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RULE NO. 424(b)(3)
REGISTRATION NO. 333-78583
Prospectus
Modified Single Payment
Combination Fixed and Variable
Life Insurance contract
Issued by Sage Life Assurance of America, Inc.
Effective May 1, 2000
CW009-5-00
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PROSPECTUS DATED MAY 1, 2000
MODIFIED SINGLE PAYMENT COMBINATION FIXED AND VARIABLE
LIFE INSURANCE CONTRACTS
ISSUED BY
THE SAGE VARIABLE LIFE ACCOUNT A AND
SAGE LIFE ASSURANCE OF AMERICA, INC.
Executive Office: Customer Service Center:
300 Atlantic Street P.O. Box 290680
Stamford, CT 06901 Wethersfield, CT 06129-0680
Telephone: (877) 835-7243 (Toll
Free)
This Prospectus describes individual and group modified single payment
combination fixed and variable life insurance contracts offered by Sage Life
Assurance of America, Inc. ("we," "us," "our," or the "Company"). We designed
the Contracts for your estate planning or other insurance needs, or to
supplement your long-term retirement savings. The Contracts provide a means
for investing your Account Value on a tax-deferred basis in our Variable
Account and our Fixed Account. You can purchase a Contract by making a minimum
initial purchase payment. After purchase, you determine the amount and timing
of additional purchase payments, subject to certain restrictions.
You may allocate purchase payments and transfer Account Value to our
Variable Account and/or our Fixed Account within certain limits. The Variable
Account has 33 Sub-Accounts. Through our Fixed Account, you can choose to
invest your money in one or more of 5 different guarantee periods.
Each Variable Sub-Account invests in a corresponding Fund of the following
Trusts (collectively the "Trusts"):
. AIM Variable Insurance Funds, Inc.
. The Alger American Fund
. Liberty Variable Investment Trust
. SteinRoe Variable Investment Trust
. MFS(R) Variable Insurance TrustSM
. The Universal Institutional Funds, Inc.
. Oppenheimer Variable Account Funds
. Sage Life Investment Trust
. T. Rowe Price Equity Series, Inc.
Your Account Value will vary daily with the investment performance of the
Variable Sub-Accounts and any interest we credit under our Fixed Account. We
do not guarantee any minimum Account Value for amounts you allocate to the
Variable Account. We do guarantee principal and a minimum fixed rate of
interest for specified periods of time on amounts you allocate to the Fixed
Account. However, amounts you withdraw, surrender, transfer, or borrow from
the Fixed Account before the end of an applicable Guarantee Period ordinarily
will be subject to a Market Value Adjustment, which may increase or decrease
these amounts.
The Contracts provide a death benefit, as well as additional benefits,
including five alternative Settlement Options for receiving death or surrender
proceeds as income payments under the Contract, and optional programs
including dollar-cost averaging, asset allocation, automatic portfolio
rebalancing, and systematic partial withdrawals.
If you currently own a life insurance policy on the life of the Insured, you
should consider carefully whether the Contract should be used to replace or
supplement your existing policy.
In almost all cases, the Contracts will be modified endowment contracts for
Federal income tax purposes. This means that a loan or other distribution from
the Contract during the life of the Insured will in almost all cases be taxed
as ordinary income to the extent of any earnings in the Contract, and may be
subject to an additional 10% Federal penalty tax, if taken before the Owner
attains age 59 1/2. Special tax and legal considerations apply if this
Contract is used in connection with a qualified plan or certain other
employment plans.
This Prospectus includes basic information about the Contracts that you
should know before investing. Please read this Prospectus carefully and keep
it for future reference. The Trust prospectuses contain important information
about the Funds. Your registered representative can provide these prospectuses
to you before you invest.
The Securities and Exchange Commission has not approved these Contracts or
determined that this Prospectus is accurate or complete. Any representation to
the contrary is a criminal offense.
Variable life contracts are not deposits or obligations of, or endorsed or
guaranteed by, any bank, nor are they federally insured or otherwise protected
by the FDIC, the Federal Reserve Board, or any other agency; they are subject
to investment risks, including possible loss of principal.
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TABLE OF CONTENTS
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Index of Terms............................................................. 1
Summary of the Contracts................................................... 3
Part I--Description of the Contracts....................................... 10
1. What Are The Contracts?................................................ 10
2. How Do I Purchase A Contract?.......................................... 11
Initial Purchase Payment.............................................. 11
Issuance of a Contract................................................ 11
Free Look Right to Cancel Contract.................................... 11
Making Additional Purchase Payments................................... 11
Grace Period.......................................................... 12
Reinstatement......................................................... 12
Specialized Uses of the Contract...................................... 12
Illustrations......................................................... 13
3.What Are My Investment Options?......................................... 13
Purchase Payment Allocations.......................................... 13
Variable Sub-Account Investment Options............................... 13
Fixed Account Investment Options...................................... 13
Market Value Adjustment............................................... 18
Transfers............................................................. 19
Telephone Transactions................................................ 20
Power of Attorney..................................................... 20
Dollar-Cost Averaging Program......................................... 20
Asset Allocation Program.............................................. 21
Automatic Portfolio Rebalancing Program............................... 21
Account Value......................................................... 22
Variable Account Value................................................ 22
Accumulation Unit Value............................................... 22
Net Investment Factor................................................. 23
Fixed Account Value................................................... 23
Loan Account Value.................................................... 23
Surrender Value....................................................... 23
4.What Are The Expenses Under A
Contract?............................................................ 23
Monthly Deduction Amount.............................................. 24
Asset-Based Charges................................................... 24
Cost of Insurance Charge.............................................. 25
Annual Administration Charge.......................................... 25
Surrender Charge...................................................... 25
Transfer Charge....................................................... 26
Fund Annual Expenses.................................................. 26
5.How Will My Contract Be Taxed?.......................................... 26
Introduction.......................................................... 26
Tax Status of the Contract............................................ 27
Tax Treatment of Contract Benefits.................................... 27
Possible Legislative Changes.......................................... 29
Possible Charge for Sage Life's Taxes................................. 29
6.How Do I Access My Money?............................................... 29
Withdrawals........................................................... 30
Systematic Partial Withdrawal Program................................. 30
Surrenders............................................................ 30
Loans................................................................. 31
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Requesting Payments................................................... 32
7.How Is Contract Performance Presented?................................. 32
8.What Is The Death Benefit Under My Contract?........................... 32
Death Benefit......................................................... 33
Insurance Amount...................................................... 33
Minimum Death Benefit................................................. 33
Proof of Death........................................................ 33
Insurance Amount Increases............................................ 33
9.What Supplemental Benefits Are Available Under My Contract?............ 34
Accelerated Death Benefit Rider....................................... 34
Accidental Death Benefit Rider........................................ 34
Waiver of Surrender Charge Rider...................................... 34
10.What Are My Settlement Options?........................................ 34
Variable Income Payments.............................................. 35
Income Unit Value..................................................... 36
Exchange of Income Units.............................................. 36
11.What Other Information Should I Know?.................................. 36
Sage Life Assurance of America, Inc................................... 36
Separate Accounts..................................................... 36
Modification.......................................................... 37
Distribution of the Contracts......................................... 38
Experts............................................................... 38
Legal Proceedings..................................................... 38
Reports to Contract Owners............................................ 38
Assignment............................................................ 38
The Owner............................................................. 38
The Beneficiary....................................................... 39
Change of Owner or Beneficiary........................................ 39
Misstatement And Proof of Age, Sex, or Survival....................... 39
Incontestability...................................................... 39
Suicide............................................................... 39
Authority to Make Agreements.......................................... 39
Participation......................................................... 39
Safekeeping of Account Assets......................................... 39
Legal Matters......................................................... 39
Financial Statements.................................................. 40
12. How Can I Make Inquiries?............................................. 40
Hypothetical Illustrations of Contract Values......................... 40
Part II--Additional Information............................................ 47
History and Business....................................................... 48
Management's Discussion and Analysis of Financial Condition................ 48
Compensation............................................................ 54
Appendix A................................................................. A-1
Appendix B................................................................. B-1
</TABLE>
This Prospectus does not constitute an offering in any jurisdiction in which
such offering may not lawfully be made.
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INDEX OF TERMS
We have tried to make this Prospectus as readable and understandable as
possible. To help you to understand how the Contract works, we have used
certain terms that have special meanings. We define these terms below.
Account Value--The Account Value is the entire amount we hold under your
Contract. It equals the sum of the values in the Variable Account, the Fixed
Account, and the Loan Account.
Accumulation Unit--An Accumulation Unit is the unit of measure we use to
keep track of the Account Value in each Variable Sub-Account.
Attained Age--The Attained Age is the Issue Age plus the number of full
years since the Contract Date.
Asset-Based Charges--The Asset-Based Charges are assessed monthly against
your Account Value and are charges for mortality and expense risks, certain
administrative expenses, certain distribution costs, and certain state and
federal tax expenses. After the proceeds from the Contract are applied to a
Settlement Option, we call these charges Variable Sub-Account Charges and
deduct them daily from the assets of the Variable Account only.
Beneficiary--The Beneficiary is the person or persons to whom we pay the
Death Proceeds when the Insured dies.
Business Day--A Business Day is any day the New York Stock Exchange ("NYSE")
is open for trading exclusive of (i) Federal holidays, (ii) any day on which
an emergency exists making the disposal or fair valuation of assets in the
Variable Account not reasonably practicable, and (iii) any day on which the
Securities and Exchange Commission ("SEC") permits a delay in the disposal or
valuation of assets in the Variable Account.
Contracts--The Contracts are modified single payment combination fixed and
variable life insurance contracts. In some jurisdictions, we issue the
Contracts directly to individuals. In most jurisdictions, however, the
Contracts are only available as a group contract. We issue a group Contract to
or on behalf of a group. Individuals who are part of a group to which we issue
a Contract receive a certificate that recites substantially all of the
provisions of the group Contract. Throughout this Prospectus and unless
otherwise stated, the term "Contract" refers to individual Contracts, group
Contracts, and certificates for group Contracts.
Contract Anniversary--A Contract Anniversary is each anniversary of the
Contract Date.
Contract Date--The Contract Date is the day we invest your initial purchase
payment in the Sub-Accounts. It is the date from which we measure Contract
Anniversaries and Contract Years. The Contract Date may or may not be the same
as the Issue Date.
Contract Year--A Contract Year is each and every consecutive twelve-month
period beginning on the Contract Date and the anniversaries thereof.
Death Proceeds--The Death Proceeds is the amount of money that we will pay
your Beneficiary if the Insured dies while your Contract is in force.
Debt--Debt is the sum of all outstanding loans plus accrued interest under a
Contract.
Excess Withdrawal--An Excess Withdrawal is a withdrawal of Account Value
that exceeds the Free Withdrawal Amount.
Expiration Date--The Expiration Date is the last day in a Guarantee Period.
In the Contract, we refer to this as the "Expiry Date."
Fixed Account--The Fixed Account is The Sage Fixed Interest Account A. The
Fixed Account is a separate investment account of ours into which you may
invest purchase payments or transfer Account Value. In certain states, we
refer to the Fixed Account as the Interest Account or the Interest Separate
Account. We divide the Fixed Account into Fixed Sub-Accounts, and establish a
Fixed Sub- Account each time you allocate an amount to the Fixed Account.
Free Withdrawal Amount--A Free Withdrawal Amount is the maximum amount that
you can withdraw within a Contract Year without being subject to a surrender
charge.
Fund--A Fund is an investment portfolio in which a Variable Sub-Account
invests.
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General Account--The General Account consists of all our assets other than
those held in any separate investment accounts.
Insured--The Insured is the person you named in your application for the
Contract whose life your Contract covers.
Issue Age--The Issue Age is the Insured's age on the last birthday on or
before the Contract Date.
Issue Date--The Issue Date is the date we issue an individual Contract or a
certificate for a group Contract at our Customer Service Center.
Loan Account--The Loan Account is an account in our General Account,
established for any amounts transferred from the Sub-Accounts as a result of a
loan. The Loan Account credits a fixed rate of interest, the loan credited
rate, that is not based on the investment experience of the Variable Account
or the Guaranteed Interest Rates applicable to the Fixed Sub-Accounts of the
Fixed Account.
Market Value Adjustment--A Market Value Adjustment is a positive or negative
adjustment that may apply to a surrender, withdrawal, transfer, or loan from a
Fixed Sub-Account before the end of its Guarantee Period.
Monthly Processing Date--The Monthly Processing Date is the day of each
month that we deduct the Monthly Deduction Amount from the Account Value of
your Contract. See "What Are the Expenses Under A Contract?" Monthly
Processing Dates are the Contract Date and the same day of each month
thereafter. If there is no such date in a particular month, the Monthly
Processing Date will be the last day of that month. If a Monthly Processing
Date is not a Valuation Date, the Monthly Processing Date will be the next
Valuation Date. This means that if your Monthly Processing Date is the 31st,
and the current month is April, your Monthly Processing Date for April will be
April 30th. If April 30th is a Sunday (which is not a Valuation Date), your
Monthly Processing Date for that April will be May 1 (assuming May 1 is a
Valuation Date).
Net Asset Value--Net Asset Value is the price of one share of a Fund.
Owner--The person or persons who owns (or own) a Contract. Provisions
relating to action by the Owner mean, in the case of joint Owners, both Owners
acting jointly. In the context of a Contract issued on a group basis, Owners
refer to holders of certificates under the group Contract.
Satisfactory Notice--Satisfactory Notice is a notice or request you make or
authorize, in a form satisfactory to us, received at our Customer Service
Center.
Surrender Value--The Surrender Value is the amount we pay you upon surrender
of your Contract. It reflects the deduction of any applicable surrender
charge, any Market Value Adjustment, and any Debt.
Valuation Date--Valuation Date is the date at the end of a Valuation Period
when we value each Variable Sub-Account.
Valuation Period--A Valuation Period is the period between one calculation
of an Accumulation Unit value and the next calculation.
Variable Account--The Variable Account is The Sage Variable Life Account A.
It is a separate investment account of ours into which you may invest purchase
payments or transfer Account Value. We divide the Variable Account into
Variable Sub-Accounts, each of which invests in shares of a particular Fund.
"We", "us", "our", "Sage Life" or the "Company" is Sage Life Assurance of
America, Inc.
"You" or "Your" is the owner of a Contract.
This Prospectus has three sections:
. Summary of the Contracts;
. Part I--which gives more detailed information on the Summary topics; and
. Part II--which provides additional information.
Please read the entire Prospectus carefully.
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SUMMARY OF THE CONTRACTS
1. What Are The Contracts?
The Contracts are modified single payment combination fixed and variable
life insurance contracts offered by Sage Life Assurance of America, Inc. Your
Contract is a contract between you, the Owner, and us, Sage Life. Your
Contract may differ from the description below because of the requirements of
the state where we issued your Contract.
We designed the Contract to meet your estate planning or other insurance
needs, or to supplement your long-term retirement needs. Because life
insurance is not a short-term investment, you should evaluate your need for
life insurance coverage and the suitability of the Contract to meet your long-
term financial objectives before you purchase a Contract.
Under the Contract, you can accumulate Account Value on a tax-deferred basis
in our Variable Account and in our Fixed Account.
Investment Flexibility. You can invest among 33 subdivisions of our Variable
Account, known as "Variable Sub-Accounts," each corresponding to a different
Fund. These Funds, listed in Section 3, are professionally managed and use a
broad range of investment strategies (growth and income, aggressive growth,
etc.), styles (growth, value, etc.) and asset classes (stocks, bonds,
international, etc.). You can select a mix of Funds to meet your financial and
retirement needs and objectives, tolerance for risk, and view of the market.
Amounts you invest in these Funds will fluctuate daily based on underlying
investment performance. So, the value of your investment may increase or
decrease.
Through our Fixed Account, you can invest to receive guaranteed rates of
interest for periods of up to 5 years ("Guarantee Periods"). We also guarantee
your principal while it remains in our Fixed Account. However, if you decide
to surrender your Contract, or transfer or access amounts in the Fixed Account
before the end of a Guarantee Period you have chosen, we ordinarily will apply
a Market Value Adjustment. This adjustment reflects changes in prevailing
interest rates since your allocation to the Fixed Account. The Market Value
Adjustment may result in an increase or decrease in the amounts surrendered,
transferred, or accessed.
As your needs or financial goals change, your investment mix can change with
them. You may transfer funds among any of the investment choices in our Fixed
or Variable Accounts while continuing to defer current income taxes.
Safety of Separate Accounts. Significantly, both our Fixed and Variable
Accounts are separate investment accounts of Sage Life. This provides you with
an important feature: we cannot charge the assets supporting your allocations
to these Accounts with liabilities arising out of any other business we may
conduct.
Income Tax-Free Life Insurance Protection For Your Beneficiaries. The
Contract provides a life insurance benefit that can pass free of federal and
state income taxes to your beneficiaries. You can create and preserve a legacy
for loved ones, a favorite charity, or even your Alma Mater.
Access to Amounts Invested. The Contract provides access to your investment
should you need it. ("Access" means a surrender of the Contract, a withdrawal
of Account Value, and a borrowing of Account Value.) During the Insured's
lifetime your investment grows tax-free until withdrawn or borrowed. You
decide how much to take and when to take it.
Ordinarily, once you access earnings, they are taxed as income. If you
access earnings before you are 59 1/2 years old, you may have to pay an
additional 10% federal tax penalty. However, if you acquire a Contract by
making a tax-free exchange from an existing contract that provides tax-free
access through loans, the Contract also may provide tax-free access through
loans.
Amounts you access may be subject to a surrender charge, and a Market Value
Adjustment (positive or negative) may apply if you access the amount from the
Fixed Account before the end of the applicable Guarantee Period.
2. How Do I Purchase A Contract?
In most cases, you may purchase a Contract with $10,000 or more through an
authorized registered representative. You must complete an application, and
the proposed Insured must meet our underwriting
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requirements. We have designed a simplified underwriting program that could
make qualifying easier and let us issue a Contract faster than would otherwise
be possible. Your eligibility for this program will depend on the amount you
want to invest and the proposed Insured's age, sex, and health.
After the first Contract Anniversary, you may make additional payments of at
least $250, subject to certain conditions. We reserve the right to require
satisfactory evidence of insurability before we accept any additional payment
that increases the life insurance benefit by more than it increases your
Account Value.
Also, if the Surrender Value of your Contract is not sufficient to pay the
charges as they come due, you will have a grace period of 61 days to make a
sufficient additional payment to keep your Contract in force. We will send you
a notice at the start of the Grace Period.
We have included hypothetical illustrations in this Prospectus to show you
how the Contract works. We have based these illustrations on hypothetical
rates of return and we do not guarantee these rates. The rates are
illustrative only, and do not represent past or future investment performance.
Your actual Contract values and benefits will be different from those in the
illustrations.
3. What Are My Investment Options?
There are 38 investment options under the Contracts available through our
Variable and Fixed Accounts. These choices are professionally managed and
allow for a broad range of investment strategies, styles, and asset classes.
Additional options may be available in the future.
Through our Variable Account you can choose to have your money invested in
one or more of the Variable Sub-Accounts investing in the following 33 Funds:
AIM Variable Insurance Funds, Inc.
. AIM V.I. Government Securities Fund
. AIM V.I. Growth and Income Fund
. AIM V.I. International Equity Fund
. AIM V.I. Value Fund
The Alger American Fund
. Alger American MidCap Growth Portfolio
. Alger American Income and Growth Portfolio
. Alger American Small Capitalization Portfolio
Liberty Variable Investment Trust
. Colonial High Yield Securities Fund, Variable Series
. Colonial Small Cap Value Fund, Variable Series
. Colonial Strategic Income Fund, Variable Series
. Colonial U.S. Growth and Income Fund, Variable Series
. Liberty All-Star Equity Fund, Variable Series
. Newport Tiger Fund, Variable Series
. Stein Roe Global Utilities Fund, Variable Series
SteinRoe Variable Investment Trust
. Stein Roe Growth Stock Fund, Variable Series
. Stein Roe Balanced Fund, Variable Series
MFS(R) Variable Insurance TrustSM
. MFS Growth With Income Series
. MFS High Income Series
. MFS Research Series
. MFS Total Return Series
. MFS Capital Opportunities Series
The Universal Institutional Funds, Inc.
. The Global Equity Portfolio
. The Mid Cap Value Portfolio
. The Value Portfolio
Oppenheimer Variable Account Funds
. Oppenheimer Bond Fund/VA
. Oppenheimer Capital Appreciation Fund/VA
. Oppenheimer Small Cap Growth Fund/VA
Sage Life Investment Trust
. EAFE(R) Equity Index Fund
. S&P 500 Equity Index Fund
. Money Market Fund
T. Rowe Price Equity Series, Inc.
. T. Rowe Price Equity Income Portfolio
. T. Rowe Price Mid-Cap Growth Portfolio
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. T. Rowe Price Personal Strategy Balanced Portfolio
The prospectuses for the Trusts describe the Funds in detail. These Funds do
not provide any performance guarantees, and their values will increase or
decrease depending upon investment performance.
Through our Fixed Account, you can choose to invest your money in one or
more of 5 different Guarantee Periods. We guarantee your principal and
interest rate when your investment is left in the Guarantee Period until it
ends. You currently can choose periods of 1, 2, 3, 4, and 5 years. However, if
you transfer or access amounts before the end of a period you have chosen, we
ordinarily will apply a Market Value Adjustment. This Adjustment may be
positive or negative depending upon current interest rates.
4. What Are The Expenses Under A Contract?
The Contract has insurance and investment features. Each has related costs.
Below is a brief summary of the Contract's charges:
Annual Administration Charge--During the first seven Contract Years only, we
will deduct an annual $40 administration charge. However, there is no charge
if, at the time of deduction, your Account Value is at least $50,000.
Asset-Based Charges--Each month, we deduct Asset-Based Charges for mortality
and expense risks, certain administrative and distribution costs, and certain
state and Federal tax expenses from your Account Value. The maximum charges
equal, on an annual basis, 1.80% of your Account Value, decreasing to 1.30%
after the tenth Contract Year.
Cost of Insurance Charges--Each month, we deduct from the amounts you
allocate to the Variable and Fixed Accounts a charge for providing the life
insurance protection. This charge will never reflect rates greater than those
shown in your Contract.
Surrender Charge--During the first seven Contract Years only, we ordinarily
will deduct a surrender charge when you surrender your Contract or withdraw
amounts in excess of the Free Withdrawal Amount (see Part I). The maximum
applicable percentage is 9% in the first Contract Year. It declines to 0%
after the seventh Contract Year. We calculate the surrender charge as a
percentage(s) of the purchase payment(s) you surrender or withdraw.
Fund Fees and Expenses--There are also Fund fees and expenses that are based
on the average daily value of the Funds. Currently, Fund fees and expenses
together range on an annual basis from 0.55% to 1.34%, depending upon the
Fund. A table of the Fund fees and expenses appears below.
Sage Life's business philosophy is to reward our long-term customers. So,
. After the seventh Contract Year we eliminate Surrender Charges.
. After the seventh Contract Year we eliminate the Annual Administration
Charge.
. And after the tenth Contract Year, we reduce the Asset-Based Charges.
This means more of your investment is working for you over the long-term.
