<PAGE> 1
NASL SERIES TRUST
Supplement to Prospectus dated May 1, 1995,
as amended August 28, 1995
FNAL VARIABLE ACCOUNT
NASL VARIABLE ACCOUNT
Supplement to Prospectus
dated May 1, 1995
NASL VARIABLE LIFE ACCOUNT
Supplement to Prospectus
dated October 16, 1995
On January 1, 1996, North American Life Assurance Company ("NAL") and
The Manufacturers Life Insurance Company merged with the combined company
retaining the name The Manufacturers Life Insurance Company ("Manulife"). NAL
is the ultimate parent of NASL Financial Services, Inc. ("NASL Financial"), the
investment adviser to NASL Series Trust (the "Trust"). Manulife, like NAL,
is a Canadian mutual life insurance company based in Toronto, Canada. The
merger may be considered to give rise to the assignment and automatic
termination of the investment advisory agreement between NASL Financial and the
Trust as well as the assignment and automatic termination of each of the
underlying subadvisory agreements for each of the portfolios (including the
consulting agreement between Salomon Brothers Asset Management Inc. ("SBAM")
and Saloman Brothers Asset Management Inc. ("SBAM Limited") relating to the
Strategic Bond Portfolio) (collectively, the "Existing Agreements").
Therefore, at the Trust's Board of Trustees meeting held September 28-29, 1995,
the Trustees of the Trust (including all the noninterested Trustees) voted to
approve a new advisory agreement between the Trust and NASL Financial, new
subadvisory agreements between NASL Financial and each of the subadvisors, and
a new consulting agreement between SBAM and SBAM Limited (collectively, the
"New Agreements"), and to submit the New Agreements to shareholders for their
consideration. The New Agreements were approved by shareholders of each series
of the Trust on December 5, 1995. THE NEW AGREEMENTS ARE SUBSTANTIALLY
IDENTICAL TO THE EXISTING AGREEMENTS. THEREFORE, THE NEW AGREEMENTS WILL NOT
RESULT IN ANY CHANGES IN ADVISORY FEES PAID BY THE TRUST, THE INVESTMENT
MANAGEMENT OR OPERATIONS OF EITHER NASL FINANCIAL OR THE SUBADVISERS, THE
INVESTMENT PERSONNEL MANAGING THE TRUST OR THE SHAREHOLDER SERVICES OR OTHER
BUSINESS ACTIVITIES OF THE TRUST.
NASL.SUPP196
V7.SUPP.196
V20/21.SUPP196
V22/23.196
V9.SUPP.196
VV.SUPP.196
VIS.SUPP.196
VLSUPP196
THE DATE OF THIS SUPPLEMENT IS JANUARY 2, 1996
<PAGE> 2
SUPPLEMENT DATED SEPTEMBER 13, 1995
TO THE CURRENT PROSPECTUS OF
NASL VARIABLE ACCOUNT
The 2.00% premium tax assessed against Pennsylvania residents for
non-qualified contracts upon withdrawal benefits, annuitization or payment of
death benefits will be waived for non-qualified annuity premiums received on or
after September 8, 1995. Premium for non-qualified contracts received for the
period October 1, 1992 through September 7, 1995 will continue to have the
premium tax assessed upon any withdrawal benefits, annuitization or payment of
death benefits.
VV.PROSUPP995
VIS25.PROSUPP995
V7.PROSUPP995
V20/21.PROSUPP995
V22/23.PROSUPP995
<PAGE> 3
Annuity Service Office Mailing Address
116 Huntington Avenue Post Office Box 818
Boston, Massachusetts 02116 Boston, Massachusetts
(617) 266-6008 02117-0818
(800) 344-1029
- --------------------------------------------------------------------------------
NASL VARIABLE ACCOUNT
- --------------------------------------------------------------------------------
OF
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
FLEXIBLE PURCHASE PAYMENT INDIVIDUAL DEFERRED
COMBINATION FIXED AND VARIABLE ANNUITY CONTRACT
NON-PARTICIPATING
This Prospectus describes a flexible purchase payment individual deferred
variable annuity contract (the "contract") issued by North American Security
Life Insurance Company ("the Company"), a stock life insurance company that is
a wholly-owned subsidiary of North American Life Assurance Company ("North
American Life"). The contract is designed for use in connection with
retirement plans which may or may not qualify for special federal income tax
treatment.
The contract provides for the accumulation of contract values on a
variable basis and the payment of annuity benefits on a variable and/or fixed
basis. The contract value during the accumulation period and annuity payments,
if selected on a variable basis, will vary according to the investment
performance of sub-accounts of NASL Variable Account (the "Variable Account").
The Variable Account is a separate account established by the Company.
Purchase payments and earnings on those purchase payments may be allocated to
and transferred among one or more of fourteen sub-accounts of the Variable
Account. The assets of each sub-account are invested in shares of NASL Series
Trust (the "Trust"), a mutual fund with the following investment portfolios
currently available to the contracts: the Global Equity Trust, Pasadena Growth
Trust, Equity Trust, Value Equity Trust, Growth and Income Trust, International
Growth and Income Trust, Strategic Bond Trust, Global Government Bond Trust,
Investment Quality Bond Trust, U.S. Government Securities Trust, Money Market
Trust and three Automatic Asset Allocation Trusts (Aggressive, Moderate and
Conservative) (see the accompanying Prospectus of the Trust).
Additional information about the contract and the Variable Account is
contained in a Statement of Additional Information, dated the same date as this
Prospectus, which has been filed with the Securities and Exchange Commission
and is incorporated herein by reference. The Statement of Additional
Information is available without charge upon request by writing the Company at
the above address or telephoning (617) 266-6008. The table of contents for the
Statement of Additional Information is included on page 29 of this Prospectus.
SHARES OF THE TRUST ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. IT
CONTAINS INFORMATION ABOUT THE VARIABLE ACCOUNT AND THE CONTRACT THAT A
PROSPECTIVE PURCHASER SHOULD KNOW BEFORE INVESTING. IT SHOULD BE ACCOMPANIED
BY A CURRENT PROSPECTUS FOR THE TRUST.
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.
The date of this Prospectus is May 1, 1995.
VV.PRO595
<PAGE> 4
<TABLE>
TABLE OF CONTENTS
<S> <C>
SPECIAL TERMS ......................................... 3
SUMMARY ............................................... 4
TABLE OF ACCUMULATION UNIT VALUES ..................... 8
GENERAL INFORMATION ABOUT NORTH
AMERICAN SECURITY LIFE INSURANCE
COMPANY, NASL VARIABLE ACCOUNT
AND NASL SERIES TRUST ................................. 9
North American Security Life Insurance Company ..... 9
NASL Variable Account .............................. 9
NASL Series Trust .................................. 9
DESCRIPTION OF THE CONTRACT ........................... 11
ACCUMULATION PROVISIONS .............................. 11
Purchase Payments .................................. 11
Accumulation Units ................................. 12
Value of Accumulation Units ........................ 12
Net Investment Factor .............................. 12
Transfers Among Investment Options ................. 13
Telephone Transactions ............................. 13
Special Transfer Services - Dollar Cost Averaging .. 13
Asset Rebalancing Program .......................... 13
Withdrawals ........................................ 14
Special Withdrawal Services - Systematic
Withdrawal Plan .................................. 14
Loans .............................................. 15
Death Benefit Before Maturity Date ................. 15
ANNUITY PROVISIONS ................................... 17
General ............................................ 17
Annuity Options .................................... 17
Determination of Amount of the First
Variable Annuity Payment .......................... 18
Annuity Units and the Determination
of Subsequent Variable Annuity Payments .......... 18
Transfers After Maturity Date ...................... 19
Death Benefit on or After Maturity Date ............ 19
OTHER CONTRACT PROVISIONS ............................ 19
Ten Day Right to Review ............................ 19
Ownership .......................................... 19
Beneficiary ........................................ 20
Modification ....................................... 20
Company Approval ................................... 20
CHARGES AND DEDUCTIONS ................................ 20
Withdrawal Charges ................................. 20
Reduction or Elimination of Withdrawal Charges ..... 21
Administration Fees ................................ 21
Distribution Fee ................................... 22
Mortality and Expense Risk Fee ..................... 22
Taxes .............................................. 22
FEDERAL TAX MATTERS ................................... 22
INTRODUCTION ......................................... 22
THE COMPANY'S TAX STATUS ............................. 23
TAXATION OF ANNUITIES IN GENERAL ..................... 23
Tax Deferral During Accumulation Period ............ 23
Taxation of Partial and Full Withdrawals ........... 24
Taxation of Annuity Payments ....................... 24
Taxation of Death Benefit Proceeds ................. 25
Penalty Tax on Premature Distributions ............. 25
Aggregation of Contracts ........................... 25
QUALIFIED RETIREMENT PLANS ........................... 25
Qualified Plan Types ............................... 25
Direct Rollovers ................................... 26
FEDERAL INCOME TAX WITHHOLDING ....................... 27
GENERAL MATTERS ....................................... 27
Tax Deferral ....................................... 27
Performance Data ................................... 27
Financial Statements ............................... 27
Asset Allocation and Timing Services ............... 27
Restrictions Under the Texas Optional
Retirement Program ............................... 28
Distribution of Contracts .......................... 28
Contract Owner Inquiries ........................... 28
Legal Proceedings .................................. 28
Other Information .................................. 28
STATEMENT OF ADDITIONAL INFORMATION-
TABLE OF CONTENTS ................................... 29
APPENDIX A: EXAMPLES OF CALCULATION OF
WITHDRAWAL CHARGE ................................... 30
APPENDIX B: STATE PREMIUM TAXES ..................... 31
APPENDIX C: MAXIMUM MATURITY AGES
IN PENNSYLVANIA ..................................... 32
</TABLE>
2
<PAGE> 5
SUPPLEMENT DATED MAY 1, 1995
REVISED AUGUST 28, 1995
TO THE CURRENT PROSPECTUS OF
NASL VARIABLE ACCOUNT
Effective May 1, 1995, a one year fixed account investment option became
available under the contract if available in a particular state or
jurisdiction. Information relating to this new investment option is set forth
below. Except as described in this supplement, the Prospectus describes only
the variable portion of the contract.
FIXED ACCOUNT INVESTMENT OPTION
Effective June 30, 1995, North American Security Life Insurance Company
(the "Company") entered into a Reinsurance Agreement with Peoples Security Life
Insurance Company ("Peoples") pursuant to which Peoples will reinsure certain
amounts with respect to the fixed account portion of the contract described in
this Supplement. Under this Reinsurance Agreement, the Company remains liable
for the contractual obligations of the contracts' fixed account and Peoples
agrees to reimburse the Company for certain amounts and obligations in
connection with the fixed account. Peoples contractual liability runs solely
to the Company, and no contract owner shall have any right of action against
Peoples. Peoples is a wholly-owned subsidiary of Louisville, Kentucky based
Providian Corporation, a diversified financial services corporation. Peoples
is rated A+ (Superior) by A.M. Best for operating performance and financial
stability and AAA by Standard & Poor's Corporation for claims paying ability.
Pursuant to a Guarantee Agreement dated November 19, 1993, North American
Life Assurance Company ("North Amercan Life"), parent of the Company,
unconditionally guarantees to the Company on behalf of and for the benefit of
the Company and owners of fixed annuity contracts issued by the Company that it
will, on demand, make funds available to the Company for the timely payment of
contractual claims under fixed annuity contracts. This Guarantee covers the
fixed portion of the contracts described by this supplement to the Prospectus.
This Guarantee may be terminated by North American Life on notice to the
Company. Termination will not affect North American Life's continuing
liability with respect to all fixed annuity contracts issued prior to the
termination of the Guarantee.
Investment Option. A one year fixed account investment option is
available under the contract. Under the one year fixed account investment
option, North American Security Life Insurance Company (the "Company")
guarantees the principal value of purchase payments and the rate of interest
credited to the investment account for the term of the guarantee period. The
portion of the contract value in the one year fixed account investment option
and monthly annuity payments, if selected on a fixed basis, will reflect such
interest and principal guarantees. The guaranteed interest rates on new
amounts allocated or transferred to a fixed investment account are determined
from time-to-time by the Company in accordance with market conditions. In no
event will the guaranteed rate of interest be less than 3%. Once an interest
rate is guaranteed for a fixed investment account, it is guaranteed for the
duration of the guarantee period and may not be changed by the Company.
Notwithstanding the foregoing, with respect to contracts issued in the State of
Maryland, no purchase payments may be invested in the one year fixed account
investment option within three years of the maturity date.
Investment Accounts. Contract owners may allocate purchase payments, or
make transfers from the variable investment options, to the one year fixed
account investment option at any time prior to the maturity date. The Company
establishes a separate investment account each time the contract owner
allocates or transfers amounts to the fixed account investment option, except
that amounts allocated or transferred to the fixed account investment option on
the same day will establish a single investment account. Amounts may not be
allocated to a fixed account investment option that would extend the guarantee
period beyond the maturity date.
<PAGE> 6
Renewals. At the end of a guarantee period, the contract owner may
establish a new investment account with a one year guarantee period at the then
current interest rate or transfer the amounts to a variable account investment
option, all without the imposition of any charge. In the case of renewals
within one year of the maturity date, the only fixed account investment option
available is to have interest accrued up to the maturity date at the then
current interest rate for one year guarantee periods.
If the contract owner does not specify the renewal option desired, the
Company will select the one year fixed account investment option. In the case
of a renewal within one year of the maturity date, the Company will credit
interest up to the maturity date at the then current interest rate for one year
guarantee periods.
Transfers. Prior to the maturity date, the contract owner may transfer
amounts from the fixed account investment option to the variable account
investment options at the end of the guaranteed period. Amounts in the one
year investment account may be transferred prior to the end of the guarantee
period as follows: (i) transfers may be made pursuant to the Dollar Cost
Averaging program (see below) and (ii) transfers may be made from a one year
fixed investment account to the variable account investment options if, at the
time of the transfer, the guaranteed interest rate for the funds to be
transferred is equal to or greater than the then current guaranteed rate for
funds being transferred into the one year fixed investment option. The Company
may withdraw its permission to make the transfers described in (ii) above at
any time after April 30, 1996.
Where there are multiple investment accounts within the one year fixed
account investment option, amounts must be transferred from the one year fixed
account investment option on a first-in-first-out basis.
Withdrawals. The contract owner may make total and partial withdrawals of
amounts held in the one year fixed account investment option at any time prior
to the maturity date or his or her death. Withdrawals from the fixed account
investment option will be made in the same manner and be subject to the same
limitations as set forth under "WITHDRAWALS" in the Prospectus plus the
following provisions also apply to withdrawals from the fixed account
investment option: (1) the Company reserves the right to defer payment of
amounts withdrawn from the fixed account investment option for up to six months
from the date it receives the written withdrawal request (if a withdrawal is
deferred for more than 30 days pursuant to this right, the Company will pay
interest on the amount deferred at a rate not less than 3% per year (or such
higher rate as may be required by the applicable state or jurisdiction)); and
(2) if there are multiple investment accounts under the fixed account
investment option, amounts must be withdrawn from such accounts on a
first-in-first-out basis.
