
of the Securities Act of 1933 and the Investment Company Act of 1940
with respect to variable life insurance policies and variable
annuity contracts:
Ronald M. Butkiewicz Shane W. Gleeson Kenneth R. Meyer
Michael J. Corey T. David Kingston Philip R. O'Connor
Michael R. Ferrari Jeff S. Liebmann Stephen Shone
* Incorporated by reference to the Registrant's Post-Effective Amendment No.
4 to the Form N-4 (Registration No 33-86738) filed electronically with
the Securities and Exchange Commission on or about April 27, 1998.
** Incorporated by reference to the Pre-Effective Amendment No. 1 to the Form
S-6 Registration Statement of First Variable Life Insurance Company
Separate Account VL, filed electronically with the Securities and Exchange
Commission on November 15, 1996 (File No. 333-05053).
*** Incorporated by reference to the Registrant's Form N-4 Registration
Statement (Registration No 333-12197) Form N-4 filed electronically with
the Securities and Exchange Commission on September 14, 1996.
# Filed herewith.
## Incorporated by reference to the Post-Effective Amendment No. 1 to the
Form S-6 Registration Statement of First Variable Life Insurance Company
Separate Account VL, filed electronically with the Securities and Exchange
Commission on or about April 27, 1998 (Registration No. 333-19193).
85
<PAGE> 86
ITEM 25. OFFICERS AND DIRECTORS OF DEPOSITOR
The following are the Officers and Directors of the Company.
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with the
Business Address Depositor
- ---------------- ---------
<S> <C>
Ronald M. Butkiewicz Chairman and Director
2211 York Road, Suite 202
Oak Brook, IL 60523
John M. Soukup President and Director
2122 York Road
Oak Brook, IL 60523
Michael J. Corey Director
401 East Host Drive
Lake Geneva, WI 53147
Michael R. Ferrari Director
25th & University Avenue
Des Moines, IA 50311
Shane W. Gleeson Director
2211 York Road
Oak Brook, IL 60523
Stephan Shone Director
Lower Abbey Street
Dublin 1, Ireland
T. David Kingston Director
Lower Abbey Street
Dublin 1, Ireland
Jeff S. Liebmann Director
1301 Avenue of the Americas
New York, NY 10019
Kenneth R. Meyer Director
200 South Wacker Drive, Suite 2100
Chicago, IL 60606
Philip R. O'Connor Director
111 West Washington, Suite 1247
Chicago, IL 60602
Norman A. Fair Director
2211 York Road, Suite 202
Oak Brook, IL 60523
Arnold R. Bergman Vice President, General Counsel and
2122 York Road Secretary
Oak Brook, IL 60523
</TABLE>
86
<PAGE> 87
<TABLE>
<S> <C>
Christopher Harden Vice President and Treasurer
2122 York Road
Oak Brook, IL 60523
Martin Sheerin Vice President and Chief Actuary
2122 York Road
Oak Brook, IL 60523
Thomas Gualdoni Vice President - Sales
2122 York Road
Oak Brook, IL 60523
Constance Graves Assistant Vice President and
10 Post Office Square Assistant Controller
Boston, MA 02109
</TABLE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE
DEPOSITOR OR REGISTRANT.
Incorporated by reference to Registrant's Post-Effective Amendment No.
4 to the Form N-4 Registration STatement, filed electronically with the
Securities and Exchange Commission on or about April 27, 1998. (File Nos.
33-86738 and 811-4092).
ITEM 27. NUMBER OF CONTRACT OWNERS
As of March 31, 1998, there were 262 owners of the Contracts.
ITEM 28. INDEMNIFICATION
Insofar as indemnification for liability arising under the Securities
Act of 1933 ("Act") may be permitted to directors and officers and controlling
persons of the Registrant, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the 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.
ITEM 29. PRINCIPAL UNDERWRITER
(a) First Variable Capital Services, Inc. ("FVCS") is the principal underwriter
for the Contracts and for the following investment companies:
First Variable Annuity Fund A
Separate Account VL of First Variable Life Insurance Company
(b) The following persons are directors and officers of FVCS:
87
<PAGE> 88
<TABLE>
<CAPTION>
Name and Principal Business Address Positions and Offices with Underwriter
- ----------------------------------- --------------------------------------
<S> <C>
Norman A. Fair Director
2211 York Road, Suite 202
Oak Brook, IL 60523
John M. Soukup President and Director
2122 York Road
Oak Brook, IL 60523
Arnold R. Bergman Secretary and Director
2122 York Road
Oak Brook, IL 60523
Thomas Gualdoni Vice President - Sales
2122 York Road
Oak Brook, IL 60523
Constance Graves Assistant Treasurer
10 Post Office Square
Boston, MA 02109
</TABLE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Arnold R. Bergman, Secretary of the Company and Christopher Harden, Treasurer of
the Company, who are located at 2122 York Road, Oak Brook, IL 60523, maintain
physical possession of the accounts, books or documents of the Separate Account
required to be maintained by Section 31(a) of the Investment Company Act of 1940
and the rules promulgated thereunder.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
(a) Registrant hereby undertakes to file a post-effective amendment to
this registration statement as frequently as is necessary to ensure that the
audited financial statements in the registration statement are never more than
sixteen (16) months old for so long as payment under the variable annuity
contracts may be accepted.
(b) Registrant hereby undertakes to include either (1) as part of any
application to purchase a contract offered by the Prospectus, a space that an
applicant can check to request a Statement of Additional Information, or (2) a
postcard or similar written communication affixed to or included in the
Prospectus that the applicant can remove to send for a Statement of Additional
Information.
(c) Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statement required to be made available under this
Form promptly upon written or oral request.
(d) In accordance with section 26(e) of the Investment Company Act of
1940, First Variable Life Insurance Company hereby represents that the fees and
charges deducted under the Contract described in this Registration Statement on
Form N-4, in the aggregate, are reasonable in relation to the services rendered,
the expenses expected to be incurred, and the risks assumed by First Variable
Life Insurance Company.
88
<PAGE> 89
REPRESENTATIONS
The Company hereby represents that it is relying upon a No Action Letter issued
to the American Council of Life Insurance dated November 28, 1988 (Commission
ref. IP-6-88) and that the following provisions have been complied with:
1. Include appropriate disclosure regarding the redemption
restrictions imposed by Section 403(b)(11) in each registration statement,
including the prospectus, used in connection with the offer of the contract;
2. Include appropriate disclosure regarding the redemption
restrictions imposed by Section 403(b) (11) in any sales literature used in
connection with the offer of the contract;
3. Instruct sales representatives who solicit participants to
purchase the contract specifically to bring the redemption restrictions imposed
by Section 403(b)(11) to the attention of the potential participants;
4. Obtain from each plan participant who purchases a Section 403(b)
annuity contract, prior to or at the time of such purchase, a signed statement
acknowledging the participant's understanding of (1) the restriction on
redemption imposed by Section 403(b)(11), and (2) other investment alternatives
available under the employer's Section 403(b) arrangement to which the
participant may elect to transfer his contract value.
89
<PAGE> 90
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company
Act of 1940, as amended, the Registrant certifies that it meets the requirements
of Securities Act Rule 485(b) for effectiveness of this Registration Statement
and has caused this Registration Statement to be signed on its behalf, in the
City of Boston, and the Commonwealth of Massachusetts, on this 27th day of
April, 1998.
FIRST VARIABLE ANNUITY FUND E
(Registrant)
By: FIRST VARIABLE LIFE INSURANCE COMPANY
(Depositor)
By: s/John M. Soukup
-------------------------
John M. Soukup, President
FIRST VARIABLE LIFE INSURANCE COMPANY
(Depositor)
By: s/John M. Soukup
-------------------------
John M. Soukup, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed below by the following persons in the
capacities indicated on this 27th day of April, 1998.
SIGNATURE TITLE
s/Ronald M. Butkiewicz* Chairman & Director
- -------------------------
Ronald M. Butkiewicz
s/Michael J. Corey* Director
- -------------------------
Michael J. Corey
s/Michael R. Ferrari* Director
- -------------------------
Michael R. Ferrari
s/Shane W. Gleeson* Director
- -------------------------
Shane W. Gleeson
s/John M. Soukup President and Director
- -------------------------
John M. Soukup
s/T. David Kingston* Director
- -------------------------
T. David Kingston
s/Jeff S. Liebmann* Director
- -------------------------
Jeff S. Liebmann
90
<PAGE> 91
s/Kenneth R. Meyer* Director
- -------------------------
Kenneth R. Meyer
s/Philip R. O'Connor* Director
- -------------------------
Philip R. O'Connor
s/Stephen Shone* Director
- -------------------------
Stephen Shone
s/Norman A. Fair Director and Principal Accounting Officer
- -------------------------
Norman A. Fair
*By Power of Attorney
s/Arnold R. Bergman
-------------------------
Arnold R. Bergman
91
<PAGE> 92
FIRST VARIABLE ANNUITY FUND E
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
No. Title of Exhibit Page
- --- ---------------- ----
<S> <C> <C>
EX-99.B4 Individual Flexible Purchase Payment Deferred Variable
Annuity Contract
EX-99.B5 Application for Variable Annuity
EX-99.B9(a) Consent of Arnold R. Bergman, Vice President, General
Counsel and
Secretary, First Variable Life Insurance Company
EX-99.B9(b) Consent of Blazzard, Grodd & Hasenauer, P.C.
EX-99.B10. Consent of Ernst & Young LLP, Independent Auditors
EX-99.B13 Calculation of Performance Information
</TABLE>
92
<PAGE> 1
EX-99.B4
Individual Flexible Purchase Payment Deferred Variable Annuity Contract
93
<PAGE> 2
[FIRST VARIABLE LIFE LOGO]
LITTLE ROCK, ARKANSAS
A STOCK LIFE INSURANCE COMPANY
FIRST VARIABLE LIFE INSURANCE COMPANY (the "Company") will make Annuity Payments
to the Annuitant, unless directed otherwise by the Owner, starting on the
Annuity Date, subject to the terms of this Contract.
This Contract is issued in return for the payment of the initial Purchase
Payment.
TEN DAY FREE LOOK--Within 10 days of the date of receipt of this Contract by the
Owner, it may be returned by delivering or mailing it to the Company at its
Variable Service Center or to the agent through whom it was purchased. When this
Contract is received by the Company, it will be voided as if it had never been
in force. The Company will refund the Contract Value computed at the end of the
Valuation Period during which this Contract is received by the Company at its
Variable Service Center.
S/ARNOLD R. BERGMAN S/JOHN M. SOUKUP
Secretary President
First Variable Life Insurance Company
Little Rock, Arkansas
ANNUITY PAYMENTS, WITHDRAWAL VALUES AND THE DEATH BENEFITS PROVIDED
BY THIS CONTRACT, WHEN BASED ON INVESTMENT EXPERIENCE OF THE SEPARATE
ACCOUNT, ARE VARIABLE AND ARE NOT GUARANTEED AS TO DOLLAR AMOUNT.