Fund Annual Expenses (as a percentage of average daily net assets of a Fund)
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<CAPTION>
Total Expenses Total Expenses
Management Other (after fee (before fee
Fees (after Expenses (after waivers and waivers and
fee waiver, reimbursement, reimbursements reimbursements
Fund as applicable) as applicable) as applicable) as applicable)
---- -------------- --------------- -------------- --------------
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AIM Variable Insurance
Funds:
AIM V.I. Government
Securities Fund...... 0.50% 0.40% 0.90% N/A
AIM V.I. Growth and
Income Fund.......... 0.61 0.16 0.77 N/A
AIM V.I. International
Equity Fund.......... 0.75 0.22 0.97 N/A
AIM V.I. Value Fund... 0.61 0.15 0.76 N/A
The Alger American Fund:
Alger American MidCap
Growth Portfolio..... 0.80 0.05 0.85 N/A
</TABLE>
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<TABLE>
<CAPTION>
Total Expenses Total Expenses
Management Other (after fee (before fee
Fees (after Expenses (after waivers and waivers and
fee waiver, reimbursement, reimbursements reimbursements
Fund as applicable) as applicable) as applicable) as applicable)
---- -------------- --------------- -------------- --------------
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The Alger American Fund
(continued):
Alger American Income
and Growth
Portfolio............ 0.625% 0.075% 0.70% N/A
Alger American Small
Capitalization
Portfolio............ 0.85 0.05 0.90 N/A
Liberty Variable
Investment Trust:
Colonial High Yield
Securities Fund,
Variable Series...... 0.60(/1/) 0.20(/1/) 0.80(/1/) 1.88%
Colonial Small Cap
Value Fund, Variable
Series............... 0.80(/1/) 0.20(/1/) 1.00(/1/) 4.46
Colonial Strategic
Income Fund, Variable
Series............... 0.65 0.10 0.75 N/A
Colonial U.S. Growth
and Income Fund,
Variable Series...... 0.80 0.08 0.88 N/A
Liberty All-Star
Equity Fund, Variable
Series............... 0.80 0.15 0.95 N/A
Newport Tiger Fund,
Variable Series...... 0.90 0.31 1.21 N/A
Stein Roe Global
Utilities Fund,
Variable Series...... 0.65 0.12 0.77 N/A
SteinRoe Variable
Investment Trust:
Stein Roe Growth Stock
Fund, Variable
Series............... 0.50 0.17 0.67 N/A
Stein Roe Balanced
Fund, Variable
Series............... 0.45 0.17 0.62 N/A
MFS(R) Variable
Insurance Trustsm:
MFS Growth with Income
Series............... 0.75 0.13(/2/) 0.88(/2/) N/A
MFS High Income
Series............... 0.75(/2/) 0.16(/2/) 0.91(/2/) 0.97
MFS Research Series... 0.75 0.11(/2/) 0.86(/2/) N/A
MFS Total Return
Series............... 0.75 0.15(/2/) 0.90(/2/) N/A
MFS Capital
Opportunities
Series............... 0.75(/2/) 0.16(/2/) 0.91(/2/) 1.02
The Universal
Institutional Funds,
Inc.:
The Global Equity
Portfolio............ 0.47(/3/) 0.68(/3/) 1.15(/3/) 1.48
The Mid Cap Value
Portfolio............ 0.43(/3/) 0.62(/3/) 1.05(/3/) 1.37
The Value Portfolio... 0.18(/3/) 0.67(/3/) 0.85(/3/) 1.22
Oppenheimer Variable
Funds:
Oppenheimer Bond
Fund/VA.............. 0.72 0.01 0.73 N/A
Oppenheimer Capital
Appreciation
Fund/VA.............. 0.68 0.02 0.70 N/A
Oppenheimer Small Cap
Growth Fund/VA....... 0.75 0.59 1.34 N/A
Sage Life Investment
Trust:
EAFE(R) Equity Index
Fund*................ 0.73(/4/) 0.17(/4/) 0.90(/4/) 1.07
S&P 500 Equity Index
Fund**............... 0.38(/4/) 0.17(/4/) 0.55(/4/) 0.72
Money Market Fund..... 0.48(/4/) 0.17(/4/) 0.65(/4/) 0.82
T. Rowe Price Equity
Series, Inc.:
T. Rowe Price Equity
Income Portfolio..... 0.85(/5/) 0.00 0.85 N/A
T. Rowe Price Mid-Cap
Growth Portfolio..... 0.85(/5/) 0.00 0.85 N/A
T. Rowe Price Personal
Strategy Balanced
Portfolio............ 0.90(/5/) 0.00 0.90 N/A
</TABLE>
(footnotes on following page)
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- --------
(1) Without fee waivers and expense reimbursements, the management fees, the
other expenses, and total expenses for each of the following Liberty
Variable Investment Trust Funds during 1999 would have been: Colonial High
Yield Securities Fund, Variable Series 0.60%, 1.28%, 1.88%; and Colonial
Small Cap Value Fund, Variable Series 0.80%, 3.66% and 4.46%.
(2) Without fee waivers and expense reimbursements, the management fees, the
other expenses, and total expenses for each of the following MFS Variable
Insurance Trust Funds during 1999 would have been: MFS Capital Opportunity
Series 0.75%, 0.27% and 1.02%; and MFS High Income Series 0.75%, 0.22%,
and 0.97%. In addition, each Fund has an expense offset arrangement with
reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. Each Fund
may enter into such arrangements and directed brokerage arrangements,
which would also have the effect of reducing Fund expenses. "Other
Expenses" do not take into account these expense reductions, and are
therefore higher than the actual expenses of the Fund. Had these fee
reductions been taken into account, "Total Expenses (after fee waivers and
reimbursements, as applicable)" would be lower and would equal: MFS Growth
with Income Series--0.87%; MFS High Income Series--0.90%; MFS Research
Series--0.85%; MFS Total Return Series--0.89%; and MFS Capital
Opportunities Series--0.90%.
(3) Without fee waivers and expense reimbursements, the management fees, the
other expenses, and total expenses for each of the following The Universal
Institutional Funds, Inc. Funds during 1999 would have been: Global Equity
Portfolio 0.80%, 0.68%, and 1.48%; Mid Cap Value Portfolio 0.75%, 0.62%,
and 1.37%; and Value Portfolio 0.55%, 0.67%, and 1.22%
(4) Without fee waivers and expense reimbursements, total expenses for each of
the Sage Life Investment Trust Funds during 1999 would have been: EAFE(R)
Equity Index Fund 1.07%; S&P 500 Equity Index Fund 0.72%; and Money Market
Fund 0.82%. In addition, a Rule 12b-1 Plan (the "Plan") has been adopted
by each Fund, pursuant to which up to 0.25% may be deducted from Fund
assets. No Plan payments were made during 1999, and no payments will be
made under the plan prior to May 1, 2001.
(5) For each of the portfolios in the T. Rowe Price Equity Series, management
fees include operating expenses.
* The EAFE(R) Index is the exclusive property of Morgan Stanley Capital
International ("MSCI"). This Fund is not sponsored, endorsed, sold or
promoted by MSCI or any affiliate of MSCI.
** S&P 500(R) is a trademark of the McGraw-Hill Companies, Inc. and has been
licensed for use by Sage Advisors, Inc. The S&P 500 Equity Index Fund is
not sponsored, endorsed, sold or promoted by Standard & Poor's, and
Standard & Poor's makes no representation regarding the advisability of
investing in the Fund.
5. How Will My Contract Be Taxed?
Under current federal tax law, life insurance contracts receive tax-favored
treatment. The death benefit is fully excludable from the Beneficiary's gross
income for federal income tax purposes. You are not taxed on any increase in
the Account Value while a life insurance contract remains in force. In most
cases, your Contract will be a Modified Endowment Contract ("MEC"). If your
Contract is a MEC, certain distributions made during the Insured's lifetime,
such as loans and withdrawals from, and collateral assignments of, the
Contract are includable in gross income on an income-first basis. A 10%
Federal tax penalty ordinarily will be imposed on income distributed before
you attain age 59 1/2. Contracts that are not Modified Endowment Contracts
("non-MECs") receive preferential tax treatment with respect to certain
distributions. See Part I "How Will My Contract Be Taxed?"
We do not give tax advice, nor is any registered representative authorized
to give tax advice on our behalf. We recommend that you consult your tax
adviser about your particular tax situation.
6. How Do I Access My Money?
If you need to take money out of your Contract, you can choose among several
different options. You can tailor your withdrawals to meet your liquidity
needs.
. You can withdraw some of your money.
. You can surrender the Contract and take the entire proceeds as a single
lump sum payment or apply the proceeds to one of the Settlement Options
we offer.
. You can withdraw money using our systematic partial withdrawal program.
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. If your Contract is a non-MEC, you have tax-free access though loans.
. If your Contract is a MEC, you may take taxable loans that may be subject
to a 10% Federal tax penalty.
Keep in mind that amounts you surrender or withdraw may be subject to a
surrender charge if taken during the first seven Contract Years. However,
during that period the Contract does provide a Free Withdrawal Amount (not
subject to a surrender charge) each year equal to your cumulative earnings, or
if greater, 10% of total purchase payments you have invested.
In addition, if you access amounts from the Fixed Account, we ordinarily
will apply a Market Value Adjustment. If you are younger than 59 1/2 when you
take money out, you may owe a 10% federal tax penalty, as well as the income
tax that ordinarily would apply. Please remember that withdrawals will reduce
your death benefit.
7. How Is Contract Performance Presented?
Articles about the Variable Account's investment performance, rankings, or
other characteristics may appear in publications. Publications may use
articles and releases developed by us, the Funds and other parties about the
Variable Account or the Funds.
Please remember that performance data represents past performance. Amounts
you invest in the Variable Sub-Accounts will fluctuate daily based on
underlying Fund investment performance, so the value of your investment may
increase or decrease.
8. What Is The Death Benefit Under My Contract?
The Contract provides for a payment to your designated Beneficiary if the
Insured dies while the Contract is in force. This payment is called the "Death
Proceeds" and is equal to the following:
. the death benefit described below; plus
. any additional insurance on the Insured's life that may be provided by
riders to the Contract; minus
. any Debt from Contract loans; minus
. any due and unpaid charges; and minus
. any amounts previously paid under the Accelerated Death Benefit Rider
plus accrued interest.
Your death benefit at issue equals your initial Insurance Amount. On any
Business Day after that it equals the greater of:
. the Insurance Amount; and
. the Minimum Death Benefit
The initial Insurance Amount depends on the amount of your initial purchase
payment, and the age and sex of the proposed Insured. We show your initial
Insurance Amount in your Contract. Your Insurance Amount remains level unless
you make additional purchase payments or withdrawals.
The Minimum Death Benefit equals the Account Value plus any positive Market
Value Adjustment as of that Business Day, multiplied by a percentage that
varies with the attained age of the Insured. We show these percentages in your
Contract.
Your Beneficiaries decide how they wish to receive the Death Proceeds. They
can elect payment in a single sum, or apply proceeds under one of the
Settlement Options we offer.
9. What Supplemental Benefits Are Available Under My Contract?
Accelerated Death Benefit Rider: This rider is automatically included in
your Contract at no additional cost. It allows you to take an advance payment
against the Death Proceeds under your Contract if the Insured is diagnosed as
having a terminal illness. You can request up to 50% of the Insurance Amount,
to a maximum of $500,000.
Accidental Death Benefit Rider: The Contract also provides an accidental
death benefit at no additional cost. If the Insured dies as a direct result of
an accident before reaching age 81, we will pay an additional death benefit to
the Beneficiary of your choice. This additional benefit equals 100% of the sum
of all purchase payments you have invested in your Contract, less any
withdrawals you have made (including any associated surrender charge and
Market Value Adjustment incurred), up to a maximum of $250,000.
Waiver of Surrender Charge Rider: We will include this rider automatically
in your Contract at no
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additional cost. It permits you to withdraw money from your Contract without a
surrender charge if you need it while you are confined to a nursing care
facility or hospital. Certain restrictions apply.
10. What Are My Settlement Options?
You can apply proceeds under your Contract to purchase a stream of regular
income payments under one of the Settlement Options shown below (or under any
other option acceptable to us). Our descriptions assume that you apply the
Surrender Value and receive the income payments from one of the options below.
Of course, you always can designate someone other than yourself to receive the
income payments, and we pay income payments from any Death Proceeds to your
Beneficiary.
Option 1--Payments for Life: You will receive payments for your life.
Option 2--Life Annuity with 10 or 20 Years Certain: You will receive
payments for your life. However, if you die before the end of the
guaranteed certain period you select (10 or 20 years), your Beneficiary
will receive the payments for the remainder of that period.
Option 3--Joint and Last Survivor Life Annuity: We will make payments as
long as either you or a second person you select (such as your spouse) is
alive.
Option 4--Payments for a Specified Period Certain: You will receive
payments for the number of years you select, which may be from 5-30 years.
However, if you die before the end of that period, your Beneficiary will
receive the payments for the remainder of the guaranteed certain period.
You or your Beneficiary, as the case may be, tell us how much to apply to
fixed income payments and to variable income payments. With variable income
payments, you currently have all of the investment choices you had before
income payments began. However, we currently limit transfers among your
investment choices. Once income payments begin, you may surrender your
Contract only if you choose variable income payments under Option 4.
We will allocate the amount you apply to provide fixed income payments to
the Fixed Account and invest it in the Guarantee Periods you select. We
guarantee the amount of each fixed income payment. The amount of each fixed
income payment will remain level throughout the period you select.
We will allocate the amount you apply to provide variable income payments to
the Variable Account and invest it in the Funds you select. The amount of each
income payment will vary according to the investment performance of those
Funds.
11. What Other Information Should I Know?
The Contract has several additional features available to you at no
additional charge:
Free Look Right: You have the right to return your Contract to us at our
Customer Service Center or to the registered representative who sold it to
you, and have us cancel the Contract within a certain number of days
(usually 10 days from the date you receive the Contract, but some states
require different periods).
If you exercise this right, we will cancel your Contract as of the
Business Day we receive it. We will send you a refund equal to your Account
Value plus any Asset-Based Charges and cost of insurance charges we have
deducted on or before the date we received the returned Contract. If
required by the law of your state, we will refund your initial purchase
payment (less any withdrawals previously taken). In the states where we are
required to return purchase payment less withdrawals, if you allocated
amounts to the Variable Account, we will temporarily allocate those amounts
to the Money Market Sub-Account until we deem the Free Look Period to end.
Dollar-Cost Averaging Program: Under our optional Dollar-Cost Averaging
Program, you may transfer a set dollar amount systematically from the Money
Market Sub-Account and/or from specially designated Fixed Sub-Accounts to
any other Variable Sub-Account, subject to certain limitations. By
investing the same amount on a regular basis, you don't have to worry about
timing the market. Since you invest the same amount each period, you
automatically acquire more units when market values fall and fewer units
when they rise. The potential benefit is to lower your average cost per
unit. This strategy does not guarantee that any Fund will gain in value. It
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also will not protect against a decline in value if market prices fall.
However, if you can continue to invest regularly throughout changing market
conditions, this program can be an effective way to help meet your long-
term goals. Due to the effect of interest that continues to be paid on the
amount remaining in the Money Market Sub- Account or the specially
designated Fixed Sub-Account, the amounts that we transfer will vary
slightly from month to month.
Asset Allocation Program: An optional Asset Allocation Program is
available if you do not wish to make your own particular investment
decisions. This investment planning tool is designed to find an asset mix
that attempts to achieve the highest expected return based upon your
tolerance for risk, and consistent with your needs and objectives. Bear in
mind that the use of an asset-allocation model does not guarantee
investment results.
Automatic Portfolio Rebalancing Program: Our optional Automatic Portfolio
Rebalancing Program can help prevent a well-conceived investment strategy
from becoming diluted over time. Investment performance will likely cause
the allocation percentages you originally selected to shift. With this
program, you can instruct us to automatically rebalance your Contract to
your original percentages on a calendar quarterly, semi-annual, or annual
basis. Money invested in the Fixed Account is not part of this program.
No Probate: If the Insured dies, we will pay the Death Proceeds to your
heirs or designated beneficiary. Generally, the Death Proceeds will be
received without going through probate.
12. How Can I Make Inquiries?
If you need further information about the Contracts, please write or call us
at our Customer Service Center (877) TEL-SAGE (835-7243), or contact an
authorized registered representative. The address of our Customer Service
Center office is P.O. Box 290680, Wethersfield, CT 06129-0680.
PART I
DESCRIPTION OF THE CONTRACTS
1. What Are The Contracts?
The Contracts are modified single payment combination fixed and variable
life insurance Contracts offered by us, Sage Life Assurance of America, Inc.
We designed the Contracts for your estate planning or other insurance needs,
or to supplement your long-term retirement savings. They provide many benefits
including:
. investing amounts on a tax-deferred basis in our Variable Account and our
Fixed Account;
. access to your investment should you need it (however, a surrender charge
and Market Value Adjustment may apply); and
. life insurance that can pass free of federal and state income taxes to
your heirs.
However, life insurance is not a short-term investment. You should evaluate
your need for life insurance coverage and the Contract's long-term investment
potential and risks before you purchase a Contract.
Under the terms of the Contract, we promise to pay the Death Proceeds to
your designated Beneficiary upon receipt of proof that the Insured died while
your Contract is in force. You purchase the Contract with an initial purchase
payment. While your Contract is in force and the Insured is alive, you may
make additional payments under the Contract (subject to certain conditions)
and will ordinarily not be taxed on increases in the value of your Contract as
long as you do not take distributions. See "How Will My Contract Be Taxed?"
The Contracts may not be available in all states or in all markets. Your
Contract may differ from the description here because of the requirements of
the State where we issued your Contract.
When you make purchase payments, you can allocate those purchase payments to
one or more of the 33 subdivisions of the Variable Account, known as "Variable
Sub-Accounts." We will invest purchase payments you allocate to a Variable
Sub-Account solely in its corresponding Fund. Your Account Value in a Variable
Sub-Account will vary
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according to the investment performance of that Fund. Depending on market
conditions, your value in each Variable Sub-Account could increase or
decrease. We do not guarantee a minimum value. You bear the risk of investing
in the Variable Account. We call the total of the values in the Variable Sub-
Accounts the "Variable Account Value."
You can also allocate purchase payments to our Fixed Account. See "Fixed
Account Investment Option." The Fixed Account includes "Fixed Sub-Accounts" to
which we credit fixed rates of interest for the Guarantee Periods you select.
We call the total of the values in the Fixed Sub-Accounts, the "Fixed Account
Value." We currently offer Guarantee Periods with durations of 1, 2, 3, 4, and
5 years. If any amount allocated or transferred remains in a Guarantee Period
until the Expiration Date, its value will equal the amount originally
allocated or transferred, multiplied on an annually compounded basis, by its
guaranteed interest rate. We will ordinarily apply a Market Value Adjustment
to any surrender, withdrawal, transfer, or amount borrowed from a Fixed Sub-
Account before its Expiration Date. The Market Value Adjustment may increase
or decrease the value of the Fixed Sub-Account (or portion thereof) being
surrendered, withdrawn, transferred, or borrowed. See "What Are My Investment
Options?"
You can transfer Account Value from one Variable Sub-Account to another, and
from a Fixed Sub-Account to a Variable Sub-Account and from a Variable Sub-
Account to a Fixed Sub-Account, subject to certain conditions. See "What Are
My Investment Options?"
We may offer other variable life insurance contracts that also invest in the
same Funds offered under the Contracts. These contracts may have different
charges and they may offer different benefits.
2. How Do I Purchase A Contract?
Initial Purchase Payment. You must make the initial purchase payment to put
a Contract in force. The minimum initial purchase payment is $10,000. We will
not issue a Contract if the proposed Insured is over age 90.
Issuance of a Contract. Once we receive your initial purchase payment and
your application at our Customer Service Center, we will process your
application to see if the proposed Insured meets our underwriting and other
criteria. Under our current underwriting rules, which are subject to change, a
proposed Insured age 80 and under may be eligible for our simplified
underwriting program. This program does not involve a medical examination, and
may enable us to issue a Contract much faster than we otherwise could. To
qualify, an Insured's application responses must meet our simplified
underwriting standards. The maximum initial purchase payment we currently
accept on a simplified underwriting basis varies with the issue age and gender
of the Insured, but, the difference between the initial Insurance Amount and
the initial purchase payment may never exceed $100,000.
We will apply customary underwriting standards to all other Insureds. Our
current underwriting rules are subject to change.
We reserve the right to reject an application for any lawful reason. If we
do not issue a Contract, we will return to you any purchase payment you
submitted with the application. If we issue a Contract, your Issue Date will
be the date we issue your Contract at our Customer Service Center.
Free Look Right to Cancel Contract. During your "Free Look" Period, you may
cancel your Contract. The Free Look Period usually ends 10 days after you
receive your Contract. Some states may require a longer period. If you decide
to cancel your Contract, you must return it to our Customer Service Center or
to one of our authorized registered representatives. We will send you a refund
of your Account Value plus any Asset-Based Charges and cost of insurance
charges we have deducted on or before the date we receive your returned
Contract at our Customer Service Center. If required by the law of your state,
we will refund your initial purchase payment (less any withdrawals previously
taken). In those latter states where this requirement exists, we will
temporarily invest amounts you allocate to the Variable Account to the Money
Market Sub-Account until the time we deem the Free Look Period to end. See
"What Are My Investment Options?"
Making Additional Purchase Payments. You may make additional payments at any
time after the
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first Contract Anniversary, while your Contract is in force and the Insured is
alive, subject to the following conditions:
. Each additional purchase payment must be at least $250.
. You may make only one purchase payment in any Contract Year.
. The Attained Age of the Insured must be less than 81.
. We must approve in advance any payment that would cause the Account Value
of all single payment or modified single payment contracts that you
maintain with us to exceed $1,000,000.
While the Insured is alive, you also may make any additional payment
necessary to keep your Contract in force.
When we accept an additional payment, that payment increases your Account
Value and may increase your death benefit. We reserve the right to require
satisfactory evidence of insurability before accepting any additional payment
that increases your Death Benefit by more than it increases your Account
Value. This is because our risk increases under these circumstances.
All additional payments are payable at our Customer Service Center. We will
credit any payment we receive after the Contract Date to the Contract as of
the Business Day on which our Customer Service Center receives it unless the
payment represents an increase in the Insurance Amount. See "What Is the Death
Benefit Under My Contract?" We will deem purchase payments we receive on other
than a Business Day as received on the next following Business Day.
Unless you tell us otherwise, we will first consider all payments we receive
while a loan is outstanding as a payment of any loan interest, next as a loan
repayment, and last as an additional purchase payment.
Grace Period. If your Surrender Value on a Monthly Processing Date is not
sufficient to cover the Monthly Deduction Amount, we will allow you a Grace
Period of 61 days for you to pay an amount sufficient to cover the Monthly
Deduction Amount due. See "What Are The Expenses Under A Contract?" We will
send you a notice at the start of the Grace Period at your last known address.
The Grace Period will end 61 days after we mail you the notice.
If you do not make the necessary payment by the end of the Grace Period,
your Contract will terminate without value. Subject to the terms and
conditions of your Contract, if the Insured dies during the Grace Period, we
will pay the Death Proceeds.
Reinstatement. If the Grace Period has ended and you have not paid the
necessary payment and have not surrendered your Contract for its Surrender
Value, you may be able to reinstate your Contract. To do so:
. submit a written request to us for reinstatement within 3 years after the
end of the Grace Period;
. provide us with satisfactory evidence of insurability;
. pay an additional purchase payment equal to the minimum initial purchase
payment for which we would then issue a Contract based upon the Insured's
Attained Age, sex, and health; and
. repay or reinstate any Debt against the Contract that existed at the end
of the Grace Period.
The effective date of a reinstated Contract will be the Monthly Processing
Date on or next following the date we approve your application for
reinstatement and receive the necessary purchase payment.
If we reinstate your Contract, the Account Value on the date of
reinstatement will be the amount provided by the purchase payment that you
paid to reinstate the Contract. Certain charges under the Contract vary
depending on how long the Contract has been in force. We will calculate these
charges based on the length of time from the Contract Date until the date of
reinstatement. Unless you have told us otherwise, we will calculate your
Account Value based on your allocation instructions in effect at the start of
the Grace Period.
Specialized Uses of the Contract. The Contract offers potential benefits
such as providing:
. a means for investing on a tax-deferred basis;
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. access to your investment if you need it; and
. life insurance that can pass free of federal and state income taxes to
your Beneficiaries under the Contract.
However, purchasing the Contract partly or wholly for such purposes entails
certain risks. For example, poor investment performance in Variable Sub-
Accounts in which you may invest may cause the need for an additional payment
in order to keep the Contract in force (this may be particularly true if there
is outstanding Debt). Such poor investment performance may cause the Account
Value or Surrender Value to be insufficient to fund the purpose for which you
purchased the Contract. Withdrawals and loans may significantly affect current
and future Account Value, Surrender Value, or Death Proceeds. Before
purchasing a Contract, you should consider whether the long-term nature of the
Contract is consistent with the purpose for which it is being considered.
Using a Contract for a specialized purpose may also have tax consequences. See
"How Will My Contract Be Taxed?"