As noted in the Prospectus, withdrawals allocated to the free withdrawal
amount may be withdrawn without the imposition of a withdrawal charge. The
free withdrawal amount will be applied to a requested withdrawal, first, to
withdrawals from variable account investment options on a pro rata basis and
then to withdrawals from fixed account investment option on a
first-in-first-out basis where there are multiple investment accounts within
the fixed account investment option.
If the contract owner does not specify the investment options from which a
partial withdrawal is to be taken, a partial withdrawal will be taken from the
variable account investment options until exhausted and then from the one year
fixed account investment option.
Withdrawals from the contract may be subject to income tax and a 10%
penalty tax. Withdrawals are permitted from contracts issued in connection
with Section 403(b) qualified plans only under limited circumstances. (See
"FEDERAL TAX MATTERS" in the Prospectus)
Loans. The Company offers a loan privilege only to owners of contracts
issued in connection with Section 403(b) qualified plans that are not subject
to Title I of ERISA. Owners of such contracts may obtain loans using the
contract as the only security for the loan. Owners of such contracts may
borrow
<PAGE> 7
amounts allocated to the fixed investment account in the same manner and
subject to the same limitations as set forth under "LOANS" in the Prospectus.
Fixed Annuity Options. Subject to the distribution of death benefits
provisions (see "DEATH BENEFIT BEFORE MATURTY DATE" in the Prospectus), on
death, withdrawal or the maturity date of the contract, the proceeds may be
applied to a fixed annuity option. (See "ANNUITY OPTIONS" in the Prospectus)
The amount of each fixed annuity payment is determined by applying the portion
of the proceeds (less any applicable premium taxes) applied to purchase the
fixed annuity to the appropriate table in the contract. If the table in use by
the Company is more favorable to the contract owner, the Company will
substitute that table. The Company guarantees the dollar amount of fixed
annuity payments.
Dollar Cost Averaging. The Dollar Cost Averaging ("DCA") program has been
expanded to allow a contract owner entering in to a DCA agreement to instruct
the Company to transfer a monthly predetermined dollar amount from any
sub-account or the one year fixed account investment option to other
sub-accounts until the amount in the sub-account from which the transfer is
made or the one year fixed account investment option is exhausted.
Mortality and Expense Risk, Administration and Distribution Fees . A
daily fee in an amount equal to 1.65% of the value of each variable investment
account on an annual basis is deducted from each sub-account (1.25% for
mortality and expense risk fees, 0.25% for administration fees and 0.15% for
distribution fees). This fee is not deducted from the one year fixed account
investment option.
Transfers After Maturity Date. As noted under "Transfers After Maturity
Date" in the Prospectus, once variable annuity payments have begun, the
contract owner may transfer all or part of the investment upon which such
payments are based from one sub-account to another. Once annuity payments have
commenced, however, no transfers may be made from a fixed annuity option to a
variable annuity option or from a variable annuity option to a fixed annuity
option.
Securities Registration. Due to certain exemptive and exclusionary
provisions, interests in the one year fixed account investment option are not
registered under the Securities Act of 1933 ("1933 Act") and the Company's
general account is not registered as an investment company under the Investment
Company Act of 1940 ("1940 Act"). Accordingly, neither interests in the one
year fixed account investment option nor the general account are subject to the
provisions or restrictions of the 1933 Act or the 1940 Act and the staff of the
Commission has not reviewed the disclosures in this supplement to the
Prospectus relating thereto. Disclosures relating to interests in the fixed
account investment option and the general account, however, may be subject to
certain generally applicable provisions of the federal securities laws relating
to the accuracy of statements made in a registration statement.
* * * * *
The following language supplements the disclosure under "Withdrawal
Charges":
There is generally no withdrawal charge on distributions made as a result
of the death of the contract owner or, if applicable, the annuitant (see "Death
Benefit Before Maturity Date--Amount of Death Benefit"), and no withdrawal
charges are imposed on the maturity date if the contract owner annuitizes as
provided in the contract.
* * * * *
<PAGE> 8
The following applies only to Section 403(b) qualified plans that are not
subject to Title I of ERISA ("Section 403(b) Plans"):
Contracts are not available for sale in New Jersey to non-ERISA Section
403(b) Plans.
* * * * *
MISSTATEMENT AND PROOF OF AGE, SEX OR SURVIVAL
The Company may require proof of age, sex or survival of any person upon
whose age, sex or survival any payment depends. If the age or sex of the
annuitant has been misstated, the benefits will be those that would have been
provided for the annuitant's correct age and sex. If the Company has made
incorrect annuity payments, the amount of any underpayment will be paid
immediately and the amount of any overpayment will be deducted from future
annuity payments.
VV.SUPP895
<PAGE> 9
SPECIAL TERMS
The following terms as used in this Prospectus have the indicated
meanings:
Accumulation Unit - A unit of measure that is used to calculate the value
of the contract before the maturity date.
Annuitant - Any natural person or persons whose life is used to determine
the duration of annuity payments involving life contingencies. If the contract
owner names more than one person as an "Annuitant," the second person named
shall be referred to as "Co-Annuitant." All provisions based on the date of
the death of the "Annuitant" will be based on the date of death of the last to
survive of the "Annuitant" or "Co-Annuitant." The "Annuitant" and
"Co-Annuitant" will be referred to collectively as "Annuitant." The
"Annuitant" is as specified in the application, unless changed.
Annuity Option - The method selected by the contract owner for annuity
payments made by the Company.
Annuity Service Office - The service office of the Company is P.O. Box
818, Boston, Massachusetts 02117-0818.
Annuity Unit - A unit of measure that is used after the maturity date to
calculate variable annuity payments.
Beneficiary - The person, persons or entity entitled to the death benefit
under the contract upon the death of the annuitant. The beneficiary is as
specified in the application, unless changed. (See also "Successor Owner").
Contingent Beneficiary - The person, persons or entity to become the
beneficiary if the beneficiary is not alive. The contingent beneficiary is as
specified in the application, unless changed.
Contract Anniversary - The anniversary of the contract date.
Contract Date - The date of issue of the contract.
Contract Value - The total of the investment account values and, if
applicable, any amount in the loan account attributable to the contract.
Contract Year - The period of twelve consecutive months beginning on the
contract date or any anniversary thereof.
Debt - Any amounts in the loan account attributable to the contract plus
any accrued loan interest. The loan provision is applicable to certain
qualified contracts only.
Due Proof of Death - Due Proof of Death is required upon the death of the
Annuitant or the Owner. One of the following must be received at the Annuity
Service Office within one year of the date of death:
(a) A certified copy of a death certificate;
(b) A certified copy of a decree of a court of competent jurisdiction as
to the finding of death; or
(c) Any other proof satisfactory to us.
Death benefits will be paid within 7 days of receipt of due proof of death and
all required claim forms by the Company's Annuity Service Office.
Fixed Annuity - Any annuity option with payments which are predetermined
and guaranteed as to dollar amount.
General Account - All the assets of the Company other than assets in
separate accounts.
Investment Account - An account established by the Company which
represents a contract owner's interest in an investment option prior to the
maturity date.
Investment Account Value - The value of a contract owner's investment in
an investment account.
3
<PAGE> 10
Investment Options - The investment choices available to contract owners.
There are fourteen sub-accounts of the Variable Account currently available.
Loan Account - The portion of the general account that is used for
collateral when a loan is taken.
Maturity Date - The date on which annuity benefits commence. The maturity
date is the date specified on the contract specifications page, unless changed.
If no date is specified, the maturity date, subject to applicable state law,
will be the later of the first day of the month following the annuitant's 85th
birthday or the first month following the tenth contract anniversary.
Net Purchase Payment - The purchase payment less the amount of premium
tax, if any.
Non-Qualified Contracts - Contracts which are not issued under qualified
plans.
Owner or Contract Owner - The person, persons (co-owner) or entity
entitled to all of the ownership rights under the contract. The owner has the
legal right to make all changes in contractual designations where specifically
permitted by the contract. The owner is as specified in the application,
unless changed.
Portfolio or Trust Portfolio - A separate investment portfolio of the
Trust, a mutual fund in which the Variable Account invests, or of any successor
mutual fund.
Purchase Payment - An amount paid by a contract owner to the Company as
consideration for the benefits provided by the contract.
Qualified Contracts - Contracts issued under qualified plans.
Qualified Plans - Retirement plans which receive favorable tax treatment
under Section 401, 403, 408 or 457 of the Internal Revenue Code of 1986, as
amended.
Separate Account - A segregated account of the Company that is not
commingled with the Company's general assets and obligations.
Sub-Account(s) - One or more of the sub-accounts of the Variable Account.
Each sub-account is invested in shares of a different Trust portfolio.
Successor Owner - The person, persons or entity to become the owner if the
owner dies prior to the Maturity Date. The successor owner is as specified in
the application, unless changed. If no Successor Owner is designated or the
Successor Owner dies before the Owner, the Owner's estate is the Successor
Owner. (See also "Beneficiary").
Valuation Date - Any date on which the New York Stock Exchange is open for
business and the net asset value of a Trust portfolio is determined.
Valuation Period - Any period from one valuation date to the next,
measured from the time on each such date that the net asset value of each
portfolio is determined.
Variable Account - The NASL Variable Account, which is a separate account
of the Company.
Variable Annuity - An annuity option with payments which: (1) are not
predetermined or guaranteed as to dollar amount, and (2) vary in relation to
the investment experience of one or more specified sub-accounts.
SUMMARY
The Contract. The contract offered by this Prospectus is a flexible
purchase payment individual deferred variable annuity contract. The contract
provides for the accumulation of contract values on a variable basis and the
payment of annuity benefits on a variable and/or fixed basis.
Retirement Plans. The contract may be issued pursuant to either
non-qualified retirement plans or plans qualifying for special income tax
treatment under the Internal Revenue Code, such as individual retirement
accounts and annuities, pension and profit-sharing
4
<PAGE> 11
plans for corporations and sole proprietorships/partnerships ("H.R. 10" and
"Keogh" plans), tax-sheltered annuities, and state and local government
deferred compensation plans. (See "QUALIFIED RETIREMENT PLANS")
Purchase Payments. A contract may be issued upon the making of an initial
purchase payment of $25,000 or more. Minimum subsequent purchase payments must
be $1,000, with an exception for qualified plans where minimum subsequent
purchase payments must be $30. Purchase payments may be made at any time. If a
purchase payment would cause the contract value to exceed $1,000,000, or the
contract value already exceeds $1,000,000, no additional purchase payments will
be accepted without prior approval of the Company. (See "PURCHASE PAYMENTS")
Investment Options. Purchase payments may be allocated among the fourteen
investment options currently available under the contract. The fourteen
investment options are fourteen sub-accounts of the Variable Account, a
separate account established by the Company. The sub-accounts invest in
corresponding portfolios of the Trust: the Global Equity Trust, Pasadena
Growth Trust, Equity Trust, Value Equity Trust, Growth and Income Trust,
International Growth and Income Trust, Strategic Bond Trust, Global Government
Bond Trust, Investment Quality Bond Trust, U.S. Government Securities Trust,
Money Market Trust and three Automatic Asset Allocation Trusts (Aggressive,
Moderate and Conservative) (see the accompanying Prospectus of the Trust). The
contract value during the accumulation period and periodic annuity payments, if
selected on a variable basis, will reflect the investment performance of the
sub-accounts selected. (See "NASL VARIABLE ACCOUNT") Subject to certain
regulatory limitations, the Company may elect to add, subtract or substitute
investment options.
Transfers. Prior to the maturity date, amounts may be transferred among
the investment options. After the maturity date, amounts may be transferred
from one sub-account to another. There is no transaction charge for transfers.
Transfers from any investment account must be at least $300 or, if less, the
entire balance in the investment account. If, after the transfer the amount
remaining in the Investment Account of the contract from which the transfer is
made is less than $100, then the Company will transfer the entire amount
instead of the requested amount. The Company may impose certain additional
limitations on transfers. (See "TRANSFERS AMONG INVESTMENT OPTIONS" and
"TRANSFERS AFTER MATURITY DATE") Transfer privileges may also be used under a
special service offered by the Company to dollar cost average an investment in
the contract. (See "SPECIAL TRANSFER SERVICES - DOLLAR COST AVERAGING")
Withdrawals. Prior to the earlier of the maturity date or the death of
the annuitant, the contract owner may withdraw all or a portion of the contract
value. The amount withdrawn from any investment account must be at least $300
or, if less, the entire balance of the investment account. If a partial
withdrawal plus any applicable withdrawal charge would reduce the contract
value to less than $300, the withdrawal request will be treated as a request to
withdraw the entire contract value. A withdrawal charge and the $30 per year
administration fee, if applicable, may be imposed. (See "WITHDRAWALS") A
withdrawal may be subject to a penalty tax. (See "FEDERAL TAX MATTERS")
Withdrawal privileges may also be exercised pursuant to the Company's
systematic withdrawal plan service. (See "SPECIAL WITHDRAWAL SERVICES -
SYSTEMATIC WITHDRAWAL PLAN")
Loans. The Company offers a loan privilege to owners of contracts issued
in connection with Section 403(b) qualified plans that are not subject to Title
I of ERISA. Owners of such contracts may obtain loans using the contract as
the only security for the loan. The effective cost of a contract loan is 2%
per year of the amount borrowed. (See "LOANS")
Death Benefit. Generally, if the annuitant dies before the maturity date,
the Company will pay to the beneficiary the minimum death benefit less any
debt. If the annuitant dies on or before the first of the month following his
or her 85th birthday and had an attained age of less than 81 years on the
contract date, the minimum death benefit will be equal to the greater of: (a)
the contract value on the date due proof of death and all required claim forms
are received at the Company's Annuity Service Office, or (b) the excess of (i)
the sum of each purchase payment accumulated daily at a rate equivalent to 5%
per year starting on the date each purchase payment is allocated to the
contract, subject to a maximum accumulation of two times each purchase payment,
over (ii) the sum of each withdrawal or annuitized amount, including any
applicable withdrawal charges, accumulated daily at a rate equivalent to 5% per
year starting as of the date of each such withdrawal or annuitization, with a
maximum accumulation of two times each such withdrawal or annuitized amount.
If the annuitant dies after the first of the month following his or her 85th
birthday or had attained age 81 or greater on the contract date, the minimum
death benefit will be the amount payable on total withdrawal on the date due
proof of death and all required claim forms are received at the Company's
Annuity Service Office. In certain other cases, an amount equal to the owner's
interest will be distributed when the owner dies before the maturity date.
(See "DEATH BENEFIT BEFORE MATURITY DATE") If the annuitant dies after the
maturity date and annuity payments have been selected based on an annuity
option providing for payments for a guaranteed period, the Company will make
the remaining guaranteed payments to the beneficiary. (See "DEATH BENEFIT ON OR
AFTER MATURITY DATE")
5
<PAGE> 12
Annuity Payments. The Company offers a variety of fixed and variable
annuity options. Periodic annuity payments will begin on the maturity date.