THE VARIABLE PROVISIONS OF THIS CONTRACT CAN BE FOUND ON PAGES 10 AND 14.
INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACT WITH
FLEXIBLE PURCHASE PAYMENTS - NON-PARTICIPATING
94
<PAGE> 3
TABLE OF CONTENTS
PAGE
----
CONTRACT DATA PAGE..........................................................CD-1
DEFINITIONS..................................................................100
INVESTMENT OPTIONS...........................................................101
The Separate Account and the Sub-Accounts....................................101
Sub-Account Investment Options...............................................101
Fixed Account Option.........................................................102
TRANSFERS....................................................................102
Transfers Among Investment Options...........................................102
General Requirements for Transfers...........................................102
Automatic Transfer of Small Accounts.........................................103
CHARGES AND DEDUCTIONS.......................................................103
Administrative Charge........................................................103
Annual Contract Maintenance Charge...........................................103
Mortality and Expense Risk Charge............................................103
Separate Account Management Fee..............................................103
Taxes........................................................................103
Transfer Fee.................................................................104
Withdrawal Charge............................................................104
GENERAL PROVISIONS...........................................................104
The Contract.................................................................104
Incontestability.............................................................104
Modification...................................................................4
Ownership....................................................................104
Change of Designations.......................................................104
Non-Participating............................................................105
Protection of Proceeds.......................................................105
Transfer by the Company......................................................105
PURCHASE PAYMENTS............................................................105
General........................................................................5
Conversion to Accumulation Units.............................................105
Delayed Investment Start Date................................................106
CONTRACT VALUE...............................................................106
General......................................................................106
Accumulation Unit Value......................................................106
Fixed Account Value..........................................................106
Minimum Value Required After Partial Withdrawal..............................107
Minimum Value Required If Subsequent Purchase Payments Not Made..............107
Minimum Value Required In Any Investment Option..............................107
Reports......................................................................107
DEATH BENEFITS...............................................................107
Death of Annuitant.............................................................7
Death of Owner...............................................................108
Payment of Owner's Death Benefit.............................................108
Owners Other than a Single Person..............................................8
95
<PAGE> 4
Beneficiary Other than a Single Person.........................................8
WITHDRAWALS..................................................................109
General......................................................................109
Withdrawal Charge............................................................109
Partial Withdrawals............................................................9
Free Withdrawal Amount.......................................................110
Suspension or Deferral of Payments...........................................110
ANNUITY PROVISIONS...........................................................110
Annuity Date.................................................................111
Annuity Payments.............................................................111
Variable Annuity Payments....................................................111
Fixed Annuity Payments........................................................11
Annuity Options...............................................................11
Mortality Tables.............................................................113
Misstatement of Age or Sex...................................................113
Supplementary Agreement.......................................................12
Evidence of Survival..........................................................12
Proof of Age.................................................................113
ANNUITY OPTION TABLES.........................................................13
96
<PAGE> 5
CONTRACT DATA PAGE
CAPITAL SIX VA
<TABLE>
<S> <C> <C> <C>
ANNUITANT: [JOHN DOE] AGE AT ISSUE: [50]
OWNER: [JOHN DOE] AGE AT ISSUE: [50]
BENEFICIARY: [as shown in
application]
CONTRACT NUMBER: [8700-96] ISSUE DATE: [1/1/96]
ANNUITY DATE: [1/1/2015] ANNUITIZATION BONUS: [3% of Contract
Value on Annuity
Date ]
SEPARATE ACCOUNT: [First Variable FIXED ACCOUNT:
Annuity Fund E] MINIMUM GUARANTEED INTEREST RATE: [3.0%]
CURRENT INTEREST RATE ON ISSUE DATE: [5.5%]
DURATION OF CURRENT INTEREST RATE: [First Contract
Year]
</TABLE>
<TABLE>
<S> <C>
INVESTMENT OPTIONS:
[VIST Common Stock Portfolio] [VIST Tilt Utility Portfolio]
[VIST Growth & Income Portfolio] [VIST U.S. Government Bond Portfolio]
[VIST High Income Bond Portfolio] [VIST World Equity Portfolio]
[VIST Multiple Strategies Portfolio] [Federated Prime Money Fund II Portfolio]
[VIST Small Cap Portfolio] [Fixed Account]
DELAYED INVESTMENT START DATE: [Not Applicable]
DELAYED INVESTMENT START SUB-ACCOUNT: [Not Applicable]
PURCHASE PAYMENTS:
INITIAL PURCHASE PAYMENT: [$ 5,000]
MINIMUM SUBSEQUENT PURCHASE PAYMENT: [$200]
MAXIMUM CUMULATIVE PURCHASE
PAYMENTS: [$1 Million]
</TABLE>
ADMINISTRATIVE CHARGE:
[Daily charge on net assets in each Sub-Account equal to an annual rate of
.25%]
ANNUAL CONTRACT MAINTENANCE CHARGE:
[$30.00 each Contract Year during the Accumulation Period, if Contract
Value is less than $100,000] [No Annual Contract Maintenance Charge during
the Annuity Period]
MORTALITY AND EXPENSE RISK CHARGE:
[Daily charge on net assets in each Sub-Account equal to an annual rate of
1.25%]
CHARGE FOR RIDERS:
[OPTIONAL ENHANCED DEATH BENEFIT Annual charge of .35% of Contract Value on
each Contract Anniversary prior to the
earlier of the Annuity Date or the Owner's
80th birthday]
97
<PAGE> 6
CONTRACT DATA PAGE
(CONTINUED)
CAPITAL SIX VA
SEPARATE ACCOUNT MANAGEMENT FEE: [None]
TRANSFERS:
FREE TRANSFERS:
[Unlimited for purposes of determining Transfer Fee]
TRANSFER FEE: [$0]
MINIMUM CONTRACT VALUE TO BE TRANSFERRED: [$1,000 or the Contract Value in the
selected Investment Option, if less]
RESTRICTIONS ON TRANSFERS FROM THE FIXED ACCOUNT: [Prior to the Annuity Date,
Contract Value to be transferred from the Fixed Account in any Contract Year may
not exceed: (1) for transfers during the first Contract Year, 25% of Fixed
Account Value on the Issue Date; and (2) for transfers after the first Contract
Year, the greater of: (a) 25% of Fixed Account Value on the immediately
preceding Contract Anniversary ; or (b) 100% of the Fixed Account Value
transferred to other Investment Options during the immediately preceding
Contract Year. No transfers of Contract Value are permitted from the Fixed
Account to other Investment Options during the Annuity Period.]
MINIMUM CONTRACT VALUE TO REMAIN IN INVESTMENT OPTION AFTER TRANSFER: [None]
VARIABLE SERVICE CENTER: [The Variable Service Center on the Issue Date is
located at P.O. Box 1317, Des Moines, IA 50305-1317]
WITHDRAWALS:
WITHDRAWAL CHARGE EVENT: [The Company may impose a Withdrawal Charge:
(1) Upon withdrawal or surrender of Contract Value during the Accumulation
Period; and
(2) On the Annuity Date, if the Annuity Date is within the first two (2)
Contract Years.
No Withdrawal Charge is imposed on Death Benefits payable if an Owner dies
before the Annuity Date.]
DURATION OF WITHDRAWAL CHARGE: [The Withdrawal Charge Duration begins on the
Issue Date and ends at the end of the sixth Contract Year]
WITHDRAWAL CHARGE PERCENTAGES:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
[(as Percentage of Purchase Payment)]
[CONTRACT YEAR 1 2 3 4 5 6 7+]
[WITHDRAWAL CHARGE PERCENTAGE 7% 6% 5% 4% 3% 2% 0%]
</TABLE>
MINIMUM PARTIAL WITHDRAWAL: [$1,000, if less, the Owner's entire Interest ]
FREE WITHDRAWAL AMOUNT ON PARTIAL WITHDRAWALS: [15% of Purchase Payments]
WITHDRAWAL VALUE REQUIRED TO REMAIN IN CONTRACT AFTER PARTIAL WITHDRAWAL:
[$1,000]
WAIVER OF WITHDRAWAL CHARGE: [As specified in Nursing Home and Terminal Illness
Waiver Endorsement]
ANNUITY UNIT VALUE: Assumed Interest Rate: [3% per anum]
98
<PAGE> 7
DEFINITIONS
ACCUMULATION PERIOD: The period during which Purchase Payments may be made prior
to the Annuity Date.
ACCUMULATION UNIT: A unit of measure used to calculate the Contract Value in a
Sub-Account of the Separate Account prior to the Annuity Date.
ACCUMULATION UNIT VALUE: The value of an Accumulation Unit on a Business Day.
AGE: The attained age on the date for which age is being determined for the
Annuitant or Owner, as applicable.
ANNUITANT: The natural person on whose life Annuity Payments are based.
ANNUITY DATE: The date on which Annuity Payments begin. The Annuity Date is
shown on the Contract Data Page.
ANNUITY PAYMENTS: The series of payments made to the Annuitant or other payee
selected by the Owner after the Annuity Date under the Annuity Option selected.
ANNUITY PERIOD: The period after the Annuity Date during which Annuity Payments
are made.
ANNUITY UNIT: A unit of measure used to calculate Variable Annuity Payments
after the Annuity Date.
ANNUITY UNIT VALUE: The value of an Annuity Unit on a Business Day.
BENEFICIARY: The person, persons or entity who will receive the death benefit.
The Beneficiary is stated on the Contract Data Page for this Contract, unless
changed in accordance with the Contract provisions.
BUSINESS DAY: Each day that the New York Stock Exchange is open for trading,
which is Monday through Friday, except for normal business holidays.
COMPANY: First Variable Life Insurance Company.
CONTRACT ANNIVERSARY: An anniversary of the Issue Date.
CONTRACT VALUE: The sum of the Owner's interest in the Sub-Accounts of the
Separate Account and in the Fixed Account.
CONTRACT YEAR: One year from the Issue Date and from each Contract Anniversary.
FIXED ACCOUNT: The Company's general investment account which contains all the
assets of the Company with the exception of the Separate Account and other
segregated asset accounts.
FIXED ACCOUNT VALUE: The Owner's interest in the Fixed Account during the
Accumulation Period.
FIXED ANNUITY PAYMENTS: A series of payments made during the Annuity Period
which are guaranteed as to dollar amount by the Company.
INVESTMENT OPTION: The Fixed Account or any of the Sub-Accounts of the Separate
Account which can be selected under this Contract.
ISSUE DATE: The date on which this Contract became effective. The Issue Date is
shown on the Contract Data Page.
OWNER: The person, persons or entity entitled to all the ownership rights under
this Contract. The Owner is stated on the Contract Data Page for this Contract,
unless changed in accordance with the Contract provisions.
99
<PAGE> 8
PORTFOLIO: A separate and distinct class of shares that is available as an
underlying investment of a Sub-Account. As of the Issue Date, each Sub-Account
invests exclusively in a Portfolio stated on the Contract Data Pages.
PURCHASE PAYMENT: An amount paid to the Company to provide benefits under this
Contract.