Illustrations. We have included hypothetical illustrations in this
Prospectus to show you how the Contract works. We have based these
illustrations on hypothetical rates of return and we do not guarantee these
rates. The rates are an illustration only, and do not represent past or future
investment performance. Your actual Contract values will be different from
those in the illustrations.
3. What Are My Investment Options?
Purchase Payment Allocations. When you apply for a Contract, you specify the
percentage of your purchase payment to be allocated to each Variable Sub-
Account and/or to each Fixed Sub-Account. You can change the allocation
percentages at any time by sending Satisfactory Notice to our Customer Service
Center. The change will apply to all purchase payments we receive on or after
the date we receive your request. Purchase payment allocations must be in
percentages totaling 100%, and each allocation percentage must be a whole
number. We currently require that each purchase payment allocation be at least
$250.
We may, however, require that an initial purchase payment allocated to a
Variable Sub-Account be temporarily invested in the Money Market Sub-Account
during the Free Look Period. We will require this if the law of your state
requires us to refund your full initial purchase payment less any withdrawals
previously taken, should you cancel your Contract during the Free Look Period.
At the end of the Free Look Period, if we temporarily allocated your initial
purchase payment to the Money Market Sub-Account, we will transfer the value
of what is in the Money Market Sub-Account to the Variable Sub-Account(s) you
specified in your application. Solely for the purpose of processing this
transfer from the Money Market Sub-Account, we will deem the Free Look Period
to end 15 days after the Contract Date. This transfer from the Money Market
Sub-Account to the Variable Sub-Accounts upon the expiration of the Free Look
Period does not count as a transfer for any other purposes under your
Contract.
Variable Sub-Account Investment Options. The Variable Account has 33 Sub-
Accounts, each investing in a specific Fund. Each of the Funds is either an
open-end diversified management investment company or a separate investment
portfolio of such a company, and is managed by a registered investment
adviser. The Funds, as well as brief descriptions of their investment
objectives, are provided below. There is no assurance that these objectives
will be met. Not every Fund may be available in every state or in every
market.
AIM VARIABLE INSURANCE FUNDS
AIM V.I. Government Securities Fund. This Fund seeks to achieve a high level
of current income consistent with reasonable concern for safety of principal
by investing in debt securities issued, guaranteed or otherwise backed by the
United States Government.
AIM V.I. Growth and Income Fund. This Fund's primary objective is growth of
capital with a secondary objective of current income.
AIM V.I. International Equity Fund. This Fund seeks to provide long-term
growth of capital by
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investing in a diversified portfolio of international equity securities whose
issuers are considered to have strong earnings momentum.
AIM V.I. Value Fund. This Fund seeks to achieve long-term growth of capital
by investing primarily in equity securities judged by the Fund's investment
adviser to be undervalued relative to the investment adviser's appraisal of
the current or projected earnings of the companies issuing the securities, or
relative to current market values of assets owned by the companies issuing the
securities or relative to the equity market generally. Income is a secondary
objective.
AIM Advisers, Inc. advises the AIM Variable Insurance Funds.
THE ALGER AMERICAN FUND
Alger American Midcap Growth Portfolio. This Fund seeks long-term capital
appreciation. It focuses on midsize companies with promising growth potential.
Under normal circumstances, the portfolio invests primarily in the equity
securities of companies having a market capitalization within the range of
companies in the S&P MidCap 400 Index.
Alger American Income and Growth Portfolio. This Fund primarily seeks to
provide a high level of dividend income; its secondary goal is to provide
capital appreciation. The Portfolio invests in dividend paying equity
securities, such as common or preferred stocks, preferably those which the
Manager believes also offer opportunities for capital appreciation.
Alger American Small Capitalization Portfolio. This Fund seeks long-term
appreciation. It focuses on small, fast-growing companies that offer
innovative products, services or technologies to a rapidly expanding
marketplace. Under normal circumstances, the portfolio invests primarily in
the equity securities of small capitalization companies. A small
capitalization company is one that has a market capitalization within the
range of the Russell 2000 Growth Index or the S&P SmallCap 600 Index.
Fred Alger Management, Inc. advises The Alger American Fund.
LIBERTY VARIABLE INVESTMENT TRUST
Colonial High Yield Securities Fund, Variable Series. This Fund seeks
current income and total return by investing primarily in lower rated
corporate debt securities (commonly referred to as "junk bonds").
Colonial Small Cap Value Fund, Variable Series. This Fund seeks long-term
growth by investing primarily in smaller capitalization equity securities.
Colonial Strategic Income Fund, Variable Series. This Fund seeks a high
level of current income, as is consistent with prudent risk and maximizing
total return, by diversifying investments primarily in U.S. and foreign
government and lower rated corporate debt securities.
Colonial U.S. Growth and Income Fund, Variable Series. This Fund seeks long-
term growth and income by investing primarily in large capitalization equity
securities. Up to 10% of its assets may be invested in debt securities.
Liberty All-Star Equity Fund, Variable Series. This Fund seeks total
investment return, comprised of long-term capital appreciation and current
income, through investment primarily in a diversified portfolio of equity
securities.
Newport Tiger Fund, Variable Series. This Fund seeks long-term capital
growth by investing primarily in equity securities of companies located in the
nine Tigers of Asia (Hong Kong, Singapore, South Korea, Taiwan, Malaysia,
Thailand, Indonesia, The People's Republic of China and the Philippines).
Stein Roe Global Utilities Fund, Variable Series. This Fund seeks current
income and long-term growth of capital by investing primarily in U.S. and
foreign securities of utility companies.
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Liberty Advisory Services Corp. provides investment management and advisory
services to the Liberty Variable Investment Trust. Colonial Management
Associates, Inc. sub-advises the High Yield Securities Fund, the U.S. Growth
and Income Fund, the Small Cap Value Fund, and the Strategic Income Fund.
Stein Roe & Farnham Incorporated sub-advises the Global Utility Fund. Newport
Fund Management, Inc. sub-advises the Tiger Fund. Liberty Asset Management
Company sub-advises the All-Star Fund.
STEINROE VARIABLE INVESTMENT TRUST
Stein Roe Growth Stock Fund. This Fund seeks long-term growth of capital
through investment primarily in common stocks.
Stein Roe Balanced Fund. This Fund seeks high total investment return
through a changing mix of equities, debt securities, and cash.
Stein Roe & Farnham Incorporated advises the SteinRoe Variable Investment
Trust.
MFS(R) VARIABLE INSURANCE TRUSTSM
MFS Growth with Income Series. This Fund seeks long-term growth of capital
and income. The Fund invests, under normal market conditions, at least 65% of
its total assets in common stock and related securities, such as preferred
stocks, convertible securities and depositary receipts for those securities.
These securities may be listed on a securities exchange or traded in the over-
the-counter markets. While the Fund may invest in companies of any size, the
Fund generally focuses on companies with larger market capitalizations that
the Fund's adviser believes have sustainable growth prospects and attractive
valuations based on current and expected earnings or cash flow.
MFS High Income Series. This Fund seeks high current income by investing
primarily in a professionally managed diversified portfolio of fixed income
securities, some of which may involve equity features. The Fund invests, under
normal market conditions, at least 80% of its total assets in high yield fixed
income securities. Fixed income securities offering the high current income
sought by the series generally are lower rated bonds (junk bonds).
MFS Research Series. This Fund seeks to provide long-term growth of capital
and future income. The Fund invests, under normal market conditions, at least
80% of its total assets in common stocks and related securities, such as
preferred stocks, convertible securities and depositary receipts. The Fund
focuses on companies that the Fund's adviser believes have favorable prospects
for long-term growth, attractive valuations based on current and expected
earnings or cash flow, dominant or growing market share and superior
management.
MFS Total Return Series. This Fund primarily seeks to obtain above-average
income (compared to a portfolio entirely invested in equity securities)
consistent with prudent employment of capital; its secondary objective is to
take advantage of opportunities for growth of capital and income since many
securities offering a better than average yield may also possess growth
potential. The Fund is a "balanced fund," and invests in a combination of
equity and fixed income securities. Under normal market conditions, the Fund
invests (i) at least 40%, but not more than 75%, of its net assets in common
stocks and related securities (referred to as equity securities), such as
preferred stocks, bonds, warrants or rights convertible into stock, and
depositary receipts for those securities; and (ii) at least 25% of its net
assets in non-convertible fixed income securities.
MFS Capital Opportunities Series. This Fund seeks capital appreciation. The
Fund invests, under normal market conditions, at least 65% of its total assets
in common stocks and related securities, such as preferred stocks, convertible
securities and depositary receipts for those securities. The Fund
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focuses on companies which the Fund's adviser believes have favorable growth
prospects and attractive valuations based on current and expected earnings or
cash flow.
MFS Investment Management(R) advises the MFS(R) Variable Insurance Trust.
THE UNIVERSAL INSTITUTIONAL FUNDS, INC.
The Global Equity Portfolio. This Fund seeks long-term capital appreciation
by investing primarily in equity securities of issuers throughout the world,
including U.S. issuers, using an approach that is oriented to the selection of
individual stocks that the Fund's investment adviser believes are undervalued.
The Mid Cap Value Portfolio. This Fund seeks above-average total return over
a market cycle of three to five years by investing primarily in common stocks
of companies with equity capitalizations in the range of companies included in
the S&P MidCap 400 Index (currently $500 million to $6 billion).
The Value Portfolio. This Fund seeks above-average return over a market
cycle of three to five years by investing primarily in a portfolio of common
stocks and other equity securities of companies with equity capitalization
greater than $2.5 billion that are deemed by the Fund's investment adviser to
be relatively undervalued based on the market as a whole, as measured by the
S&P 500 Index.
Morgan Stanley Dean Witter Investment Management, Inc. advises The Global
Equity Portfolio. Miller Anderson & Sherrerd, LLP advises The Value Portfolio
and The Mid Cap Value Portfolio.
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Oppenheimer Bond Fund/VA. This Fund seeks a high level of current income.
Secondarily, this Fund seeks capital growth when consistent with its primary
objective. The Fund will, under normal market conditions, invest at least 65%
of its total assets in investment grade debt securities.
Oppenheimer Capital Appreciation Fund/VA. This Fund seeks to achieve capital
appreciation by investing in securities of well-known, established companies.
Oppenheimer Small Cap Growth Fund/VA. This Fund seeks capital appreciation.
Current income is not an objective. In seeking its investment objective, the
Fund invests mainly in securities of "growth type" companies with market
capitalizations of less than $1 billion.
Oppenheimer Funds, Inc. manages Oppenheimer Variable Account Funds.
SAGE LIFE INVESTMENT TRUST
EAFE(R) Equity Index Fund. This Fund seeks to replicate as closely as
possible the performance of the Morgan Stanley Capital International Europe,
Australasia, Far East Index before the deduction of Fund expenses.
S&P 500 Equity Index Fund. This Fund seeks to replicate as closely as
possible the performance of the S&P 500 Composite Stock Price Index before the
deduction of Fund expenses.
Money Market Fund. This Fund seeks to provide high current income consistent
with the preservation of capital and liquidity. Although the Fund seeks to
maintain a constant net asset value of $1.00 per share, there can be no
assurance that the Fund can do so on a continuous basis. An investment in the
Money Market Fund is not guaranteed.
Sage Advisors, Inc. is the investment manager to the Sage Life Investment
Trust. State Street Global Advisors subadvises the EAFE(R) Equity Index Fund
and S&P 500 Equity Index Fund. Conning Asset Management Company subadvises the
Money Market Fund.
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T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price Equity Income Portfolio. This Fund seeks to provide
substantial dividend income as well as long-term growth of capital through
investments in the common stocks of established companies.
T. Rowe Price Mid-Cap Growth Portfolio. This Fund seeks to provide long-
term capital appreciation by investing in mid-cap stocks with potential for
above-average earnings.
T. Rowe Price Personal Strategy Balanced Portfolio. The Fund seeks to
provide the highest total return over time, with an emphasis on both capital
growth and income. The Personal Strategy Balanced Portfolio invests in a
diversified portfolio of stocks, bonds, and money market securities.
T. Rowe Price Associates, Inc. provides investment management to the T. Rowe
Price Equity Series, Inc.
The investment objectives and policies of certain Funds may be similar to
those of other retail mutual funds which can be purchased outside of a
variable insurance product, and that are managed by the same investment
adviser or manager. The investment results of the Funds, however, may be
higher or lower than the results of such other retail mutual funds. There can
be no assurance, and no representation is made, that the investment results of
any of the Funds will be comparable to the investment results of any other
retail mutual fund, even if the other retail mutual fund has the same
investment adviser or manager.
Shares of the Funds may be sold to separate accounts of insurance companies
that are not affiliated with us or each other, a practice known as "shared
funding." They also may be sold to separate accounts to serve as the
underlying investment for both variable annuity contracts and variable life
insurance contracts, a practice known as "mixed funding." As a result, there
is a possibility that a material conflict may arise between the interests of
Owners who allocate Account Values to the Variable Account, and owners of
other contracts who allocate contract values to one or more other separate
accounts investing in any of the Funds. Shares of some of the Funds may also
be sold directly to certain qualified pension and retirement plans qualifying
under Section 401 of the Code. As a result, there is a possibility that a
material conflict may arise between the interest of Owners or owners of other
contracts (including contracts issued by other companies), and such retirement
plans or participants in such retirement plans. In the event of any such
material conflicts, we will consider what action may be appropriate, including
removing a Fund from the Variable Account or replacing the Fund with another
Fund. There are certain risks associated with mixed and shared funding and
with the sale of shares to qualified pension and retirement plans, as
disclosed in each Trust's prospectus.
We have entered into agreements with either the investment adviser or
distributor for each of the Funds in which the adviser or distributor pays us
a fee ordinarily based upon an annual percentage of up to .25% of the average
aggregate net amount we have invested on behalf of the Variable Account and
other separate accounts. These percentages differ, and some investment
advisers or distributors pay us a greater percentage than other advisers or
distributors. These agreements reflect administrative services we provide.
More detailed information concerning the investment objectives, policies,
and restrictions of the Funds, the expenses of the Funds, the risks attendant
to investing in the Funds and other aspects of their operations can be found
in the current prospectus for each Trust which accompanies this Prospectus.
You should read the Trusts' prospectuses carefully before you decide to
allocate amounts to the Variable Sub-Accounts.
Fixed Account Investment Options. Each time you allocate purchase payments or
transfer funds to the Fixed Account, we establish a Fixed Sub-Account. We
guarantee an interest rate (the "Guaranteed Interest Rate") for each Fixed
Sub- Account for a period of time (a "Guarantee Period"). When you make an
allocation to the Fixed Sub-Account, we apply the Guaranteed Interest Rate
then in effect. (Keep in mind that we deduct charges from a Fixed Sub-Account,
and these deductions will reduce your actual return. See "What are the
Expenses Under a Contract?") We may establish specially designated Fixed Sub-
Accounts ("DCA Fixed Sub-Accounts"), for our Dollar-Cost Averaging Program.
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How we determine the Guaranteed Interest Rate. We have no specific formula
for establishing the Guaranteed Interest Rates for the different Guarantee
Periods. The determination we make will be influenced by, but not necessarily
correspond to, interest rates available on fixed income investments that we
may acquire with the amounts we receive as purchase payments or transfers of
Account Value under the Contracts. We will invest these amounts primarily in
investment-grade fixed income securities including: securities issued by the
U.S. Government or its agencies or instrumentalities, which issues may or may
not be guaranteed by the U.S. Government; debt securities that have an
investment grade, at the time of purchase, within the four highest grades
assigned by Moody's Investor Services, Inc., Standard & Poor's Corporation, or
any other nationally recognized rating service; mortgage-backed securities
collateralized by real estate mortgage loans, or securities collateralized by
other assets, that are insured or guaranteed by the Federal Home Loan Mortgage
Corporation, the Federal National Mortgage Association, or the Government
National Mortgage Association, or that have an investment grade at the time of
purchase within the four highest grades described above; other debt
instruments; commercial paper; cash or cash equivalents. You will have no
direct or indirect interest in these investments, and you do not share in the
investment performance of the assets of the Fixed Account. We will also
consider other factors in determining the Guaranteed Interest Rates, including
regulatory and tax requirements, sales commissions, administrative expenses
borne by us, general economic trends, and competitive factors. The Company's
management will make the final determination of the Guaranteed Interest Rates
it declares. We cannot predict or guarantee the level of future interest
rates. However, our Guaranteed Interest Rates will be at least 3% per year.
Guaranteed Interest Rates do not depend upon and do not reflect the
performance of the Fixed Account.
Guarantee Periods. We measure the length of a Guarantee Period from the end
of the calendar month in which you allocated or transferred the amount to the
Fixed Sub-Account. This means that the Expiration Date of any Guarantee Period
will always be the last day of a calendar month. The currently available
Guarantee Periods are 1, 2, 3, 4, and 5 years. We may offer different
Guarantee Periods in the future. Not all Guarantee Periods may be available in
all states.
We will notify you of your options for renewal at least thirty days before
an Expiration Date of a Fixed Sub-Account in which you are invested. Your
options are:
. Take no action and we will transfer the value of the expiring Fixed Sub-
Account to the Fixed Sub-Account with the same Guarantee Period, but not
longer than five years, as of the day the previous Fixed Sub-Account
expires. If such Guarantee Period is not currently available, we will
transfer your value to the next shortest Guarantee Period. If there is no
shorter Guarantee Period, we will transfer your value to the Money Market
Sub-Account.
. Elect a new Guarantee Period(s) from among those we offer as of the day
the previous Fixed Sub-Account expires.
. Elect to transfer the value of the Fixed Sub-Account to one or more
Variable Sub-Accounts.
Any amounts surrendered, withdrawn, transferred or borrowed other than
during the thirty days before the Expiration Date of the Guarantee Period are
subject to a Market Value Adjustment with the exception of the following
transactions:
. Transfers from DCA Fixed Sub-Accounts made automatically under our
Dollar-Cost Averaging Program; and
. Withdrawals of earned interest made automatically under our Systematic
Partial Withdrawal Program.
Market Value Adjustment. A Market Value Adjustment reflects the change in
interest rates since we established a Fixed Sub-Account. It compares: (1) the
current Index Rate for a period equal to the time remaining in the Guarantee
Period, and (2) the Index Rate at the time we established the Fixed Sub-
Account for a period equal to the Guarantee Period.
Ordinarily, if the current Index Rate for a period equal to the time
remaining in the Guarantee Period is higher than the applicable Index Rate at
the time we established the Fixed Sub-Account, the Market Value Adjustment
will be negative. Similarly, if the current Index Rate for a period equal to
the time remaining in the Guarantee Period is lower than the applicable Index
Rate at the time we established the
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Fixed Sub-Account, the Market Value Adjustment will be positive.
We will apply a Market Value Adjustment as follows:
. For a surrender, withdrawal, transfer, or amount borrowed, we will
calculate the Market Value Adjustment on the total amount (including any
applicable surrender charge) that must be surrendered, withdrawn,
transferred or borrowed to provide the amount requested.
. If the Market Value Adjustment is negative, it reduces any remaining
value in the Fixed Sub-Account, or amount of Surrender Value. Any
remaining Market Value Adjustment then reduces the amount withdrawn,
transferred, or borrowed.
. If the Market Value Adjustment is positive, it increases any remaining
value in the Fixed Sub-Account. In the case of surrender, or if you
withdraw, transfer or borrow the full amount of the Fixed Sub-Account,
the Market Value Adjustment increases the amount surrendered, withdrawn,
transferred, or borrowed.
We will compute the Market Value Adjustment by multiplying the factor below
by the total amount (including any applicable surrender charge) that must be
surrendered, withdrawn, transferred, or borrowed from the Fixed Sub-Account to
provide the amount you requested.
[(1+I)/(1+J+.0025)]to the power of N divided by the 365th power - 1
Where
I is the Index Rate for a maturity equal to the Fixed Sub-Account's
Guarantee Period at the time we established the Sub-Account;
J is the Index Rate for a maturity equal to the time remaining (rounded
up to the next full year) in the Fixed Sub-Account's Guarantee Period at
the time of calculation; and
N is the remaining number of days in the Guarantee Period at the time of
calculation.
We currently base the Index Rate for a calendar week on the reported rate
for the preceding calendar week. We reserve the right to set it less
frequently than weekly but in no event less often than monthly. If there is no
Index Rate for the maturity needed to calculate I or J, we will use straight-
line interpolation between the Index Rate for the next highest and next lowest
maturities to determine that Index Rate. If the maturity is one year or less,
we will use the Index Rate for a one-year maturity.
In the states of Maryland and Oregon, state insurance law requires that the
Market Value Adjustment be computed by multiplying the amount being surrendered,
withdrawn, transferred, or borrowed, by the greater of the factor above and the
following factor: [(1.03)/(1+K)] to the power of G - N divided by the 365th
power - 1, where N is as defined above, K equals the Guaranteed Interest Rate
for the Guarantee Period, and G equals the initial number of days in the
Guarantee Period. In the state of Washington, we will not assess the Market
Value Adjustment because of state insurance law requirements. Because of these
requirements, not all Guarantee Periods are available in Washington state;
please contact our Customer Service Center for available Guarantee Periods.
Examples of how the Market Value Adjustment works are shown in Appendix A.
Transfers. You may transfer Account Value from and among the Variable and
Fixed Sub-Accounts at any time, subject to certain conditions. In certain
states, your right to transfer Account Value is restricted until after the end
of the Free Look Period. See "How Do I Purchase a Contract?" The minimum
amount of Account Value that you may transfer from a Sub-Account is $250, or,
if less, the entire remaining Account Value held in that Sub-Account. You must
give us Satisfactory Notice of the Sub-Accounts from which and to which we are
to make the transfers. Otherwise, we will not transfer your Account Value. A
transfer from a Fixed Sub-Account ordinarily will be subject to a Market Value
Adjustment. There is currently no limit on the number of transfers from and
among the Sub-Accounts.
A transfer ordinarily takes effect on the Business Day we receive
Satisfactory Notice at our Customer Service Center. We will deem requests
received on other than a Business Day as received on the next following
Business Day. We may, however, defer transfers to, from, and among the
Variable Sub- Accounts under the same conditions that we may delay paying
proceeds.
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We reserve the right to impose a transfer charge of up to $25 on each
transfer in a Contract Year in excess of twelve, and to limit, upon notice,
the maximum number of transfers you may make per calendar month or per
Contract Year. For purposes of assessing any transfer charge, we will consider
each transfer request one transfer, regardless of the number of Sub-Accounts
affected by the transfer.
In addition, we may not honor your transfer request if:
. Any Variable Sub-Account that would be affected by the transfer is unable
to purchase or redeem shares of the Fund in which the Variable Sub-
Account invests;
. We determine the transfer would adversely affect Accumulation Unit
values;
. Any affected Fund determines it would be adversely affected by the
transfer.
We also may not honor certain transfers made by individuals holding multiple
powers of attorney. See "What Are My Investment Options?--Power of Attorney,"
below.
If you have applied proceeds under your Contract to a Settlement Option, you
must have our prior consent to transfer value from the Fixed Account to the
Variable Account or from the Variable Account to the Fixed Account. A Market
Value Adjustment ordinarily will apply to transfers from the Fixed Account. We
reserve the right to limit the number of transfers among the Variable Sub-
Accounts to one transfer per Contract Year.
Telephone Transactions. You may request transfers, withdrawals or loans by
telephone. We will not be liable for following instructions communicated by
telephone that we reasonably believe to be genuine. To request transfers,
withdrawals or loans by telephone, you must elect the option on our
authorization form. We will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. We may only be liable for
any losses due to unauthorized or fraudulent instructions where we fail to
follow our procedures properly. These procedures include: (a) asking you or
your authorized representative to provide certain identifying information; (b)
tape recording all such conversations; and (c) sending you a confirmation
statement after all such telephone transactions.
Our telephone transaction authorization form also allows you to create a
power of attorney by authorizing another person to give telephone
instructions. Unless prohibited by state law, we will treat such power as a
durable power of attorney. The Owner's subsequent incapacity, disability, or
incompetency will not affect the power of attorney. We may cease to honor the
power by sending written notice to you at your last known address. Neither we
nor any person acting on our behalf shall be subject to liability for any act
done in good faith reliance upon your power of attorney.