The contract owner selects the maturity date, frequency of payment and annuity
option. (See "ANNUITY PROVISIONS")
Ten Day Review. Within 10 days of receipt of a contract, the contract
owner may cancel the contract by returning it to the Company. (See "TEN DAY
RIGHT TO REVIEW")
Charges and Deductions. The following table and Example are designed to
assist contract owners in understanding the various costs and expenses that
contract owners bear directly and indirectly. The table reflects expenses of
the separate account and the underlying portfolio company. In addition to the
items listed in the following table, premium taxes may be applicable to certain
contracts and the Company reserves the right to impose an annual $30 per
contract administration fee on contracts where the contract value is less than
$10,000 as a result of a partial withdrawal. The items listed under "Contract
Owner Transaction Expenses" and "Separate Account Annual Expenses" are more
completely described in this Prospectus (see "CHARGES AND DEDUCTIONS"). The
items listed under "Trust Annual Expenses" are described in detail in the
accompanying Trust Prospectus to which reference should be made.
<TABLE>
CONTRACT OWNER TRANSACTION EXPENSES
Deferred sales load (as percentage of purchase payments)
<CAPTION>
NUMBER OF COMPLETE YEARS WITHDRAWAL CHARGE
PURCHASE PAYMENT IN PERCENTAGE
CONTRACT
-----------------------------------------------------------------------
<S> <C>
0 3%
1 3%
2 3%
3+ 0%
</TABLE>
<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
<S> <C>
Mortality and expense risk fees ............................................. 1.25%
Administration fee .......................................................... 0.25%
Distribution fee ............................................................ 0.15%
Total Separate Account Annual Expenses ...................................... 1.65%
</TABLE>
<TABLE>
<CAPTION>
TRUST ANNUAL EXPENSES
(as a percentage of Trust average net assets)
MANAGEMENT OTHER TOTAL TRUST
TRUST PORTFOLIO FEES EXPENSES ANNUAL EXPENSES
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity .................... 0.900% 0.180% 1.080%
Pasadena Growth .................. 0.975% 0.000% 0.975%
Equity ........................... 0.750% 0.090% 0.840%
Value Equity ..................... 0.800% 0.070% 0.870%
Growth and Income ................ 0.750% 0.070% 0.820%
International Growth and Income .. 0.950% 0.300%* 1.250%
Strategic Bond ................... 0.775% 0.135% 0.910%
Global Government Bond ........... 0.800% 0.160% 0.960%
Investment Quality Bond .......... 0.650% 0.110% 0.760%
U.S. Government Securities ....... 0.650% 0.080% 0.730%
Money Market ..................... 0.500% 0.070% 0.570%
Aggressive Asset Allocation ...... 0.750% 0.140% 0.890%
Moderate Asset Allocation ........ 0.750% 0.100% 0.850%
Conservative Asset Allocation .... 0.750% 0.120% 0.870%
<FN>
*Based on estimates of payments to be made during the current fiscal year.
</TABLE>
6
<PAGE> 13
Example
<TABLE>
A contract owner would pay the following expenses on a $1,000 investment,
assuming a 5% annual return on assets, if the contract owner surrendered the
contract at the end of the applicable time period:
TRUST PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Global Equity .................. $55 $114 $144 $307
Pasadena Growth ................ 54 111 139 296
Equity ......................... 53 107 133 283
Value Equity ................... 53 108 134 286
Growth and Income .............. 53 106 132 281
Int'l Growth and Income ........ 55 114 N/A N/A
Strategic Bond ................. 54 109 136 290
Global Government Bond ......... 54 110 139 295
Investment Quality Bond ........ 52 105 129 275
U.S. Government Securities ..... 52 104 127 272
Money Market ................... 50 99 119 256
Aggressive Asset Allocation .... 53 108 135 288
Moderate Asset Allocation ...... 53 107 133 284
Conservative Asset Allocation .. 53 108 134 286
</TABLE>
<TABLE>
A contract owner would pay the following expenses on a $1,000 investment,
assuming a 5% annual return on assets, if the contract owner annuitized as
provided in the contract or did not surrender the contract at the end of the
applicable time period:
TRUST PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Global Equity .................. $28 $85 $144 $307
Pasadena Growth ................ 27 82 139 296
Equity ......................... 25 78 133 283
Value Equity ................... 26 78 134 286
Growth and Income .............. 25 77 132 281
Int'l Growth and Income ........ 28 85 N/A N/A
Strategic Bond ................. 26 80 136 290
Global Government Bond ......... 26 81 139 295
Investment Quality Bond ........ 24 75 129 275
U.S. Government Securities ..... 24 74 127 272
Money Market ................... 23 69 119 256
Aggressive Asset Allocation .... 26 79 135 288
Moderate Asset Allocation ...... 25 78 133 284
Conservative Asset Allocation .. 26 78 134 286
</TABLE>
For purposes of presenting the foregoing Example, the Company has made
certain assumptions mandated by the Securities and Exchange Commission (the
"Commission"). The Company has assumed that, where applicable, the maximum
sales load is deducted, that there are no transfers or other transactions and
that the "Other Expenses" line item under "Trust Annual Expenses" will remain
the same. Such assumptions, which are mandated by the Commission in an attempt
to provide prospective investors with standardized data with which to compare
various annuity contracts, do not take into account certain features of the
contract and prospective changes in the size of the Trust which may operate to
change the expenses borne by contract owners. Consequently, the amounts listed
in the Example above should not be considered a representation of past or
future expenses and actual expenses borne by contract owners may be greater or
lesser than those shown.
* * * * * * * *
7
<PAGE> 14
The above summary is qualified in its entirety by the detailed information
appearing elsewhere in this Prospectus and Statement of Additional Information
and the accompanying Prospectus and Statement of Additional Information for the
Trust, to which reference should be made.
<TABLE>
TABLE OF ACCUMULATION UNIT VALUES
Unit VALUE
AT START UNIT VALUE AT NUMBER OF UNITS
YEAR ENDED 12/31 OF YEAR END OF YEAR AT END OF YEAR
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity
1993 ................. $10.000000 $12.143755 1,455,573.105
1994 ................. 12.143755 12.153179 3,592,193.950
Pasadena Growth
1993 ................. 10.000000 9.910654 495,011.310
1994 ................. 9.910654 9.280989 1,241,595.122
Equity
1993 ................. 10.000000 11.207514 1,310,160.137
1994 ................. 11.207514 10.965867 2,816,189.184
Value Equity*
1993 ................. 10.000000 10.669366 647,304.380
1994 ................. 10.669366 10.578121 1,934,939.580
Growth and Income
1993 ................. 10.000000 10.315501 1,200,427.110
1994 ................. 10.315501 10.436393 2,638,198.076
Strategic Bond
1993 ................. 10.000000 10.703311 404,454.864
1994 ................. 10.703311 9.897404 702,527.632
Global Government Bond
1993 ................. 10.000000 11.068993 919,628.562
1994 ................. 11.068993 10.262238 1,430,116.858
Investment Quality Bond (formerly
called Bond Sub-account)
1993 ........................ 10.000000 10.356230 341,616.109
1994 ........................ 10.356230 9.713969 687,635.876
U.S. Gov. Securities (formerly called
U.S. Gov. Bond Sub-account)
1993 ........................... 10.000000 10.262275 1,311,380.702
1994 ........................... 10.262275 9.968713 1,477,293.193
Money Market
1993 ........................... 10.000000 10.073934 516,542.992
1994 ........................... 10.073934 10.290731 2,071,787.931
Aggressive Asset Allocation
1993 ........................... 10.000000 10.546977 165,598.227
1994 ........................... 10.546977 10.303433 461,965.883
Moderate Asset Allocation
1993 ........................... 10.000000 10.493326 983,507.615
1994 ........................... 10.493326 10.156264 1,725,861.503
Conservative Asset Allocation
1993 ........................... 10.000000 10.407901 544,736.049
1994 ........................... 10.407901 10.050011 771,618.527
</TABLE>
8
<PAGE> 15
GENERAL INFORMATION ABOUT NORTH AMERICAN
SECURITY LIFE INSURANCE
COMPANY, NASL VARIABLE ACCOUNT AND NASL SERIES TRUST
NORTH AMERICAN SECURITY LIFE INSURANCE COMPANY
North American Security Life Insurance Company ("the Company") is a stock
life insurance company organized under the laws of Delaware in 1979. The
Company's principal office is located at 116 Huntington Avenue, Boston,
Massachusetts 02116. The Company is a wholly-owned subsidiary of North
American Life, 5650 Yonge Street, North York, Ontario M2M 4G4, a mutual life
insurance company established in 1881 in Canada.
NASL VARIABLE ACCOUNT
The Company established the Variable Account on August 24, 1984 as a
separate account under Delaware law. The income, gains and losses, whether or
not realized, from assets of the Variable Account are, in accordance with the
contracts, credited to or charged against the Variable Account without regard
to other income, gains or losses of the Company. Nevertheless, all obligations
arising under the contracts are general corporate obligations of the Company.
Assets of the Variable Account may not be charged with liabilities arising out
of any other business of the Company.
The Variable Account is registered with the Commission under the
Investment Company Act of 1940 ("1940 Act") as a unit investment trust. A unit
investment trust is a type of investment company which invests its assets in
specified securities, such as the shares of one or more investment companies.
Registration under the 1940 Act does not involve supervision by the Commission
of the management or investment policies or practices of the Variable Account.
There are currently fourteen sub-accounts within the Variable Account
available under the contracts: the Global Equity Sub-Account, the Pasadena
Growth Sub-Account, the Equity Sub-Account, the Value Equity Sub-Account, the
Growth and Income Sub-Account, the International Growth and Income Sub-Account,
the Strategic Bond Sub-Account, the Global Government Bond Sub-Account, the
Investment Quality Bond Sub-Account, the U.S. Government Securities
Sub-Account, the Money Market Sub-Account and three Automatic Asset Allocation
Sub-Accounts (Aggressive, Moderate and Conservative). The Company reserves the
right, subject to compliance with applicable law, to add other sub-accounts,
eliminate existing sub-accounts, combine sub-accounts or transfer assets in one
sub-account to another sub-account established by the Company or an affiliated
company. The Company will not eliminate existing sub-accounts or combine
sub-accounts without the prior approval of the appropriate state or federal
regulatory authorities.
NASL SERIES TRUST
The assets of each available sub-account of the Variable Account are
invested in shares of a corresponding portfolio of the Trust: the Global
Equity Trust, Pasadena Growth Trust, Equity Trust, Value Equity Trust, Growth
and Income Trust, International Growth and Income Trust, Strategic Bond Trust,
Global Government Bond Trust, Investment Quality Bond Trust, U.S. Government
Securities Trust, Money Market Trust and three Automatic Asset Allocation
Trusts (Aggressive, Moderate and Conservative). The Trust is registered under
the 1940 Act as an open-end management investment company. Each of the
portfolios is diversified for purposes of the 1940 Act, except for the Global
Government Bond Trust which is non-diversified so that it may invest more than
5% of its assets in securities issued by a foreign government. The Trust
receives investment subadvisory services from NASL Financial Services, Inc.
The Trust currently has seven subadvisers. Fidelity Management Trust
Company provides investment subadvisory services to the Equity, Conservative
Asset Allocation, Moderate Asset Allocation and Aggressive Asset Allocation
Trusts. Goldman Sachs Asset Management provides investment subadvisory
services to the Value Equity Trust. Roger Engemann Management Co., Inc.
provides investment subadvisory services to the Pasadena Growth Trust.
Wellington Management Company provides investment subadvisory services to the
Growth and Income, Investment Quality Bond and Money Market Trusts. Salomon
Brothers Asset Management Inc provides investment subadvisory services to the
U.S. Government Securities and Strategic Bond Trusts. Oechsle International
Advisors, L.P. provides investment subadvisory services to the Global Equity
and Global Government Bond Trusts. J.P. Morgan Investment Management Inc.
provides investment subadvisory services to the International Growth and Income
Trust.
9
<PAGE> 16
The following is a brief description of each portfolio:
Global Equity Trust. The investment objective of the Global Equity Trust
is to obtain long-term capital appreciation by investing primarily in a
globally diversified portfolio of common stocks and securities convertible into
or exercisable for common stocks.
Pasadena Growth Trust. The principal investment objective of the Pasadena
Growth Trust is long-term growth of capital by emphasizing investments in
companies with rapidly growing earnings per share, some of which may be smaller
emerging growth companies.
Equity Trust. The principal investment objective of the Equity Trust is
to obtain growth of capital by investing primarily in common stocks of United
States issuers and securities convertible into or carrying the right to buy
common stocks. Current income is a secondary consideration although growth of
income may accompany growth of capital.
Value Equity Trust. The principal investment objective of the Value
Equity Trust is long-term growth of capital by investing primarily in common
stocks and securities convertible into or carrying the right to buy common
stocks.
Growth and Income Trust. The principal investment objective of the Growth
and Income Trust is to provide long-term growth of capital and income,
consistent with prudent investment risk, by investing primarily in a
diversified portfolio of common stocks of
U.S. issuers which the subadviser believes are of high quality.
International Growth and Income Trust. The investment objective of the
International Growth and Income Trust is to seek long-term growth of capital
and income by investing, under normal circumstances, at least 65% of its total
assets in equity securities of foreign issuers. The portfolio may also invest
in debt securities of corporate or sovereign issuers rated A or higher by
Moody's or S&P or, if unrated, of equivalent credit quality as determined by
J.P. Morgan. Under normal circumstances, the portfolio will be invested
approximately 85% in equity securities and 15% in fixed income securities.
Strategic Bond Trust. The principal investment objective of the Strategic
Bond Trust is to seek a high level of total return consistent with preservation
of capital by giving its Subadviser broad discretion to deploy the portfolio's
assets among certain segments of the fixed-income market as the Subadviser
believes will best contribute to the achievement of the portfolio's objective.
Global Government Bond Trust. The investment objective of the Global
Government Bond Trust is to obtain a high level of total return by placing
primary emphasis on high current income and the preservation of capital by
investing primarily in a global portfolio of high-quality, fixed-income
securities of foreign and United States governmental entities and supranational
issuers.
Investment Quality Bond Trust. The principal investment objective of the
Investment Quality Bond Trust is to provide a high level of current income
consistent with the maintenance of principal and liquidity by investing
primarily in a diversified portfolio of investment grade corporate bonds and
U.S. government bonds with intermediate to longer term maturities. The
portfolio may also invest up to 20% of its assets in non-investment grade fixed
income securities.
U.S. Government Securities Trust. The investment objective of the U.S.
Government Securities Trust is to obtain a high level of current income
consistent with preservation of capital and maintenance of liquidity, by
investing in debt obligations and mortgage-backed securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
derivative securities such as collateralized mortgage obligations backed by
such securities.
Money Market Trust. The investment objective of the Money Market Trust is
to obtain maximum current income consistent with preservation of principal and
liquidity by investing in high quality money market instruments with maturities
of thirteen months or less issued primarily by United States entities.
Automatic Asset Allocation Trusts. The investment objective of the
Automatic Asset Allocation Trusts is to obtain the highest total return
consistent with a specified level of risk tolerance -- conservative, moderate
or aggressive -- by investing primarily in domestic debt, equity and money
market securities.
* The Aggressive Asset Allocation Trust seeks the highest total return
consistent with an aggressive level of risk tolerance. The Trust attempts to
limit the decline in portfolio value in very adverse market conditions to 15%
over any twelve month period.