SEPARATE ACCOUNT: A separate investment account of the Company designated on the
Contract Data Page.
SUB-ACCOUNT: A segment of the Separate Account.
VALUATION PERIOD: The period of time between the close of one Business Day and
the close of business for the next succeeding Business Day.
VARIABLE ACCOUNT VALUE: The Owner's interest in the Sub-Accounts of the Separate
Account during the Accumulation Period.
VARIABLE ANNUITY PAYMENTS: A series of payments made during the Annuity Period
which vary in amount with the investment experience of each applicable
Sub-Account.
VARIABLE SERVICE CENTER: The Company's administrative service center for this
Contract. The mailing address for the Variable Service Center on the Issue Date
is shown on the Contract Data Pages.
Other terms are defined in the Contract.
INVESTMENT OPTIONS
THE SEPARATE ACCOUNT AND THE SUB-ACCOUNTS
The Separate Account is a separate investment account of the Company. It is
shown on the Contract Data Page. The Company has allocated a part of its assets
for this and certain other contracts to the Separate Account. The assets of the
Separate Account are the property of the Company. The Company guarantees that
the portion of the Separate Account assets equal to the Company's reserves and
other contract liabilities shall not be chargeable with the liabilities arising
out of any other business the Company may conduct.
Assets of the Separate Account are valued at their fair market value in
accordance with procedures of the Company. The Separate Account is segmented
into Sub-Accounts. Each Sub-Account available under this Contract on the Issue
Date invests its assets exclusively in shares of one of the Portfolios shown on
the Contract Data Page.
SUB-ACCOUNT INVESTMENT OPTIONS
The Owner may allocate Purchase Payments to one or more of the Sub-Accounts that
correspond to the Portfolios shown on the Contract Data Page. The Company may,
from time to time, invest Separate Account assets in additional mutual funds,
portfolios of mutual funds, or other investment vehicles. The Owner may be
permitted to transfer Contract Value or allocate Purchase Payments to these
additional Separate Account investments. However, the right to make any transfer
will be limited by the terms and conditions imposed by the Company.
If the shares of any Portfolio, or of any other Separate Account investment,
become unavailable for investment by the Separate Account, or if the Company's
Board of Directors deems further investment in these shares inappropriate, the
Company may limit further purchase of these shares or may substitute shares of
another Portfolio or other investment vehicle for shares already purchased under
this Contract.
100
<PAGE> 9
FIXED ACCOUNT OPTION
The Owner may allocate Purchase Payments to the Fixed Account. Interest will be
credited to amounts allocated to the Fixed Account as described in the "Contract
Value - Fixed Account Value" provision of this Contract.
TRANSFERS
TRANSFERS AMONG INVESTMENT OPTIONS
During the Accumulation Period, the Owner may transfer Contract Value among
Investment Options without the imposition of any fee or charge if there have
been no more than the number of free transfers shown on the Contract Data Page
for the Contract Year. No transfers are permitted, however, until the end of a
Delayed Investment Start Date, if any, shown on the Contract Data Page. The
amount of Contract Value which may be transferred from the Fixed Account to
other Investment Options will be subject, without limitation, to the specific
restrictions, if any, shown on the Contract Data Page.
During the Annuity Period, the Owner may make a transfer from one or more
Sub-Accounts to other Investment Options only once each Contract Year, and no
transfers of Contract Value are permitted from the Fixed Account to the Separate
Account. The amount transferred to the Fixed Account from a Sub-Account of the
Separate Account WILL be equal to the annuity reserves for the Owner's interest
in that Sub-Account. The annuity reserve is the product of (a) multiplied by (b)
multiplied by (c), where (a) is the number of Annuity Units representing the
Owner's interest in the Sub-Account per Annuity Payment; (b) is the Annuity Unit
value for the Sub-Account; and (c) is the present value of $1.00 per payment
period as of the Age of the Annuitant at time of transfer for the Annuity
Option, determined using the Mortality Tables used to construct the Annuity
Tables contained in this Contract and the assumed interest rate shown on the
Contract Data Page. Amounts transferred to the Fixed Account will be applied to
the existing Annuity Option, using the Age of the Annuitant at the time of the
transfer.
All amounts, Accumulation Unit Values and Annuity Unit Values will be determined
as of the end of the Valuation Period during which a transfer request was
received by the Company of its Variable Service Center.
GENERAL REQUIREMENTS FOR TRANSFERS
If more than the permitted number of free transfers have been made in the
Contract Year, the Company will deduct the Transfer Fee shown on the Contract
Data Page for each subsequent transfer. The Transfer Fee will be deducted from
the Owner's interest in the Investment Option from which the transfer is made.
However, if the Owner's entire interest in an Investment Option is being
transferred, the Transfer Fee will be deducted from the amount which is
transferred.
The minimum amount of Contract Value which can be transferred is shown on the
Contract Data Page. The minimum amount of Contract Value, if any, which must
remain in an Investment Option after a transfer from it is shown on the Contract
Data Page.
Any transfer instruction must be in form satisfactory to the Company, and
received by the Company at its Variable Service Center. Without limitation, any
such instruction must clearly specify the amount which is to be transferred and
the Investment Options which are to be affected. The Company will not be liable
for transfers made in accordance with instructions by, or on behalf of, the
Owner.
The Company reserves the right, at any time and without prior notice to any
party, to terminate, suspend or modify the transfer privileges described above.
101
<PAGE> 10
AUTOMATIC TRANSFER OF SMALL ACCOUNTS
The Company reserves the right to the extent permitted by law, on any Business
Day to transfer Contract Value then held in any particular Investment Option in
the event that Contract Value in that Investment Option is less than $250, to
the Investment Option with the then highest Contract Value.
CHARGES AND DEDUCTIONS
ADMINISTRATIVE CHARGE
The Company deducts on each Business Day, both prior to and during the Annuity
Period, an Administrative Charge from the Separate Account which is equal, on an
annual basis, to the amount shown on the Contract Data Page. The Administrative
Charge compensates the Company for the costs associated with the administration
of this Contract and the Separate Account.
ANNUAL CONTRACT MAINTENANCE CHARGE
The Company deducts an Annual Contract Maintenance Charge to reimburse it for
its administrative expenses from the Contract Value for the amount, and during
the period, shown on the Contract Data Page. The charge is deducted by the
Company reducing Fixed Account Value and/or Accumulation Unit Value from each
applicable Investment Option in the ratio that the value that Contract Value in
each applicable Investment Option bears to the total Contract Value.
Accumulation Unit Value is reduced by the Company canceling Accumulation Units
credited to this Contract.
The Annual Contract Maintenance Charge will be deducted from the Contract Value
on each Contract Anniversary while this Contract is in force. If a total
withdrawal (surrender) is made on other than a Contract Anniversary, the Annual
Contract Maintenance Charge will be deducted at the time of withdrawal. If the
Annuity Date is not a Contract Anniversary, the Annual Contract Maintenance
Charge will be deducted on the Annuity Date. After the Annuity Date, the Annual
Contract Maintenance Charge, if any, will be collected on a monthly basis and
will result in a reduction of each Annuity Payment.
MORTALITY AND EXPENSE RISK CHARGE
The Company deducts on each Business Day, both prior to and during the Annuity
Period, a Mortality and Expense Risk Charge from the Separate Account which is
equal, on an annual basis, to the amount shown on the Contract Data Page. The
Mortality and Expense Risk Charge compensates the Company for assuming the
mortality and expense risks under this Contract. The Company guarantees that the
dollar amount of each Annuity Payment after the first Annuity Payment will not
be affected by variations in mortality or expense experience.
SEPARATE ACCOUNT MANAGEMENT FEE
Any fee deducted by the Company from the Separate Account for investment
management is shown on the Contract Data Page.
TAXES
Any taxes paid to any governmental entity relating to this Contract will be
deducted from the Purchase Payment or Contract Value when incurred. The Company
will, in its sole discretion, determine when taxes have resulted from: the
investment experience of the Separate Account; receipt by the Company of the
Purchase Payments; or commencement of Annuity Payments. The Company may, at its
sole discretion, pay taxes when due and deduct that amount from the Contract
Value at a later date, or may establish
102
<PAGE> 11
reserves or other appropriate provision for payment of taxes at a later date.
Payment at an earlier date does not waive any right the Company may have to
deduct amounts at a later date. The Company will deduct any withholding taxes
required by applicable law.
TRANSFER FEE
The Transfer Fee applicable to a permitted transfer of Contract Value among
Investment Options is shown on the Contract Data Page.
WITHDRAWAL CHARGE
The Withdrawal Charge, if any, shown on the Contract Data Page may be deducted
in the event of a withdrawal of all or a portion of the Contract Value. It is
described in the Withdrawals provisions of this Contract.
GENERAL PROVISIONS
THE CONTRACT
The entire contract consists of this Contract and any riders or endorsements
attached to this Contract.
This Contract may be changed or altered only by the President or Vice President
and the Secretary of the Company. A change or alteration must be made in
writing.
INCONTESTABILITY
The Contract will not be contestable after it has been in force for a period of
two years from the Issue Date.
MODIFICATION
This Contract may be modified in order to maintain compliance with applicable
state and federal law.
OWNERSHIP
The Owner has all rights and may receive all benefits under this Contract. The
Owner is the person shown on the Contract Data Page, unless changed prior to the
Annuity Date. Upon the death of the Owner, the Beneficiary will have all the
rights and may receive all benefits under this Contract.
Assignment: The Owner may, at any time during his or her lifetime, assign his or
her rights under this Contract. The Company will not be bound by any assignment
until written notice is received by the Company at its Variable Service Center.
The Company is not responsible for the validity or tax consequences of any
assignment. The Company will not be liable as to any payment or other settlement
made by the Company before receipt of the assignment.
CHANGE OF DESIGNATIONS
A request to change the designated Owner, Annuitant or Beneficiary must be made
in writing and received by the Company at its Variable Service Center. The
change will become effective as of the date the written request is signed. A new
designation will not apply to any payment made or action taken by the Company
prior to the time it records the change, and the Company shall be released from
any further liability with respect to any such payment made or action taken.
Owner. The Owner may change the Owner at any time prior to the Annuity Date. A
change of Owner will automatically revoke any prior designation of Owner.
103
<PAGE> 12
Annuitant. The Owner may change the Annuitant at any time prior to the Annuity
Date, but not if the Contract is owned by a non-natural person. Any change of
Annuitant is subject to the Company's underwriting rules then in effect. The
Owner may automatically become the Annuitant if a new Annuitant is not
designated within thirty (30) days of the death of the Annuitant prior to the
Annuity Date, as stated in the Death Benefit provisions of this Contract. A
permitted change of Annuitant will automatically revoke any prior designation of
Annuitant.
Beneficiary: Subject to the rights of any irrevocable Beneficiary(ies), the
Owner may change the primary Beneficiary(ies) or contingent Beneficiary(ies). A
permitted change of Beneficiary will automatically revoke any prior designation
of Beneficiary.
NON-PARTICIPATING
This Contract will not share in any distribution of dividends.