In addition to telephone transactions, we expect to be able to offer all of
these transactions via the Internet in the second quarter of 2000. We will
send Owners information about our website and transactions that may be made
through it.
Power of Attorney. As a general rule and as a convenience to you, we allow
the use of powers of attorney whereby you can give a third party the right to
make transfers on your behalf. However, when the same third party possesses
powers of attorney executed by many Owners, the result can be simultaneous
transfers involving large amounts of Account Value. Such transfers can disrupt
the orderly management of the Funds, can result in higher costs to Owners, and
are ordinarily not compatible with the long-range goals of purchasers of the
Contracts. We believe that such simultaneous transfers made by such third
parties are not in the best interest of all shareholders of the Funds. The
managements of the Funds share this position.
Therefore, to the extent necessary to reduce the adverse effects of
simultaneous transfers made by third parties holding multiple powers of
attorney, we may not honor such powers of attorney and have instituted or will
institute procedures to assure that the transfer requests that we receive
have, in fact, been made by the Owners in whose names they are submitted.
However, you will not be prevented by these procedures from making your own
transfer requests.
Dollar-Cost Averaging Program. Our optional dollar-cost averaging program
permits you to systematically transfer (monthly or as frequently as we allow)
a set dollar amount from the Money Market Sub-Account to any combination of
Variable Sub-Accounts. We also allow dollar-cost averaging
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from the DCA Fixed Sub-Accounts. These DCA Fixed Sub-Accounts may have
different Guarantee Periods and different Guaranteed Interest Rates than the
Fixed Sub-Accounts.
The dollar-cost averaging method of investment is designed to reduce the
risk of making purchases only when the price of Accumulation Units is high.
However, you should carefully consider your financial ability to continue the
program over a long enough period of time to purchase units when their value
is low as well as when high. Dollar-cost averaging does not assure a profit or
protect against a loss. Due to the effect of interest that continues to be
earned on the balance in the Money Market Sub-Account or a DCA Fixed Sub-
Account, the amounts we transfer will vary slightly from month to month. An
example of how our dollar-cost averaging program works is shown in Appendix B.
You may elect to participate in the dollar-cost averaging program at any
time before the proceeds are applied to a Settlement Option by sending us
Satisfactory Notice. The minimum transfer amount is $250 from the Money Market
Sub-Account or from a DCA Fixed Sub-Account. We will make all dollar-cost
averaging transfers on the day of each month that corresponds to your Contract
Date unless that date is not a Business Day. Otherwise, we will make the
transfer on the next following Business Day. If you want to dollar-cost
average from more than one DCA Fixed Sub-Account at the same time, certain
restrictions may apply.
Once elected, dollar-cost averaging remains in effect from the date we
receive your request until you surrender the Contract, until the value of the
Sub-Account from which transfers are being made is depleted, or until you
cancel the program by written request. If you request to cancel dollar-cost
averaging from a DCA Fixed Sub-Account before the end of the selected period,
we reserve the right to treat this request as a transfer request and transfer
any proceeds that remain to a Fixed Sub-Account that has the duration you
request, and we ordinarily will assess a Market Value Adjustment on the amount
canceled. You can request changes by writing us at our Customer Service
Center. There is no additional charge for dollar-cost averaging. We do not
consider a transfer under this program a transfer for purposes of assessing a
transfer charge. We reserve the right to discontinue offering this program at
any time and for any reason. Dollar-cost averaging is not available while you
are participating in the systematic partial withdrawal program.
Asset Allocation Program. You may select from asset allocation model
portfolios we make available, or you may use these models as a guide to help
you develop your own asset allocation model.
If you participate in the asset allocation program, we will automatically
allocate all initial and additional purchase payments among the Variable Sub-
Accounts indicated by the model you select. The models do not include
allocations to the Fixed Account. Although you may only use one model at a
time, you may elect to change your selection as your tolerance for risk,
and/or your needs and objectives change. Bear in mind, the use of an asset
allocation model does not guarantee investment results. You may use a
questionnaire that is offered to determine the model that best meets your risk
tolerance and time horizons.
Because each Variable Sub-Account performs differently over time, your
portfolio mix may vary from its initial allocations. We will automatically
rebalance your Fund mix quarterly to bring your portfolio back to its original
allocation percentages.
From time to time the models are reviewed and the allocation percentages
among the Variable Sub-Accounts or even some of the Variable Sub-Accounts
within a particular model may need to be changed. We will send you a notice at
least 30 days before any such change is made, and give you an opportunity not
to make the change.
If you participate in the asset allocation program, the transfers made under
the program are not taken into account in determining any transfer charge.
There is no additional charge for this program, and you may discontinue your
participation in this program by contacting our Customer Service Center. We
reserve the right to cancel the asset allocation program at any time and for
any reason. Please contact our Customer Service Center for more information
about our asset allocation program.
Automatic Portfolio Rebalancing Program. Once you allocate your money among
the Variable Sub-Accounts, the investment performance of each Variable Sub-
Account may cause your allocation to shift. Before proceeds are applied to a
Settlement
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Option, you may instruct us to automatically rebalance (on a calendar quarter,
semi-annual, or annual basis) your Variable Account Value to return it to your
original allocation percentages. Your request will be effective on the
Business Day on which we receive your request at our Customer Service Center.
We will deem requests received on other than a Business Day as received on the
next following Business Day. Your allocation percentages must be in whole
percentages. You may start and stop automatic portfolio rebalancing at any
time and make changes to your allocation percentages by written request. There
is no additional charge for using this program. We do not consider a transfer
under this program a transfer for purposes of assessing any transfer charge.
We reserve the right to discontinue offering this program at any time and for
any reason. We do not include any money allocated to the Fixed Account in the
rebalancing.
Account Value. The Account Value is the entire amount we hold under your
Contract for you. The Account Value serves as a starting point for calculating
certain values under your Contract. It equals the sum of the Variable Account
Value, the Fixed Account Value, and the Loan Account Value (each term as
defined below) credited to your Contract. We first determine your Account
Value on the Contract Date and after that on each Business Day. The Account
Value will vary to reflect:
. the performance of the Variable Sub-Accounts you have selected;
. interest credited on amounts you allocated to the Fixed Account;
. interest credited on amounts allocated to the Loan Account;
. any additional purchase payments; and
. charges, transfers, withdrawals, loans, and surrenders.
Your Account Value may be more or less than purchase payments you made.
Variable Account Value. Variable Account Value equals the sum of the values
in each Variable Sub-Account on any particular day. On the Contract Date, the
Variable Account Value for a Variable Sub-Account equals the portion of the
initial purchase payment allocated to the Sub-Account. On each subsequent
Business Day it equals:
. the Variable Account Value in the Sub-Account on the preceding Business
Day multiplied by its net investment factor for the current Valuation
Period; plus
. the amount of any allocation or transfer to the Sub-Account during the
current Valuation Period; minus
. the amount of any transfer from the Sub-Account during the current
Valuation Period; minus
. the amount of any charges allocated to the Sub-Account during the current
Valuation Period; and minus
. the amount of any withdrawal or loan allocated to the Sub-Account during
the current Valuation Period.
We keep track of the Variable Account Value in each of your Variable Sub-
Accounts by the number of Accumulation Units in that Sub-Account. The value in
each Variable Sub-Account equals the number of Accumulation Units attributable
to that Variable Sub-Account multiplied by the Accumulation Unit value for
that Variable Sub-Account on that Business Day. When you allocate a purchase
payment or transfer Account Value to a Variable Sub-Account, we credit your
Contract with Accumulation Units in that Variable Sub-Account. We determine
the number of Accumulation Units by dividing the dollar amount allocated or
transferred to the Variable Sub-Account by the Sub-Account's Accumulation Unit
value for that Business Day. Similarly, when you transfer, withdraw, borrow,
or surrender an amount from a Variable Sub-Account, we cancel Accumulation
Units in that Variable Sub-Account. We determine the number of Accumulation
Units canceled by dividing the dollar amount you transferred, withdrew,
borrowed, or surrendered by the Variable Sub-Account's Accumulation Unit value
for that Business Day.
Accumulation Unit Value. An Accumulation Unit value varies to reflect the
investment experience of the underlying Fund, and may increase or decrease
from one Business Day to the next. We arbitrarily set the Accumulation Unit
value for each Variable Sub-Account at $10 when we established the Sub-
Account. For each Valuation Period after the date of establishment, we
determine the Accumulation Unit value by multiplying the Accumulation Unit
value for a Sub-Account for the prior Valuation Period by the
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net investment factor for the Variable Sub-Account for the Valuation Period.
Net Investment Factor. The net investment factor is an index we use to
measure the investment performance of a Variable Sub-Account from one
Valuation Period to the next. We determine the net investment factor for any
Valuation Period by dividing (a) by (b) where:
(a) is the net result of:
(i) the Net Asset Value of the Fund in which the Variable Sub-Account
invests determined at the end of the current Valuation Period; plus
(ii) the per share amount of any dividend or capital gain distributions
made by the Fund on shares held in the Variable Sub-Account if the "ex-
dividend" date occurs during the current Valuation Period; and plus or
minus
(iii) a per share charge or credit for any taxes reserved for, which we
determine to have resulted from the operations of the Variable Sub-
Account; and
(b) is the Net Asset Value of the Fund in which the Variable Sub-Account
invests determined at the end of the immediately preceding Valuation
Period.
The net investment factor may be more or less than, or equal to, one.
Fixed Account Value. Fixed Account Value is the sum of the values in each
Fixed Sub-Account (including a DCA Fixed Sub-Account) on any particular date.
On the Contract Date the Fixed Account Value for a Sub-Account equals the
portion of the initial purchase payment allocated to the Sub-Account. On each
subsequent Business Day it equals:
. the Fixed Account Value in the Sub-Account on the preceding Business Day
multiplied by the daily equivalent of its Guaranteed Interest Rate earned
for the number of days in the current Valuation Period; plus
. the amount of any allocation or transfer to the Sub-Account during the
current Valuation Period; minus
. the amount of any transfer from the Sub-Account during the current
Valuation Period; minus
. the amount of any charges allocated to the Sub-Account during the current
Valuation Period and minus
. the amount of any withdrawal or loan allocated to the Sub-Account during
the current Valuation Period.
We also adjust the Fixed Account Value for any Market Value Adjustment, the
value of which could be positive or negative.
Loan Account Value. Unless you take a loan, the Loan Account Value is zero.
If you take a loan, then on the effective date of the loan the Loan Account
Value equals the amount of the loan. On each subsequent Business Day it
equals:
. the Loan Account Value on the preceding Business Day; plus
. the amount of interest earned (at the loan credited rate) on Loan Account
Value during the current Valuation Period; plus
. any amounts transferred to the Loan Account because of any additional
loans and any due and unpaid loan interest during the current Valuation
Period; minus
. the amount of any loan repayment you make during the current Valuation
Period; and minus
. any amount of interest earned on Loan Account Value and transferred to
the Sub-Accounts during the current Valuation Period.
Surrender Value. The Surrender Value on a Business Day is the Account Value,
plus or minus any applicable Market Value Adjustment, reduced by any
applicable surrender charge or other charges that are due us but not yet
deducted, less any Debt.
4. What Are The Expenses Under A Contract?
We deduct the charges described below. The charges are for the services and
benefits we provide, costs and expenses we incur, and risks we assume under
the Contracts. Services and benefits we provide include:
. the ability of Owners to make withdrawals, surrenders, and take loans
under the Contracts;
. the death benefit paid on the death of the Insured;
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. the available investment options, including dollar-cost averaging, asset
allocation, automatic portfolio rebalancing, and systematic partial
withdrawal programs;
. administration of the Settlement Options available under the Contracts;
and
. the distribution of various reports to Owners.
Costs and expenses we incur include:
. those related to various overhead and other expenses associated with
providing the services and benefits provided by the Contracts;
. sales and marketing expenses; and
. other costs of doing business.
Risks we assume include:
. the risks that Insureds may live for a shorter period than we estimated
when we established the mortality factors under the Contracts; and
. that the costs of providing the services and benefits under the Contracts
will exceed the charges deducted.
We may realize a profit or loss on one or more of the charges. We may use
any such profits for any corporate purpose, including, among other things,
payment of sales expenses.
To assist you in understanding how the expenses under a Contract will affect
values, we have included hypothetical illustrations beginning on page . You
can also request a personalized illustration from your registered
representative.
Unless we otherwise specify, we will deduct charges proportionately from all
Variable Sub-Accounts and Fixed Sub-Accounts in which you are invested.
We may reduce or eliminate charges under the Contracts when sales result in
savings, reduction of expenses and/or risks to the Company. Generally, we will
make such reductions based on the following factors:
. the size of the group;
. the total amount of purchase payments to be received from the group;
. the purposes for which the Contracts are purchased;
. the nature of the group for which the Contracts are purchased; and
. any other circumstances that could reduce Contract costs and expenses.
We may also sell the Contracts with lower or no charges to a person who is
an officer, director or employee of Sage Life or of certain affiliates or
service providers of ours. Reductions in Contract charges will not be unfairly
discriminatory against any person. Please contact our Customer Service Center
for more information about those cost reductions.
Monthly Deduction Amount
We deduct the Monthly Deduction Amount on each Monthly Processing Date. It
equals:
. the Asset-Based Charges, plus
. the cost of insurance charge, plus
. the cost of any riders for which a separate charge is assessed, and plus
. any other applicable charge that we assess.
On a Monthly Processing Date that is also a Contract Anniversary, the
Monthly Deduction Amount equals the Monthly Deduction Amount described above,
plus the Annual Administration Charge.
Asset-Based Charges. We assess Asset-Based Charges against your Contract for
assuming mortality and expense risks, certain administrative and distribution
costs, and certain state and Federal tax expenses. We calculate the charges as
a percentage of your Account Value as of the date we deduct them. On the
Contract Date, and monthly thereafter, we deduct the charges proportionately
from the Sub-Accounts in which you are invested.
The maximum asset-based charges are:
<TABLE>
<CAPTION>
Combined Charges
Asset-Based Monthly
Annual Charge Charge
------------- ---------
<S> <C> <C>
Contract Years 1-7...................................... 1.80% 0.150000%
Contract Years 8+....................................... 1.30% 0.108333%
</TABLE>
Asset-Based Charges will also apply to any Loan Account Value you have. (If
you have not taken a loan, then no charges will be assessed.) The current
charges applicable to the Loan Account Value are, on
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<PAGE>
an annual basis, 0.90% (0.075000% monthly), decreasing to .40% (0.033333%
monthly) after the tenth Contract Year.
If proceeds are applied to a Settlement Option, we will deduct the Asset-
Based Charges daily from the assets in each Variable Sub-Account supporting
variable income payments. We refer to these charges as Variable Sub-Account
Charges when applied to the proceeds under a Settlement Option.
Cost of Insurance Charge. We deduct the cost of insurance charge from your
Account Value to compensate us for providing life insurance for the Insured.
Current Cost of Insurance Charge. The current cost of insurance charge is
the actual monthly charge that we deduct from your Account Value. We calculate
this charge as a percentage of your Account Value on the date of deduction. On
the Contract Date, and monthly thereafter, we deduct the current cost of
insurance charge in proportion to the Sub-Accounts in which you are invested.
The maximum charge will never be more than the guaranteed maximum monthly cost
of insurance charge described below.
We determine the current cost of insurance charge based on our expectation
of future mortality experience. Your cost of insurance charge will depend on
the Insured's risk class. The two standard risk classes are smoker and
nonsmoker. We generally charge higher rates for smokers.
We also place Insureds in various sub-standard risk classes, if the
underwriting warrants doing so. These sub-standard risk classes involve a
higher mortality risk and, therefore, higher charges.
At present, in most states the current cost of insurance charges as an
annual percentage of Account Value are 0.55% and 0.85% for standard nonsmokers
and smokers, respectively, and 0.75% and 1.40% for sub-standard nonsmokers and
smokers, respectively. We will apply any charge we make on a uniform basis for
Insureds of the same risk class and Attained Age.
Guaranteed Maximum Monthly Cost of Insurance Charge. The maximum monthly
cost of insurance charge equals (a) times (b) and then divided by (c), where:
(a) is the maximum Cost of Insurance Rate per $1,000 shown in your
Contract based on the Insured's Attained Age, gender and risk class;
(b) is an amount equal to the death benefit minus the Account Value; and
(c) is $1,000.
For standard risks, we base the guaranteed cost of insurance charge on the
1980 Commissioners Standard Ordinary Mortality Table, Male/Female, Age Last
Birthday ("1980 CSO"). Because the mortality table differentiates between men
and women, the Contract may pay different benefits to men and women of the
same age, even if all other factors are the same. Certain states, however, may
require unisex rates. We include a table of guaranteed maximum cost of
insurance rates per $1,000 in your Contract. For substandard risks, we base
the guaranteed cost of insurance charge on a multiple of the 1980 CSO. We will
base the multiple on the Insured's substandard rating.
Annual Administration Charge
We will deduct an annual administration charge of $40 for the first seven
Contract Years (i) on each Contract Anniversary, and (ii) on the day of any
surrender if the surrender is not on the Contract Anniversary. We will waive
this charge on and after the eighth Contract Anniversary, or if the Account
Value is at least $50,000 when we would have otherwise deducted the annual
administration charge.
Surrender Charge
If you make an Excess Withdrawal or surrender your Contract during the first
seven Contract Years, we may deduct a surrender charge calculated as a
percentage of the amount of purchase payment(s) withdrawn or surrendered. We
apply the surrender charge to each purchase payment as a percentage of the
payment as follows:
<TABLE>
<CAPTION>
Complete
Years
Elapsed Maximum
Since Surrender
Contract Charge
Date Percentage
- -------- ----------
<S> <C>
0 9%
1 9%
2 8%
3 7%
4 6%
5 5%
6 3%
7+ 0%
</TABLE>
25
<PAGE>
If you surrender your Contract, we deduct the surrender charge from your
Account Value in determining the Surrender Value. If you take an Excess
Withdrawal, we deduct the surrender charge from your Account Value remaining
after we pay you the amount requested. We include any surrender charge we
assess in the calculation of any applicable Market Value Adjustment for
withdrawals from the Fixed Account. Each year you may withdraw the "Free
Withdrawal Amount" without incurring a surrender charge. The Free Withdrawal
Amount equals the greater of:
(i) 10% of your total purchase payments; less all prior withdrawals in
that Contract Year (including any associated surrender charge and Market
Value Adjustment incurred); or
(ii) cumulative earnings (i.e., the excess of the Account Value on the
date of withdrawal over unliquidated purchase payments).
With an Excess Withdrawal, we will liquidate purchase payments in whole or in
part on a "first-in, first-out" basis. This means we liquidate purchase
payments in the order you made them: the oldest unliquidated purchase payment
first, the next oldest unliquidated purchase payment second, until all purchase
payments have been liquidated.
The total surrender charge will be the sum of the surrender charges for each
purchase payment being liquidated. The amount you request from a Sub- Account
may not exceed the value of that Sub-Account less any applicable surrender
charge.
Example of Calculation of Surrender Charge. Assume the applicable surrender
charge is 7%, you have requested a withdrawal of $2,000 and no Market Value
Adjustment is applicable. Your total purchase payments are $10,000, your
current Account Value is $10,500, and you made no prior withdrawals during that
Contract Year. Your Free Withdrawal Amount is the greater of (a) or (b), where:
(a) is the excess of 10% of the total purchase payments, over 100% of all
prior withdrawals in that Contract Year (including any associated
surrender charge and Market Value Adjustment incurred) (10% X $10,000 =
$1,000); and
(b) is the excess of the Account Value on the date of withdrawal over the
unliquidated purchase payments ($10,500- $10,000 = $500).
Therefore, the Free Withdrawal Amount is $1,000. A surrender charge will
apply to the excess of $2,000 over $1,000. The surrender charge equals $70 (7%
X $1,000).
Waiver of Surrender Charge. We will not deduct a surrender charge if, at the
time we receive your request for a withdrawal or a surrender, we have also
received due proof that you have been confined continuously to a "Qualifying
Hospital or Nursing Care Facility" for at least 45 days in a 60 day period. We
define "Qualifying Hospital or Nursing Care Facility" in your Contract.
Transfer Charge
We currently do not deduct this charge. However, we reserve the right to
deduct a transfer charge of up to $25 for the 13th and each subsequent transfer
during a Contract Year. For the purpose of assessing the transfer charge, we
consider each written or telephone request to be one transfer, regardless of
the number of Sub-Accounts affected by the transfer. In the event that the
transfer charge becomes applicable, we will deduct it proportionately from the
Sub-Accounts from which you made the transfer. This charge is at cost with no
profit to us. Transfers made in connection with the dollar-cost averaging,
asset allocation, and automatic portfolio rebalancing programs will not count
as transfers for purposes of assessing this charge.
Fund Annual Expenses
Because the Variable Account purchases shares of the various Funds you
choose, the net assets of the Variable Account will reflect the investment
management fees and other operating expenses incurred by those Funds. These
Fund fees and other expenses are shown in the Summary under "What Are the
Expenses Under A Contract?". For a description of each Fund's expenses,
management fees, and other expenses, see the Trusts' prospectuses.
5. How Will My Contract Be Taxed?
Introduction
The following summary provides a general description of the Federal income
tax considerations associated with the Contract and does not purport to be
complete or to cover all tax situations. This
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<PAGE>
discussion is not intended as tax advice. Counsel or other competent tax
advisors should be consulted for more complete information. This discussion is
based upon our understanding of the present Federal income tax laws. No
representation is made as to the likelihood of continuation of the present
Federal income tax laws or as to how they may be interpreted by the Internal
Revenue Service.
Tax Status of the Contract
In order to qualify as a life insurance contract for Federal income tax
purposes and to receive the tax treatment normally accorded life insurance
contracts under Federal tax law, a Contract must satisfy certain requirements
which are set forth in the Internal Revenue Code. Guidance as to how these
requirements are to be applied is limited. Nevertheless, we believe that the
Contract should satisfy the applicable requirements. There is less guidance,
however, with respect to Contracts issued on a rated or automatic issue basis
and Contracts with term riders added and it is not clear whether such
Contracts will in all cases satisfy the applicable requirements. If it is
subsequently determined that a Contract does not satisfy the applicable
requirements, we may take appropriate steps to bring the Contract into
compliance with such requirements and we reserve the right to restrict
Contract transactions in order to do so.
In certain circumstances, owners of variable life insurance contracts have
been considered for Federal income tax purposes to be the owners of the assets
of the variable account supporting their contracts due to their ability to
exercise investment control over those assets. Where this is the case, the
contract owners have been currently taxed on income and gains attributable to
the variable account assets. There is little guidance in this area, and some
features of the Contracts, such as the flexibility of a Owner to allocate
premiums and cash values, have not been explicitly addressed in published
rulings. While we believe that the Contracts do not give Owners investment
control over Variable Account assets, we reserve the right to modify the
Contracts as necessary to prevent an Owner from being treated as the owner of
the Variable Account assets supporting the Contract.
In addition, the Code requires that the investments of the Variable Account
be "adequately diversified" in order for the Contracts to be treated as life
insurance contracts for Federal income tax purposes. It is intended that the
Variable Account, through the Funds, will satisfy these diversification
requirements.
The following discussion assumes that the Contract will qualify as a life
insurance contract for Federal income tax purposes.
Tax Treatment of Contract Benefits
In General. We believe that the death benefit under a Contract should be
excludible from the gross income of the beneficiary. Federal, state and local
transfer, and other tax consequences of ownership or receipt of Contract
proceeds depend on the circumstances of each Owner or beneficiary. A tax
advisor should be consulted on these consequences.
Generally, the Owner will not be deemed to be in constructive receipt of the
Contract cash value until there is a distribution. When distributions from a
Contract occur, or when loans are taken out from or secured by a Contract, the
tax consequences depend on whether the Contract is classified as a "Modified
Endowment Contract."
Modified Endowment Contracts. Under the Internal Revenue Code, certain life
insurance contracts are classified as "Modified Endowment Contracts," with
less favorable tax treatment than other life insurance contracts. In most
cases the Contract will be classified as a Modified Endowment Contract. Any
Contract issued in exchange for a Modified Endowment Contract will be a
Modified Endowment Contract. A Contract issued in exchange for a life
insurance contract that is not a Modified Endowment Contract will generally
not be treated as a Modified Endowment Contract. The payment of additional
premiums at the time of or after the exchange or certain changes to the
Contract after is is issued may, however, cause the Contract to become a
Modified Endowment Contract. A prospective Owner should consult a tax advisor
before effecting an exchange.