10
<PAGE> 17
* The Moderate Asset Allocation Trust seeks the highest total return
consistent with a moderate level of risk tolerance. The Trust attempts to
limit the decline in portfolio value in very adverse market conditions to 10%
over any twelve month period.
* The Conservative Asset Allocation Trust seeks the highest total return
consistent with a conservative level of risk tolerance. The Trust attempts to
limit the decline in portfolio value in very adverse market conditions to 5%
over any twelve month period.
In pursuing the Strategic Bond and Investment Quality Bond Trusts'
investment objective, each portfolio expects to invest a portion of its assets
in high yield securities, commonly known as "junk bonds" which also present a
high degree of risk. The risks of these securities include price volatility
and risk of default in the payment of interest and principal. See "Risk
Factors Relating to High Yield Securities" contained in the NASL Series Trust
prospectus before investing in either Trust.
In pursuing the Global Equity, Strategic Bond, International Growth and
Income and Global Government Bond Trusts' investment objective, each portfolio
may invest a portion of its assets in foreign securities which may present
additional risks. See "Foreign Securities" in the NASL Series Trust prospectus
before investing in any of these Trusts.
If the shares of a Trust portfolio are no longer available for investment
or in the Company's judgment investment in a Trust portfolio becomes
inappropriate in view of the purposes of the Variable Account, the Company may
eliminate the shares of a portfolio and substitute shares of another portfolio
of the Trust or another open-end registered investment company. Substitution
may be made with respect to both existing investments and the investment of
future purchase payments. However, no such substitution will be made without
notice to the contract owner and prior approval of the Commission to the extent
required by the 1940 Act.
The Company will vote shares of the Trust portfolios held in the Variable
Account at meetings of shareholders of the Trust in accordance with voting
instructions received from the persons having the voting interest under the
contracts. The number of portfolio shares for which voting instructions may be
given will be determined by the Company in the manner described below, not more
than 90 days prior to the meeting of the Trust. Trust proxy material will be
distributed to each person having the voting interest under the contract
together with appropriate forms for giving voting instructions. Portfolio
shares held in the Variable Account that are attributable to contract owners
and as to which no timely instructions are received will be voted by the
Company in proportion to the instructions received. Portfolio shares that are
not attributable to contract owners will be voted by the owners of such shares
in their discretion.
Prior to the maturity date, the person having the voting interest under a
contract is the contract owner and the number of votes as to each portfolio for
which voting instructions may be given is determined by dividing the value of
the investment account corresponding to the sub-account in which such portfolio
shares are held by the net asset value per share of that portfolio. After the
maturity date, the person having the voting interest under a contract is the
annuitant and the number of votes as to each portfolio for which voting
instructions may be given is determined by dividing the reserve for the
contract allocated to the sub-account in which such portfolio shares are held
by the net asset value per share of that portfolio. Generally, the number of
votes tends to decrease as annuity payments progress since the amount of
reserves attributable to a contract will usually decrease after commencement of
annuity payments. The Company reserves the right to make any changes in the
voting rights described above that may be permitted by the federal securities
laws or regulations or interpretations of these laws or regulations.
A full description of the Trust, including the investment objectives,
policies and restrictions of each of the portfolios, is contained in the
Prospectus for the Trust which accompanies this Prospectus and should be read
by a prospective purchaser before investing.
DESCRIPTION OF THE CONTRACT
ACCUMULATION PROVISIONS
PURCHASE PAYMENTS
Purchase payments are paid to the Company at its Annuity Service Office.
The minimum initial purchase payment is $25,000. Minimum subsequent purchase
payments must be $1,000 with an exception for qualified plans where minimum
subsequent purchase payments must be $30. Purchase payments may be made at any
time. The Company may provide by separate agreement for purchase payments to
be automatically withdrawn from a contract owner's bank account on a periodic
basis. If a purchase payment would cause the contract value to exceed
$1,000,000 or the contract value already exceeds $1,000,000, additional
purchase payments will be accepted only with the prior approval of the Company.
11
<PAGE> 18
The Company may, at its option, cancel a contract at the end of any two
consecutive contract years in which no purchase payments have been made, if
both (i) the total purchase payments made over the life of the contract, less
withdrawals, are less than $2,000; and (ii) the contract value at the end of
such two year period is less than $2,000. Upon cancellation the Company will
pay the contract owner the contract value computed as of the valuation period
during which the cancellation occurs less any debt and less the annual $30
administration fee, if applicable. The amounts paid will be treated as
withdrawals for federal tax purposes and, thus, may be subject to income tax
and to a 10% penalty tax. (See "FEDERAL TAX MATTERS")
Purchase payments are allocated among the investment options in accordance
with the percentages designated by the contract owner in the application. The
contract owner may change the allocation of subsequent purchase payments at any
time upon written notice to the Company or by telephone in accordance with the
Company's telephone transfer procedures.
ACCUMULATION UNITS
The Company will establish an investment account for the contract owner
for each investment option to which such contract owner allocates purchase
payments. Purchase payments are credited to such investment accounts in the
form of accumulation units.
The number of accumulation units to be credited to each investment account
is determined by dividing the net purchase payment allocated to that investment
account by the value of an accumulation unit for that investment account for
the valuation period during which the purchase payment is received at the
Company's Annuity Service Office complete with all necessary information or, in
the case of the first purchase payment, pursuant to the procedures described
below.
Initial purchase payments received by mail will usually be credited in the
valuation period during which received at the Annuity Service Office, and in
any event not later than two business days after receipt of a properly
completed application and all information necessary for processing of the
application. The applicant will be informed of any deficiencies in an
application if it cannot be processed and the purchase payment credited within
two business days after receipt. If the deficiencies are not remedied within
five business days, the purchase payment will be returned promptly to the
applicant, unless the applicant specifically consents to the Company's
retaining the purchase payment until all necessary information is received.
Initial purchase payments received by wire transfer from broker-dealers will be
credited in the valuation period during which received where such
broker-dealers have made special arrangements with the Company for the
collection and forwarding of contract applications.
VALUE OF ACCUMULATION UNITS
The value of accumulation units will vary from one valuation period to the
next depending upon the investment results of the particular sub-accounts to
which purchase payments are allocated. The value of an accumulation unit for
each sub-account was arbitrarily set at $10 for the first valuation period
under other contracts issued by the Company. The value of an accumulation unit
for any subsequent valuation period is determined by multiplying the value of
an accumulation unit for the immediately preceding valuation period by the net
investment factor for such sub-account (described below) for the valuation
period for which the value is being determined.
NET INVESTMENT FACTOR
The net investment factor is an index used to measure the investment
performance of a sub-account from one valuation period to the next. The net
investment factor for each sub-account for any valuation period is determined
by dividing (a) by (b) and subtracting (c) from the result:
Where (a) is:
(1) the net asset value per share of a portfolio share held in the
sub-account determined at the end of the current valuation period, plus
(2) the per share amount of any dividend or capital gain
distributions made by the portfolio on shares held in the sub-account if
the "ex-dividend" date occurs during the current valuation period.
Where (b) is:
the net asset value per share of a portfolio share held in the
sub-account determined as of the end of the immediately preceding
valuation period.
12
<PAGE> 19
Where (c) is:
a factor representing the charges deducted from the sub-account on a
daily basis for certain administrative expenses, a portion of the
distribution expenses, and mortality and expense risks fees. Such factor
is equal on an annual basis to 1.65%: (0.25% for administrative expenses,
0.15% for distribution expenses and 1.25% for mortality and expense
risks).
The net investment factor may be greater or less than or equal to one;
therefore, the value of an accumulation unit may increase, decrease or remain
the same.
TRANSFERS AMONG INVESTMENT OPTIONS
Before the maturity date the contract owner may transfer amounts among the
investment options at any time and without charge upon written notice to the
Company or by telephone if the contract owner authorizes the Company in writing
to accept telephone transfer requests. Accumulation units will be canceled
from the investment account from which amounts are transferred and credited to
the investment account to which amounts are transferred. The Company will
effect such transfers so that the contract value on the date of the transfer
will not be affected by the transfer. The contract owner must transfer at
least $300 or, if less, the entire value of the investment account. If after
the transfer the amount remaining in the investment account is less than $100,
then the Company will transfer the entire amount instead of the requested
amount. The Company reserves the right to limit, upon notice, the maximum
number of transfers a contract owner may make to one per month or six at any
time within a contract year. In addition, the Company reserves the right to
defer the transfer privilege at any time that the Company is unable to purchase
or redeem shares of the Trust portfolios. The Company also reserves the right
to modify or terminate the transfer privilege at any time in accordance with
applicable law.
TELEPHONE TRANSACTIONS
Contract owners are permitted to request transfers/redemptions by
telephone. The Company will not be liable for following instructions
communicated by telephone that it reasonably believes to be genuine. To be
permitted to request a transfer/redemption by telephone, a contract owner must
elect the option on the Application. (If a contract owner does not initially
elect an option in the Application form, they may request authorization by
executing an appropriate authorization form provided by the Company upon
request.) The Company will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine and may only be liable for
any losses due to unauthorized or fraudulent instructions where it fails to
employ its procedures properly. Such procedures include the following. Upon
telephoning a request, contract owners will be asked to provide their account
number, and if not available, their social security number. For the contract
owner's and Company's protection, all conversations with contract owners will
be tape recorded. All telephone transactions will be followed by a
confirmation statement of the transaction.
SPECIAL TRANSFER SERVICES - DOLLAR COST AVERAGING
The Company administers a Dollar Cost Averaging ("DCA") program which
enables a contract owner to pre-authorize a periodic exercise of the
contractual transfer rights described above. Contract owners entering into a
DCA agreement instruct the Company to transfer monthly a predetermined dollar
amount from any Sub-account to other Sub-accounts until the amount in the
Sub-account from which the transfer is made is exhausted. The DCA program is
generally suitable for contract owners making a substantial deposit to the
contract and who desire to control the risk of investing at the top of a market
cycle. The DCA program allows such investments to be made in equal
installments over time in an effort to reduce such risk. Contract owners
interested in the DCA program may elect to participate in the program on the
contract application or by separate application. Contract owners may obtain a
separate application and full information concerning the program and its
restrictions from their securities dealer or the Annuity Service Office.
ASSET REBALANCING PROGRAM
The Company administers an Asset Rebalancing Program which enables a
contract owner to indicate to the Company the percentage levels he or she would
like to maintain in particular portfolios. On the last business day of every
calendar quarter, the contract owner's contract value will be automatically
rebalanced to maintain the indicated percentages by transfers among the
portfolios. The entire contract value must be included in the Asset
Rebalancing Program. Other investment programs, such as the DCA program, or
other transfers or withdrawals may not work in concert with the Asset
Rebalancing Program. Therefore, contract owners should monitor their use of
these other programs and any other transfers or withdrawals while the Asset
Rebalancing Program is being used. Contract owners interested in the Asset
Rebalancing Program may obtain a separate application and full information
concerning the program and its restrictions from their securities dealer or the
Annuity Service Office.
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WITHDRAWALS
Prior to the earlier of the maturity date or the death of the annuitant,
the contract owner may withdraw all or a portion of the contract value upon
written request, complete with all necessary information to the Company's
Annuity Service Office. For certain qualified contracts, exercise of the
withdrawal right may require the consent of the qualified plan participant's
spouse under the Internal Revenue Code and regulations promulgated by the
Treasury Department. In the case of a total withdrawal, the Company will pay
the contract value as of the date of receipt of the request at its Annuity
Service Office, less any applicable annual $30 administration fee, any debt and
any applicable withdrawal charge, and the contract will be canceled. In the
case of a partial withdrawal, the Company will pay the amount requested and
cancel that number of accumulation units credited to each investment account
necessary to equal the amount withdrawn from each investment account plus any
applicable withdrawal charge deducted from such investment account. (See
"CHARGES AND DEDUCTIONS")
When making a partial withdrawal, the contract owner should specify the
investment options from which the withdrawal is to be made. The amount
requested from an investment option may not exceed the value of that investment
option less any applicable withdrawal charge. If the contract owner does not
specify the investment options from which a partial withdrawal is to be made,
the withdrawal will be taken pro rata from the investment options: taking from
each investment option an amount which bears the same relationship to the total
amount withdrawn as the value of such investment option bears to the total
investment account values.
There is no limit on the frequency of partial withdrawals; however, the
amount withdrawn must be at least $300 or, if less, the entire balance in the
investment option. If after the withdrawal (and deduction of any withdrawal
charge) the amount remaining in the investment option is less than $100, the
Company will treat the partial withdrawal as a withdrawal of the entire amount
held in the investment option. If a partial withdrawal plus any applicable
withdrawal charge would reduce the contract value to less than $300, the
Company will treat the partial withdrawal as a total withdrawal of the contract
value.
The amount of any withdrawal will be paid promptly, and in any event
within seven days of receipt of the request, complete with all necessary
information at the Company's Annuity Service Office, except that the Company
reserves the right to defer the right of withdrawal or postpone payments for
any period when: (1) the New York Stock Exchange is closed (other than
customary weekend and holiday closings), (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 Variable Account is not reasonably practicable or it
is not reasonably practicable to determine the value of the Variable Account's
net assets, or (4) the Commission, by order, so permits for the protection of
security holders; provided that applicable rules and regulations of the
Commission shall govern as to whether the conditions described in (2) and (3)
exist.
Withdrawals from the contract may be subject to income tax and a 10%
penalty tax. Withdrawals are permitted from contracts issued in connection with
Section 403(b) qualified plans only under limited circumstances. (See "FEDERAL
TAX MATTERS")
Telephone Redemptions. The contract owner may request the option to
withdraw a portion of the contract value by telephone by completing the
application described under "Telephone Transactions" above. The Company
reserves the right to impose maximum withdrawal amounts and procedural
requirements regarding this privilege. For additional information on Telephone
Redemptions see "Telephone Transactions" above.
SPECIAL WITHDRAWAL SERVICES - SYSTEMATIC WITHDRAWAL PLAN
The Company administers a Systematic Withdrawal Plan ("SWP") which enables
a contract owner to pre-authorize a periodic exercise of the contractual
withdrawal rights described above. Contract owners entering into a SWP
agreement instruct the Company to withdraw a level dollar amount from specified
investment options on a periodic basis. The total of SWP withdrawals in a
contract year is limited to not more than 10% of the purchase payments made to
ensure that no withdrawal charge will ever apply to a SWP withdrawal. If an
additional withdrawal is made from a contract participating in SWP, the SWP
will terminate automatically and may be reinstated only on or after the next
contract anniversary pursuant to a new application. SWP is not available to
contracts participating in the dollar cost averaging program or for which
purchase payments are being automatically deducted from a bank account on a
periodic basis. SWP withdrawals will be free of withdrawal charges. SWP
withdrawals may, however, be subject to income tax and a 10% penalty tax. (See
"FEDERAL TAX MATTERS") Contract owners interested in SWP may elect to
participate in this program on the contract application or by separate
application. Contract owners may obtain a separate application and full
information concerning the program and its restrictions from their securities
dealer or the Annuity Service Office.