PROTECTION OF PROCEEDS
To the extent permitted by law, Death Benefits and Annuity Payments shall be
free from legal process and the claim of any creditor if the person is entitled
to them under this Contract. No payment and no amount under this Contract can be
taken or assigned in advance of its payment date unless the Company receives the
Owner's written consent.
TRANSFER BY THE COMPANY
The Company reserves the right to transfer its obligations hereunder to another
qualified life insurance company under an assumption reinsurance arrangement
without the prior consent of the Owner.
PURCHASE PAYMENTS
GENERAL
The initial Purchase Payment as shown on the Contract Data Page is due on the
Issue Date. The Owner may make subsequent Purchase Payments prior to the Annuity
Date and may increase or decrease or change the frequency of such payments.
Purchase Payments are, however, subject to the Minimum Subsequent Purchase
Payment amount and the Maximum Cumulative Purchase Payment amount shown on the
Contract Data Page (unless otherwise approved by the Company). The Company
reserves the right to reject any Purchase Payment.
CONVERSION TO ACCUMULATION UNITS
Each Purchase Payment is allocated to the Fixed Account and/or one or more
Sub-Accounts of the Separate Account. A Purchase Payment allocated to a
Sub-Account of the Separate Account is converted into Accumulation Units. The
number of Accumulation Units in a Sub-Account credited to this Contract is
determined by dividing the Purchase Payment allocated to that Sub-Account by the
dollar value of the Accumulation Unit Value for that Sub-Account as of the end
of the Valuation Period during which that Purchase Payment is received by the
Company at its Variable Service Center. Except as described in the Delayed
Investment Start Date provision below, the allocation of the initial Purchase
Payment is made in accordance with the selection made by the Owner. Unless
otherwise changed by the Owner, subsequent Purchase Payments are allocated in
the same manner as the initial Purchase Payment. Allocation of the Purchase
Payments is subject to the terms and conditions imposed by the Company.
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<PAGE> 13
DELAYED INVESTMENT START DATE
If a Delayed Investment Start Date is shown on the Contract Data Page, the
initial Purchase Payments for this Contract will be allocated to the Delayed
Investment Start Sub-Account shown on the Contract Data Page in lieu of
allocation to any other Sub-Account Investment Option. Contract Value will be
transferred from the Delayed Investment Start Sub-Account on the Business Day
immediately following the Delayed Investment Start Date to any other Sub-Account
Investment Option in accordance with the initial instructions of the Owner.
The allocation of Purchase Payments to the Fixed Account is not affected by a
Delayed Investment Start Date. Purchase Payments received after a Delayed
Investment Start Date will be allocated to any Investment Option then available
under this Contract in accordance with the Owner's direction.
CONTRACT VALUE
GENERAL
The Contract Value on any Business Day is the sum of the Owner's interest in the
Sub-Accounts of the Separate Account and in the Fixed Account. The value of the
Owner's interest in a Sub-Account is determined by multiplying the number of
Accumulation Units attributable to that Sub-Account by the Accumulation Unit
Value for that Sub-Account.
ACCUMULATION UNIT VALUE
The number of Accumulation Units in a Sub-Account credited to this Contract is
determined by dividing the amount to be allocated to or deducted from that
Sub-Account by the Accumulation Unit Value for that Sub-Account as of the end of
the Valuation Period during which the request for the transaction was received
by the Company at its Variable Service. The Accumulation Unit Value for each
Sub-Account was arbitrarily set initially at $10. Subsequent Accumulation Unit
Values are determined by subtracting (2) from (1) and dividing the result by (3)
where:
(1) is the net result of:
a. the assets of the Sub-Account attributable to Accumulation Units;
plus or minus
b. the cumulative charge or credit for taxes reserved which is
determined by the Company to have resulted from the operation or
maintenance of that Sub-Account.
(2) is the cumulative unpaid charge for the Mortality and Expense Risk
Charge and for the Administrative Charge, which are shown on the
Contract Data Page; and
(3) is the number of Accumulation Units outstanding at the end of the
Valuation Period.
The Accumulation Unit Value may increase or decrease from Valuation Period to
Valuation Period.
FIXED ACCOUNT VALUE
The Company guarantees that it will credit interest to Contract Value in the
Fixed Account at a rate not less than the Minimum Guaranteed Interest Rate shown
on the Contract Data Page. Additional amounts of interest may be credited by the
Company from time to time in its sole discretion. The Current Interest Rate
credited on the Issue Date, which includes the minimum guaranteed interest rate,
is shown on the Contract Data Page. It is guaranteed for the first Contract Year
by the Company, unless a greater period is shown on the Contract Data Page.
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<PAGE> 14
New Purchase Payments allocated to the Fixed Account may be credited with
interest at a different rate than the interest rate credited to Contract Value
transferred from the Separate Account to the Fixed Account. Contract Value
existing in the Fixed Account may be credited with interest at a different rate
than the interest rate(s) applied to new Purchase Payment allocations and
Separate Account transfers. The Company determines interest rates in advance,
and credits interest daily to Fixed Account Value in dollars.
MINIMUM VALUE REQUIRED AFTER PARTIAL WITHDRAWAL
The Company may deem a Contract surrendered if it receives a request to withdraw
Contract Value that would cause the remaining Withdrawal Value to be less than
the amount required to remain in the Contract after a partial withdrawal. The
Withdrawal Value required to remain in the Contract after a partial withdrawal
is shown on the Contract Data Page. The Company reserves the right to terminate
the Contract in such event and pay all Withdrawal Value to the Owner. The
Company will send a notice to the Owner at his or her last known address at
least thirty (30) days in advance of any such termination. This Contract will
remain in force during such thirty (30) day period. The Owner may make
additional Purchase Payments during the thirty (30) day period to increase
Contract Value above such minimum.
MINIMUM VALUE REQUIRED IF SUBSEQUENT PURCHASE PAYMENTS NOT MADE
The Company reserves the right to terminate a Contract if the Contract Value on
any Business Day falls below $1,000 and no Purchase Payments were received by
the Company during the then current Contract Year and the two (2) immediately
preceding Contract Years. The Company will send a notice to the Owner at his or
her last known address at least thirty (30) days in advance of any such
termination. This Contract will remain in force during such thirty (30) day
period. The Owner may make additional Purchase Payments during the thirty (30)
day period to increase Contract Value above such minimum. If such additional
Purchase Payments are received by the Company in good order during the thirty
(30) day period, the Contract will not be in default for failure to make
subsequent Purchase Payments during the then current Contract Year and the two
(2) immediately preceding Contract Years. This Minimum Value requirement,
however, will continue to apply during the next and each subsequent Contract
Year.
MINIMUM VALUE REQUIRED IN ANY INVESTMENT OPTION
The Company reserves the right to the extent permitted by law to transfer
Contract Value from any Investment Option if on any Business Day the Contract
Value in the Investment Option is less than $250. In such event, the Contract
Value will be transferred to the Investment Option with the highest Contract
Value.
REPORTS
At least once each calendar year, the Company will furnish the Owner with a
report showing the Contract Value and any other information as may be required
by law. Reports will be sent to the last known address of the Owner.
DEATH BENEFITS
DEATH OF ANNUITANT
Upon the death of the Annuitant prior to the Annuity Date, the Owner may
designate a new Annuitant. If no designation is made within 30 days of the death
of the Annuitant, the Owner will become the Annuitant. If the Owner is a
non-natural person, the death of the Annuitant will be treated as the death of
the Owner and a new Annuitant may not be designated.
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<PAGE> 15
Upon the death of the Annuitant after the Annuity Date, the Death Benefit, if
any, will be as specified in the Annuity Option elected.
DEATH OF OWNER
Upon the death of an Owner prior to the Annuity Date, the Death Benefit will be
paid to the Beneficiary designated by the Owner. The Death Benefit will be the
greater of:
1. the Purchase Payments, less the sum of any Withdrawal Value previously
taken; or
2. the Contract Value.
For purposes of determining the Death Benefit, "Withdrawal Value previously
taken" is the sum of the reductions in Contract Value attributable to partial
withdrawals during the Owner's lifetime, including applicable charges.
If the Beneficiary is the spouse of the Owner and elects to continue the
Contract, the Contract Value remains unchanged and no determination of the Death
Benefit is made at that time.
Upon the death of an Owner on or after the Annuity Date, any remaining amounts
payable under the Contract will be distributed at least as rapidly as under the
method of distribution being used as of the date of the Owner's death.
PAYMENT OF OWNER'S DEATH BENEFIT
The Death Benefit will be determined by the Company as of the date of the
Owner's death. The Death Benefit will be paid as of the Valuation Period next
following the date of receipt by the Company of both due proof of death and, if
no election of payment method was previously made by the Owner, an election for
the payment method. In the event of the death of an Owner prior to the Annuity
Date, a Beneficiary may elect to have the Death Benefit paid under one of the
following options: (a) as a single lump sum payment; (b) payment of the entire
Death Benefit within five years of the date of the Owner's death or (c) payment
of the Death Benefit under an Annuity Option over the lifetime of the
Beneficiary or over a period not extending beyond the life expectancy of the
Beneficiary with payments commencing within one year of the date of the Owner's
death. Any portion of the Death Benefit not applied under option (c) within one
year of the date of the Owner's death, must be distributed within five years of
the date of such death.
A spousal Beneficiary may elect one of the above options or elect to continue
the Contract in his or her name at the then current Contract Value in lieu of
receiving any Death Benefit. Payment to the Beneficiary other than in a lump
sum, may only be elected during the sixty (60) day period beginning with the
date of receipt of proof of death.
If a single sum payment is requested, the amount will be paid within seven (7)
days of receipt of proof of death and the election, unless the Suspension or
Deferral of Payments provision is in effect.
Payment to the Beneficiary, other than in a single sum, may only be elected
during the sixty-day period beginning with the date of receipt of proof of
death.
The Company will require due proof of death before payment of a Death Benefit.
For these purposes, "due proof of death" means:
1. a certified death certificate;
2. a certified decree of a court of competent jurisdiction as to the
finding of death; or
3. any other proof satisfactory to the Company.
All Death Benefits will be paid in accordance with applicable law or regulations
governing death benefit payments.
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<PAGE> 16
OWNERS OTHER THAN A SINGLE PERSON
If there are Joint Owners, any references to the death of an Owner shall mean
the first death of an Owner. Any Joint Owner must be the spouse of the other
Owner. Upon the death of either Owner, the surviving spouse will be the primary
Beneficiary.
BENEFICIARY OTHER THAN A SINGLE PERSON
Unless the Owner provides otherwise, the Death Benefit will be paid in equal
shares to the survivor(s) as follows:
1. to the primary Beneficiary(ies) who survive the death of the Owner
and/or Annuitant, as applicable; or if there are none,
2. to the contingent Beneficiary(ies) who survive the death of the Owner
and/or Annuitant, as applicable; or if there are none,
3. to the estate of the Owner.