Distributions Other Than Death Benefits from Modified Endowment
Contracts. Contracts classified as Modified Endowment Contracts are subject to
the following tax rules:
(1) All distributions other than death benefits, including distributions
upon surrender and withdrawals, from a Modified Endowment
27
<PAGE>
Contract will be treated first as distributions of gain taxable as
ordinary income and as tax-free recovery of the Owner's investment in
the Contract only after all gain has been distributed.
(2) Loans taken from or secured by a Contract classified as a Modified
Endowment Contract are treated as distributions and taxed accordingly.
(3) A 10 percent additional income tax is imposed on the amount subject to
tax except where the distribution or loan is made when the Owner has
attained age 59 1/2 or is disabled, or where the distribution is part
of a series of substantially equal periodic payments for the life (or
life expectancy) of the Owner or the joint lives (or joint life
expectancies) of the Owner and the Owner's beneficiary or designated
beneficiary.
Distributions Other Than Death Benefits from Contracts that are not Modified
Endowment Contracts. Distributions other than death benefits from a Contract
that is not classified as a Modified Endowment Contract are generally treated
first as a recovery of the Owner's investment in the Contract and only after
the recovery of all investment in the Contract as taxable income. However,
certain distributions which must be made in order to enable the Contract to
continue to qualify as a life insurance contract for Federal income tax
purposes if Contract benefits are reduced during the first 15 Contract years
may be treated in whole or in part as ordinary income subject to tax.
Loans from or secured by a Contract that is not a Modified Endowment
Contract are generally not treated as distributions. However, the tax
consequences associated with preferred loans are less clear and a tax adviser
should be consulted about such loans.
Finally, neither distributions from nor loans from or secured by a Contract
that is not a Modified Endowment Contract are subject to the 10 percent
additional income tax.
If a Contract becomes a Modified Endowment Contract, distributions that
occur during the Contract Year will be taxed as distributions from a Modified
Endowment Contract. In addition, distributions from a Contract within two
years before it becomes a Modified Endowment Contract will be taxed in this
manner. This means that a distribution made from a Contract that is not a
Modified Endowment Contract could later become taxable as a distribution from
a Modified Endowment Contract.
Investment in the Contract. Your investment in the Contract is generally
your aggregate Premiums. When a distribution is taken from the Contract, your
investment in the Contract is reduced by the amount of the distribution that
is tax-free.
Contract Loans. In general, interest on a Contract loan will not be
deductible. If a Contract loan is outstanding when a Contract is canceled or
lapses, the amount of the outstanding indebtedness will be added to the amount
distributed and will be taxed accordingly.
Before taking out a Contract loan, you should consult a tax adviser as to
the tax consequences.
Multiple Contracts. All Modified Endowment Contracts that are issued by us
(or our affiliates) to the same Owner during any calendar year are treated as
one Modified Endowment Contract for purposes of determining the amount
includible in the Owner's income when a taxable distribution occurs.
Accelerated Benefits Rider. If such a rider is made available, we believe
that payments received under the accelerated benefit rider should be fully
excludible from the gross income of the beneficiary if the beneficiary is the
insured under the Contract. (See "Acceleration of Death Benefit Rider" for
more information regarding the rider.) However, you should consult a qualified
tax adviser about the consequences of adding this rider to a Contract or
requesting payment under this rider.
Continuation of Contract Beyond Age 100. The tax consequences of continuing
the Contract beyond the insured's 100th year are unclear. You should consult a
tax adviser if you intend to keep the Contract in force beyond the insured's
100th year.
Pension or Profit-Sharing Plan or Similar Deferred Compensation
Arrangement. If the Contract is used in connection with a pension or profit-
sharing plan, or similar deferred compensation arrangement, the Federal, state
and estate tax
28
<PAGE>
consequences could differ. The amounts of life insurance that may be purchased
on behalf of a participant in a pension or profit-sharing plan are limited.
The current cost of insurance for the net amount at risk is treated as a
"current fringe benefit" and must be included annually in the plan
participant's gross income. We report this cost (generally referred to as the
"P.S. 58" cost) to the participant annually. If the plan participant dies
while covered by the plan and the Contract proceeds are paid to the
participant's beneficiary, then the excess of the death benefit over the cash
value is not taxable. However, the cash value will generally be taxable to the
extent it exceeds the participant's cost basis in the Contract. Contracts
owned under these types of plans may be subject to restrictions under the
Employee Retirement Income Security Act of 1974 ("ERISA"). You should consult
a qualified adviser regarding ERISA.
Department of Labor ("DOL") regulations impose requirements for participant
loans under retirement plans covered by ERISA. Plan loans must also satisfy
tax requirements to be treated as non-taxable. Plan loan requirements and
provisions may differ from Contract loan provisions. Failure of plan loans to
comply with the requirements and provisions of the DOL regulations and of tax
law may result in adverse tax consequences and/or adverse consequences under
ERISA. Plan fiduciaries and participants should consult a qualified adviser
before requesting a loan under a Contract held in connection with a retirement
plan.
Business Uses of Contract. Businesses can use the Contracts in various
arrangements, including nonqualified deferred compensation or salary
continuance plans, split dollar insurance plans, executive bonus plans, tax
exempt and nonexempt welfare benefit plans, retiree medical benefit plans and
others. The tax consequences of such plans may vary depending on the
particular facts and circumstances. If you are purchasing the Contract for any
arrangement the value of which depends in part on its tax consequences, you
should consult a qualified tax adviser. In recent years, moreover, Congress
has adopted new rules relating to life insurance owned by businesses. Any
business contemplating the purchase of a new Contract or a change in an
existing Contract should consult a tax adviser.
Other Tax Considerations. The transfer of the Contract or designation of a
beneficiary may have federal, state, and/or local transfer and inheritance tax
consequences, including the imposition of gift, estate, and generation-
skipping transfer taxes. For example, the transfer of the Contract to, or the
designation as a beneficiary of, or the payment of proceeds to, a person who
is assigned to a generation which is two or more generations below the
generation assignment of the owner may have generation skipping transfer tax
consequences under federal tax law. The individual situation of each owner or
beneficiary will determine the extent, if any, to which federal, state, and
local transfer and inheritance taxes may be imposed and how ownership or
receipt of Contract proceeds will be treated for purposes of federal, state
and local estate, inheritance, generation skipping and other taxes.
Possible Tax Law Changes. Although the likelihood of legislative changes is
uncertain, there is always the possibility that the tax treatment of the
Contract could change by legislation or otherwise. Consult a tax adviser with
respect to legislative developments and their effect on the Contract.
Our Income Taxes
Under current Federal income tax law, we are not taxed on the Variable
Account's operations. Thus, currently we do not deduct a charge from the
Variable Account for Federal income taxes. We reserve the right to charge the
Variable Account for any future Federal income taxes we may incur.
Under current laws in several states, we may incur state and local taxes (in
addition to premium taxes). These taxes are not now significant and we are not
currently charging for them. If they increase, we may deduct charges for such
taxes.
6. How Do I Access My Money?
You may access the money in your Contract: (1) by making a withdrawal or a
surrender, or (2) by taking a loan from your Contract. If you surrender your
Contract, you can take the proceeds in a single sum, or you can request that
we pay the proceeds over a period of time under one of our Settlement Options.
See "What Are My Settlement Options?"
29
<PAGE>
Withdrawals
You may withdraw all or part of your Surrender Value at any time while your
Contract is in force during the Insured's lifetime. (If you have elected
variable Settlement Option 4, Payments for a Specified Period Certain, you may
request a full or partial withdrawal after the date the Settlement Option
becomes effective; otherwise, no withdrawals are permitted after the effective
date of a Settlement Option.) You may make your withdrawal request in writing
or by telephone. See "Requesting Payments." Any withdrawal must be at least
$250. If a withdrawal request would reduce your Account Value remaining in a
Sub-Account below $250, we will treat the withdrawal request as a request to
withdraw the entire amount. If a requested withdrawal would reduce your
Account Value below $5,000, we reserve the right to treat the request as a
withdrawal of only the excess over $5,000. We will pay you the withdrawal
amount in one sum. Under certain circumstances, we may delay this payment. See
"Requesting Payments."
When you request a withdrawal, you can direct how we deduct the withdrawal
from your Account Value. If you provide no directions, we will deduct the
withdrawal from your Account Value in the Sub-Accounts on a pro-rata basis.
When you make a withdrawal, we reduce the Account Value by the amount of the
withdrawal (including any associated surrender charges and Market Value
Adjustment incurred). We also reduce the Insurance Amount by the same
percentage that the withdrawal (including any associated surrender charge and
Market Value Adjustment incurred) reduced Account Value.
A withdrawal may have adverse tax consequences. See "How Will My Contract Be
Taxed?"
Systematic Partial Withdrawal Program
The systematic partial withdrawal program provides automatic monthly,
quarterly, semi-annual, or annual payments to you from the amounts you have
accumulated in the Sub-Accounts. You select the day we take the withdrawals,
but this day can be no later than the 28th day of the month. If you do not
select a day, we will use the day of each month that corresponds to your
Contract Date. If that date is not a Business Day, we will use the next
following Business Day. The minimum payment is $100. You can elect to withdraw
either earnings in a prior period (for example, prior month for monthly
withdrawals or prior quarter for quarterly withdrawals) or a specified dollar
amount.
. If you elect earnings, we will deduct the withdrawals from the Sub-
Accounts in which you are invested on a pro-rata basis.
. If you elect a specified dollar amount, we will deduct the withdrawals
from the Sub-Accounts in which you are invested on a pro-rata basis
unless you tell us otherwise. Any amount in excess of the Free Withdrawal
Amount may be subject to a surrender charge. See "What Are The Expenses
Under A Contract?" Also, any amount in excess of interest earned on a
Fixed Sub-Account in the prior Guarantee Period ordinarily will be
subject to a Market Value Adjustment. See "What Are My Investment
Options?"
You may participate in the systematic partial withdrawal program at any time
during the Insured's lifetime by providing Satisfactory Notice. Once we
receive your request, the program will begin and will remain in effect until
your Account Value drops to zero. You may cancel or make changes in the
program at any time by providing us with Satisfactory Notice. We do not deduct
any other charges for this program. We reserve the right to discontinue the
systematic partial withdrawal program at any time and for any reason.
Systematic partial withdrawals are not available while you are participating
in the dollar-cost averaging program.
A systematic withdrawal may have adverse tax consequences. See "How Is My
Contract Taxed?"
Surrenders
You may cancel and surrender your Contract at any time during the Insured's
lifetime. Your Contract will terminate on the Valuation Date we receive your
request or a later date as you might request. We will pay you the Surrender
Value in one sum unless you choose a Settlement Option. (Unless you choose
Settlement Option 4, you cannot surrender your Contract once payments have
begun under a Settlement Option.) Under certain circumstances, we may delay
payments of proceeds from a surrender. See "Requesting Payments."
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<PAGE>
A surrender may have adverse tax consequences. See "How Will My Contract Be
Taxed?"
Loans
While your Contract is in force and after the Free Look Period, you may
request a loan by giving us Satisfactory Notice. Unless you tell us otherwise,
we will transfer an amount equal to the loan from the Sub-Accounts to the Loan
Account in proportion to the Account Value in each Sub-Account in which you
are invested as of the date we process the loan. We use the Loan Account Value
as collateral for your loan. Your Contract will be the only security we
require for the loan. Any loan must be at least $250.
A loan may have adverse tax consequences. See "How Is My Contract Taxed?"
Maximum Loanable Value. The maximum amount that you may borrow ("maximum
loanable value") is 90% of the Account Value less any surrender charge and
less any due and unpaid Monthly Deduction Amount. The amount of the loan and
all existing loans may not be more than the maximum loanable value as of the
loan date, which is the date we process the loan.
If on any Business Day where there is Debt outstanding and the Surrender
Value is negative, we will send you an overloan notice at your last known
address. You will then have 61 days from the date we send the notice to avoid
termination of your Contract by paying us at least the minimum repayment
amount listed in the notice.
Loan Repayment. You may repay all or part of your loan at any time while
your Contract is in force during the Insured's lifetime. Any loan repayment
must be at least $250. If the Grace Period has expired and the Contract has
terminated, any Debt that exists at the end of the Grace Period may not be
repaid unless you reinstate your Contract.
Unless you tell us otherwise, we will transfer an amount equal to the loan
repayment from the Loan Account to the Sub-Accounts in the same proportion as
your most recent purchase payment.
Loan Interest. Interest on the loan accrues daily at a loan interest rate of
6% per annum, and is due on each Contract Anniversary. If you do not pay loan
interest when due, we will transfer the difference between the Loan Account
and Debt from the Sub-Accounts to the Loan Account in proportion to the
Account Value in each Sub-Account in which you are invested.
Interest Credited. The portion of your Account Value represented by the Loan
Account will earn interest daily from the date of transfer at a minimum loan
credited rate of 4% per annum.
However, the Preferred Loan Amount will earn interest daily at a Loan
Credited Rate that is currently 6% per annum. We can change this rate at any
time, however, it will never be less than 4% per annum. The Preferred Loan
Amount equals:
. The part of a Loan equal to cumulative earnings (i.e., the excess of the
Account Value on the date of the Loan over unliquidated purchase
payments), and
. Any loan carried over from an existing contract to a Contract as part of
a valid 1035 Exchange, as defined by the Internal Revenue Code.
Effects of a Loan. When you take out a loan, we transfer funds
proportionately from the Sub-Accounts in which you are invested to the Loan
Account. We also will transfer any loan interest that becomes due that you do
not pay from your Sub-Accounts to the Loan Account. A Market Value Adjustment
may apply to amounts taken from the Fixed Sub-Accounts.
Since we transfer the amount you borrow from the Sub-Accounts, a loan
whether or not repaid, will have a permanent effect on your Surrender Value
and may have a permanent effect on your death benefit. This is because the
Loan Account does not share in the investment results of the Sub-Accounts.
Rather, the Loan Account earns interest daily at the Loan Credited Rate.
Depending upon how the investment results compare to the Loan Credited Rate,
this effect may be favorable or unfavorable. This is true whether you repay
the loan or not. If not repaid, the loan will reduce the amount of Death
Proceeds and could cause your Contract to terminate if investment results are
not as expected. See "How Do I Purchase A Contract?--Grace Period" and "How Is
My Contract Taxed?"
31
<PAGE>
Requesting Payments
You must provide us with Satisfactory Notice of your request for payment. We
will ordinarily pay any Death Proceeds, loan, withdrawal, or surrender
proceeds within seven days after receipt at our Customer Service Center of all
requirements. We will determine the amount as of the Valuation Date our
Customer Service Center receives all requirements.
We may delay making a payment, applying proceeds to a Settlement Option, or
processing a transfer request if:
. the disposal or valuation of the Variable Account's assets is not
reasonably practicable because the New York Stock Exchange is closed for
other than a regular holiday or weekend, trading is restricted by the
SEC, or the SEC declares that an emergency exists; or
. the SEC, by order, permits postponement of payment to protect our Owners.
We also may defer making payments attributable to a check that has not
cleared (which may take up to 15 days), and we may defer payment of proceeds
from the Fixed Account for a withdrawal, surrender, loan, or transfer request
for up to six months from the date we receive the request, if permitted by
state law.
If we defer payment 30 days or more, the amount deferred will earn interest
at a rate not less than the minimum required in the jurisdiction in which we
delivered the Contract.
7. How Is Contract Performance Presented?
Articles discussing the Variable Account's investment performance, rankings,
and other characteristics may appear in publications. Some or all of these
publishers or ranking services (including, but not limited to, Lipper
Analytical Services and Morningstar, Inc.) may publish their own rankings or
performance review of variable contract separate accounts, including the
Variable Account. We may use references to or reprints of such articles or
rankings as sales material, and may include rankings that indicate the names
of other variable contract separate accounts and their investment experience.
Publications may use articles and releases developed by us, the Funds and
other parties, about the Variable Account or the Funds. We may use references
to or reprints of such articles in sales material for the Contracts or the
Variable Account. Such literature may refer to personnel of the advisers, who
have portfolio management responsibility, and their investment style and
include excerpts from media articles.
If we quote performance data, the data will represent past performance and
you should not view it as any indication of future performance. Amounts you
invest in the Variable Sub-Accounts will fluctuate daily based on Fund
investment performance, so the value of your investment may increase or
decrease. The hypothetical illustrations beginning on page of this
Prospectus show how the performance of the Funds may affect Contract values.
8. What Is The Death Benefit Under My Contract?
The Contract provides for a payment to your designated Beneficiary if the
Insured dies while the Contract is in force. This payment is called the "Death
Proceeds," and equals:
. the death benefit described below; plus
. any additional insurance on the Insured's life that may be provided by
riders to the Contract; minus
. any Debt from Contract loans, minus
. any due and unpaid charges; and minus
. any amounts previously paid under the Accelerated Death Benefit Rider
plus accrued interest.
The Death Proceeds will be adjusted in certain circumstances. See
"Incontestability," "Suicide," and "Misstatement of Age or Sex" in "What Other
Information Should I Know?"
You or your Beneficiary decide how to receive the Death Proceeds. You or
your Beneficiary can elect payment in a single sum, in which case your
Contract will terminate; or you or your Beneficiary may apply proceeds under
one of the Settlement Options in your Contract. See "What Are My Settlement
Options?" Unless you or your Beneficiary specify otherwise, we will pay the
Death Proceeds in one sum within 90 days after we receive proof of death. If
required by the law of your state, we also will pay interest from the date of
death until we distribute the Death Proceeds.
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Death Benefit. At issue, your death benefit equals your Insurance Amount
shown in your Contract. On any Business Day after that, it equals the greater
of:
. the Insurance Amount; or
. the Minimum Death Benefit.
However, if the state in which we issue a Contract does not allow us to
deduct a cost of insurance charge on or after the Contract Anniversary when
the Insured reaches age 100, we will limit the death benefit on and after that
anniversary to the Minimum Death Benefit. The tax consequences associated with
continuing a Contract after the Insured reaches age 100 are unclear.
Insurance Amount. The initial Insurance Amount depends on the amount of your
initial purchase payment and the age and sex of the proposed Insured. It
remains level unless you make additional purchase payments or withdrawals.
Additional payments may increase the Insurance Amount. See "Insurance Amount
Increases" below. Withdrawals reduce the Insurance Amount in the same
proportion as the Account Value is reduced.
Minimum Death Benefit. To ensure that the Contract continues to qualify as
life insurance under the Code, each Business Day we will calculate a Minimum
Death Benefit. The Minimum Death Benefit equals (a) times (b), where:
(a) is the Account Value plus any positive Market Value Adjustment on the
date of calculation; and
(b) is the Minimum Death Benefit Percentage from the table below.
Table of Minimun Death Benefit Percentages
<TABLE>
<CAPTION>
Attained Attained Attained
Age Percentages Age Percentages Age Percentages
- -------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
0-40 250% 54 157% 68 117%
41 243% 55 150% 69 116%
42 236% 56 146% 70 115%
43 229% 57 142% 71 113%
44 222% 58 138% 72 111%
45 215% 59 134% 73 109%
46 209% 60 130% 74 107%
47 203% 61 128% 75-90 105%
48 197% 62 126% 91 104%
49 191% 63 124% 92 103%
50 185% 64 122% 93 102%
51 178% 65 120% 94-99 101%
52 171% 66 119% 100+ 100%
53 164% 67 118%
</TABLE>
Since positive investment performance increases your Account Value, it may
increase your death benefit to the extent that the Minimum Death Benefit is
greater than the Insurance Amount. Conversely, since negative investment
performance decreases your Account Value, it may decrease your death benefit,
but never below the Insurance Amount.
Proof of Death. We will pay the Death Proceeds to your Beneficiary after we
receive satisfactory proof of death at our Customer Service Center. We will
accept one of the following items:
1. An original certified copy of an official death certificate, or
2. An original certified copy of a decree of a court of competent
jurisdiction as to the finding of death, or
3. Any other proof satisfactory to us.
Insurance Amount Increases. If you make additional purchase payments, we may
have to increase your Insurance Amount so that your Contract continues to
qualify as life insurance under the Code. We reserve the right to require
satisfactory evidence of insurability as to any increase in the Insurance
Amount. In addition, we reserve the right to require that the Insured's risk
class be identical to
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that on the Contract Date. Other than in connection with making additional
purchase payments, we do not currently permit you to request an increase in
your Insurance Amount.
9. What Supplemental Benefits Are Available Under My Contract?
The following supplemental benefits are available under the Contracts by
rider. We include these riders automatically in your Contract at no additional
cost. The riders have certain conditions and use special terms and may not be
available in all states.
Accelerated Death Benefit Rider. The Accelerated Death Benefit Rider
provides you with access to a portion of the death benefit during the
Insured's lifetime, if the Insured is diagnosed as having a terminal illness.
You can request to receive up to 50% of the Insurance Amount up to a maximum
of $500,000.
You must provide us with proof that the Insured has a terminal illness. You
may receive an accelerated benefit amount only once. The accelerated benefit
amount will first be used to repay any outstanding Debt. We will pay any
amount in excess of the outstanding Debt to you in a lump sum. Other
conditions apply.
The tax treatment of amounts received under the Accelerated Death Benefit is
uncertain. You should consult a tax adviser before requesting accelerated
death benefits.
Accidental Death Benefit Rider. The Accidental Death Benefit Rider provides
an additional death benefit called the accidental death benefit. This
additional benefit will equal the purchase payments made minus any withdrawals
(including any associated surrender charge or Market Value Adjustment
incurred), determined as of the date of the Insured's death (or the next
Business Day if the Insured dies on other than a Business Day), up to a
maximum of $250,000.
To qualify for this benefit, the Insured's death must: (i) occur before the
first Contract Anniversary after the Insured attains age 80; and (ii) be a
direct result of accidental bodily injury, independent of all other causes.
Further, all the terms and conditions described in the Contract must be
satisfied, including the requirement that we receive satisfactory proof of
accidental death at our Customer Service Center within 30 days after an
accidental death or as soon thereafter as reasonably possible. We will pay the
accidental death benefit to the Beneficiary or the person entitled to receive
the death benefit under the Contract, after receipt of satisfactory proof of
accidental death.
We terminate the accidental death benefit provision:
. when we pay the benefit;
. when you surrender the Contract or apply the entire Surrender Value to a
settlement Option;
. when we distribute the interest in the Contract due to the death of an
Insured; or
. when you request termination of the benefit.
Waiver of Surrender Charge Rider. The Waiver of Surrender Charge Rider
provides that we will not deduct a surrender charge if, when you submit your
request for a withdrawal or a surrender, you also submit due proof that you
have been confined continuously to a "Qualifying Hospital or Nursing Care
Facility" for at least 45 days in a 60 day period. We define "Qualifying
Hospital or Nursing Care Facility" in your Contract.
10 . What Are My Settlement Options?
You may elect to have the Surrender Value or Death Proceeds paid in a single
sum or under one of our Settlement Options if the amount is at least $5,000.
You select a Settlement Option from the list below, and indicate whether you
want your income payments to be fixed or variable or a combination of fixed
and variable. Once payments have begun under a Settlement Option, (i) our
prior approval is necessary for transfers from the Fixed Account to the
Variable Account and from the Variable Account to the Fixed Account, and (ii)
we reserve the right to limit transfers between Variable Sub-Accounts to one
per Contract Year. Any other changes require our prior approval.
On the date the Settlement Option becomes effective, the Surrender Value
under the Contract will be used to provide income payments. Unless you request
otherwise, we will use any Variable Account Value to provide variable income
payments, and we
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will use any Fixed Account Value to provide fixed income payments.
You may elect one of the Settlement Options shown below (or any other option
acceptable to us). For ease of describing these Settlement Options, we assume
that you apply the Surrender Value and receive the income payments from one of
the options below. Of course, you may always designate someone other than
yourself to receive the income payments, and your designated Beneficiary will
receive the income payments from any Death Proceeds.
Option 1--Payments for Life: You will receive payments for your life.