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<PAGE> 21
LOANS
The Company offers a loan privilege only to owners of contracts issued in
connection with Section 403(b) qualified plans that are not subject to Title I
of ERISA. Owners of such contracts may obtain loans using the contract as the
only security for the loan. Loans are subject to provisions of the Code and to
applicable retirement program rules (collectively, "loan rules"). Tax advisers
and retirement plan fiduciaries should be consulted prior to exercising loan
privileges.
Under the terms of the contract, the maximum loan value is equal to 80% of
the contract value, although loan rules may serve to reduce such maximum loan
value in some cases. The amount available for a loan at any given time is the
loan value less any outstanding debt. Debt equals the amount of any loans plus
accrued interest. Loans will be made only upon written request from the owner.
The Company will make loans within seven days of receiving a properly
completed loan application (applications are available from the Annuity Service
Office), subject to postponement under the same circumstances that payment of
withdrawals may be postponed. (See "WITHDRAWALS")
When an owner requests a loan, the Company will reduce the owner's
investment in the investment accounts and transfer the amount of the loan to
the loan account, a part of the Company's general account. The owner may
designate the investment accounts from which the loan is to be withdrawn.
Absent such a designation, the amount of the loan will be withdrawn from the
investment accounts in accordance with the rules for making partial
withdrawals. (See "WITHDRAWALS") The contract provides that owners may repay
contract debt at any time. Under applicable tax rules, loans generally must be
repaid within five years, repayments must be made at least quarterly and
repayments must be made in substantially equal amounts. When a loan is repaid,
the amount of the repayment will be transferred from the loan account to the
investment accounts. The owner may designate the investment accounts to which
a repayment is to be allocated. Otherwise, the repayment will be allocated in
the same manner as the owner's most recent purchase payment. On each contract
anniversary, the Company will transfer from the investment accounts to the loan
account the amount by which the debt on the contract exceeds the balance in the
loan account.
The Company charges interest of 6% per year on contract loans. Loan
interest is payable in arrears and, unless paid in cash, the accrued loan
interest is added to the amount of the debt and bears interest at 6% as well.
The Company credits interest with respect to amounts held in the loan account
at a rate of 4% per year. Consequently, the net cost of loans under the
contract is 2%. If on any date debt under a contract exceeds the contract
value, the contract will be in default. In such case the owner will receive a
notice indicating the payment needed to bring the contract out of default and
will have a thirty-one day grace period within which to pay the default amount.
If the required payment is not made within the grace period, the contract may
be foreclosed (terminated without value).
The amount of any debt will be deducted from the minimum death benefit.
(See "DEATH BENEFIT BEFORE MATURITY DATE") In addition, debt, whether or not
repaid, will have a permanent effect on the contract value because the
investment results of the investment accounts will apply only to the unborrowed
portion of the contract value. The longer debt is outstanding, the greater the
effect is likely to be. The effect could be favorable or unfavorable. If the
investment results are greater than the rate being credited on amounts held in
the loan account while the debt is outstanding, the contract value will not
increase as rapidly as it would have if no debt were outstanding. If
investment results are below that rate, the contract value will be higher than
it would have been had no debt been outstanding.
DEATH BENEFIT BEFORE MATURITY DATE
The following discussion applies principally to contracts that are not
issued in connection with qualified plans, i.e., a "non-qualified contract."
The requirements of the tax law applicable to qualified plans, and the tax
treatment of amounts held and distributed under such plans, are quite complex.
Accordingly, a prospective purchaser of the contract to be used in connection
with a qualified plan should seek competent legal and tax advice regarding the
suitability of the contract for the situation involved and the requirements
governing the distribution of benefits, including death benefits, from a
contract used in the plan. In particular, a prospective purchaser who intends
to use the contract in connection with a qualified plan should consider that
the contract provides a minimum death benefit (described below) that could be
characterized as an incidental death benefit. There are limits on the amount
of incidental benefits that may be provided under certain qualified plans and
the provision of such benefits may result in currently taxable income to plan
participants. (See "FEDERAL TAX MATTERS".)
Death of Last Surviving Annuitant (Where the Annuitant Was Not an Owner)
The Company will pay the minimum death benefit, less any debt, to the
beneficiary if (1) the annuitant dies before the maturity date, (2) the
annuitant is not an owner, (3) there is no surviving co-annuitant, and (4) no
owner of the contract is a non-natural person. (If any owner of the contract
is a non-natural person, the death or change of any annuitant is treated as the
death of an owner -- see "Death of
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<PAGE> 22
Owner") The beneficiary (1) may elect to receive payment (either as a lump sum
or in accordance with any annuity option described in the contract) or (2) may
elect to continue the contract, as its owner, with the contract value on the
date due proof of death and all required claim forms are received, equal to the
minimum death benefit. An election to receive the minimum death benefit under
an annuity option must be made within 60 days after the date on which the death
benefit first becomes payable. (See "Annuity Options") (In general, a
beneficiary who continues the contract will nonetheless be treated for federal
income tax purposes as if he or she had received the minimum death benefit.)
Death of Owner
Deceased Owner (Who was the Last-Surviving Annuitant): The Company will
pay the minimum death benefit, less any debt, to the beneficiary if (1) an
owner dies before the maturity date, (2) the deceased owner is an annuitant,
and (3) there is no surviving co-annuitant. If the contract is a non-qualified
contract, after the owner's death, the beneficiary's entire interest must be
distributed within five years unless (1) the beneficiary elects to receive his
or her interest as an annuity which begins within one year of the owner's death
and is paid over the beneficiary's life or over a period not extending beyond
the beneficiary's life expectancy or (2) the beneficiary is the deceased
owner's surviving spouse and elects to continue the contract, as its owner,
with the contract value on the date due proof of death and all required claim
forms are received, equal to the minimum death benefit. An election to receive
the minimum death benefit as an annuity must be made within 60 days after the
date on which the death benefit first becomes payable. (See "Annuity Options")
If the spouse continues the contract, the distribution rules applicable when a
contract owner dies generally will apply when that spouse, as the owner, dies.
For purposes of this paragraph, in determining the minimum death benefit,
withdrawal charges (applicable when an annuitant either dies after the first of
the month following his or her 85th birthday or when the annuitant had attained
age 81 or greater on the contract date -- see "Minimum Death Benefit") will be
taken into account, but only when the minimum death benefit is paid and only if
such charges would have applied if the payment had been made to the deceased
owner at that time.
Deceased Owner (Who was Not the Last-Surviving Annuitant and There Are No
Surviving Owners): If (1) an owner dies before the maturity date, (2) any
annuitant survives, and (3) there are no surviving owners, the Company will
transfer the interest in the contract to the successor owner. If the contract
is a non-qualified contract, after the owner's death, the successor owner's
entire interest in the contract must be distributed within five years unless
(1) the successor owner elects to receive payment of the interest in the
contract as an annuity which begins within one year of the owner's death and is
paid over the successor owner's life or over a period not extending beyond the
successor owner's life expectancy or (2) the successor owner is the deceased
owner's surviving spouse and elects to continue the contract, as its owner,
with the contract value on the date due proof of death and all required claim
forms are received, equal to the interest in the contract. An election to
receive the interest in the contract as an annuity must be made within 60 days
after the date on which the death benefit first becomes payable. (See "Annuity
Options") If the spouse continues the contract, the distribution rules
applicable when a contract owner dies generally will apply when that spouse, as
the owner, dies. If the deceased Owner had not attained age 81 on the contract
date, the interest in the contract equals the contract value. If the deceased
Owner had attained age 81 on the contract date, the interest in the contract
also equals the contract value, but such interest may be subject to applicable
withdrawal charges when any amounts are actually paid. (See "Withdrawals")
The successor owner's right to the interest in the contract does not affect the
annuitant designations in the contract, although the successor owner may change
such designations after acquiring the interest in the contract.
Deceased Owner (Who was Not the Last-Surviving Annuitant and There Are
Surviving Owners): If (1) an owner dies before the maturity date, (2) any
annuitant survives, and (3) there is a surviving owner, the Company will
transfer the interest in the contract to the surviving owner. The amount of
this interest and the rights and restrictions attendant to this transfer are
the same as those described in the immediately preceding paragraph, except that
"surviving owner" should be substituted for "successor owner," wherever these
terms appear.
Non-Natural Owners: If any owner of a non-qualified contract is not an
individual, the death or change of any annuitant will be treated as the death
of an owner (who was not the last-surviving annuitant), unless the
last-surviving annuitant has actually died in which case the death will be
treated as the death of an owner (who is the last-surviving annuitant).
Application of Distributed Amounts Towards the Purchase of a New Contract:
A beneficiary, successor owner, or surviving owner, as the case may be, may
apply amounts required to be distributed towards the purchase of a new
contract. In general, if such distributed amounts are so applied, the
beneficiary, successor owner, or surviving owner will be treated for federal
income tax purposes as if he or she had received these distributed amounts.
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Minimum Death Benefit
If the last surviving annuitant dies on or before the first of the month
following his or her 85th birthday and had an attained age of less than 81
years on the contract date, the minimum death benefit will be equal to the
greater of: (a) the contract value on the date due proof of death and all
required claim forms are received at the Company's Annuity Service Office, or
(b) the excess of (i) the sum of each purchase payment accumulated daily, at
the equivalent of 5% per year, starting on the date each purchase payment is
allocated to the Contract, with a maximum accumulation of two times each
purchase payment, over (ii) the sum of each withdrawal or annuitized amount,
including any applicable withdrawal charges, accumulated daily at a rate
equivalent to 5% per year, starting as of the date of each such withdrawal or
annuitization, with a maximum accumulation of two times each such withdrawal or
annuitization amount. If the last surviving annuitant dies after the first of
the month following his or her 85th birthday and had an attained age of less
than 81 years on the contract date, the minimum death benefit will be equal to
the greater of: (a) the contract value on the date due proof of death and all
required claim forms are received at the Company's Annuity Service Office, or
(b) the excess of (i) the sum of all purchase payments over (ii) the sum of any
amounts deducted in connection with partial withdrawals. If the last surviving
annuitant dies and the Annuitant had an attained age of 81 or greater on the
contract date, the minimum death benefit payable on due proof of death and
receipt of all required claim forms will equal the amount payable on total
withdrawal.
Death benefits will be paid within seven days of receipt of due proof of
death and all required claim forms are received at the Company's Annuity
Service Office, subject to postponement under the same circumstances that
payment of withdrawals may be postponed. (See "WITHDRAWALS")
ANNUITY PROVISIONS
GENERAL
The proceeds of the contract payable on death, withdrawal or the contract
maturity date may be applied to the annuity options described below, subject to
the distribution of death benefit provisions. (See "DEATH BENEFIT BEFORE
MATURITY DATE")
Generally, annuity benefits under the contract will begin on the maturity
date. The maturity date is the date specified on the contract specifications
page, unless changed. If no date is specified, the maturity date is the
maximum maturity date described below. The contract owner may specify a
different maturity date at any time by written request at least one month
before both the previously specified and the new maturity date. The maximum
maturity date, subject to applicable state law, will be the later of the first
day of the month following the annuitant's 85th birthday or the first month
following the tenth contract anniversary. Distributions from qualified
contracts may be required before the maturity date. The Company may at its
discretion permit an extension of the maturity date. See Appendix C for
contracts issued in Pennsylvania. Maturity dates which occur at advanced ages,
e.g., past age 85, may in some circumstances have adverse income tax
consequences. See "FEDERAL TAX MATTERS."
The contract owner may select the frequency of annuity payments. However,
if the contract value at the maturity date is such that a monthly payment would
be less than $20, the Company may pay the contract value, less any debt, in one
lump sum to the annuitant on the maturity date.
ANNUITY OPTIONS
Annuity benefits are available under the contract on a fixed or variable
basis or any combination of fixed and variable bases. Upon purchase of the
contract, and on or before the maturity date, the contract owner may select one
or more of the annuity options described below on a fixed and/or variable basis
(except Option 5 which is available on a fixed basis only) or choose an
alternate form of settlement acceptable to the Company. If on the maturity
date you have not selected an annuity option, we will provide variable annuity
payments which will continue for ten years or for the life of the annuitant if
longer. Such variable payments will be based on the allocation of your
contract value among the sub-accounts at the time the first variable annuity
payment is determined as described under "Determination of Amount of the First
Annuity Payment" section below. Treasury Department regulations may preclude
the availability of certain annuity options in connection with certain
qualified contracts.
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The following annuity options are guaranteed in the contract.
Option 1(a): Non-Refund Life Annuity - An annuity with payments during the
lifetime of the annuitant. No payments are due after the
death of the annuitant. Since there is no guarantee that
any minimum number of payments will be made, an annuitant
may receive only one payment if the annuitant dies prior to
the date the second paymeny is due.
Option 1(b): Life Annuity with Payments Guaranteed for 10 Years - An
annuity with payments guaranteed for 10 years and continuing
thereafter during the lifetime of the annuitant. Since
payments are guaranteed for 10 years, annuity payments will
be made to the end of such period if the annuitant dies prior
to the end of the tenth year.
Option 2(a): Joint & Survivor Non-Refund Life Annuity - An annuity with
payments during the lifetimes of the annuitant and a
designated co-annuitant. No payments are due after the death
of the last survivor of the annuitant and co-annuitant.
Since there is no guarantee that any minimum number of
payments will be made, an annuitant or co-annuitant may
receive only one payment if the annuitant and co-annuitant
die prior to the date the second payment is due.
Option 2(b): Joint & Survivor Life Annuity with Payments Guaranteed for 10
Years - An annuity with payments guaranteed for 10 years and
continuing thereafter during the lifetimes of the annuitant
and a designated co-annuitant. Since payments are guaranteed
for 10 years, annuity payments will be made to the end of
such period if both the annuitant and the co-annuitant die
prior to the end of the tenth year.
In addition to the foregoing annuity options which the Company is
contractually obligated to offer at all times, the Company currently offers the
following annuity options. The Company may cease offering the following
annuity options at any time and may offer other annuity options in the future.
Option 3: Life annuity with Payments Guaranteed for 5, 15 or 20 Years -
An Annuity with payments guaranteed for 5, 15 or 20 years and
continuing thereafter during the lifetime of the annuitant.
Since payments are guaranteed for the specific number of
years, annuity payments will be made to the end of the last
year of the 5, 15 or 20 year period.
Option 4: Joint & Two-Thirds Survivor Non-Refund Life Annuity - An
annuity with full payments during the joint lifetime of the
annuitant and a designated co-annuitant and two-thirds
payments during the lifetime of the survivor. Since there is
no guarantee that any minimum number of payments will be
made, an annuitant or co- annuitant may receive only one
payment if the annuitant and co-annuitant die prior to the
date the second payment is due.
Option 5: Period Certain Only Annuity for 5, 10, 15 or 20 years - An
annuity with payments for a 5, 10, 15 or 20 year period and
no payments thereafter.
DETERMINATION OF AMOUNT OF THE FIRST VARIABLE ANNUITY PAYMENT
The first variable annuity payment is determined by applying that portion
of the contract value used to purchase a variable annuity, measured as of a
date not more than ten business days prior to the maturity date (minus any
applicable premium taxes), to the annuity tables contained in the contract.