WITHDRAWALS
GENERAL
Prior to the Annuity Date, the Owner may, upon written request received by the
Company at its Variable Service Center, make a total withdrawal (surrender) or
partial withdrawal of the Withdrawal Value. The Withdrawal Value is:
1. the Contract Value at the end of the Valuation Period during which a
written request for a withdrawal is received at the Company; less
2. any applicable taxes not previously deducted; less
3. the Withdrawal Charge, if any; less
4. the Annual Contract Maintenance Charge, if any; less
5. the Optional Enhanced Death Benefit Charge, if any.
A withdrawal will result in the cancellation of Accumulation Units from each
applicable Sub-Account or a reduction in Fixed Account Value in the ratio that
the Contract Value in each Investment Option bears to the total Contract Value.
The Owner may request in writing in advance if a different method for canceling
Accumulation Units or reducing Fixed Account Value is desired. The Company
reserves the right to approve or disapprove any such request.
The Company will pay the amount of any withdrawal within seven (7) days of
receipt of a request in good order unless the Suspension or Deferral of Payments
provision is in effect.
WITHDRAWAL CHARGE
A Withdrawal Charge may be imposed by the Company if a Withdrawal Charge Event
shown on the Contract Data Page occurs during the Withdrawal Charge Duration
shown on the Contract Data Page
The Withdrawal Charge is determined by the Company applying the Withdrawal
Charge Percentages shown on the Contract Data Page to the Contract Value deemed
by the Company to represent Purchase Payments withdrawn, surrendered or applied
to an Annuity Option. The charge will vary depending on the elapsed period shown
on the Contract Data Page for which a Withdrawal Charge applies. Purchase
Payments are deemed withdrawn in the order in which they are received by the
Company. The amount
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<PAGE> 17
deducted will result in the cancellation of Accumulation Units from each
applicable Sub-Account or a reduction in Fixed Account Value in the ratio that
the Contract Value in each Investment Option bears to the total Contract Value.
The Owner may request in writing in advance if a different method for assessing
the Withdrawal Charge is desired. The Company reserves the right to approve or
disapprove any such request.
PARTIAL WITHDRAWALS
Each partial withdrawal must be for an amount which is not less than the amount
shown on the Contract Data Page. The remaining Withdrawal Value which must
remain in the Contract after a partial withdrawal, if any, is shown on the
Contract Data Page. If a partial withdrawal is requested that would reduce the
remaining Withdrawal Value for the Contract below that shown on the Contract
Data Page, the Company may deem the request to be a total withdrawal (surrender)
from the Contract. In such event, the Company may pay the then current
Withdrawal Value and terminate the Contract in accordance with the "Minimum
Value Required After Partial Withdrawal" provision of this Contract.
FREE WITHDRAWAL AMOUNT
The Free Withdrawal Amount on Partial Withdrawals applicable to this Contract,
if any, is shown on the Contract Data Page. No Withdrawal Charge will be imposed
on a partial withdrawal unless the amount withdrawn during a Contract Year
exceeds the Free Withdrawal Amount on Partial Withdrawals. Amounts taken as a
Free Withdrawal Amount do not reduce Purchase Payments for purposes of computing
the Withdrawal Charge on Contract Value subject to a Withdrawal Charge. The
Withdrawal Charge will apply to any amount withdrawn during a Contract Year in
excess of the Free Withdrawal Amount on Partial Withdrawals. The unused portion
of the Free Withdrawal Amount for one Contract Year will not carry-over to the
next Contract Year. The Free Withdrawal Amount is not available if a withdrawal
request would result in remaining Withdrawal Value that is less than the
Withdrawal Value Required to Remain in Contract After Partial Withdrawal shown
on the Contract Data Page.
SUSPENSION OR DEFERRAL OF PAYMENTS
The Company reserves the right to suspend or postpone payments for a withdrawal
or transfer for any period when:
1. the New York Stock Exchange is closed;
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of securities held
in the Separate Account is not reasonably practicable or it is not
reasonably practicable to determine the value of the Separate
Account's net assets; or
4. during any other period when the Securities and Exchange Commission,
by order, so permits for the protection of Owners;
5. provided that applicable rules and regulations of the Securities and
Exchange Commission will govern as to whether the conditions described
in 2. and 3. exist.
The Company reserves the right to defer payment for a withdrawal or transfer
from the Fixed Account for the period permitted by law, but not for more than
six months after written election is received by the Company.
ANNUITY PROVISIONS
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<PAGE> 18
ANNUITY DATE
The Owner selects the Annuity Date at the time of the application, and may later
change it by written request to the Company's Variable Service Center at least
thirty (30) days prior to the existing Annuity Date. If an Annuity Date is
selected that would cause a Withdrawal Charge Event to occur, a Withdrawal
Charge will be deducted from Contract Value before the first Annuity Payment is
made. The Annuity Date on the Issue Date is shown on the Contract Data Page.
ANNUITY PAYMENTS
Annuity Payments are paid in monthly installments in the form of Fixed Annuity
Payments, Variable Annuity Payments or a combination of Fixed Annuity Payments
and Variable Annuity Payments.
The Owner may select the form of Annuity Payments by written request to the
Company at its Variable Service Center at least seven (7) days prior to the
Annuity Date. If all of the Contract Value on the seventh calendar day before
the Annuity Date is allocated to the Fixed Account, Fixed Annuity Payments will
be made. If all of the Contract Value on that date is allocated to the Separate
Account, Variable Annuity Payments will be made. If the Contract Value on that
date is allocated to both the Fixed Account and the Separate Account, a
combination of Fixed Annuity Payments and Variable Annuity Payments will be made
to reflect the allocation between the Fixed Account Value and the Variable
Account Value.
The payments will be made to the Annuitant, unless a different payee is selected
by the Owner by written request to the Company at its Variable Service Center at
least 30 days prior to the Annuity Date.
The Contract Value on the Annuity Date, as adjusted for any applicable taxes and
charges ("Adjusted Contract Value"), will be applied to the applicable Annuity
Table contained in the Contract based upon the Annuity Option selected by the
Owner. The amount of the first payment for each $1,000 of Adjusted Contract
Value is shown in the Annuity Tables. If, as of the Annuity Date, the current
Annuity Option rates applicable to this class of contracts provide an initial
Annuity Payment greater than that guaranteed under the same Annuity Option under
this Contract, the greater payment will be made.
The total dollar amount of each Annuity Payment is the sum of the Variable
Annuity Payment and the Fixed Annuity Payment. The Company reserves the right to
pay Annuity Payments in one sum when the remaining payments are less than
$2,000, or other minimum amount established by the Company from time to time, or
when the Annuity Option elected would result in periodic payments of less than
$100.
VARIABLE ANNUITY PAYMENTS
The amount of a Variable Annuity Payment is dependent upon (a) the Contract
Value, adjusted for any applicable charges, that is applied to an Annuity
Option; (b) the rates for the Annuity Option selected, as stated in the Annuity
Option Tables; and (c) the investment performance of the selected Sub-Accounts
during the Annuity Period. Variable Annuity Payments are not guaranteed as to
dollar amount.
Calculation. The dollar amount of Variable Annuity Payments for each applicable
Sub-Account after the first Variable Annuity Payment is determined as follows:
1. the dollar amount of the first Variable Annuity Payment is divided by
the value of an Annuity Unit for each applicable Sub-Account as of the
Annuity Date. This sets the number of Annuity Units for each monthly
payment for the applicable Sub-Account. The number of Annuity Units
for each applicable Sub-Account remains fixed during the Annuity
Period;
2. the fixed number of Annuity Units per payment in each Sub-Account is
multiplied by the Annuity Unit Value for that Sub-Account for the last
Valuation Period of the month preceding the month for which the
payment is due. This result is the dollar amount of the payment for
each applicable Sub-Account.
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<PAGE> 19
The total dollar amount of each Variable Annuity Payment is the sum of all
Sub-Account Variable Annuity Payments.
Annuity Unit: The value of any Annuity Unit for each Sub-Account of the Separate
Account was arbitrarily set initially at $10.
The Sub-Account Annuity Unit Value at the end of any subsequent Valuation Period
is determined by subtracting 2. from 1. and dividing the result by 3. and
multiplying the result by a factor which neutralizes the assumed interest rate
shown on the Contract Data Page, where:
1. is the net result of: (a) the assets of the Sub-Account attributable
to the Annuity Units; plus or minus (b) the cumulative charge or
credit for taxes reserved which is determined by the Company to have
resulted from the operation or maintenance of the Sub-Account;
2. is the cumulative unpaid charge for the Mortality and Expense Risk
Charge and for the Administrative Charge, which are shown on the
Contract Data Page; and
3. is the number of Annuity Units outstanding at the end of the Valuation
Period.
The value of an Annuity Unit may increase or decrease from Valuation Period to
Valuation Period.
FIXED ANNUITY PAYMENTS
The dollar amount of each Fixed Annuity Payment shall be determined in
accordance with Annuity Tables contained in this Contract which are based on the
minimum guaranteed interest rate of 3.0% per year. After the initial Fixed
Annuity Payment, the payments will not change regardless of investment,
mortality or expense experience.
ANNUITY OPTIONS
An Annuity Option is selected by the Owner at the time of the application and
may be changed by the Owner by written request at least thirty (30) days prior
to the Annuity Date. If no Annuity Option election is in effect at least thirty
(30) days before the Annuity Date, Option B. Life Annuity with a period certain
of 120 months will automatically be applied
The following Annuity Options or any other Annuity Option acceptable to the
Company may be selected:
OPTION A. LIFE ANNUITY: Monthly Annuity Payments during the life of the
Annuitant.
OPTION B. LIFE ANNUITY WITH PERIODS CERTAIN OF 60,120, 180 OR 240 MONTHS:
Monthly Annuity Payments during the lifetime of the Annuitant and in any event
for sixty (60), one hundred twenty (120), one hundred eighty (180) or two
hundred forty (240) months certain as selected.
OPTION C. JOINT AND SURVIVOR ANNUITY: Monthly Annuity Payments payable during
the joint lifetime of the Annuitant and a designated second person and then
during the lifetime of the survivor at the percentage (100%, 75%, 66 2/3% or
50%) selected.
OPTION D. JOINT AND CONTINGENT ANNUITY: Monthly Annuity Payments during the
Annuitant's lifetime and continuing during the lifetime of a designated second
person after the Annuitant's death at the percentage (100%, 75%, 66 2/3% or 50%)
selected.
OPTION E. FIXED PAYMENTS FOR A PERIOD CERTAIN: Fixed monthly Annuity Payments
for any specified period (at least five years but not exceeding thirty years),
as selected.
Annuity Options A, B, C and D are available for Fixed Annuity Payments, Variable
Annuity Payments or a combination of both. Annuity Option E is available for
Fixed Annuity Payments only. If the Annuitant dies during a period certain
(Annuity Options B or E), the remaining Annuity Payments will be made to the
Beneficiary. The Beneficiary may elect to receive the commuted value of the
remaining Annuity Payments in a single sum instead. The Company will determine
the commuted value by discounting the remaining Annuity Payments at its then
current interest rate used for commutation.