Option 2--Life Annuity with 10 or 20 Years Certain: You will receive
payments for your life. However, if you die before the end of the guaranteed
certain period you select (10 or 20 years), your Beneficiary will receive the
payments for the remainder of that period.
Option 3--Joint and Last Survivor Life Annuity: We will make payments as
long as either you or a second person you select (such as your spouse) is
alive.
Option 4--Payments for a Specified Period Certain: You will receive payments
for the number of years you select, which may be from 5-30 years. However, if
you die before the end of that period, your Beneficiary will receive the
payments for the remainder of the guaranteed certain period.
Your income payments will be made monthly, unless you or the Beneficiary, as
the case may be, choose quarterly, semi-annual or annual payments by giving us
Satisfactory Notice. Each payment must be at least $100. If any payment would
be less than $100, we may change the payment frequency to the next longer
interval, but in no event less frequent than annual.
If you told us that you want a life annuity, it is possible that you could
only receive one payment.
We will base your first income payment, whether fixed or variable, on the
amount of proceeds applied under the Settlement Option you or the Beneficiary,
as the case may be, have selected and on the applicable "purchase rates." If
applicable, these rates will vary based on: (i) the age and sex of the person
that will receive the income payments (the "Payee"); (ii) the age and sex of a
second designated person; and (iii) the specified period certain. The purchase
rate we apply will never be lower than the rate shown in your Contract.
If you told us you want fixed income payments, we guarantee the amount of
each income payment and it remains level throughout the period you selected.
If you told us you want variable income payments, the amount of each payment
will vary according to the investment performance of the Funds you selected.
Variable Income Payments. To calculate your initial and future variable
income payments, we need to make an assumption regarding the investment
performance of the Funds you select. We call this your assumed investment
rate. This rate is simply the total return, after expenses, you need to earn
to keep your variable income payments level. Rather than building in our own
estimate, we will allow you to tailor your variable income payments to meet
your needs by giving you a choice of rates. Currently, you may select either
3% or 6%; if you do not select a rate, we will apply the 3% rate. (We may
offer other rates in the future). The lower the rate, the lower your initial
variable income payment, but the better your payments will keep pace with
inflation (assuming net positive investment performance greater than the
assumed investment rate). Conversely, the higher the rate, the higher your
initial variable income payment, but the less likely your payments will keep
pace with inflation (assuming net positive investment performance greater than
the assumed investment rate).
For example, if you select 6%, this means that if the investment
performance, after expenses, of your Funds is less than 6%, then the dollar
amount of your variable income payment will decrease. Conversely, if the
investment performance, after expenses, of your Funds is greater than 6%, then
the dollar amount of your income payments will increase.
Your variable payments will fluctuate based on Variable Sub-Account
performance. The dollar amount of each payment attributable to each Variable
Sub-Account is the number of Income Units for each Variable Sub-Account times
the Income Unit value
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of that Sub-Account. The sum of the dollar amounts for each Variable Sub-
Account is the amount of the total variable income payment. We will determine
the Income Unit values for each payment no earlier than five Business Days
preceding the due date of the variable income payment (except for Option 4,
which is determined on the due date). We guarantee the payment will not vary
due to changes in mortality or expenses.
Income Unit Value. We calculate the value of an Income Unit at the same time
that we calculate the value of an Accumulation Unit and base it on the same
values for Fund shares and other assets and liabilities. The Income Unit value
for a Variable Sub-Account's first Business Day was set at $10. After that, we
determine the Income Unit value for every Business Day by multiplying (a) by
(b), and then dividing by (c) where:
(a) is the Income Unit value for the immediately preceding Valuation
Period;
(b) is the "net investment factor" for the Variable Sub-Account for the
Valuation Period for which the value is being determined; and
(c) is the daily equivalent of the assumed investment rate that you have
selected for the number of days in the Valuation Period.
Under a Settlement Option, we calculate the net investment factor slightly
different than is otherwise the case. Before a Settlement Option is elected,
we calculate Asset-Based Charges as a percentage of the Account Value on the
date of deduction. These charges on an annual basis equal 1.80%, decreasing to
1.30% after the tenth Contract Year. However, once a Settlement Option is
elected, we call these charges Variable Sub-Account Charges and deduct them
from the assets in each Variable Sub-Account on a daily basis. Therefore, we
determine the "net investment factor" in (b), above, by dividing (i) by (ii),
and then subtracting (iii) where:
(i) is the Accumulation Unit value for the current Valuation Period;
(ii) is the Accumulation Unit value for the immediately preceding Valuation
Period; and
(iii) is the daily equivalent Variable Sub-Account Charges (adjusted for
the number of days in the Valuation Period).
Exchange of Income Units. Under a Settlement Option, if there is an exchange
of value of a designated number of Income Units of particular Variable Sub-
Accounts into other Income Units, the value will be such that the dollar
amount of the income payment made on the date of exchange will be unaffected
by the exchange.
11. What Other Information Should I Know?
Sage Life Assurance of America, Inc.
We are a Delaware stock life insurance company that is wholly owned by Sage
Life Holdings of America, Inc., also a Delaware corporation. Sage Life
Holdings is, in turn, wholly owned by Sage Insurance Group Inc., also a
Delaware corporation. Our Executive Office is located at 300 Atlantic Street,
Stamford, CT 06901. We were incorporated in 1981 and have been engaged in the
life insurance business since that year. We are subject to regulation by the
Insurance Department of the State of Delaware as well as by the insurance
departments of all other states and jurisdictions in which we do business. We
sell insurance in 49 states and the District of Columbia. We submit annual
statements on our operations and finance to insurance officials in such states
and jurisdictions where required. The Contracts described in this Prospectus
have been filed with and/or approved by insurance officials in jurisdictions
where they are sold.
Separate Accounts
The Sage Variable Life Account A. We established the Variable Account as a
separate investment account under Delaware law on December 3, 1997. The
Variable Account may invest in mutual funds, unit investment trusts, and other
investment portfolios. We own the assets in the Variable Account and are
obligated to pay all benefits under the Contracts. We use the Variable Account
to support the Contracts as well as for other purposes permitted by law. We
registered the Variable Account with the SEC as a unit investment trust under
the 1940 Act and it qualifies as a "separate account" within the meaning of
the federal securities laws. Such registration does not involve any
supervision by the SEC of the management of the Variable Account or Sage Life.
We divided the Variable Account into Variable Sub-Accounts, each of which
currently invests in shares of a specific Fund of AIM Variable Insurance
Funds, Inc., The Alger American Fund, Liberty
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Variable Investment Trust, SteinRoe Variable Investment Trust, MFS(R) Variable
Investment TrustSM, The Universal Funds, Inc., Oppenheimer Variable Account
Funds, Sage Life Investment Trust, and T. Rowe Price Equity Series, Inc.
Variable Sub-Accounts buy and redeem Fund shares at net asset value without
any sales charge. We reinvest any dividends from net investment income and
distributions from realized gains from security transactions of a Fund at net
asset value in shares of the same Fund. Income, gains and losses, realized or
unrealized, of the Variable Account are credited to or charged against the
Variable Account without regard to any other income, gains or losses of Sage
Life. Assets equal to the reserves and other Contract liabilities with respect
to the Variable Account are not chargeable with liabilities arising out of any
other business or account of Sage Life. If the assets exceed the required
reserves and other liabilities, we may transfer the excess to our General
Account.
Voting of Fund Shares. We are the legal owner of shares held by the Variable
Sub-Accounts and as such, have the right to vote on all matters submitted to
shareholders of the Funds. However, as required by law, we will vote shares
held in the Variable Sub-Accounts at regular and special meetings of
shareholders of the Funds according to instructions received from Owners with
Account Value in the Variable Sub-Accounts. To obtain your voting instructions
before a Fund shareholder meeting, we will send you voting instruction
materials, a voting instruction form, and any other related material. We will
vote shares held by a Variable Sub-Account for which we received no timely
instructions in the same proportion as those shares for which we received
voting instructions. Should the applicable federal securities laws,
regulations, or interpretations thereof change so as to permit us to vote
shares of the Funds in our own right, we may elect to do so.
The Sage Fixed Interest Account A. The Fixed Account is a separate
investment account under state insurance law. We maintain it separate from our
General Account and separate from any other separate account that we may have.
We own the assets in the Fixed Account, and also offer the Fixed Account with
our variable annuity contracts. Assets equal to the reserves and other
liabilities of the Fixed Account will not be charged with liabilities that
arise from any other business that we conduct. Thus, the Fixed Account
represents pools of assets that provide an additional measure of assurance
that Owners will receive full payment of benefits under the Contracts. We may
transfer to our General Account assets that exceed the reserves and other
liabilities of the Fixed Account. Notwithstanding the foregoing, our
obligations under (and values and benefits under) the Fixed Account do not
vary as a function of the investment performance of the Fixed Account. Owners
and Beneficiaries with rights under the Contracts do not participate in the
investment gains or losses of the assets of the Fixed Account. These gains or
losses accrue solely to us. We retain the risk that the value of the assets in
the Fixed Account may fall below the reserves and other liabilities that we
must maintain in connection with our obligations under the Fixed Account. In
such an event, we will transfer assets from our General Account to the Fixed
Account to make up the difference. We are not required to register the Fixed
Account as an investment company under the 1940 Act.
Modification
When permitted by applicable law, we may modify the Contracts as follows:
. deregister the Variable Account under the 1940 Act;
. operate the Variable Account as a management company under the 1940 Act
if it is operating as a unit investment trust;
. operate the Variable Account as a unit investment trust under the 1940
Act if it is operating as a managed separate account;
. restrict or eliminate any voting rights of Owners, or other persons who
have voting rights as to the Variable Account;
. combine the Variable Account with other separate accounts; and
. combine a Variable Sub-Account with another Variable Sub-Account.
We also reserve the right, subject to applicable law, to make additions to,
deletions from, or substitutions of shares of a Fund that are held by the
Variable Account (shares of the new Fund and may have higher fees and charges
than the Fund it replaced and not all Funds may be available to all Classes of
Contracts) and to establish additional
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Variable Sub-Accounts or eliminate Variable Sub-Accounts, if marketing, tax,
or investment conditions so warrant. Subject to any required regulatory
approvals, we reserve the right to transfer assets of a Variable Sub-Account
that we determine to be associated with the class of Contracts to which the
Contract belongs, to another separate account or to another separate account
sub-account.
If the actions we take result in a material change in the underlying
investments of a Variable Sub-Account in which you are invested, we will
notify you of the change. You may then make a new choice of Variable Sub-
Accounts.
Distribution of the Contracts
Sage Distributors, Inc. ("Sage Distributors"), acts as the distributor
(principal underwriter) of the Contracts. Sage Distributors is a Delaware
corporation registered as a broker-dealer under the Securities Exchange Act of
1934, and is a member of the National Association of Securities Dealers, Inc.
(the "NASD"). Sage Distributors is a wholly owned subsidiary of Sage Insurance
Group Inc. We compensate Sage Distributors for acting as principal underwriter
under a distribution agreement. We offer the Contracts on a continuous basis,
and do not anticipate discontinuing their sale. The Contracts may not be
available in all states.
The Contracts are sold by broker-dealers through their registered
representatives who are also appointed and licensed as insurance agents of
Sage Life. These broker-dealers receive commissions for selling Contracts
calculated as a percentage of purchase payments (up to a maximum of 8.5%).
Broker-dealers who meet certain productivity and profitability standards may
be eligible for additional compensation.
Experts
Ernst & Young LLP, independent auditors, have audited our financial
statements as of December 31, 1999 and 1998, and for the three years in the
period ended December 31, 1999, as set forth in their report, which is
included in this Prospectus. We included our financial statements in this
Prospectus in reliance on their report, given on their authority as experts in
accounting and auditing.
Legal Proceedings
Sage Life and its subsidiaries, as of the date of this Prospectus, are not
involved in any lawsuits. However, our direct and indirect parent companies,
like other companies, are involved in lawsuits. In some lawsuits involving
insurers, substantial damages have been sought and/or material settlement
payments have been made. Although the outcome of any litigation cannot be
predicted with certainty, we believe that at the present time there are no
pending or threatened lawsuits that are reasonably likely to have a material
adverse impact on the Variable Account, the Fixed Account, the General
Account, or Sage Life.
Reports to Contract Owners
We maintain records and accounts of all transactions involving the
Contracts, the Variable Account, and the Fixed Account at our Customer Service
Center. Each year, or more often if required by law, we will send you a report
showing information about your Contract for the period covered by the report.
We will also send you an annual and a semi-annual report for each Fund
underlying a Variable Sub-Account in which you are invested as required by the
1940 Act. In addition, when you make purchase payments, or if you make
transfers or withdrawals, we will send you a confirmation of these
transactions.
Assignment
You may assign your Contract at any time during the Insured's lifetime. No
assignment will be binding on us unless we receive Satisfactory Notice. We
will not be liable for any payments made or actions we take before we accept
the assignment. An absolute assignment will revoke the interest of any
revocable Beneficiary. We are not responsible for the validity of any
assignment. An assignment may be a taxable event.
The Owner
You are the Owner of the Contract. You are also the Insured unless you named
another Insured in the application. You have the rights and options described
in the Contract while the Insured is living and the Contract is in force. One
or more people may own the Contract.
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The Beneficiary
We pay the Death Proceeds to the primary Beneficiary. If the primary
Beneficiary dies before the Insured, we pay the Death Proceeds to the
Contingent Beneficiary, if any. If there is no surviving Beneficiary, we pay
the Death Proceeds to the Owner's estate.
You may name one or more persons as primary Beneficiary or Contingent
Beneficiary. We will assume any Death Proceeds are to be paid in equal shares
to the multiple surviving Beneficiaries, unless you tell us otherwise.
You have the right to change Beneficiaries. However, if you designate the
primary Beneficiary as irrevocable, you may need the consent of that
Beneficiary to exercise the rights and options under your Contract.
Change of Owner or Beneficiary
During your lifetime and while your Contract is in force you can transfer
ownership of your Contract or change the Beneficiary. To make any of these
changes, you must send us Satisfactory Notice. If accepted, any change in
Owner or Beneficiary will take effect on the date you signed the notice. Any
of these changes will not affect any payment made or action we took before our
acceptance. A change of Owner may be a taxable event.
Misstatement And Proof of Age, Sex, or Survival
We may require proof of age, sex, or survival of any person on whose age,
sex, or survival any payments depend. If the age or sex of the Insured has
been misstated, the benefits will be those that the initial purchase payment
and any additional purchase payments would have provided for the correct age
and sex.
Incontestability
We will not contest the payment of the Death Proceeds based upon the initial
purchase payment after the Contract has been in force during the Insured's
lifetime for two years from the Issue Date.
For any increase in Insurance Amount requiring evidence of insurability, we
will not contest payment of the Death Proceeds based on such an increase after
it has been in force during the Insured's lifetime for two year from its
effective date.
Suicide
If the Insured dies by suicide, while sane or insane, within two years from
the Issue Date, we will not pay the Death Proceeds normally payable on the
Insured's death. Instead, we will limit the death benefit to the Account Value
as of the date we receive proof of death. We will otherwise calculate Death
Proceeds in the usual manner.
If the Insured dies by suicide, while sane or insane, within two years of
any date we receive and accept an additional purchase payment, any amount of
death benefit that would not be payable except for the fact the additional
purchase payment was made will be limited to the amount of such payment.
Authority to Make Agreements
One of our officers must sign all agreements we make. No other person,
including an insurance agent or registered representative, can change the
terms of your Contract or make changes to it without our consent.
Participation
The Contract does not participate in the surplus or profits of the Company,
and the Company does not pay dividends on the Contracts.
Safekeeping of Account Assets
We hold the title to the assets of the Variable Account. We keep the assets
physically segregated and hold them separate and apart from our General
Account assets and from the assets in any other separate account.
We maintain records of all purchases and redemptions of Fund shares held by
each of the Variable Sub-Accounts.
Lloyd's of London has issued a fidelity bond in the amount of approximately
$10 million per occurrence covering our directors, officers, and employees.
Legal Matters
All matters relating to Delaware law pertaining to the Contracts, including
the validity of the Contracts and our authority to issue the Contracts, have
been passed upon by James F. Bronsdon, our Vice President, Legal and
Compliance. Sutherland
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Asbill & Brennan LLP has provided advice on certain matters relating to the
federal securities laws.
Financial Statements
No financial statements are presented for the Variable Account because the
Variable Account has yet to commence operations.
We have included audited financial statements for Sage Life for the years
ended December 31, 1999, 1998 and 1997 in this Prospectus. You should consider
these financial statements only as bearing on the ability of Sage Life to meet
its obligations under the Contracts. You should not consider them as bearing
on the investment performance of the assets held in the Variable Account.
12. How Can I Make Inquiries?
You may make inquiries about your Contract by writing to us at our Customer
Service Center, by calling us at 877-835-7243 (Toll Free), or by contacting
one of our authorized registered representatives.
HYPOTHETICAL ILLUSTRATIONS OF CONTRACT VALUES
To show you how the Contract works, we have included some hypothetical
illustrations for the following Insureds: a male issue age 45, a female issue
age 55, and a male issue age 65. These illustrations show how Account Values,
Surrender Values and death benefits under a Contract vary over time assuming
the following circumstances:
. An initial purchase payment of $10,000 allocated entirely to Variable
Sub-Accounts and remaining there for the entire period;
. The Insured is in good health, does not smoke, and qualifies under our
simplified underwriting program;
. There are no additional purchase payments, no withdrawals, no charges for
supplemental benefits; and
. The Funds earn gross (that is, before deductions for investment
management fees and other operating expenses of the Funds) annual rates
of return of 0%, 6%, and 12%.
It is important to understand that the illustrations assume a level rate of
return for all years. The values under a Contract would be different from
those shown if the hypothetical returns averaged 0%, 6%, or 12% but fluctuated
over and under those averages throughout the years shown.
The illustrations also reflect an average daily charge equal to an annual
charge of 0.86% of the average daily net assets of the Funds for investment
management fees and other operating expenses. We calculated these fees based
on an average of the expense ratios of each of the Funds (in some cases, we
estimated those fees) for the last year of operations. Taking into account
this average charge, the net annual rates of return for the Variable
Sub-Accounts are - 0.86%, 5.14% and 11.14%, respectively. The average daily
charge for the Fund expenses, reflects voluntary expense agreements between
certain of the Funds and their investment managers. These expense agreements
could terminate at any time. See "What Are The Expenses Under A Contract?" If
these agreements terminate, the values shown on the following pages would be
less.
The illustrations also reflect the Monthly Deduction Amount and other
applicable charges for the hypothetical Insured. These include the Asset-Based
Charges and the cost of insurance charges that we deduct on each Monthly
Processing Date, and any annual administration charge that we deduct on a
Contract Anniversary. Our current charges and the higher guaranteed charges we
have the contractual right to charge are reflected in separate illustrations
on each of the following pages. All the illustrations reflect the fact that no
charges for Federal or state income taxes are currently made against the
Variable Account.
Each illustration also has a column labeled "Payments Accumulated at 5%
Interest Per Year." This column shows the amount that would accumulate if the
initial purchase payment was invested to earn interest, after taxes, of 5% per
year, compounded annually.
Upon request, we will furnish you a personalized illustration based upon the
proposed Insured's individual circumstances. Such illustrations will reflect
the current cost of insurance charges and the guaranteed maximum cost of
insurance charges and may assume different hypothetical rates of return than
those shown in the following illustrations.
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The investment rates of return we have chosen to use in the illustrations
are hypothetical only, and you should understand that they do not represent
actual past or future rates of return. The actual rates of return under a
Contract may be more or less than the hypothetical rates of return in the
illustrations.
Modified Single Payment Combination Fixed and Variable Life Insurance
Male Nonsmoker $10,000 Initial Purchase Payment
Issue Age 45 $34,078 Initial Insurance Amount
<TABLE>
<CAPTION>
Current Charges Basis
-----------------------------------------------------------------------------
Assumed Gross Annual Assumed Gross Annual Assumed Gross Annual
Payments Investment Return of Investment Return of Investment Return of
Accumulated 0.00% (-0.86% Net) 6.00% (5.14% Net) 12.00% (11.14% Net)
End of at 5% ------------------------- ------------------------- -------------------------
Contract Interest Account Surrender Death Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- -------- ----------- ------- --------- ------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 9,684 8,744 34,078 10,270 9,330 34,078 10,856 9,916 34,078
2 11,025 9,338 8,398 34,078 10,505 9,565 34,078 11,741 10,801 34,078
3 11,576 9,004 8,164 34,078 10,748 9,908 34,078 12,703 11,863 34,078
4 12,155 8,681 7,941 34,078 10,996 10,256 34,078 13,746 13,006 34,078
5 12,763 8,367 7,727 34,078 11,252 10,612 34,078 14,879 14,239 34,078
6 13,401 8,064 7,524 34,078 11,514 10,974 34,078 16,109 15,569 34,078
7 14,071 7,770 7,430 34,078 11,784 11,444 34,078 17,444 17,104 34,078
8 14,775 7,485 7,485 34,078 12,060 12,060 34,078 18,893 18,893 34,078
9 15,513 7,248 7,248 34,078 12,385 12,385 34,078 20,510 20,510 34,078
10 16,289 7,019 7,019 34,078 12,719 12,719 34,078 22,265 22,265 34,955
11 17,103 6,831 6,831 34,078 13,128 13,128 34,078 24,291 24,291 36,437
12 17,959 6,648 6,648 34,078 13,550 13,550 34,078 26,502 26,502 38,693
13 18,856 6,470 6,470 34,078 13,985 13,985 34,078 28,914 28,914 41,058
14 19,799 6,297 6,297 34,078 14,434 14,434 34,078 31,548 31,548 43,537
15 20,789 6,128 6,128 34,078 14,898 14,898 34,078 34,427 34,427 46,133
16 21,829 5,964 5,964 34,078 15,376 15,376 34,078 37,577 37,577 48,850
17 22,920 5,804 5,804 34,078 15,870 15,870 34,078 41,010 41,010 52,493
18 24,066 5,649 5,649 34,078 16,380 16,380 34,078 44,752 44,752 56,388
19 25,270 5,498 5,498 34,078 16,906 16,906 34,078 48,833 48,833 60,552
20 26,533 5,351 5,351 34,078 17,449 17,449 34,078 53,283 53,283 65,005
25 33,864 4,671 4,671 34,078 20,437 20,437 34,078 82,375 82,375 95,555
30 43,219 4,079 4,079 34,078 23,937 23,937 34,078 127,527 127,527 136,454
35 55,160 3,561 3,561 34,078 28,036 28,036 34,078 198,428 198,428 208,349
</TABLE>
We emphasize that the assumed gross annual investment rates of return shown
above and elsewhere in this prospectus are illustrative only and should not be
deemed a representation of past or future gross annual investment rates of
return. Actual gross annual rates of return may be more or less than those
shown and will depend on a number of factors, including investment allocations
made to the Sub-Accounts. The death benefit, Account Values and Surrender
Values for a Contract would be different from those shown if the actual gross
annual rates of return averaged 0%, 6% and 12% over a period of years, but
varied above or below that average during the period. They would also be
different if you take a loan or withdrawal during the period of time
illustrated. No representation can be made that those assumed gross annual
rates of return can be achieved for any one year or sustained over any period
of time.