(The amount of the first and all subsequent fixed annuity payments is
determined on the same basis using the portion of the contract value used to
purchase a fixed annuity.) The rates contained in such tables depend upon the
annuitant's age, as adjusted, and annuity option selected. Under such tables,
the longer the life expectancy of the annuitant under any life annuity option
or the duration of any period for which payments are guaranteed under the
option, the smaller will be the amount of the first monthly variable annuity
payment. The tables are based on the 1983-a Individual Annuitant Mortality
Table projected at Scale G, and reflect an assumed interest rate of 4% per
year.
ANNUITY UNITS AND THE DETERMINATION OF SUBSEQUENT VARIABLE ANNUITY PAYMENTS
Variable annuity payments subsequent to the first will be based on the
investment performance of the sub-accounts selected. The amount of such
subsequent payments is determined by dividing the amount of the first annuity
payment from each sub-account by the annuity unit value of such sub-account (as
of the same date the contract value to effect the annuity was determined) to
establish the number of
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annuity units which will thereafter be used to determine payments. This number
of annuity units for each sub-account is then multiplied by the appropriate
annuity unit value as of a uniformly applied date not more than ten business
days before the annuity payment is due, and the resulting amounts for each
sub-account are then totaled to arrive at the amount of the payment to be made.
The number of annuity units remains constant during the annuity payment
period.
The value of an annuity unit for each sub-account for any valuation period
is determined by multiplying the annuity unit value for the immediately
preceding valuation period by the net investment factor for that sub-account
(see "NET INVESTMENT FACTOR") for the valuation period for which the annuity
unit value is being calculated and by a factor to neutralize the assumed
interest rate.
A 4% assumed interest rate is built into the annuity tables in the
contract used to determine the first variable annuity payment. A higher
assumption would mean a larger first annuity payment, but more slowly rising
subsequent payments when actual investment performance exceeds the assumed
rate, and more rapidly falling subsequent payments when actual investment
performance is less than the assumed rate. A lower assumption would have the
opposite effect. If the actual net investment performance is 4% annually,
annuity payments will be level.
TRANSFERS AFTER MATURITY DATE
Once variable annuity payments have begun, the contract owner may transfer
all or part of the investment upon which such payments are based from one
sub-account to another. Transfers will be made upon notice to the Company at
least 30 days before the due date of the first annuity payment to which the
change will apply. Transfers after the maturity date will be made by
converting the number of annuity units being transferred to the number of
annuity units of the sub-account to which the transfer is made, so that the
next annuity payment if it were made at that time would be the same amount that
it would have been without the transfer. Thereafter, annuity payments will
reflect changes in the value of the new annuity units. The Company reserves
the right to limit, upon notice, the maximum number of transfers a contract
owner may make per contract year to four. In addition, the Company reserves
the right to defer the transfer privilege at any time that the Company is
unable to purchase or redeem shares of the Trust portfolios. The Company also
reserves the right to modify or terminate the transfer privilege at any time in
accordance with applicable law.
DEATH BENEFIT ON OR AFTER MATURITY DATE
If annuity payments have been selected based on an annuity option
providing for payments for a guaranteed period, and the annuitant dies on or
after the maturity date, the Company will make the remaining guaranteed
payments to the beneficiary. Any remaining payments will be made as rapidly as
under the method of distribution being used as of the date of the annuitant's
death. If no beneficiary is living, the Company will commute any unpaid
guaranteed payments to a single sum (on the basis of the interest rate used in
determining the payments) and pay that single sum to the estate of the last to
die of the annuitant and the beneficiary.
OTHER CONTRACT PROVISIONS
TEN DAY RIGHT TO REVIEW
The contract owner may cancel the contract by returning it to the
Company's Annuity Service Office or agent at any time within 10 days after
receipt of the contract. Within 7 days of receipt of the contract by the
Company, the Company will pay to the contract owner an amount equal to the sum
of (i) the difference between the purchase payments paid and the net purchase
payments and (ii) the contract value computed at the end of the valuation
period during which the contract is received by the Company. No withdrawal
charge is imposed upon return of the contract within the ten day right to
review period. The ten day right to review may vary in certain states in order
to comply with the requirements of insurance laws and regulations in such
states. When the contract is issued as an individual retirement annuity under
Internal Revenue Code Section 408, during the first 7 days of the 10 day
period, the Company will return all purchase payments if this is greater than
the amount otherwise payable.
OWNERSHIP
The contract owner is the person entitled to exercise all rights under the
contract. Prior to the maturity date, the contract owner is the person
designated in the application or as subsequently named. On and after the
maturity date, the annuitant is the contract owner, and after the death of the
annuitant, the beneficiary is the contract owner.
In the case of non-qualified contracts, ownership of the contract may be
changed or the contract collaterally assigned at any time during the lifetime
of the annuitant prior to the maturity date, subject to the rights of any
irrevocable beneficiary. Assigning a contract, or
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changing the ownership of a contract, may be treated as a distribution of the
contract value for Federal tax purposes. (See "FEDERAL TAX MATTERS".) Any
change of ownership or assignment must be made in writing. Any change must be
approved by the Company. Any assignment and any change, if approved, will be
effective as of the date on which written. The Company assumes no liability
for any payments made or actions taken before a change is approved or
assignment is accepted or responsibility for the validity or sufficiency of any
assignment.
In the case of qualified contracts, ownership of the contract generally
may not be transferred except by the trustee of an exempt employees' trust
which is part of a retirement plan qualified under Section 401 of the Internal
Revenue Code. Subject to the foregoing, a qualified contract may not be sold,
assigned, transferred, discounted or pledged as collateral for a loan or as
security for the performance of an obligation or for any other purpose to any
person other than the Company.
BENEFICIARY
The beneficiary is the person, persons or entity designated in the
application or as subsequently named. The beneficiary may be changed during
the lifetime of the annuitant subject to the rights of any irrevocable
beneficiary. Any change must be made in writing and approved by the Company
and, if approved, will be effective as of the date on which written. The
Company assumes no liability for any payments made or actions taken before the
change is approved. Prior to the maturity date, if no beneficiary survives the
annuitant, the contract owner or the contract owner's estate will be the
beneficiary. The interest of any beneficiary is subject to that of any
assignee. In the case of certain qualified contracts, regulations promulgated
by the Treasury Department prescribe certain limitations on the designation of
a beneficiary.
MODIFICATION
The contract may not be modified by the Company without the consent of the
contract owner, except as may be required to make it conform to any law or
regulation or ruling issued by a governmental agency or to improve the rights
and/or benefits under the contract.
COMPANY APPROVAL
The Company reserves the right to accept or reject any contract
application at its sole discretion.
CHARGES AND DEDUCTIONS
Charges and deductions under the contracts are assessed against purchase
payments, contract values or annuity payments. Currently, there are no
deductions made from purchase payments, except for premium taxes in certain
states. See "Taxes" below. In addition, there are deductions from and
expenses paid out of the assets of the Trust portfolios that are described in
the accompanying Prospectus of the Trust.
WITHDRAWAL CHARGES
If a withdrawal is made from the contract before the maturity date, a
withdrawal charge (contingent deferred sales charge) may be assessed against
amounts withdrawn attributable to purchase payments that have been in the
contract less than three complete contract years. There is never a withdrawal
charge with respect to earnings accumulated in the contract, certain other free
withdrawal amounts described below or purchase payments that have been in the
contract more than three complete contract years. In no event may the total
withdrawal charges exceed 3% of the total purchase payments made. The amount
of the withdrawal charge and when it is assessed is discussed below:
1. Each withdrawal from the contract is allocated first to the "free
withdrawal amount" and second to "unliquidated purchase payments". In any
contract year, the free withdrawal amount for that year is the greater of (1)
the excess of the contract value on the date of withdrawal over the
unliquidated purchase payments (the accumulated earnings on the contract) or
(2) 10% of total purchase payments less any prior partial withdrawals in that
year. Withdrawals allocated to the free withdrawal amount may be withdrawn
without the imposition of a withdrawal charge.
2. If a withdrawal is made for an amount in excess of the free withdrawal
amount, the excess will be allocated to purchase payments which will be
liquidated on a first-in first-out basis. On any withdrawal request, the
Company will liquidate purchase payments equal to the amount of the withdrawal
request which exceeds the free withdrawal amount in the order such purchase
payments were made: the oldest unliquidated purchase payment first, the next
purchase payment second, etc....until all purchase payments have been
liquidated.
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3. Each purchase payment or portion thereof liquidated in connection with
a withdrawal request that has been in the contract for less than three years is
subject to a withdrawal charge of 3%.
4. The withdrawal charge is deducted from the contract value remaining
after the contract owner is paid the amount requested, except in the case of a
complete withdrawal when it is deducted from the amount otherwise payable. In
the case of a partial withdrawal, the amount requested from an investment
account may not exceed the value of that investment account less any applicable
withdrawal charge.
5. There is generally no withdrawal charge on distributions made as a
result of the death of the annuitant or contract owner and no withdrawal
charges are imposed on the maturity date if the contract owner annuitizes as
provided in the contract.
The amount collected from the withdrawal charge will be used to reimburse
the Company for the compensation paid to cover selling concessions to
broker-dealers, preparation of sales literature and other expenses related to
sales activity.
For examples of calculation of the withdrawal charge, see Appendix A.
REDUCTION OR ELIMINATION OF WITHDRAWAL CHARGES
The amount of the withdrawal charge on a contract may be reduced or
eliminated when sales of the contracts are made to individuals or to a group of
individuals in such a manner that results in savings of sales expenses. The
entitlement to such a
reduction in the withdrawal charge will be determined by the Company in the
following manner:
1. The size and type of group to which sales are to be made will be
considered. Generally, sales expenses for a larger group are smaller than for
a smaller group because of the ability to implement large numbers of contracts
with fewer sales contacts.
2. The total amount of purchase payments to be received will be
considered. Per dollar sales expenses are likely to be less on larger purchase
payments than on smaller ones.
3. Any prior or existing relationship with the Company will be
considered. Per contract sales expenses are likely to be less when there is a
prior or existing relationship because of the likelihood of implementing the
contract with fewer sales contacts.
4. The level of commissions paid to selling broker-dealers will be
considered. Certain broker-dealers may offer the contract in connection with
financial planning programs offered on a fee for service basis. In view of the
financial planning fees, such broker-dealers may elect to receive lower
commissions for sales of the contracts, thereby reducing the Company's sales
expenses.
5. There may be other circumstances of which the Company is not presently
aware, which could result in reduced sales expenses.
If, after consideration of the foregoing factors, it is determined that
there will be a reduction in sales expenses, the Company will provide a
reduction in the withdrawal charge. The withdrawal charge will be eliminated
when a contract is issued to an officer, director or employee (or a relative
thereof) of the Company, North American Life, the Trust or any of their
affiliates. In no event will reduction or elimination of the withdrawal charge
be permitted where such reduction or elimination will be unfairly
discriminatory to any person.
ADMINISTRATION FEES
A daily fee in an amount equal to 0.25% of the value of each investment
account on an annual basis is deducted from each sub-account as an
administration fee. The fee is designed to compensate the Company for the cost
of providing administrative services attributable to the contracts and the
operations of the Variable Account and the Company in connection with the
contracts. The fee will be reflected in the contract value as a proportionate
reduction in the value of each investment account. Because the administration
fee is a percentage of assets rather than a flat amount, larger contracts will
in effect pay a higher proportion of the administrative expenses than smaller
contracts.
Also, if the contract value falls below $10,000 as a result of a partial
withdrawal, the Company may deduct an annual administration fee of $30 as
partial compensation for administrative expenses. The fee will be deducted on
the last day of each contract year. It will be withdrawn from each investment
option in the same proportion that the value of such investment option bears to
the contract value. If the entire contract value is withdrawn on other than
the last day of any contract year, the fee will be deducted from the amount
paid.
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The Company does not expect to recover from the administration fees any
amount in excess of its accumulated administrative expenses. Even though
administrative expenses may increase, the Company guarantees that it will not
increase the amount of the administration fees.
DISTRIBUTION FEE
A daily fee in an amount equal to 0.15% of the value of each investment
account on an annual basis is deducted from each sub-account as a distribution
fee. The fee is designed to compensate the Company for a portion the sales
expenses it incurs with respect to the contracts. The fee will be reflected in
the contract value as a proportionate reduction in the value of each investment
account. Because the distribution fee is a percentage of assets rather than a
flat amount, larger contracts will in effect pay a higher proportion of sales
expenses than smaller contracts. The Company will monitor the performance of
the contracts to ensure that the aggregate amount of withdrawal charges and the
distribution fee assessed under a contract does not exceed 9% of the total
purchase payments made.
MORTALITY AND EXPENSE RISK FEE
The mortality risk assumed by the Company is the risk that annuitants may
live for a longer period of time than estimated.
The Company assumes this mortality risk by virtue of annuity rates incorporated
into the contract which cannot be changed. This assures each annuitant that
his longevity will not have an adverse effect on the amount of annuity
payments. Also, the Company guarantees that if the annuitant dies before the
maturity date, it will pay a minimum death benefit. (See "DEATH BENEFIT BEFORE
MATURITY DATE") The expense risk assumed by the Company is the risk that the
administration fees may be insufficient to cover actual expenses.
To compensate it for assuming these risks, the Company deducts from each
sub-account a daily fee in an amount equal to 1.25% of the value of each
investment account on an annual basis, consisting of .8% for the mortality risk
and .45% for the expense risk. The fee will be reflected in the contract value
as a proportionate reduction in the value of each variable investment account.
The rate of the mortality and expense risk fee cannot be increased. If the fee
is insufficient to cover the actual cost of the mortality and expense risks
undertaken, the Company will bear the loss. Conversely, if the fee proves more
than sufficient, the excess will be profit to the Company and will be available
for any proper corporate purpose including, among other things, payment of
distribution expenses.
TAXES
The Company reserves the right to charge, or provide for, certain taxes
against purchase payments, contract values or annuity payments. Such taxes may
include premium taxes or other taxes levied by any government entity which the
Company determines to have resulted from the (i) establishment or maintenance
of the Variable Account, (ii) receipt by the Company of purchase payments,
(iii) issuance of the contacts, or (iv) commencement or continuance of annuity
payments under the contracts. In addition, the Company will withhold taxes to
the extent required by applicable law.
Except for residents in Pennsylvania and South Dakota, premium taxes will
be deducted from the contract value used to provide for fixed or variable
annuity payments unless required otherwise by applicable law. The amount
deducted will depend on the premium tax assessed in the applicable state.
State premium taxes currently range from 0% to 3.5% depending on the
jurisdiction and the tax status of the contract and are subject to change by
the legislature or other authority. (See "APPENDIX B: STATE PREMIUM TAXES")
For residents of South Dakota or Pennsylvania a premium tax will be assessed
against all non-qualified purchase payments, upon payment of any withdrawal
benefits, upon any annuitization or payment of death benefits. For purchase
payments received prior to October 1, 1992 the premium tax will be deducted
upon annuitization only. In the states of Pennsylvania and South Dakota,
purchase payments received in connection with the funding of a qualified are
exempt from state premium tax.