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<PAGE> 20
MORTALITY TABLES
The mortality tables used in determining the Annuity Purchase Rates for Options
A, B, C, and D is the 1983a Annuity Mortality Table (40% Male, pivotal age 65)
and interest at a rate of 3.0% per year, compounded annually. A detailed
statement of the method of calculation has been filed with the insurance
department of the state in which the Contract was issued. The Company will
compute reserves on this Contract on the Commissioners Annuity Reserve Valuation
Method (CARVM). The reserves and guaranteed values including any paid-up
annuity, Withdrawal Value or Death Benefits will at no time be less than the
minimum required by the laws of the state in which the application was signed.
The dollar amount of an Annuity Payment for any Age or combination of Ages not
shown in the Tables or for any other form of Annuity Option agreed to by the
Company will be provided by the Company upon request.
MISSTATEMENT OF AGE OR SEX
If the Age or sex of the Annuitant, or the Age or sex of any designated second
person, has been misstated, any Annuity Payments will be the Annuity Payments
provided by the correct Age or sex. If the misstatement is discovered after the
Annuity Date: (a) the Company will add interest to any overpayments at the rate
of 6% per year, compounded annually, and deduct the amount from remaining
Annuity Payments until the total is repaid; and (b) the Company will add
interest to any underpayments at the rate of 6% per year, compounded annually,
and pay the amount in a single sum with next Annuity Payment.
SUPPLEMENTARY AGREEMENT
A Supplementary Agreement setting forth the terms of the Annuity Option selected
will be issued at the Annuity Date, at which time this Contract will be
exchanged for the Supplementary Agreement.
EVIDENCE OF SURVIVAL
The Company may require satisfactory evidence of the continued survival of any
person(s) on whose life Annuity Payments are based.
PROOF OF AGE
The Company may require evidence of Age of any payee under Annuity Options A, B,
C, and D and of the designated second person under Annuity Options C and D.
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<PAGE> 21
ANNUITY OPTION TABLES
MINIMUM MONTHLY PAYMENT RATES FOR EACH $1,000 APPLIED
OPTIONS A AND B - LIFETIME PAYMENT OPTION
<TABLE>
<CAPTION>
AGE OF 10 YEAR & AGE OF 10 YEAR &
PAYEE LIFE PAYEE LIFE
<S> <C> <C> <C>
50 4.07 70 6.30
51 4.13 71 6.47
52 4.20 72 6.65
53 4.28 73 6.83
54 4.35 74 7.01
55 4.44 75 7.20
56 4.52 76 7.39
57 4.61 77 7.58
58 4.71 78 7.76
59 4.81 79 7.95
60 4.91 80 8.12
61 5.02 81 8.29
62 5.14 82 8.45
63 5.26 83 8.60
64 5.39 84 8.74
65 5.53 80 8.87
66 5.67
67 5.82
68 5.97
69 6.13
</TABLE>
OPTIONS C AND D - JOINT LIFETIME PAYMENT - PAYMENTS FOR TWO LIVES ONLY
<TABLE>
<CAPTION>
ANNUITANTS' AGES PERCENTAGE OF PAYMENT PAYABLE TO SURVIVING
ANNUITANT IS:
<S> <C> <C> <C> <C> <C>
PRIMARY JOINT 50% 66 2/3% 75% 100%
(A) Payments reduce upon the death of either the Annuitant or the Joint Annuitant:
50 50 4.10 3.93 3.85 3.63
50 55 4.29 4.09 4.00 3.74
55 55 4.49 4.28 4.18 3.90
55 60 4.74 4.48 4.37 4.05
60 60 5.01 4.74 4.61 4.27
60 65 5.35 5.02 4.87 4.47
65 65 5.73 5.37 5.20 4.76
65 70 6.20 5.75 5.56 5.04
</TABLE>
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<PAGE> 22
(B) Payments reduce only upon the death of the Annuitant (ERISA Joint and
Survivor Annuity Option):
<TABLE>
<S> <C> <C> <C> <C> <C>
50 50 3.85 3.78 3.73 3.63
50 55 3.91 3.86 3.83 3.74
55 50 4.08 3.97 3.90 3.74
55 55 4.18 4.08 4.03 3.90
55 60 4.26 4.19 4.15 4.05
60 55 4.48 4.33 4.26 4.05
60 60 4.61 4.49 4.43 4.27
60 65 4.72 4.64 4.59 4.47
65 60 5.02 4.83 4.73 4.47
65 65 5.20 5.05 4.97 4.76
65 70 5.36 5.25 5.19 5.04
70 65 5.76 5.51 5.38 5.04
</TABLE>
Monthly payment rates for other age combinations will be furnished on request.
For quarterly payments, multiply the monthly payment rate by 2.99. For
semi-annual payments, multiply by 5.96. For annual payment, multiply by 11.84.
OPTION E - FIXED TIME PAYMENT
<TABLE>
<CAPTION>
YEARS MONTHLY PAYMENT YEARS MONTHLY PAYMENT YEARS MONTHLY PAYMENT
<S> <C> <C> <C> <C> <C>
1 Not available 11 8.86 21 5.32
2 Not available 12 8.24 22 5.15
3 Not available 13 7.71 23 4.99
4 Not available 14 7.26 24 4.84
5 17.91 15 6.87 25 4.71
6 15.14 16 6.53 26 4.59
7 13.16 17 6.23 27 4.47
8 11.68 18 5.96 28 4.37
9 10.53 19 5.73 29 4.27
10 9.61 20 5.51 30 4.18
</TABLE>
For quarterly payments, multiply the monthly payment rate by 2.99. For
semi-annual payments, multiply by 5.96. For annual payment, multiply by 11.84.
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<PAGE> 23
FIRST VARIABLE LIFE INSURANCE COMPANY
LITTLE ROCK, ARKANSAS
BONUS DEATH BENEFIT RIDER
This Rider is made part of the Contract to which it is attached, and is
effective upon the Issue Date.
The DEATH BENEFITS provision of the Contract is amended to include the
following:
BONUS DEATH BENEFIT: If no partial withdrawals have previously been taken, the
Death Benefit payable upon the death of the Owner prior to the Annuity Date may
be increased. This Bonus Death Benefit is the excess, if any, of:
1. The Step Up Amount in effect on the date of the Owner's death; over
2. The Death Benefit on the date of the Owner's death.
A Step Up Amount is determined for each Bonus Period while this Contract is in
force. The first Bonus Period begins on the Issue Date and ends on the earlier
of the sixth Contract Anniversary or the day on which the Owner attains Age 80.
Each succeeding Bonus Period is for the six (6) Contract Years immediately
following the preceding Bonus Period or, if earlier, until the day on which the
Owner attains Age 80.
The Step Up Amount at the start of the first Bonus Period is the initial
Purchase Payment. The Step Up Amount at the start of each succeeding Bonus
Period is the greater of:
1. The Step Up Amount at the end of the preceding Bonus Period; or
2. The Contract Value at the end of the preceding Bonus Period.
The Step Up Amount during any Bonus Period is increased by the amount of
Purchase Payments received by the Company during that Bonus Period.
No Bonus Death Benefit is payable: (a) if any withdrawals of Contract Value were
taken during the Owner's lifetime; (b) if death occurs after the Annuity Date;
or (c) if death occurs beyond the Owner's eightieth birthday.
If the Owner is a non-natural person, the Annuitant will be considered the Owner
for purposes of determining the Bonus Death Benefit. If the initial Owner is
changed, however, this Rider will terminate unless the Company consents
otherwise.
If the Beneficiary is the spouse of the Owner and elects to continue the
Contract, the Contract Value remains unchanged and no determination of the Death
Benefit or Bonus Death Benefit is made at that time.
s/Arnold R. Bergman s/John M. Soukup
Secretary President
First Variable Life Insurance Company
Little Rock, Arkansas
115
<PAGE> 24
FIRST VARIABLE LIFE INSURANCE COMPANY
LITTLE ROCK, ARKANSAS
ENHANCED DEATH BENEFIT RIDER
In consideration of the Optional Enhanced Death Benefit Charge stated on the
Contract Data Page, this Rider is made part of the Contract to which it is
attached, and is effective upon the Issue Date.
The Contract is amended as follows:
1. The CHARGES AND DEDUCTIONS provisions are amended to include the following:
The Company will deduct the Optional Enhanced Death Benefit Charge stated on the
Contract Data Page on each Contract Anniversary prior to the Annuity Date or the
Owner's 80th birthday, if earlier. The Optional Enhanced Death Benefit Charge
will also be deducted on the Annuity Date, and upon surrender of the Contract,
based on the Contract Value at that time. The charge is deducted by the Company
reducing Contract Value from each Investment Option in the ratio that the value
of each Investment Option bears to the total Contract Value. Variable Account
Value is reduced by the Company canceling Accumulation Units credited to the
Contract in each applicable Sub-Account.
2. The DEATH OF OWNER provision and BONUS DEATH BENEFIT Rider, if any,
provisions are deleted and the following inserted in its place:
DEATH OF OWNER: The Contract provides for a Death Benefit to be paid to the
Beneficiary upon the death of an Owner prior to the Annuity Date. The Death
Benefit is:
- the Basic Death Benefit; or
- if greater and if no withdrawals of Contract Value have been taken
during the Owner's lifetime, the Bonus Death Benefit; or
- if greater, the Enhanced Death Benefit.
Upon the death of an Owner on or after the Annuity Date, any remaining payments
under the Contract will be distributed at least as rapidly as under the method
of distribution being used as of the date of the Owner's death.
Basic Death Benefit. The Basic Death Benefit is the greater of:
- Purchase Payments less the sum of any reductions in Contract Value
attributable to partial withdrawals during the Owner's lifetime
(including applicable charges); or
- the Contract Value.
Bonus Death Benefit. The Bonus Death Benefit is the greater of:
- the Basic Death Benefit on the date of the Owner's death; or
- the Step Up Amount in effect on the date of the Owner's death
A Step Up Amount is determined at the start of each Bonus Period while a
Contract is in force. The first Bonus Period begins on the Issue Date and ends
on the earlier of the seventh Contract Anniversary or the day on which the Owner
attains Age 80. Each succeeding Bonus Period is for the next 6 Contract Years
or, if earlier, until the Owner attains Age 80.
116
<PAGE> 25
The Step Up Amount at the start of the first Bonus Period is the initial
Purchase Payment. The Step Up Amount at the start of each succeeding Bonus
Period is the greater of:
- The Step Up Amount at the end of the preceding Bonus Period; or
- The Contract Value at the end of the preceding Bonus Period.
The Step Up Amount during any Bonus Period is increased by the amount of
Purchase Payments received by the Company during that Bonus Period.
The Step Up Amount on and after the day the Owner attains Age is 80 is zero.
Unless the Company consents otherwise, the Bonus Death Benefit will terminate if
the Owner is changed.
Optional Enhanced Death Benefit. The Owner may elect an Enhanced Death Benefit
at the time a Contract is purchased. The Enhanced Death Benefit, up to the
Owner's 80th birthday, is an amount equal to:
- Purchase Payments, less the sum of any reductions in Contract Value
attributable to partial withdrawals during the Owner's lifetime
(including applicable charges); and
- interest accumulated at an annual rate of 4.5%
up to a maximum amount equal to two (2) times the sum of Purchase Payments.