41
<PAGE>
Modified Single Payment Combination Fixed and Variable Life Insurance
Male Nonsmoker $10,000 Initial Purchase Payment
Issue Age 45 $34,078 Initial Insurance Amount
<TABLE>
<CAPTION>
Maximum Charges Basis
-----------------------------------------------------------------------------
Assumed Gross Annual Assumed Gross Annual Assumed Gross Annual
Payments Investment Return of Investment Return of Investment Return of
Accumulated 0.00% (-0.86% Net) 6.00% (5.14% Net) 12.00% (11.14% Net)
End of at 5% ------------------------- ------------------------- -------------------------
Contract Interest Account Surrender Death Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- -------- ----------- ------- --------- ------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 9,623 8,683 34,078 10,210 9,270 34,078 10,797 9,857 34,078
2 11,025 9,206 8,266 34,078 10,378 9,438 34,078 11,619 10,679 34,078
3 11,576 8,788 7,948 34,078 10,541 9,701 34,078 12,510 11,670 34,078
4 12,155 8,367 7,627 34,078 10,701 9,961 34,078 13,478 12,738 34,078
5 12,763 7,942 7,302 34,078 10,854 10,214 34,078 14,532 13,892 34,078
6 13,401 7,512 6,972 34,078 11,001 10,461 34,078 15,678 15,138 34,078
7 14,071 7,072 6,732 34,078 11,139 10,799 34,078 16,925 16,585 34,078
8 14,775 6,623 6,623 34,078 11,266 11,266 34,078 18,286 18,286 34,078
9 15,513 6,198 6,198 34,078 11,421 11,421 34,078 19,814 19,814 34,078
10 16,289 5,756 5,756 34,078 11,562 11,562 34,078 21,485 21,485 34,078
11 17,103 5,322 5,322 34,078 11,746 11,746 34,078 23,432 23,432 35,148
12 17,959 4,863 4,863 34,078 11,917 11,917 34,078 25,564 25,564 37,323
13 18,856 4,377 4,377 34,078 12,071 12,071 34,078 27,890 27,890 39,604
14 19,799 3,860 3,860 34,078 12,207 12,207 34,078 30,431 30,431 41,995
15 20,789 3,309 3,309 34,078 12,322 12,322 34,078 33,208 33,208 44,499
16 21,829 2,718 2,718 34,078 12,413 12,413 34,078 36,246 36,246 47,120
17 22,920 2,080 2,080 34,078 12,472 12,472 34,078 39,558 39,558 50,634
18 24,066 1,386 1,386 34,078 12,496 12,496 34,078 43,168 43,168 54,391
19 25,270 627 627 34,078 12,476 12,476 34,078 47,103 47,103 58,408
20 26,533 -- -- -- 12,405 10,405 34,078 51,396 51,396 62,703
25 33,864 -- -- -- 10,980 10,980 34,078 79,334 79,334 92,028
30 43,219 -- -- -- 6,067 6,067 34,078 122,636 122,636 131,220
35 55,160 -- -- -- -- -- 34,078 190,817 190,817 200,357
</TABLE>
We emphasize that the assumed gross annual investment rates of return shown
above and elsewhere in this prospectus are illustrative only and should not be
deemed a representation of past or future gross annual investment rates of
return. Actual gross annual rates of return may be more or less than those
shown and will depend on a number of factors, including investment allocations
made to the Sub-Accounts. The death benefit, Account Values and Surrender
Values for a Contract would be different from those shown if the actual gross
annual rates of return averaged 0%, 6% and 12% over a period of years, but
varied above or below that average during the period. They would also be
different if you take a loan or withdrawal during the period of time
illustrated. No representation can be made that those assumed gross annual
rates of return can be achieved for any one year or sustained over any period
of time.
42
<PAGE>
Modified Single Payment Combination Fixed and Variable Life Insurance
Female Nonsmoker $10,000 Initial Purchase Payment
Issue Age 55 $29,068 Initial Insurance Amount
<TABLE>
<CAPTION>
Current Charges Basis
-----------------------------------------------------------------------------
Assumed Gross Annual Assumed Gross Annual Assumed Gross Annual
Payments Investment Return of Investment Return of Investment Return of
Accumulated 0.00% (-0.86% Net) 6.00% (5.14% Net) 12.00% (11.14% Net)
End of at 5% ------------------------- ------------------------- -------------------------
Contract Interest Account Surrender Death Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- -------- ----------- ------- --------- ------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 9,684 8,744 29,068 10,270 9,330 29,068 10,856 9,916 29,068
2 11,025 9,338 8,398 29,068 10,505 9,565 29,068 11,741 10,801 29,068
3 11,576 9,004 8,164 29,068 10,748 9,908 29,068 12,703 11,863 29,068
4 12,155 8,681 7,941 29,068 10,996 10,256 29,068 13,746 13,006 29,068
5 12,763 8,367 7,727 29,068 11,252 10,612 29,068 14,879 14,239 29,068
6 13,401 8,064 7,524 29,068 11,514 10,974 29,068 16,109 15,569 29,068
7 14,071 7,770 7,430 29,068 11,784 11,444 29,068 17,444 17,104 29,068
8 14,775 7,485 7,485 29,068 12,060 12,060 29,068 18,893 18,893 29,068
9 15,513 7,248 7,248 29,068 12,385 12,385 29,068 20,510 20,510 29,068
10 16,289 7,019 7,019 29,068 12,719 12,719 29,068 22,274 22,274 29,068
11 17,103 6,831 6,831 29,068 13,128 13,128 29,068 24,339 24,339 29,207
12 17,959 6,648 6,648 29,068 13,550 13,550 29,068 26,616 26,616 31,673
13 18,856 6,470 6,470 29,068 13,985 13,985 29,068 29,103 29,103 34,341
14 19,799 6,297 6,297 29,068 14,434 14,434 29,068 31,820 31,820 37,229
15 20,789 6,128 6,128 29,068 14,898 14,898 29,068 34,788 34,788 40,354
16 21,829 5,964 5,964 29,068 15,376 15,376 29,068 38,030 38,030 43,734
17 22,920 5,804 5,804 29,068 15,870 15,870 29,068 41,580 41,580 46,985
18 24,066 5,649 5,649 29,068 16,380 16,380 29,068 45,470 45,470 50,472
19 25,270 5,498 5,498 29,068 16,906 16,906 29,068 49,737 49,737 54,213
20 26,533 5,351 5,351 29,068 17,449 17,449 29,068 54,424 54,424 58,233
25 33,864 4,671 4,671 29,068 20,437 20,437 29,068 85,350 85,350 89,618
30 43,219 4,079 4,079 29,068 23,937 23,937 29,068 132,557 132,557 139,185
35 55,160 3,561 3,561 29,068 28,036 28,036 29,438 204,911 204,911 215,156
</TABLE>
We emphasize that the assumed gross annual investment rates of return shown
above and elsewhere in this prospectus are illustrative only and should not be
deemed a representation of past or future gross annual investment rates of
return. Actual gross annual rates of return may be more or less than those
shown and will depend on a number of factors, including investment allocations
made to the Sub-Accounts. The death benefit, Account Values and Surrender
Values for a Contract would be different from those shown if the actual gross
annual rates of return averaged 0%, 6% and 12% over a period of years, but
varied above or below that average during the period. They would also be
different if you take a loan or withdrawal during the period of time
illustrated. No representation can be made that those assumed gross annual
rates of return can be achieved for any one year or sustained over any period
of time.
43
<PAGE>
Modified Single Payment Combination Fixed and Variable Life Insurance
Female Nonsmoker $10,000 Initial Purchase Payment
Issue Age 55 $29,068 Initial Insurance Amount
<TABLE>
<CAPTION>
Maximum Charges Basis
-----------------------------------------------------------------------------
Assumed Gross Annual Assumed Gross Annual Assumed Gross Annual
Payments Investment Return of Investment Return of Investment Return of
Accumulated 0.00% (-0.86% Net) 6.00% (5.14% Net) 12.00% (11.14% Net)
End of at 5% ------------------------- ------------------------- -------------------------
Contract Interest Account Surrender Death Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- -------- ----------- ------- --------- ------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 9,597 8,657 29,068 10,184 9,244 29,068 10,771 9,831 29,068
2 11,025 9,153 8,213 29,068 10,324 9,384 29,068 11,565 10,625 29,068
3 11,576 8,709 7,869 29,068 10,462 9,622 29,068 12,431 11,591 29,068
4 12,155 8,263 7,523 29,068 10,597 9,857 29,068 13,377 12,367 29,068
5 12,763 7,815 7,175 29,068 10,727 10,087 29,068 14,410 13,770 29,068
6 13,401 7,362 6,822 29,068 10,852 10,312 29,068 15,538 14,998 29,068
7 14,071 6,900 6,900 29,068 10,969 10,629 29,068 16,772 16,432 29,068
8 14,775 6,424 6,424 29,068 11,072 11,072 29,068 18,122 18,122 29,068
9 15,513 5,968 5,968 29,068 11,201 11,201 29,068 19,644 19,644 29,068
10 16,289 5,488 5,488 29,068 11,312 11,312 29,068 21,314 21,314 29,068
11 17,103 5,008 5,008 29,068 11,461 11,461 29,068 23,270 23,270 29,068
12 17,959 4,496 4,496 29,068 11,593 11,593 29,068 25,438 25,438 30,272
13 18,856 3,951 3,951 29,068 11,705 11,705 29,068 27,815 27,815 32,822
14 19,799 3,370 3,370 29,068 11,798 11,798 29,068 30,412 30,412 35,582
15 20,789 2,746 2,746 29,068 11,866 11,866 29,068 33,249 33,249 38,568
16 21,829 2,070 2,070 29,068 11,904 11,904 29,068 36,347 36,347 41,799
17 22,920 1,327 1,327 29,068 11,901 11,901 29,068 39,740 39,740 44,907
18 24,066 496 496 29,068 11,844 11,844 29,068 43,459 43,459 48,239
19 25,270 -- -- -- 11,718 11,718 29,068 47,537 47,537 51,815
20 26,533 -- -- -- 11,507 11,507 29,068 52,016 52,016 55,657
25 33,864 -- -- -- 8,466 8,466 29,068 81,575 81,575 85,653
30 43,219 -- -- -- -- -- -- 126,658 126,658 132,991
35 55,160 -- -- -- -- -- -- 193,217 193,217 202,878
</TABLE>
We emphasize that the assumed gross annual investment rates of return shown
above and elsewhere in this prospectus are illustrative only and should not be
deemed a representation of past or future gross annual investment rates of
return. Actual gross annual rates of return may be more or less than those
shown and will depend on a number of factors, including investment allocations
made to the Sub-Accounts. The death benefit, Account Values and Surrender
Values for a Contract would be different from those shown if the actual gross
annual rates of return averaged 0%, 6% and 12% over a period of years, but
varied above or below that average during the period. They would also be
different if you take a loan or withdrawal during the period of time
illustrated. No representation can be made that those assumed gross annual
rates of return can be achieved for any one year or sustained over any period
of time.
44
<PAGE>
Modified Single Payment Combination Fixed and Variable Life Insurance
Male Nonsmoker $10,000 Initial Purchase Payment
Issue Age 65 $18,552 Initial Insurance Amount
<TABLE>
<CAPTION>
Current Charges Basis
-----------------------------------------------------------------------------
Assumed Gross Annual Assumed Gross Annual Assumed Gross Annual
Payments Investment Return of Investment Return of Investment Return of
Accumulated 0.00% (-0.86% Net) 6.00% (5.14% Net) 12.00% (11.14% Net)
End of at 5% ------------------------- ------------------------- -------------------------
Contract Interest Account Surrender Death Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- -------- ----------- ------- --------- ------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 9,684 8,744 18,552 10,270 9,330 18,552 10,856 9,916 18,552
2 11,025 9,338 8,398 18,552 10,505 9,565 18,552 11,741 10,801 18,552
3 11,576 9,004 8,164 18,552 10,748 9,908 18,552 12,703 11,863 18,552
4 12,155 8,681 7,941 18,552 10,996 10,256 18,552 13,746 13,006 18,552
5 12,763 8,367 7,727 18,552 11,252 10,612 18,552 14,879 14,239 18,552
6 13,401 8,064 7,524 18,552 11,514 10,974 18,552 16,109 15,569 18,552
7 14,071 7,770 7,430 18,552 11,784 11,444 18,552 17,444 17,104 19,711
8 14,775 7,485 7,485 18,552 12,060 12,060 18,552 18,893 18,893 20,971
9 15,513 7,248 7,248 18,552 12,385 12,385 18,552 20,518 20,518 22,364
10 16,289 7,019 7,019 18,552 12,719 12,719 18,552 22,298 22,298 23,859
11 17,103 6,831 6,831 18,552 13,128 13,128 18,552 24,377 24,377 25,595
12 17,959 6,648 6,648 18,552 13,550 13,550 18,552 26,640 26,640 27,972
13 18,856 6,470 6,470 18,552 13,985 13,985 18,552 29,104 29,104 30,559
14 19,799 6,297 6,297 18,552 14,434 14,434 18,552 31,783 31,783 33,372
15 20,789 6,128 6,128 18,552 14,898 14,898 18,552 34,694 34,694 36,429
16 21,829 5,964 5,964 18,552 15,376 15,376 18,552 37,856 37,856 39,748
17 22,920 5,804 5,804 18,552 15,870 15,870 18,552 41,301 41,301 43,366
18 24,066 5,649 5,649 18,552 16,380 16,380 18,552 45,060 45,060 47,313
19 25,270 5,498 5,498 18,552 16,906 16,906 18,552 49,162 49,162 51,620
20 26,533 5,351 5,351 18,552 17,449 17,449 18,552 53,636 53,636 56,318
25 33,864 4,671 4,671 18,552 20,437 20,437 21,459 82,913 82,913 87,059
30 43,219 4,079 4,079 18,552 23,931 23,981 24,221 128,406 128,406 129,690
35 55,160 3,561 3,561 18,552 28,127 28,127 28,409 198,772 198,772 200,760
</TABLE>
We emphasize that the assumed gross annual investment rates of return shown
above and elsewhere in this prospectus are illustrative only and should not be
deemed a representation of past or future gross annual investment rates of
return. Actual gross annual rates of return may be more or less than those
shown and will depend on a number of factors, including investment allocations
made to the Sub-Accounts. The death benefit, Account Values and Surrender
Values for a Contract would be different from those shown if the actual gross
annual rates of return averaged 0%, 6% and 12% over a period of years, but
varied shown above or below that average during the period. They would also be
different if you take a loan or withdrawal during the period of time
illustrated. No representation can be made that those assumed gross annual
rates of return can be achieved for any one year or sustained over any period
of time.
45
<PAGE>
Modified Single Payment Combination Fixed and Variable Life Insurance
Male Nonsmoker $10,000 Initial Purchase Payment
Issue Age 65 $18,552 Initial Insurance Amount
<TABLE>
<CAPTION>
Current Charges Basis
-----------------------------------------------------------------------------
Assumed Gross Annual Assumed Gross Annual Assumed Gross Annual
Payments Investment Return of Investment Return of Investment Return of
Accumulated 0.00% (-0.86% Net) 6.00% (5.14% Net) 12.00% (11.14% Net)
End of at 5% ------------------------- ------------------------- -------------------------
Contract Interest Account Surrender Death Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- -------- ----------- ------- --------- ------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 9,503 8,563 18,552 10,092 10,092 18,552 10,682 9,742 18,552
2 11,025 8,942 8,002 18,552 10,125 10,125 18,552 11,380 10,440 18,552
3 11,576 8,352 7,512 18,552 10,136 10,136 18,552 12,145 11,305 18,552
4 12,155 7,728 6,988 18,552 10,122 10,122 18,552 12,989 12,249 18,552
5 12,763 7,061 6,421 18,552 10,078 10,078 18,552 13,925 13,285 18,552
6 13,401 6,343 5,803 18,552 9,998 9,998 18,552 14,969 14,429 18,552
7 14,071 5,560 5,220 18,552 9,874 9,874 18,552 16,145 15,805 18,552
8 14,775 4,696 4,696 18,552 9,695 9,695 18,552 17,469 17,469 19,391
9 15,513 3,772 3,772 18,552 9,493 9,493 18,552 18,972 18,972 20,679
10 16,289 2,725 2,725 18,552 9,213 9,213 18,552 20,618 20,618 22,061
11 17,103 1,542 1,542 18,552 8,889 8,889 18,552 22,540 22,540 23,667
12 17,959 178 178 18,552 8,456 8,456 18,552 24,633 24,633 25,865
13 18,856 -- -- -- 7,892 7,892 18,552 26,911 26,911 28,256
14 19,799 -- -- -- 7,169 7,169 18,552 29,388 29,388 30,857
15 20,789 -- -- -- 6,245 6,245 18,552 32,080 32,080 33,684
16 21,829 -- -- -- 5,063 5,063 18,552 35,003 35,003 36,754
17 22,920 -- -- -- 3,542 3,542 18,552 38,174 38,174 40,082
18 24,066 -- -- -- 1,569 1,569 18,552 41,607 41,607 43,687
19 25,270 -- -- -- -- -- -- 45,319 45,319 47,585
20 26,533 -- -- -- -- -- -- 49,328 49,328 51,795
25 33,864 -- -- -- -- -- -- 74,475 74,475 78,198
30 43,219 -- -- -- -- -- -- 113,346 113,346 114,480
35 55,160 -- -- -- -- -- -- 173,532 173,532 175,267
</TABLE>
We emphasize that the assumed gross annual investment rates of return shown
above and elsewhere in this prospectus are illustrative only and should not be
deemed a representation of past or future gross annual investment rates of
return. Actual gross annual rates of return may be more or less than those
shown and will depend on a number of factors, including investment allocations
made to the Sub-Accounts. The death benefit, Account Values and Surrender
Values for a Contract would be different from those shown if the actual gross
annual rates of return averaged 0%, 6% and 12% over a period of years, but
varied shown above or below that average during the period. They would also be
different if you take a loan or withdrawal during the period of time
illustrated. No representation can be made that those assumed gross annual
rates of return can be achieved for any one year or sustained over any period
of time.
46
<PAGE>
PART II
ADDITIONAL INFORMATION
History and Business
Ownership. Sage Life was incorporated under the laws of the state of
Delaware in 1981. The Company is authorized to write general life insurance
and fixed and variable annuity contracts in all states except New York, and
also is licensed to conduct variable life insurance business in all but five
states.
Fidelity Mutual Life Insurance Company, a Pennsylvania insurer, sponsored
the Company's formation in 1981 under the name of Fidelity Standard Life
Insurance Company ("Fidelity Life"). Security First Life Insurance Company
("Security First") of Los Angeles, California acquired Fidelity Life in
December 1984. In January 1997, Sage Insurance Group Inc. ("Sage Insurance
Group") (formerly Finplan Investment Corp.), a Delaware corporation and a
wholly owned indirect subsidiary of Sage Group Limited ("Sage Group"), a South
African corporation and the Company's ultimate parent, acquired Fidelity Life.
The Company changed to its present name in September 1997. In December 1998,
Sage Insurance Group formed a new company, Sage Life Holdings of America, Inc.
("Sage Life Holdings"), to act as the new immediate parent of the Company. The
transaction is discussed more fully in the section below entitled "Holding
Company Structure and Background."
Prior Business Operations. As a Security First subsidiary, the Company
specialized in the marketing of annuities qualifying under Section 403(b) of
the Code. Under an assumption reinsurance agreement, Fidelity Life's annuity
business was irrevocably transferred to Security First in January 1997 except
for a small number of contracts. During 1998, Security First assumption
reinsured all of the remaining annuity business of Fidelity Life. Security
First is now a subsidiary of The Metropolitan Life Insurance Company.
Holding Company Structure and Background. We are an indirect, wholly owned
subsidiary of Sage Insurance Group, which is a holding company for us and
affiliated entities conducting life and annuity insurance business in the
United States. We also are an indirect, wholly owned subsidiary of Sage Group
Limited ("Sage Group"), a corporation quoted on the Johannesburg Stock
Exchange. Sage Group is a holding company with a thirty-year history of
extensive operating experience in mutual funds, life assurance and investment
management. Sage Group has directly and indirectly engaged in insurance
marketing activities in the United States since 1977 through its financial
interests in Independent Financial Marketing Group Inc., a financial planning
and bank insurance marketing company. Sage Group sold its interest in
Independent Financial Marketing Group in March 1996 to the Liberty Financial
Companies of Boston.
On December 1, 1998, Sage Group entered into a letter of intent with Swiss
Re Life and Health America, Inc. ("Swiss Re"). Swiss Re is an indirect
subsidiary of Swiss Reinsurance Company, Switzerland, one of the world's
largest reinsurance groups. This agreement contemplates two transactions: (1)
that Sage Life will enter into a reinsurance agreement with Swiss Re or its
affiliate, Life Reassurance Corporation of America ("LRCA"); and (2) that
Swiss Re or LRCA would make an investment in Sage Life Holdings, our immediate
parent. The reinsurance agreement has not been finalized. However, we
anticipate that we will enter into the reinsurance agreement with LRCA by the
end of the second quarter of 2000. As to the investment in Sage Life Holdings,
on December 31, 1998, LRCA did invest $12.5 million in non-voting, non-
redeemable, cumulative preferred stock of Sage Life Holdings, which at that
point became our immediate parent and a wholly-owned subsidiary of Sage
Insurance Group. We anticipate that, during the second quarter of 2000, LRCA
will exchange part of its preferred stock for a voting interest of not more
that 9.9% in Sage Life Holdings with a retroactive effective date of April
1999. The arrangements contemplated by the agreement may be subject to
regulatory approval.
Selected Financial Data. We cannot compare our historical financial results
for the calendar year 1996 and all prior years, to the results for the years
1997, 1998 and 1999 due to the substantial change in our business operations.
We effectively disposed of all in-force business existing as of December 31,
1996 and, therefore, on January 1, 1997, had no insurance liabilities under
any of our policies other
47
<PAGE>
than the small number of policies that were not 100% assumption reinsured to
our former parent company. We subsequently novated these insurance liabilities
during 1998. Effectively, therefore, since January 1997, we became comparable
to a new company that had not yet begun its business activities.
We present the following selected financial data as of December 31, 1999,
1998 and 1997 and for the years then ended, taken from our audited financial
statements. Please read the information below along with the financial
statements, including related notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" we included
elsewhere in this Prospectus.
Selected Financial Data
(in thousands)
<TABLE>
<CAPTION>
Year Year Year
ended ended ended
December December December
31, 1999 31, 1998 31, 1997
-------- -------- --------
<S> <C> <C> <C>
Income Statement Data:
Revenues:
Net investment income........................... $ 1,290 $ 1,244 $ 989
Administrative service fees..................... 38 -- --
Annuity charges and fees........................ 1 -- --
------- ------- -------
Total revenues.................................... 1,329 1,244 989
------- ------- -------
Benefits and Expenses:
Salaries and benefits expenses.................. 972 742 497
Development expenses............................ 3,828 -- --
Insurance expenses and taxes.................... 721 522 518
Amortization expenses........................... 235 549 326
------- ------- -------
Total benefits and expenses....................... 5,756 1,813 1,341
Loss before cumulative effect adjustment.......... (4,427) (569) (352)
Cumulative effect adjustment...................... (4,269) -- --
------- ------- -------
Net loss.......................................... $(8,696) $ (569) $ (352)
======= ======= =======
Balance Sheet Data:
Total Assets.................................... $31,737 $36,542 $36,689
Total Liabilities............................... $ 234 $ 70 $ 3,486
Stockholder's Equity............................ $31,503 $36,472 $33,203
</TABLE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Introduction. The following discussion highlights the significant factors
that influence our operations. Please read this discussion along with our
financial statements and the related notes included in this Prospectus.
History and Business Overview. Sage Insurance Group acquired the Company on
December 31, 1996, and since that date, we have prepared for the
recommencement of our insurance underwriting and marketing activities, and, on
a limited basis, began those activities in 1999. (Before the acquisition of
the Company, all new business production and marketing ended in October 1996.)
We totally reengineered our products, systems and administration since the
change of ownership. All of our current senior management are experienced in
the insurance industry (either in the United States or in South Africa). We
recruited most of them since January 1997. Our ongoing business strategy is to
focus on the development, underwriting, and marketing of variable insurance
products. Our
48
<PAGE>
obligations under these contracts are supported by (1) variable accounts--
determined by the value of investments held in separate accounts, and (2)
fixed accounts--backed by investments held in separate accounts. We may not
use the assets of these separate accounts that equal the reserves and other
liabilities supporting the contracts to which they relate, to pay any of our
other obligations or creditors. During February 1999, we began to market, on a
limited basis, our new variable insurance products. Our initial marketing
focus has been to distribute the contracts through banks and third-party
marketing organizations working closely with banks. We anticipate that, over
the long-term, our distribution channels will expand to include wirehouses,
regional broker-dealers, and financial planners.
Results of Operations. Net loss for 1999 was $8.7 million, compared to
losses of $.6 million in 1998 and $.4 million in 1997. The large increase in
losses for 1999 is due to the adoption of Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 required
the Company to charge to expense all start-up costs incurred, as well as
write-off any unamortized capitalized development costs on January 1, 1999.
The development costs incurred during 1999 of $3.8 million and the write-off
of unamortized capitalized development costs of $4.3 million produced an
additional $8.1 million of losses over the prior year results.