FEDERAL TAX MATTERS
INTRODUCTION
The following discussion of the federal income tax treatment of the
contract is not exhaustive, does not purport to cover all situations, and is
not intended as tax advice. A qualified tax adviser should always be consulted
with regard to the application of law to individual circumstances. This
discussion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Department regulations, and interpretations existing on the
date of this Prospectus. These authorities, however, are subject to change by
Congress, the Treasury Department, and judicial decisions.
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This discussion does not address state or local tax consequences
associated with the purchase of a contract. In addition, THE COMPANY MAKES NO
GUARANTEE REGARDING ANY TAX TREATMENT -- FEDERAL, STATE OR LOCAL -- OF ANY
CONTRACT OR OF ANY TRANSACTION INVOLVING A CONTRACT.
THE COMPANY'S TAX STATUS
The Company is taxed as a life insurance company under Subchapter L of the
Code. Since the operations of the Variable Account are a part of, and are
taxed with, the operations of the Company, the Variable Account is not
separately taxed as a "regulated investment company" under Subchapter M of the
Code. Under existing federal income tax laws, investment income and capital
gains of the Variable Account are not taxed to the extent they are applied to
increase reserves under a contract. Since, under the contracts, investment
income and realized capital gains of the Variable Account are automatically
applied to increase reserves, the Company does not anticipate that it will
incur any federal income tax liability attributable to the Variable Account,
and therefore the Company does not intend to make provision for any such taxes.
If the Company is taxed on investment income or capital gains of the Variable
Account, then the Company may impose a charge against the Variable Account in
order to make provision for such taxes.
TAXATION OF ANNUITIES IN GENERAL
TAX DEFERRAL DURING ACCUMULATION PERIOD
Under existing provisions of the Code, except as described below, any
increase in the contract value is generally not taxable to the contract owner
or annuitant until received, either in the form of annuity payments, as
contemplated by the contract, or in some other form of distribution. However,
this rule applies only if (1) the owner is an individual, (2) the investments
of the Variable Account are "adequately diversified" in accordance with
Treasury Department regulations, and (3) the Company, rather than the owner, is
considered the owner of the assets of the Variable Account for federal tax
purposes.
Non-Natural Owner. As a general rule, deferred annuity contracts held by
"non-natural persons" such as a corporation, trust or other similar entity, as
opposed to a natural person, are not treated as annuity contracts for federal
tax purposes. The investment income on such contracts is taxed as ordinary
income that is received or accrued by the owner of the contract during the
taxable year. There are several exceptions to this general rule for
non-natural contract owners. First, contracts will generally be treated as
held by a natural person if the nominal owner is a trust or other entity which
holds the contract as an agent for a natural person. However, this special
exception will not apply in the case of any employer who is the nominal owner
of an annuity contract under a non-qualified deferred compensation arrangement
for its employees.
In addition, exceptions to the general rule for non-natural contract
owners will apply with respect to (1) contracts acquired by an estate of a
decedent by reason of the death of the decedent, (2) certain qualified
contracts, (3) contracts purchased by employers upon the termination of certain
qualified plans, (4) certain contracts used in connection with structured
settlement agreements, and (5) contracts purchased with a single premium when
the annuity starting date is no later than a year from purchase of the annuity
and substantially equal periodic payments are made, not less frequently than
annually, during the annuity period.
Diversification Requirements. For a contract to be treated as an annuity
for federal income tax purposes, the investments of the Variable Account must
be "adequately diversified" in accordance with Treasury Department regulations.
The Secretary of the Treasury has issued regulations which prescribe standards
for determining whether the investments of the Variable Account are "adequately
diversified." If the Variable Account failed to comply with these
diversification standards, a contract would not be treated as an annuity
contract for federal income tax purposes and the contract owner would be
taxable currently on the excess of the contract value over the premiums paid
for the contract.
Although the Company does not control the investments of the NASL Series
Trust, it expects that the Trust will comply with such regulations so that the
Variable Account will be considered "adequately diversified."
Ownership Treatment. In certain circumstances, variable annuity contract
owners may be considered the owners, for federal income tax purposes, of the
assets of the separate account used to support their contracts. In those
circumstances, income and gains from the separate account assets would be
includible in the contract owners' gross income. The Internal Revenue Service
(the "Service") has stated in published rulings that a variable contract owner
will be considered the owner of separate account assets if the owner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. In addition, the Treasury Department
announced, in connection with the issuance of regulations concerning investment
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a separate
account may cause the investor, rather than the
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insurance company, to be treated as the owner of the assets in the account."
This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular sub-accounts [of a separate account] without being
treated as owners of the underlying assets." As of the date of this
Prospectus, no such guidance has been issued.
The ownership rights under this contract are similar to, but different in
certain respects from, those described by the Service in rulings in which it
was determined that contract owners were not owners of separate account assets.
For example, the owner of this contract has the choice of more investment
options to which to allocate premiums and contract values, and may be able to
transfer among investment options more frequently than in such rulings. These
differences could result in the contract owner being treated as the owner of
the assets of the Variable Account. In addition, the Company does not know
what standards will be set forth in the regulations or rulings which the
Treasury Department has stated it expects to issue. The Company therefore
reserves the right to modify the contract as necessary to attempt to prevent
the contract owner from being considered the owner of the assets of the
Variable Account.
Delayed Maturity Dates. If the contract's scheduled maturity date is at a
time when the annuitant has reached an advanced age, e.g., past age 85, it is
possible that the contract would not be treated as an annuity. In that event,
the income and gains under the contract could be currently includible in the
owner's income.
The remainder of this discussion assumes that the contract will be treated
as an annuity contract for federal income tax purposes and that the Company
will be treated as the owner of the Variable Account assets.
TAXATION OF PARTIAL AND FULL WITHDRAWALS
In the case of a partial withdrawal, amounts received are includible in
income to the extent the contract value before the withdrawal exceeds the
"investment in the contract." In the case of a full withdrawal, amounts
received are includible in income to the extent they exceed the "investment in
the contract." For these purposes the investment in the contract at any time
equals the total of the purchase payments made under the contract to that time
(to the extent such payments were neither deductible when made nor excludible
from income as, for example, in the case of certain contributions to qualified
plans) less any amounts previously received from the contract which were not
included in income.
Other than in the case of certain qualified contracts, any amount received
as a loan under a contract, and any assignment or pledge (or agreement to
assign or pledge) any portion of the contract value, is treated as a withdrawal
of such amount or portion. The investment in the contract is increased by the
amount includible as income with respect to such assignment or pledge, though
it is not affected by any other aspect of the assignment or pledge (including
its release). If an individual transfers an annuity contract without adequate
consideration to a person other than the owner's spouse (or to a former spouse
incident to divorce), the owner will be taxed on the difference between the
"contract value" and the "investment in the contract" at the time of transfer.
In such case, the transferee's investment in the contract will be increased to
reflect the increase in the transferor's income.
The contract provides a death benefit that in certain circumstances may
exceed the greater of the purchase payments and the contract value. As
described elsewhere in this prospectus, the Company imposes certain charges
with respect to the death benefit. It is possible that some portion of those
charges could be treated for federal tax purposes as a partial withdrawal from
the contract.
TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each annuity payment taxable as ordinary income
is equal to the excess of the payment over the exclusion amount. In the case
of variable annuity payments, the exclusion amount is the "investment in the
contract" (defined above) allocated to the variable annuity option, adjusted
for any period certain or refund feature, when payments begin to be made
divided by the number of payments expected to be made (determined by Treasury
Department regulations which take into account the annuitant's life expectancy
and the form of annuity benefit selected). In the case of fixed annuity
payments, the exclusion amount is the amount determined by multiplying (1) the
payment by (2) the ratio of the investment in the contract allocated to the
fixed annuity option, adjusted for any period certain or refund feature, to the
total expected value of annuity payments for the term of the contract
(determined under Treasury Department regulations).
Once the total amount of the investment in the contract is excluded using
these ratios, annuity payments will be fully taxable. If annuity payments
cease because of the death of the annuitant and before the total amount of the
investment in the contract is recovered, the unrecovered amount generally will
be allowed as a deduction to the annuitant in his last taxable year.
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TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be distributed from a contract because of the death of an
owner or an annuitant. In the case of a non-qualified contract, such death
benefit proceeds are includible in income as follows: (1) if distributed in a
lump sum, they are taxed in the same manner as a full withdrawal, as described
above, or (2) if distributed under an annuity option, they are taxed in the
same manner as annuity payments, as described above.
PENALTY TAX ON PREMATURE DISTRIBUTIONS
There is a 10% penalty tax on the taxable amount of any payment from a
non-qualified contract unless the payment is: (a) received on or after the
contract owner reaches age 59 1/2; (b) attributable to the contract owner's
becoming disabled (as defined in the tax law); (c) made to a beneficiary on or
after the death of the contract owner or, if the contract owner is not an
individual, on or after the death of the primary annuitant (as defined in the
tax law); (d) made as a series of substantially equal periodic payments (not
less frequently than annually) for the life (or life expectancy) of the
annuitant or the joint lives (or joint life expectancies) of the annuitant and
"designated beneficiary" (as defined in the tax law); (e) made under an annuity
contract purchased with a single premium when the annuity starting date is no
later than a year from purchase of the annuity and substantially equal periodic
payments are made, not less frequently than annually, during the annuity
period; and (f) made with respect to certain annuities issued in connection
with structured settlement agreements. (Similar rules apply in the case of
certain qualified contracts.)
AGGREGATION OF CONTRACTS
In certain circumstances, the Service may determine the amount of an
annuity payment or a withdrawal from a contract that is includible in income by
combining some or all of the non-qualified contracts owned by an individual.
For example, if a person purchases a contract offered by this Prospectus and
also purchases at approximately the same time an immediate annuity, the Service
may treat the two contracts as one contract. In addition, if a person
purchases two or more deferred annuity contracts from the same insurance
company (or its affiliates) during any calendar year, all such contracts will
be treated as one contract. The effects of such aggregation are not clear;
however, it could affect the time when income is taxable and the amount which
might be subject to the 10% penalty tax described above.
QUALIFIED RETIREMENT PLANS
The contracts are also designed for use in connection with certain types
of retirement plans which receive favorable treatment under the Code. Numerous
special tax rules apply to the participants in such qualified plans and to the
contracts used in connection with such qualified plans. These tax rules vary
according to the type of plan and the terms and conditions of the plan itself.
For example, for both withdrawals and annuity payments under certain qualified
contracts, there may be no "investment in the contract" and the total amount
received may be taxable. In addition, loans from qualified contracts, where
allowed, are subject to a variety of limitations, including restrictions as to
the amount that may be borrowed, the duration of the loan, and the manner in
which the loans must be repaid. (Owners should always consult their tax
advisors and retirement plan fiduciaries prior to exercising their loan
privileges.) Also, special rules apply to the time at which distributions must
commence and the form in which the distributions must be paid. Therefore, no
attempt is made to provide more than general information about the use of
contracts with the various types of qualified plans.
When issued in connection with a qualified plan, a contract will be
amended as generally necessary to conform to the requirements of the type of
plan. However, contract owners, annuitants, and beneficiaries are cautioned
that the rights of any person to any benefits under qualified plans may be
subject to the terms and conditions of the plans themselves, regardless of the
terms and conditions of the contract. In addition, the Company shall not be
bound by terms and conditions of qualified plans to the extent such terms and
conditions contradict the contract, unless the Company consents.
QUALIFIED PLAN TYPES
Following are brief descriptions of various types of qualified plans in
connection with which the Company may issue a contract.
Individual Retirement Annuities. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA." IRAs are subject to limits on the
amounts that may be contributed, the persons who may be eligible and on the
time when distributions may commence. Also, distributions from certain other
types of qualified retirement plans may be "rolled over" on a tax-deferred
basis into an IRA.
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IRAs generally may not provide life insurance, but they may provide a
death benefit that equals the greater of the premiums paid and the contract's
cash value. The contract provides a death benefit that in certain
circumstances may exceed the greater of the purchase payments and the contract
value. The Company intends to ask the IRS to approve the use of the contract,
as to form, as an IRA, but there is no assurance that such approval will be
granted.
Simplified Employee Pensions (SEP-IRAs). Section 408(k) of the Code
allows employers to establish simplified employee pension plans for their
employees, using the employees' IRAs for such purposes, if certain criteria
are met. Under these plans the employer may, within specified limits, make
deductible contributions on behalf of the employees to IRAs. Employers
intending to use the contract in connection with such plans should seek
competent advice. In particular, employers should consider that IRAs generally
may not provide life insurance, but they may provide a death benefit that
equals the greater of the premiums paid and the contract's cash value. The
contract provides a death benefit that in certain circumstances may exceed the
greater of the purchase payments and the contract value. The Company intends
to ask the IRS to approve use of the contract, as to form, as an IRA, but there
is no assurance that such approval will be granted.
Corporate and Self-Employed ("H.R. 10" and "Keogh") Pension and
Profit-Sharing Plans. Sections 401(a) and 403(a) of the Code permit corporate
employers to establish various types of tax-favored retirement plans for
employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as
amended, commonly referred to as "H.R. 10" or "Keogh," permits self-employed
individuals also to establish such tax-favored retirement plans for themselves
and their employees. Such retirement plans may permit the purchase of the
contracts in order to provide benefits under the plans. The contract provides a
death benefit that in certain circumstances may exceed the greater of the
purchase payments and the contract's cash value. It is possible that such
death benefit could be characterized as an incidental death benefit. There are
limitations on the amount of incidental benefits that may be provided under
pension and profit sharing plans. In addition, the provision of such benefits
may result in currently taxable income to participants. Employers intending to
use the contract in connection with such plans should seek competent advice.
Tax-Sheltered Annuities. Section 403(b) of the Code permits public school
employees and employees of certain types of charitable, educational and
scientific organizations specified in Section 501(c)(3) of the Code to have
their employers purchase annuity contracts for them and, subject to certain
limitations, to exclude the amount of purchase payments from gross income for
tax purposes. These annuity contracts are commonly referred to as
"tax-sheltered annuities." Purchasers of the contracts for such purposes
should seek competent advice as to eligibility, limitations on permissible
amounts of purchase payments and other tax consequences associated with the
contracts. In particular, purchasers should consider that the contract provides
a death benefit that in certain circumstances may exceed the greater of the
purchase payments and the contract value. It is possible that such death
benefit could be characterized as an incidental death benefit. If the death
benefit were so characterized, this could result in currently taxable income to
purchasers. In addition, there are limitations on the amount of incidental
death benefits that may be provided under a tax-sheltered annuity. Even if the
death benefit under the contract were characterized as an incidental death
benefit, it is unlikely to violate those limits unless the purchaser also
purchases a life insurance contract as part of his or her tax-sheltered annuity
plan.
Withdrawals from a tax-sheltered annuity attributable to contributions
made pursuant to a salary reduction agreement in a taxable year beginning after
December 31, 1988, may be paid only if the employee has reached age 59 1/2,
separated from service, died, become disabled, or in the case of hardship.
Amounts permitted to be distributed in the event of hardship are limited to
actual contributions; earnings thereon may not be distributed on account of
hardship. (These limitations on withdrawals do not apply to the extent the
Company is directed to transfer some or all of the contract value to the issuer
of another tax-sheltered annuity or into a Section 403(b)(7) custodial
account.)