The Enhanced Death Benefit on and after the day the Owner attains Age 80 is
zero. Unless the Company consents otherwise, the Enhanced Death Benefit will end
if the Owner is changed.
If the Owner is a non-natural person, the Annuitant will be considered the Owner
for purposes of determining the Basic Death Benefit, the Bonus Death Benefit and
the Enhanced Death Benefit.
If the Beneficiary is the spouse of the Owner and elects to continue the
Contract, the Contract Value remains unchanged and no determination of the Death
Benefit is made at that time.
TERMINATION OF RIDER: This Rider will terminate on the earliest of:
1. The death of the Owner before the Annuity Date;
2. A change of designation of Owner, unless the Company consents
otherwise;
3. The Annuity Date;
4. The Contract Anniversary following the Owner's request to terminate
the Rider; and
5. The termination of the Contract.
6. The Owner's 80th birthday.
A request to terminate this Rider by the Owner must be received by the Company
at its Variable Service Center no later than thirty (30) days before a Contract
Anniversary. If a request is received during this thirty (30) period, the Rider
will remain in force (unless terminated for other reasons) during the
immediately following Contract Year.
The Optional Enhanced Death Benefit Charge stated on the Contract Data Page will
be deducted upon termination of this Rider, unless termination is due to death
of the Owner before the Annuity Date.
s/Arnold R. Bergman s/John M. Soukup
Secretary President
First Variable Life Insurance Company
Little Rock, Arkansas
117
<PAGE> 26
[LOGO]
[LETTERHEAD]
ANNUITIZATION BONUS RIDER
This Rider is made part of the Contract to which it is attached, and is
effective upon the Issue Date:
The ANNUITY PROVISIONS of the Contract is amended to include the following:
ANNUITIZATION BONUS: The Company will increase the Contract Value on the Annuity
Date if Contract Value is applied to an Annuity Option. The increase in Contract
Value will be calculated by the Company with respect to Contract Value as of the
immediately preceding Business Day, using the percentage shown on the Contract
Data Page. The increase in Contract Value will be allocated pro-rata to the
Investment Options to which Contract Value is then allocated.
s/Arnold R. Bergman s/John M. Soukup
Secretary President
First Variable Life Insurance Company
Little Rock, Arkansas
118
<PAGE> 27
[LOGO]
[LETTERHEAD]
ENDORSEMENT - NURSING HOME AND TERMINAL ILLNESS WAIVER
This Endorsement is made part of the Contract to which it is attached, and is
effective upon the Issue Date.
The WITHDRAWALS provisions of the Contract are amended to include the following:
WAIVER OF WITHDRAWAL CHARGE: The Withdrawal Charge may be waived:
1. After the first Contract Year, due to Confinement in a Qualifying Nursing
Home; or
2. Due to diagnosis of a Terminal Illness.
A request to waive any Withdrawal Charges is subject to the following
conditions:
Qualifying Nursing Home Conditions. If request is made for waiver due to
confinement in a Qualifying Nursing Home:
1. The Owner or the Owner's spouse must be and have been confined in a
Qualifying Nursing Home for the immediately preceding period of ninety (90)
consecutive days.
2. The Owner or the Owner's spouse must never have been confined in a
Qualifying Nursing Home on or before the date of application for this
Contract.
3. The Owner must not have changed.
4. Confinement must be for reasons that are medically necessary, prescribed by
a licensed physician; and be based on physical limitations which prohibit
daily living in a non-institutional environment.
5. The Company must be presented with written and signed documentation from
the confining facility that it qualifies as Qualifying Nursing Home and
that the confinement satisfies the criteria stated in 4., above.
To be eligible as a Qualifying Nursing Home, a facility must be either:
- - A Skilled Nursing Facility or an Intermediate Care Facility which maintains
a daily medical record of each patient.
- - A Custodial Care Facility that is licensed and operated as such in the
state in which it is located and accommodates three or more persons for a
charge.
A Qualified Nursing Home must provide nursing service 24 hours a day, and
service must be under the supervision of a licensed physician, registered
graduate professional nurse or licensed practical nurse.
Terminal Illness Conditions. If request is made for waiver due to a Terminal
Illness:
119
<PAGE> 28
1. The Owner or the Owner's spouse must never have been diagnosed with a
Terminal Illness on or before the date of application for this Contract.
2. The Owner or the Owner's spouse must be diagnosed as having a Terminal
Illness by a duly licensed physician. Such duly licensed physician shall
not be:
- - The Owner or the Owner's spouse;
- - A person who lives with the Owner or the Owners spouse; or
- - A person who is related to the Annuitant or Owner by blood or marriage.
3. The Company must be presented with written and signed evidence of a
Terminal Illness:
- - During the lifetime of the Owner or Owner's Spouse, as applicable; and
- - From a duly licensed physician as stated above.
4. The Company may request additional medical information and may require an
independent examination of the Owner or Owner's spouse by a duly licensed
physician selected by the Company to confirm the diagnosis of a Terminal
Illness.
A "Terminal Illness" means a non-correctable medical condition which is expected
to result in a drastically limited life span of six (6) months or less.
The Company will not accept any additional Purchase Payments under a Contract if
a waiver of Withdrawal Charges under this Endorsement is in effect.
s/Arnold R. Bergman s/John M. Soukup
Secretary President
120
<PAGE> 29
INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACT WITH
FLEXIBLE PURCHASE PAYMENTS
NON-PARTICIPATING
[LOGO]
[LETTERHEAD]
121
<PAGE> 1
EX-99.B5
Application for Variable Annuity
122
<PAGE> 2
FIRST VARIABLE LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
Application for Capital Six
Issued and Administered by First Variable Life Insurance Company
A stock company domiciled in Little Rock, Arkansas
- --------------------------------------------------------------------------------
INSTRUCTIONS: Please type or print in permanent black ink. This form will
be photocopied. Joint Owner must be spouse. Include date of birth and social
security number for both parties.
- --------------------------------------------------------------------------------
1. Annuitant (If no Owner is specified in Section 2, the Annuitant will be the
Owner)
Name :
Male Female
Social Security Number: ____________________________
Date of Birth: _____________________________________
Permanent Address: _________________________________________________
_________________________________________________
- --------------------------------------------------------------------------------
2. Owner (Complete only if different from the Annuitant)
Name : ____________________________________________________
Male Female
Social Security Number: ____________________________
Date of Birth: _____________________________________
Permanent Address: _________________________________________________
_________________________________________________
- --------------------------------------------------------------------------------
3. Beneficiary
Name (Primary): _____________________________________________
Social Security Number: _____________________________________
Date of Birth: ______________________________________________
Name (Contingent): __________________________________________
Social Security Number: _____________________________________
Date of Birth: ______________________________________________
- --------------------------------------------------------------------------------
4. Purchase Payment (Make check payable to : First Variable Life Insurance
Company)
Purchase Payment
Accompanying Application $ ______________________________
Initial minimum: $5,000 (Non-qualified) or $2,000 (Qualified)
- --------------------------------------------------------------------------------
123
<PAGE> 3
5. Type of Plan
NON-QUALIFIED QUALIFIED
IRA (circle one):
Regular Rollover SEP Transfer
401 HR 10 (KEOGH)
401 Corporate
403(b) TSA
457 Deferred Compensation
If applicable indicate:
1035 Exchange (non-qualified) from*: _____________________________
(company name)
Transfer of Assets (qualified) from*: _____________________________
(company name)
* If 1035 Exchange or other Transfer of Assets, attach a copy of the
exchange form or letter.
- --------------------------------------------------------------------------------
6 Replacement
Will the proposed annuity contract replace any existing annuity or life
insurance contract?
No Yes (If "yes," state company, contract number, and
annuitant in the Additional Remarks Section. Attach replacement forms.)
- --------------------------------------------------------------------------------
7. Fund Selection
_______% Federated-Prime Money Fund 11 Portfolio (Federated Investment
Counseling)
_______% U.S. Government Bond Portfolio (Strong Capital Management, Inc.)
_______% High Income Bond Portfolio (Federated Investment Counseling)
_______% Growth Portfolio (Value Line, Inc.)
_______% Multiple Strategies Portfolio (Value Line, Inc.)
_______% Matrix Equity Portfolio (State Street Global Advisors)
_______% World Equity Portfolio (Keystone Investment Management Company)
_______% Growth & Income Portfolio (Warburg Pincus Counsellors, Inc.)
_______% Small Cap Growth Portfolio (Pilgrim Baxter & Associates Ltd.)
_______% Other _________________________________
Fixed Account
______% 1-Year Option
______% Other___________________________________
Use whole percentages only. Total Allocation must equal 100%.
- --------------------------------------------------------------------------------
124
<PAGE> 4
8. Telephone Transfers
By initialing this box, , I hereby authorize the Company, either directly
or through it agents, to transfer Contract Values among the investment
division available under the Contract upon telephone instructions from the
Owner or any other person who purports to give instructions on his or her
behalf. This authorization is subject to the restrictions and limitations
contained in the rules and procedures established by the Company from time
to time. (A copy of these rules will be provided with your Contract.)
The Company will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine, and if it does not, it may be liable
for any losses due to unauthorized or fraudulent transactions.
The Company is authorized, without prior disclosure, to record telephone
conversations containing telephone instructions.
The Owner agrees to examine promptly all confirmation statements reflecting
transfers made in accordance with telephone instructions. Errors shall be
reported to the Company immediately.
This authorization will continue in effect until the Company receives
written revocation from the Owner, or the Company discontinues telephone
transfers.
- --------------------------------------------------------------------------------
9. Additional Remarks
Asset Rebalancing: Yes, I elect this service. Effective Date:___________
_________________________________________________________________________
_________________________________________________________________________
- --------------------------------------------------------------------------------
10. Signature
All statements made in this Application are true to the best of my
knowledge and belief I agree to all its terms and conditions. I further
agree that this application shall be a part of the annuity contract. I
verify my understanding that ALL PAYMENTS AND VALUES PROVIDED BY THE
CONTRACT, WHEN BASED ON INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE
VARIABLE AND NOT GUARANTEED AS TO DOLLAR AMOUNT. ALLOCATION DURING FREE
LOOK PERIOD: Under certain circumstances, as described in the accompanying
Prospectus, the initial purchase payment will be allocated to the Cash
Management Portfolio until the expiration of the Free Look period.
Thereafter, the purchase payments will be allocated as directed in the
Purchase Payment Allocation Section. I acknowledge receipt of current
prospectuses. I certify that the Social Security (or taxpayer
identification) number is correct as it appears in this application.
____ Check here if you wish to receive a copy of the Statement of
Additional Information.