Deferred Compensation Plans of State and Local Governments and Tax-Exempt
Organizations. Section 457 of the Code permits employees of state and local
governments and tax-exempt organizations to defer a portion of their
compensation without paying current taxes. The employees must be participants
in an eligible deferred compensation plan. To the extent the contracts are
used in connection with an eligible plan, employees are considered general
creditors of the employer and the employer as owner of the contract has the
sole right to the proceeds of the contract. Loans to employees are not
permitted under such plans. Generally, with respect to purchase payments made
after February 28, 1986, a contract purchased by a state or local government or
a tax-exempt organization will not be treated as an annuity contract for
federal income tax purposes. Those who intend to use the contracts in
connection with such plans should seek competent advice.
DIRECT ROLLOVERS
If the contract is used in connection with a pension, profit-sharing, or
annuity plan qualified under sections 401(a) or 403(a) of the Code, or is a
tax-sheltered annuity under section 403(b) of the Code, any "eligible rollover
distribution" from the contract will be subject to the direct rollover and
mandatory withholding requirements enacted by Congress in 1992. An eligible
rollover distribution generally is any taxable distribution from a qualified
pension plan under section 401(a) of the Code, qualified annuity plan under
section 403(a) of the Code,
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or section 403(b) annuity or custodial account, excluding certain amounts (such
as minimum distributions required under section 401(a)(9) of the Code and
distributions which are part of a "series of substantially equal periodic
payments" made for life or a specified period of 10 years or more).
Under these requirements, federal income tax equal to 20% of the eligible
rollover distribution will be withheld from the amount of the distribution.
Unlike withholding on certain other amounts distributed from the contract,
discussed below, the owner cannot elect out of withholding with respect to an
eligible rollover distribution. However, this 20% withholding will not apply
if, instead of receiving the eligible rollover distribution, the owner elects
to have it directly transferred to certain qualified plans. Prior to receiving
an eligible rollover distribution, the owner will receive a notice explaining
generally the direct rollover and mandatory withholding requirements and how to
avoid the 20% withholding by electing a direct transfer.
FEDERAL INCOME TAX WITHHOLDING
The Company will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a contract unless the
distributee notifies the Company at or before the time of the distribution that
he or she elects not to have any amounts withheld. In certain circumstances,
the Company may be required to withhold tax, as explained above. The
withholding rates applicable to the taxable portion of periodic annuity
payments (other than eligible rollover distributions) are the same as the
withholding rates generally applicable to payments of wages. In addition, the
withholding rate applicable to the taxable portion of non-periodic payments
(including withdrawals prior to the maturity date) is 10%. As discussed above,
the withholding rate applicable to eligible rollover distributions is 20%.
GENERAL MATTERS
TAX DEFERRAL
The status of the contract as an annuity generally allows all earnings on
the underlying investments to be tax-deferred until withdrawn or until annuity
payments begin. (See "FEDERAL TAX MATTERS") This tax deferred treatment may be
beneficial to contract owners in building assets in a long-term investment
program.
PERFORMANCE DATA
From time to time the Variable Account may publish advertisements
containing performance data relating to its sub-accounts. For periods prior to
April 1, 1993, performance data will be hypothetical figures based on the
assumption that a contract offered by this Prospectus was issued when the
sub-accounts first became available for investment under other contracts
offered by the Company. The sub-accounts may advertise both "standardized" and
"non-standardized" total return figures, although standardized figures will
always accompany non-standardized figures. Standardized performance data will
consist of total return quotations, which will always include quotations for
recent one year and, when applicable, five and ten year periods and, where less
than ten years, for the period subsequent to the date each sub-account first
became available for investment. Such quotations for such periods will be the
average annual rates of return required for an initial purchase payment of
$1,000 to equal the actual contract value attributable to such purchase payment
on the last day of the period, after reflection of all charges. Standardized
total return figures will be quoted assuming redemption at the end of the
period. Such figures may be accompanied by non-standardized total return
figures that are calculated on the same basis as the standardized returns
except that the calculations assume no redemption at the end of the period. In
addition to the non-standardized returns, each of the sub-accounts may from
time to time quote aggregate non-standardized total returns for other time
periods. Except as noted above, performance figures used by the Variable
Account are based on the actual historical performance of its sub-accounts for
specified periods, and the figures are not intended to indicate future
performance. More detailed information on the computations is set forth in the
Statement of Additional Information.
FINANCIAL STATEMENTS
Financial Statements for the Variable Account and the Company are
contained in the Statement of Additional Information.
ASSET ALLOCATION AND TIMING SERVICES
The Company is aware that certain third parties are offering asset
allocation and timing services in connection with the contracts. In certain
cases the Company has agreed to honor transfer instructions from such asset
allocation and timing services where it has received powers of attorney, in a
form acceptable to it, from the contract owners participating in the service.
THE COMPANY DOES NOT
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<PAGE> 34
ENDORSE, APPROVE OR RECOMMEND SUCH SERVICES IN ANY WAY AND CONTRACT OWNERS
SHOULD BE AWARE THAT FEES PAID FOR SUCH SERVICES ARE SEPARATE AND IN ADDITION
TO FEES PAID UNDER THE CONTRACTS.
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Section 830.105 of the Texas Government Code permits participants in the
Texas Optional Retirement Program ("ORP") to withdraw their interest in a
variable annuity contract issued under the ORP only upon (1) termination of
employment in the Texas public institutions of higher education, (2)
retirement, (3) death, or (4) the participant's attainment of age 70 1/2.
Accordingly, before any amounts may be distributed from the contract, proof
must be furnished to the Company that one of these four events has occurred.
The foregoing restrictions on withdrawal do not apply in the event a
participant in the ORP transfers the contract value to another contract or
another qualified custodian during the period of participation in the ORP.
Loans are not available under contracts subject to the ORP.
DISTRIBUTION OF CONTRACTS
NASL Financial Services, Inc. ("NASL Financial"), 116 Huntington Avenue,
Boston, Massachusetts 02116, a wholly-owned subsidiary of the Company, is the
principal underwriter of the contracts in addition to providing advisory
services to the Trust. NASL Financial is a broker-dealer registered under the
Securities Exchange Act of 1934 ("1934 Act") and a member of the National
Association of Securities Dealers, Inc. ("NASD"). NASL Financial has entered
into an exclusive promotional agent agreement with Wood Logan Associates, Inc.
("Wood Logan"). Wood Logan, approximately 20% owned by North American Life and
its affiliates, is a broker-dealer registered under the 1934 Act and a member
of the NASD. Sales of the contracts will be made by registered representatives
of broker-dealers authorized by NASL Financial to sell the contracts. Such
registered representatives will also be licensed insurance agents of the
Company. Under the promotional agent agreement, Wood Logan will recruit and
provide sales training and licensing assistance to such registered
representatives. In addition, Wood Logan will prepare sales and promotional
materials for the Company's approval. NASL Financial will pay distribution
compensation to selling brokers in varying amounts which under normal
circumstances are not expected to exceed 1% of purchase payments plus 1% of the
contract value per year commencing one year after each initial purchase
payment. NASL Financial may from time to time pay additional compensation
pursuant to promotional contests. Additionally, in some circumstances, NASL
Financial will provide reimbursement of certain sales and marketing expenses.
NASL Financial will pay the promotional agent for providing marketing support
for the distribution of the contracts.
CONTRACT OWNER INQUIRIES
All contract owner inquiries should be directed to the Company's Annuity
Service Office at P.O. Box 818, Boston, Massachusetts 02117-0818.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party or
to which the assets of the Variable Account are subject. Neither the Company
nor NASL Financial are involved in any litigation that is of material
importance in relation to their total assets or that relates to the Variable
Account.
OTHER INFORMATION
A registration statement has been filed with the Commission under the
Securities Act of 1933, as amended, with respect to the contracts described in
this Prospectus. Not all the information set forth in the registration
statement, amendments and exhibits thereto has been included in this
Prospectus. Statements contained in this Prospectus or the Statement of
Additional Information concerning the content of the contracts and other legal
instruments are only summaries. For a complete statement of the terms of these
documents, reference should be made to the instruments filed with the
Commission.
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<PAGE> 35
<TABLE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<S> <C>
General Information and History ....................................... 3
Performance Data ...................................................... 3
Services
Independent Accountants ............................................. 6
Servicing Agent ..................................................... 6
Principal Underwriter ............................................... 6
Cancellation of Contract ............................................ 6
Financial Statements .................................................. 7
</TABLE>
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<PAGE> 36
APPENDIX A
EXAMPLES OF CALCULATION OF WITHDRAWAL CHARGE
<TABLE>
EXAMPLE 1 - Assume a single payment of $50,000 is made into the contract, no
transfers are made, no additional payments are made and there are no partial
withdrawals. The table below illustrates four examples of the withdrawal
charges that would be imposed if the contract is completely withdrawn, based on
hypothetical contract values.
<CAPTION>
WITHDRAWAL
HYPOTHETICAL FREE PURCHASE CHARGE
CONTRACT CONTRACT WITHDRAWAL PAYMENTS --------------------------------
YEAR VALUE AMOUNT LIQUIDATED PERCENT AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 55,000 5,000(a) 50,000 3% 1,500
2 50,500 5,000(b) 45,500 3% 1,365
3 60,000 10,000(c) 50,000 3% 1,500
4 70,000 20,000(d) 50,000 0% 0
</TABLE>
(a) During any contract year the free withdrawal amount is the greater of
accumulated earnings, or 10% of the total purchase payments made under the
contract less any prior partial withdrawals in that contract year. In the
first contract year the earnings under the contract and 10% of purchase
payments both equal $5,000. Consequently, on total withdrawal $5,000 is
withdrawn free of the withdrawal charge, the entire $50,000 purchase
payment is liquidated and the withdrawal charge is assessed against such
liquidated purchase payment (contract value less free withdrawal amount).
(b) In the example for the second contract year, the accumulated earnings of
$500 is less than 10% of purchase payments, therefore the free withdrawal
amount is equal to 10% of purchase payments ($50,000 X 10% = $5,000) and
the withdrawal charge is only applied to purchase payments liquidated
(contract value less free withdrawal amount).
(c) In the example for the third contract year, the accumulated earnings of
$10,000 is greater than 10% of purchase payments ($5,000), therefore the
free withdrawal amount is equal to the accumulated earnings of $10,000 and
the withdrawal charge is applied to the purchase payments liquidated
(contract value less free withdrawal amount).
(d) There is no withdrawal charge on any purchase payments liquidated that have
been in the contract for at least 3 years.
EXAMPLE 2 - Assume a single payment of $50,000 is made into the contract, no
transfers are made, no additional payments are made and there are a series of
four partial withdrawals made during the third contract year of $2,000, $5,000,
$7,000, and $8,000.
<TABLE>
<CAPTION>
WITHDRAWAL
HYPOTHETICAL PARTIAL FREE PURCHASE CHARGE
CONTRACT WITHDRAWAL WITHDRAWAL PAYMENTS --------------------------------
VALUE REQUESTED AMOUNT LIQUIDATED PERCENT AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
a) 65,000 2,000 15,000 0 3% 0
b) 49,000 5,000 3,000 2,000 3% 60
c) 52,000 7,000 4,000 3,000 3% 90
d) 44,000 8,000 0 8,000 3% 240
</TABLE>
(a) The free withdrawal amount during any contract year is the greater of the
contract value less the unliquidated purchase payments (accumulated
earnings), or 10% of purchase payments less 100% of all prior withdrawals
in that contract year. For the first example, accumulated earnings of
$15,000 is the free withdrawal amount since it is greater than 10% of
purchase payments less prior withdrawals ($5,000-0). The amount requested
($2,000) is less than the free withdrawal amount so no purchase payments
are liquidated and no withdrawal charge applies.
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<PAGE> 37
(b) The contract has negative accumulated earnings ($49,000-$50,000), so
the free withdrawal amount is limited to 10% of purchase payments less all
prior withdrawals. Since $2,000 has already been withdrawn earlier in the
current contract year, the remaining free withdrawal amount during the
third contract year is $3,000. The $5,000 partial withdrawal will consist
of $3,000 free of withdrawal charge, and the remaining $2,000 will be
subject to a withdrawal charge and result in purchase payments being
liquidated. The remaining unliquidated purchase payments are $48,000.
(c) The contract has increased in value to $52,000. The unliquidated purchase
payments are $48,000 so the accumulated earnings are $4,000, which is
greater than 10% of purchase payments less prior withdrawals
($5,000-$2,000-$5,000<0). Hence the free withdrawal amount is $4,000.
Therefore, $3,000 of the $7,000 partial withdrawal will be subject to a
withdrawal charge and result in purchase payments being liquidated. The
remaining unliquidated purchase payments are $45,000.
(d) The free withdrawal amount is zero since the contract has negative
accumulated earnings ($44,000-$45,000) and the full 10% of purchase
payments ($5,000) has already been utilized. The full amount of $8,000
will result in purchase payments being liquidated subject to a withdrawal
charge. At the beginning of the next contract year the full 10% of
purchase payments would be available again for withdrawal requests during
that year.
APPENDIX B
STATE PREMIUM TAXES
Premium taxes vary according to the state and are subject to change. In
many jurisdictions there is no tax at all. For current information, a tax
adviser should be consulted.
<TABLE>
<CAPTION>
TAX RATE
QUALIFIED NON-QUALIFIED
STATE CONTRACTS CONTRACTS
-----------------------------------------------------------------
<S> <C> <C>
CALIFORNIA ............ .50% 2.35%
DISTRICT OF COLUMBIA .. 2.25% 2.25%
KANSAS ................ .00% 2.00%
KENTUCKY .............. 2.00% 2.00%
MAINE ................. .00% 2.00%
MICHIGAN .............. .00075% .00075%
MISSISSIPPI ........... .00% 1.00%
NEVADA ................ .00% 3.50%
PENNSYLVANIA .......... .00% 2.00%
PUERTO RICO ........... 1.00% 1.00%
SOUTH DAKOTA .......... .00% 1.25%
TEXAS ................. .04% .04%
WEST VIRGINIA ......... 1.00% 1.00%
WYOMING ............... .00% 1.00%
</TABLE>
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<PAGE> 38
APPENDIX C
<TABLE>
For all contracts issued in Pennsylvania the maximum maturity age based upon
the issue age of the annuitant is as follows:
ISSUE AGE MAXIMUM MATURITY AGE
- -------------------------------------------------------------------------
<S> <C>
70 or less 85
71-75 86
76-80 88
81-85 90
86-90 93
91-93 96
94-95 98
96-97 99
98-99 101
100-101 102
102 103
103 104
104 105
105 106
</TABLE>
It is required that the annuitant exercise a settlement annuity option no
later than the maximum maturity age stated above. For example an annuitant age
60 at issue must exercise a settlement option prior to the attainment of age
86. The Company will use the issue age of the youngest named annuitant in the
determination of the required settlement option date.
If contracts are issued with annuitants over age 96, a withdrawal charge
could be imposed if they terminate the contract rather than elect a settlement
option upon attainment of the maximum maturity age. This is a result of the
restrictions by Pennsylvania in combination with the 3-year withdrawal charge
schedule of the contract.
32