Signed at City _________________________ State ___________ Date _________
SIGNATURE OF ANNUITANT ___________________________________ PHONE #_________
SIGNATURE OF OWNER (Completed only if Owner is different from Annuitant)
___________________________________________________________________________
- --------------------------------------------------------------------------------
125
<PAGE> 5
11. Signature of Representative
To the best of my knowledge, this application ___ will ___ will not replace
or change an existing insurance policy or annuity.
(If replacement/change is involved, please give full details, including
name of company. Attach required documents.)
I have reviewed this Annuity program with the Applicant. I believe it to
be suitable in view of the Applicant's investment objectives, financial
situation, and needs.
Signature of Representative:_________________________________________
Date: ___________________
Representative's Name (please print) ______________________________________
Phone #: _________________________ Soc. Sec. #: _________________
Name of Broker Dealer (please print): _____________________________________
Comp _____ Trail: _____ Option A _____ Option B
_____ No Trail
- --------------------------------------------------------------------------------
Send completed application with a check made out to
FIRST VARIABLE LIFE INSURANCE COMPANY to your
investment dealer's home office or to:
First Variable Service Center
P.O. Box 1317
Des Moines, IA 50305-1317
(800) 228-1035
126
<PAGE> 1
EX-99.B9(a)
Consent of Counsel
127
<PAGE> 2
[LOGO]
[LETTERHEAD]
April 27, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Registration of Contract Interests
First Variable Annuity Fund E of First Variable Life Insurance Company
(File Nos. 333-12197 and 811-4092)
Dear Sir/Madam:
I consent to the use in Registration No. 333-12197 of my opinion letter dated
April 25, 1997.
Very truly yours,
s/Arnold R. Bergman
- -------------------
Arnold R. Bergman
Vice President, General Counsel* and Secretary
*Admitted in NY
128
<PAGE> 1
EX-99.B9(b) Consent of
Blazzard, Grodd & Hasenauer, P.C.
129
<PAGE> 2
BLAZZARD, GRODD & HASENAUER, P.C.
ATTORNEYS AT LAW CONNECTICUT OFFICE:
943 POST ROAD EAST - P.O. BOX 5108
NORSE N. BLAZZARD** WESTPORT, CONNECTICUT 06881-5108
LESLIE E. GRODD* TELEPHONE (203) 226-7866
JUDITH A. HASENAUER** FACSIMILE (203) 454-4028
WILLIAM E. HASENAUER*
RAYMOND A. O'HARA III* FLORIDA OFFICE:
LYNN KORMAN STONE* SUITE 213, OCEANWALK MALL
MAUREEN M. MURPHY* 101 NORTH OCEAN DRIVE
HOLLYWOOD, FLORIDA 33019
* Admitted in Connecticut TELEPHONE (305) 920-6590
** Admitted in Connecticut & Florida
FACSIMILE (305) 920-6902
April 20, 1998
CONSENT OF COUNSEL
We consent to the reference to our Firm under the caption "Legal Counsel"
contained in the Statement of Additional Information which forms a part of
Post-Effective Amendment No. 2 to the Registration Statement on Form N-4 (File
No. 333-12197) for the individual flexible payment deferred variable annuity
contracts ("Contracts") to be issued by First Variable Life Insurance Company
and its separate account, First Variable Annuity Fund E.
Sincerely,
s/BLAZZARD, GRODD & HASENAUER, P.C.
BLAZZARD, GROOD & HASENAUER, P.C.
130
<PAGE> 1
EX-99.B10
Consent of Ernst & Young LLP, Independent Auditors
131
<PAGE> 2
Exhibit 10
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Independent
Auditors" and to the use of our reports dated February 6, 1998, with respect to
the consolidated financial statements of First Variable Life Insurance
Company and January 30, 1998 with respect to the financial statements of First
Variable Life Insurance Company-First Variable Annuity Fund E, in Post
Effective Amendment No. 2 to the Registration Statement (Form N-4 No.
333-12197) and related Prospectus of First Variable Life Insurance Company.
s/Ernst & Young LLP
-------------------
ERNST & YOUNG LLP
Boston, Massachusetts
April 27, 1998
132
<PAGE> 1
EX-99.B13.
Calculation of Performance Information
133
<PAGE> 2
PRIME MONEY FUND II CAPITAL 6 FUND E YIELD CALCULATIONS AS OF 12/31/97
Seven Day Yield
<TABLE>
<S> <C> <C>
12/31/97 Unit Price 10.737 (A)
12/24/97 Unit Price 10.729 (B)
Difference 0.008 (C)
Base Return (C) / (B) 0.00074564
</TABLE>
Annualized Base Return = (C) / (B) * 365/7 = 3.89%
Effective Yield = (1+Base Return) (exponent)(365/7) -1 = 3.96%
TOTAL RETURN ON CAPITAL 6 PORTFOLIOS OVER RESPECTIVE PERIODS
FORMULA P*(1+T) (exponent)N = ERV T = ((ERV/P) (exponent)1/N) -1
<TABLE>
<S> <C>
POLICY ISSUE FEE 0
ANN CONTRACT MNT CHG 30.00
TIME SINCE START 2.17
TIME SINCE START 2.17(Small Cap & Growth & Income Portfolio's)
SURRENDER CHARGE 1 0
SURRENDER CHARGE 2 0
SURRENDER CHARGE 3 0
SURRENDER CHARGE 4 0
SURRENDER CHARGE 5 0
SURRENDER CHARGE 6 0
</TABLE>
<TABLE>
<CAPTION>
SMALL CAP GROWTH SMALL CAP GROWTH
ONE YEAR START OF
PORTFOLIO
<S> <C> <C> <C>
Unit Price EOP 12.909 Unit Price EOP 12.909
Unit Price BOP 13.01 Unit Price BOP 10.000
Accum Value EOP 992.24 Accum Value EOP 1,290.90
Surrender Charge 54.00 Surrender Charge 45.00
Ann Contract Charge 0.42 Ann Contract Charge 0.91
Surrender Value 937.82 Surrender Value 1,244.99
Effective Yield -6.218% Effective Yield 10.625%
</TABLE>
134
<PAGE> 3
<TABLE>
<CAPTION>
WORLD EQUITY WORLD EQUITY
ONE YEAR START OF
PORTFOLIO
<S> <C> <C> <C>
Unit Price EOP 12.279 Unit Price EOP 12.279
Unit Price BOP 11.333 Unit Price BOP 10.000
Accum Value EOP 1,083.47 Accum Value EOP 1,227.90
Surrender Charge 54.00 Surrender Charge 45.00
Ann Contract Charge 0.42 Ann Contract Charge 0.91
Surrender Value 1,029.05 Surrender Value 1,181.99
Effective Yield 2.905% Effective Yield 8.010%
</TABLE>
<TABLE>
<CAPTION>
GROWTH GROWTH
ONE YEAR START OF
PORTFOLIO
<S> <C> <C> <C>
Unit Price EOP 15.307 Unit Price EOP 15.307
Unit Price BOP 12.569 Unit Price BOP 10.000
Accum Value EOP 1,217.84 Accum Value EOP 1,530.70
Surrender Charge 54.00 Surrender Charge 45.00
Ann Contract Charge 0.42 Ann Contract Charge 0.91
Surrender Value 1,163.42 Surrender Value 1,484.79
Effective Yield 16.342% Effective Yield 19.980%
</TABLE>
<TABLE>
<CAPTION>
MATRIX EQUITY MATRIX EQUITY
ONE YEAR START OF
PORTFOLIO
<S> <C> <C> <C>
Unit Price EOP 13.157 Unit Price EOP 13.157
Unit Price BOP 10.942 Unit Price BOP 10.000
Accum Value EOP 1,202.43 Accum Value EOP 1,315.70
Surrender Charge 54.00 Surrender Charge 45.00
Ann Contract Charge 0.42 Ann Contract Charge 0.91
Surrender Value 1,148.01 Surrender Value 1,269.79
Effective Yield 14.801% Effective Yield 11.636%
</TABLE>
<TABLE>
<CAPTION>
GROWTH & INCOME GROWTH & INCOME
ONE YEAR
<S> <C> <C> <C>
Unit Price EOP 14.835 Unit Price EOP 14.835
Unit Price BOP 11.747 Unit Price BOP 10.000
</TABLE>
135
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
Accum Value EOP 1,262.88 Accum Value EOP 1,483.50
Surrender Charge 54.00 Surrender Charge 45.00
Ann Contract Charge 0.42 Ann Contract Charge 0.91
Surrender Value 1,208.46 Surrender Value 1,437.59
Effective Yield 20.846% Effective Yield 18.207%
</TABLE>
<TABLE>
<CAPTION>
MULTIPLE MULTIPLE
STRATEGIES STRATEGIES
ONE YEAR START OF
PORTFOLIO
<S> <C> <C> <C>
Unit Price EOP 14.102 Unit Price EOP 14.102
Unit Price BOP 11.835 Unit Price BOP 10.000
Accum Value EOP 1,191.55 Accum Value EOP 1,410.20
Surrender Charge 54.00 Surrender Charge 45.00
Ann Contract Charge 0.42 Ann Contract Charge 0.91
Surrender Value 1,137.13 Surrender Value 1,364.29
Effective Yield 13.713% Effective Yield 15.390%
</TABLE>
<TABLE>
<CAPTION>
HIGH INCOME BOND HIGH INCOME BOND
ONE YEAR START OF
PORTFOLIO
<S> <C> <C> <C>
Unit Price EOP 12.802 Unit Price EOP 12.802
Unit Price BOP 11.446 Unit Price BOP 10.000
Accum Value EOP 1,118.47 Accum Value EOP 1,280.20
Surrender Charge 54.00 Surrender Charge 45.00
Ann Contract Charge 0.42 Ann Contract Charge 0.91
Surrender Value 1,064.05 Surrender Value 1,234.29
Effective Yield 6.405% Effective Yield 10.186%
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT BOND U.S. GOVERNMENT BOND
ONE YEAR START OF PORTFOLIO
<S> <C> <C> <C>
Unit Price EOP 11.189 Unit Price EOP 11.189
Unit Price BOP 10.385 Unit Price BOP 10.000
Accum Value EOP 1,077.42 Accum Value EOP 1,118.90
Surrender Charge 54.00 Surrender Charge 45.00
</TABLE>
136
<PAGE> 5
<TABLE>
<S> <C> <C> <C>
Ann Contract Charge 0.42 Ann Contract Charge 0.91
Surrender Value 1,023.00 Surrender Value 1,072.99
Effective Yield 2.300% Effective Yield 3.300%
</TABLE>
<TABLE>
<CAPTION>
PRIME MONEY FUND II PRIME MONEY FUND II
ONE YEAR START OF
PORTFOLIO
<S> <C> <C> <C>
Unit Price EOP 10.737 Unit Price EOP 10.387
Unit Price BOP 10.387 Unit Price BOP 10.000
Accum Value EOP 1,033.70 Accum Value EOP 1,038.70
Surrender Charge 54.00 Surrender Charge 45.00
Ann Contract Charge 0.42 Ann Contract Charge 0.91
Surrender Value 979.28 Surrender Value 992.79
Effective Yield -2.072% Effective Yield -0.333%
</TABLE>
137