As the Company continued in the development phase during most of 1999,
revenues continued to be derived primarily from investment income earned on
Company investments. Net investment income earned during 1999 was $1.3
million, compared to $1.2 million and $1.0 million in 1998 and 1997,
respectively. The Company's investments consist entirely of U.S. Government
securities and highly rated corporate bonds. Investment yields of 5.4%, 5.1%
and 4.9% were earned in 1999, 1998 and 1997, respectively. The Company's other
sources of income are administrative service fees and Contract charges and
fees. Administrative service fees are asset-based charges that the Company
receives on Contract Owner funds invested with various investment fund
managers. Contract charges and fees are both asset-based fees and flat annual
per-Contract fees charged to each Contract Owner. As the Company broadens its
distribution of products during 2000, these Contract charges and fees are
anticipated to become a major source of revenue. The Contract charges and fees
earned during 1999 were minimal as there were a very limited number of
Contracts issued during the year.
With the adoption of SOP 98-5, the Company's primary expenses during 1999
were those non-recurring expenses incurred in the development of products and
systems. Expenses incurred for development costs in 1999 were $3.8 million.
Prior to 1999, these expenses were capitalized and amortized over fifteen
years. As these expenses are no longer amortized, amortization expenses
decreased to $.2 million in 1999 from $.5 million in 1998. The amortization
expenses for 1999 relate entirely to the goodwill associated with the purchase
of the Company. Salaries and benefits expenses for 1999 were $1.0 million,
compared to $.7 million and $.5 million in 1998 and 1997, respectively.
Insurance expenses and taxes were $.2 million, $.5 million and $.3 million in
1999, 1998 1997, respectively. These overhead expenses include rent,
professional fees, office expenses and statutory filing fees.
The Company has no federal income tax expenses for each of the three years
ended December 31, 1999. The Company has a net operating loss carryforward of
approximately $10.3 million at the end of 1999.
Liquidity and Capital Resources. Since the beginning of 1997, we have needed
money primarily to develop our insurance products and related infrastructure,
and to fund our daily operations. We have met our cash needs through interest
income and capital contributions from Sage Insurance Group.
During 2000, we expect our cash needs to substantially increase due to our
expanded underwriting and marketing activities. We still anticipate that we
will be unable to meet all of our liquidity requirements in the coming year
without additional capital. However, Sage Insurance Group will continue to
provide capital to us for our non-recurring costs associated with new products
and business development during the year. In addition, as discussed
previously, LRCA, an indirect subsidiary of Swiss Reinsurance Corporation, has
made an equity investment in our parent company that will provide an
additional source of funds to us for new business expenses.
We also expect to enter into a coinsurance reinsurance arrangement with LRCA
that will provide an additional source of cash for operations.
49
<PAGE>
Our future marketing efforts could be hampered in the unlikely event that
Swiss Re, LRCA, Sage Insurance Group and/or their affiliates are unwilling to
commit additional funding.
Segment Information. We currently plan to conduct our business as a single
segment, and anticipate that this segment will eventually include all of the
following products:
. Combination fixed and variable deferred annuities;
. Combination fixed and variable immediate annuities; and
. Combination fixed and variable life insurance products.
Reinsurance. As discussed above in Holding Company Structure and Background,
we expect to enter into a coinsurance reinsurance arrangement with LRCA,
pursuant to which LRCA will reinsure a significant portion of our liabilities
under our variable insurance contracts with a retroactive effective date of
February 1, 1999. This arrangement will provide additional capacity for growth
of our variable insurance business.
In addition, we have entered into a reinsurance arrangement that reinsures
certain mortality risks associated with the guaranteed minimum death benefit
and accidental death benefit features of the Contracts. We intend to use only
highly rated reinsurance companies to reinsure these risks.
Reinsurance does not relieve us from our obligations to Owners. We remain
primarily liable to our Owners to the extent that any reinsurer does not meet
its obligations under the reinsurance agreements.
Reserves. The insurance laws and regulations under which we operate obligate
us to carry on our books, as liabilities, actuarially determined reserves to
meet our obligations on outstanding Contracts. We base our reserves involving
life contingencies on mortality tables in general use in the United States.
Where applicable, we compute our reserves to equal amounts which, together
with interest on such reserves computed annually at certain assumed rates,
will be sufficient to meet our Contract obligations at their maturities or in
the event of the Owner's death. In the financial statements included in this
Prospectus, all reserves have been determined in accordance with generally
accepted accounting principles. At December 31, 1999 we held $93 thousand of
reserves in our Separate Account. As previously noted, all of Fidelity Life's
existing annuity business has been irrevocably transferred to Security First,
resulting in no remaining contract obligations at December 31, 1998.
Investments. Our General Account cash and invested assets of $24.1 million,
$25.5 million and $25.3 million at December 31, 1999, 1998 and 1997,
respectively, was invested entirely in investment grade securities and money
market funds. It is our stated policy to refrain from investing in securities
having speculative characteristics. Our entire portfolio is classified as
available-for sale, and is reported at fair value, with resulting unrealized
gains or losses included as a separate component of stockholder's equity.
Dividend Restrictions. We are subject to state regulatory restrictions that
limit the maximum amount of dividends payable. Subject to certain net income
carryforward provisions described below, we must obtain approval of the
Insurance Commissioner of the State of Delaware to pay, in any 12-month
period, "extraordinary" dividends which are defined as those in excess of the
greater of 10% of surplus in regard to shareholders as of the prior year-end
and statutory net income less realized capital gains for such prior year. We
may pay dividends only out of unassigned surplus. In addition, we must provide
notice to the Insurance Commissioner of the State of Delaware of all dividends
and other distributions to shareholders within five business days after
declaration and at least ten days prior to payment. At December 31, 1999 we
could not pay a dividend to Sage Life Holdings without prior approval from
state regulatory authorities as we currently do not have earned surplus. We
did not pay a dividend to Sage Life Holdings.
Competition. We are engaged in a business that is highly competitive due to
the large number of stock and mutual life insurance companies as well as other
entities marketing insurance products comparable to our products. There are
approximately 1,600 stock, mutual, and other types of insurers in the life
insurance business in the United States, a substantial number of which are
significantly larger than we are. We are unique in that we are one of the few
life insurers confining its activities to the
50
<PAGE>
marketing of separate account variable insurance products.
Transactions with Sage Insurance Group, Inc. In 1997, the Company entered
into a Cost Sharing Agreement with Sage Insurance Group, the parent of Sage
Life Holdings, to share the personnel costs, office rent and equipment costs.
These costs are allocated between the companies based upon the estimated time
worked, square footage of space utilized and upon monitored usage of the
equipment, respectively. Pursuant to this agreement, the Company has received
$.9 million and $.2 million from Sage Insurance Group for the years ended
December 31, 1999 and 1998, respectively. The Company paid Sage Insurance
Group $.1 million for the period ended December 31, 1997. At December 31, 1999
the amount due from Sage Insurance Group relating to this agreement was $.6
million. There was no amount due at December 31, 1998. In addition, Sage
Insurance Group provides funds to the Company to meet various operating
expenses. As these amounts are paid back to Sage Insurance Group at the end of
each quarter, no amounts remained payable at December 31, 1999 and 1998.
All non-recurring development costs of the Company are paid by Sage
Insurance Group or its parent, Sage Group, and treated as capital
contributions. The amount of development costs paid for by affiliated
companies at December 31, 1999, 1998 and 1997 were $7.1 million, $3.3 million
and $1.5 million, respectively.
Employees. Due to our business strategy of outsourcing our primary
administrative and investment functions to organizations that specialize in
these areas, the number of full time personnel we employ is limited. The
Company had 27, 14 and 8 full time employees at December 31, 1999, 1998, and
1997, respectively.
State Regulation. We are subject to the laws of the State of Delaware
governing insurance companies and to the regulations of the Delaware
Department of Insurance (the "Insurance Department"). We file a detailed
financial statement in the prescribed form (the "Statement") with the
Insurance Department each year covering our operations for the preceding year
and our financial condition as of the end of that year. Regulation by the
Insurance Department means that the Insurance Department may examine us and
our books and records to determine, among other things, whether contract
liabilities and reserves as we state them are correct. The Insurance
Department, under the auspices of the National Association of Insurance
Commissioners ("NAIC"), will periodically conduct a full examination of our
operations.
In addition, we are subject to regulation under the insurance laws of all
jurisdictions in which we operate. The laws of the various jurisdictions
establish supervisory agencies with broad administrative powers with respect
to various matters, including licensing to transact business, overseeing trade
practices, licensing agents, approving contract forms, establishing reserve
requirements, fixing maximum interest rates on life insurance contract loans
and minimum rates for accumulation of surrender values, prescribing the form
and content of required financial statements and regulating the type and
amounts of investments permitted. We must file the Statement with supervisory
agencies in each of the jurisdictions in which we do business, and our
operations and accounts are subject to examination by these agencies at
regular intervals.
The NAIC has adopted several regulatory initiatives designed to improve the
surveillance and financial analysis regarding the solvency of insurance
companies in general. These initiatives include the development and
implementation of a risk-based capital formula for determining adequate levels
of capital and surplus. Insurance companies are required to calculate their
risk-based capital in accordance with this formula and to include the results
in their Statements. We anticipate that these standards will have no
significant effect upon us.
Further, many states regulate affiliated groups of insurers like us and our
affiliates, under insurance holding company legislation. Under such laws,
inter-company transfers of assets and dividend payments from insurance
subsidiaries may be subject to prior notice or approval, depending on the size
of the transfers and payments in relation to the financial positions of the
companies involved.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for contract owner losses
incurred when other insurance companies have
51
<PAGE>
become insolvent. Most of these laws provide that an assessment may be excused
or deferred if it would threaten an insurer's own financial strength.
Although the federal government ordinarily does not directly regulate the
business of insurance, federal initiatives often have an impact on the
business in a variety of ways. Our insurance products are subject to various
federal securities laws and regulations. In addition, current and proposed
federal measures that may significantly affect the insurance business include:
. regulation of insurance company solvency,
. employee benefit regulation,
. tax law changes affecting the taxation of insurance companies, and
. tax treatment of insurance products and its impact on the relative
desirability of various personal investment vehicles.
52
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Position held with
the Company/Year Other Principal Positions
Name (Age) Commenced During Past Five Years
---------- ------------------ -------------------------
<C> <C> <S>
Ronald S. Scowby(/1/) Director, 1/97 to Chairman and Trustee, Sage Life
Age 61 present; Chairman, Investment Trust, 7/98 to
2/98 to present present; Director, Sage Life
Assurance Company of New York,
5/98 to present; Deputy Chairman
2/98 to present, President, 1/97
to 2/98, Director, 1/97 to
present, Sage Insurance Group
Inc.; Director, Sage Advisors,
Inc., 1/98 to 12/99; President,
Chief Executive Officer, Sage
Life Assurance of America Inc.,
1/97-2/98; Director, Sage
Distributors, Inc., 1/98 to
12/99; Director, President,
Chief Executive Officer, Sage
Management Services (USA), Inc.,
6/96 to 12/99; Owner, Sheldon
Scowby Resources 7/95-6/96.
Robin I. Marsden(/1/) Director, 1/97 to Director and President, Sage
Age 34 present; President Life (Bermuda) Ltd., 1/2000 to
and Chief Executive present; President and Trustee,
Officer, 2/98 to Sage Life Investment Trust, 7/98
present to present; Director, Sage Life
Assurance Company of New York,
5/98 to present; Director,
President, Sage Advisors, Inc.,
1/98 to present; Director, Sage
Distributors, Inc., 1/98 to
present; Director, 1/97 to
present, President and Chief
Executive Officer, 2/98 to
present, Sage Insurance Group,
Inc.; Chief Investment Officer,
Sage Life Holdings, Ltd., 11/94
to 1/98; and Executive-Strategic
Developments, Sage Group Ltd.,
11/94 to 1/98.
H. Louis Shill(/2/) Director, 1/97 to Director, Sage Life Assurance
Age 69 present Company of New York, 5/98 to
present; Chairman, Sage Life
Assurance of America, Inc., 1/97
to 2/98; Chairman, Sage
Insurance Group, Inc., 1/97 to
present; Founder, Chairman, Sage
Group Limited, 1965 to present.
Paul C. Meyer(/3/) Director, 1/97 to Director, Sage Life Assurance
Age 47 present Company of New York, 5/98 to
present; Partner, Rogers &
Wells, 1986 to present.
Richard D. Starr(/4/) Director, 1/97 to Director, Sage Life Assurance
Age 55 present Company of New York, 5/98 to
present; President, First
Interstate Securities, 1/95 to
12/95; Chairman & Chief
Executive Officer, Financial
Institutions Group, Inc., 10/78
to present.
Mitchell R. Katcher(/1/) Director, 12/97 to Director, Chief Financial
Age 46 present; Senior Officer and Chief Actuary, Sage
Executive Vice Life (Bermuda), Ltd., 1/2000 to
President, Chief present; Vice President, Sage
Financial Officer, Life Investment Trust, 7/98 to
Chief Actuary 5/97 present; Director, Sage Life
to present Assurance Company of New York,
5/98 to present; Director,
Treasurer, Sage Advisors, Inc.,
1/98 to present; Director, Sage
Distributors, Inc., 1/98 to
present; Treasurer, 7/97 to
present, Senior Executive Vice
President, 12/97 to present,
Sage Insurance Group, Inc.;
Executive Vice President, Golden
American Life Insurance Company,
7/93-2/97.
Meyer Feldberg(/5/) Director, 1/2000 to Dean/Professor, Columbia
Age 58 present University Graduate School of
Business, 7/89 to present;
Director, 1/2000 to present,
Sage Life Assurance Company of
New York and Sage Insurance
Group, Inc.
</TABLE>
53
<PAGE>
- --------
(1) The principal business address of these persons is 300 Atlantic Street,
Stamford, CT 06901.
(2) Mr. Shill's principal business address is Sage Centre, 10 Fraser Street,
Johannesburg, South Africa 2000.
(3) Mr. Meyer's principal business address is 200 Park Avenue, New York, N.Y.
10166.
(4) Mr. Starr's principal business address is 22507 SE 47th Place, Issaquah,
WA 98029.
(5) Dr. Feldberg's principal business address is Columbia University Graduate
School of Business, Uris Hall, Room 101, 3022 Broadway, New York, NY
10027.
Compensation
Our executive officers also serve as officers of our parent and of certain
affiliated companies. Cost allocations have been made to us as to the time
these individuals devoted to their duties with us. No allocation was made
during 1997 nor was any made for 1998 for the services of Mr. Shill. No
allocation was made during 1997 for the services of Mr. Marsden.
The following table includes compensation paid by us for services rendered
in all capacities for the years indicated for the Chief Executive Officer and
the other Executive Officers compensated more than $100,000 for the year ended
December 31, 1999.
Annual Compensation
<TABLE>
<CAPTION>
All Other
Name and Principal Position Year Salary Bonus Compensation
- --------------------------- ---- -------- -------- ------------
<S> <C> <C> <C> <C>
Ronald S. Scowby........................... 1997 $337,500 $100,000 $ 22,097
Chairman(/1/) 1998 $350,000 $100,000 $100,000
1999 $350,000 $100,000
Robin I. Marsden........................... 1998 $275,000 $100,000 $ 20,956
President and Chief Executive Officer(/1/) 1999 $322,500 $150,000
Mitchell R. Katcher........................ 1997 $114,583 $265,000
Senior Executive Vice President, Chief 1998 $250,000 $125,000 $ 19,037
Financial Officer and Chief Actuary(/1/) 1999 $268,750 $150,000
</TABLE>
- --------
(1) All salaries and bonuses are paid by Sage Insurance Group.
We pay outside directors $12,000 and $2,000 per meeting attended. (Dr.
Feldberg is paid $30,000 and $8,000 per meeting attended.) For meetings
attended in the year ended December 31, 1999, we paid each outside director
$20,000. (Dr. Feldberg attended no meetings in 1999; we paid Dr. Feldberg's
Year 2000 retainer of $30,000 in 1999.) We do not compensate directors who are
officers or employees of ours or our affiliates for serving on the Board.
Directors do not receive retirement benefits.
54
<PAGE>
Audited Financial Statements
Sage Life Assurance of America, Inc.
Years ended December 31, 1999, 1998 and 1997
with Report of Independent Auditors
55
<PAGE>
Sage Life Assurance of America, Inc.
Audited Financial Statements
Years ended December 31, 1999, 1998 and 1997
Contents
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. 57
Audited Financial Statements
Balance Sheets.............................................................. 58
Statements of Operations.................................................... 59
Statements of Stockholder's Equity.......................................... 60
Statements of Cash Flows.................................................... 61
Notes to Financial Statements............................................... 62
</TABLE>
56
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Sage Life Assurance of America, Inc.
We have audited the accompanying balance sheets of Sage Life Assurance of
America, Inc. as of December 31, 1999 and 1998, and the related statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sage Life Assurance of
America, Inc. as at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Stamford, CT
February 24, 2000
57
<PAGE>
SAGE LIFE ASSURANCE OF AMERICA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value
(amortized cost: 1999--$17,296,410 and 1998--
$12,967,022)...................................... $16,179,750 $12,992,917
Short-term investments............................. 5,972,494 10,975,402
----------- -----------
Total investments.................................... 22,152,244 23,968,319
Cash and cash equivalents............................ 1,979,985 1,531,165
Accrued investment income............................ 226,234 203,425
Receivable from affiliates........................... 671,270 --
Deferred income taxes................................ 376,461 --
Goodwill............................................. 6,228,146 6,565,134
Development costs.................................... -- 4,269,488
Other assets......................................... 9,231 5,000
Separate account assets.............................. 93,009 --
----------- -----------
Total assets......................................... $31,736,580 $36,542,531
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accrued expenses................................... $ 140,426 $ 61,670
Deferred income taxes.............................. -- 8,804
Separate account liabilities....................... 93,009 --
----------- -----------
Total liabilities.................................... 233,435 70,474
Stockholder's equity:
Common stock, $2,500 par value, 1,000 shares
authorized, issued and outstanding................ 2,500,000 2,500,000
Additional paid-in capital......................... 39,351,096 34,875,727
Retained deficit................................... (9,617,174) (920,760)
Accumulated other comprehensive (loss) income...... (730,777) 17,090
----------- -----------
Total stockholder's equity........................... 31,503,145 36,472,057
----------- -----------
Total liabilities and stockholder's equity........... $31,736,580 $36,542,531
=========== ===========
</TABLE>
See accompanying notes to financial statements.
58
<PAGE>
SAGE LIFE ASSURANCE OF AMERICA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>
Revenues
Investment income......................... $ 1,290,196 $1,243,522 $ 989,494
Administrative service fees............... 37,671 -- --
Policy charges and fees................... 861 -- --
----------- ---------- ---------
Total revenues.......................... 1,328,728 1,243,522 989,494
Expenses
Salaries and benefits expenses............ 972,052 741,979 497,426
Development expenses...................... 3,827,887 -- --
Amortization expense...................... 234,468 548,818 325,406
General and administrative expenses....... 721,247 521,699 518,448
----------- ---------- ---------
Total expenses.......................... 5,755,654 1,812,496 1,341,280
Loss before cumulative effect adjustment.. (4,426,926) (568,774) (351,786)
Cumulative effect adjustment for change in
accounting for development costs......... (4,269,488) -- --
----------- ---------- ---------
Net loss.................................. $(8,696,414) $ (568,974) $(351,786)
=========== ========== =========
</TABLE>
See accompanying notes to financial statements.
59
<PAGE>
SAGE LIFE ASSURANCE OF AMERICA, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Deficit (Loss) Income Total
---------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1997................... $2,500,000 $15,505,508 -- -- $18,005,508
Net loss................ $ (351,786) (351,786)
Change in unrealized
gain on investments,
net of taxes........... $ 48,706 48,7061
-----------
Comprehensive income.... (303,080)
Additional capital
contributions.......... 15,500,000 15,500,000
---------- ----------- ----------- --------- -----------
Balance at January 1,
1998................... 2,500,000 31,005,508 (351,786) 48,706 33,202,428
Net loss................ (568,974) (568,974)
Change in unrealized
gain on investments,
net of taxes........... (31,616) (31,616)
-----------
Comprehensive income.... (600,590)
Additional capital
contributions.......... 3,870,219 3,870,219
---------- ----------- ----------- --------- -----------
Balance at December 31,
1998................... 2,500,000 34,875,727 (920,760) 17,090 36,472,057
Net loss................ (8,696,414) (8,696,414)
Change in unrealized
loss on investments,
net of taxes........... (747,867) (747,867)
-----------
Comprehensive income.... (9,444,281)
Purchase price
adjustment............. (102,518) (102,518)
Additional capital
contributions.......... 4,577,887 4,577,887
---------- ----------- ----------- --------- -----------
Balance at December 31,
1999................... $2,500,000 $39,351,096 $(9,617,174) $(730,777) $31,503,145
========== =========== =========== ========= ===========
</TABLE>
See accompanying notes to financial statements.
60
<PAGE>
SAGE LIFE ASSURANCE OF AMERICA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities
Net loss............................... $(8,696,414) $ (568,974) $ (351,786)
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Amortization expense.................. 234,468 548,818 325,406
Cumulative effect adjustment for
change in accounting for development
costs................................ 4,269,488 -- --
Changes in:
Accrued investment income............ (22,809) (145,386) (29,638)
Receivable from affiliates........... (671,270) (128,425) 128,425
Other assets......................... (4,231) 6,443 (11,443)
Accrued expenses..................... 78,756 (118,772) 116,216
----------- ----------- -----------
Net cash (used in) provided by operating
activities............................. (4,812,012) (406,296) 177,180
Investing activities
Purchase of fixed maturity securities.. (4,319,964) (10,295,783) --
Proceeds from sales, maturities and
repayments of fixed maturity
securities............................ -- 849,153 42,941
Net sales of short-term investments.... 5,002,909 10,555,486 (15,507,987)
----------- ----------- -----------
Net cash provided by (used in) investing
activities............................. 682,945 1,108,856 (15,465,046)
Financing activities
Development costs paid by parent....... 3,827,887 -- --
Capital contribution from the parent... 750,000 600,000 15,500,000
----------- ----------- -----------
Net cash provided by financing
activities............................. 4,577,887 600,000 15,500,000
----------- ----------- -----------
Increase in cash and cash equivalents... 448,820 1,302,560 212,134
Cash and cash equivalents at beginning
of year................................ 1,531,165 228,605 16,471
----------- ----------- -----------
Cash and cash equivalents at end of
year................................... $ 1,979,985 $ 1,531,165 $ 228,605
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
61
<PAGE>
SAGE LIFE ASSURANCE OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. Nature of Operations and Significant Accounting Policies
Organization and Operation
Sage Life Assurance of America, Inc. (the "Company") is a wholly-owned
subsidiary of Sage Life Holdings of America, Inc. ("SLHA"), which is a wholly-
owned indirect subsidiary of Sage Group Limited, a South African company.
Description of Business
Sage Life Assurance of America, Inc. (the "Company"), which is domiciled in
Delaware, is a wholly-owned subsidiary of Sage Life Holdings of America, Inc.,
which is a wholly-owned indirect subsidiary of Sage Group Limited (Sage
Group), a South African company.
The Company is in the process of developing and preparing to market variable
annuity and variable life insurance products. The sale of these products began
on a limited basis in the first quarter of 1999. The Company has mutually
agreed to enter into a coinsurance reinsurance arrangement with Swiss Re Life
& Health America (Swiss Re), pursuant to which Swiss Re will reinsure a
significant portion of the liabilities under the variable insurance contracts.
Basis of Presentation
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity
of three months or less from the date of purchase to be cash equivalents. Cash
and cash equivalents are carried at cost, which approximates fair value.
Investments
The Company has classified all of its fixed maturity investments as available-
for-sale. Those investments are carried at fair value and changes in
unrealized gains and losses are reported as a component of stockholder's
equity, net of applicable deferred income taxes. Fair values are determined by
quoted market prices.
Short-term investments are carried at cost, which approximates fair value.
Realized gains and losses on disposal of investments are determined by the
specific identification method and are included in revenues.
Separate Accounts
The separate account assets and liabilities reported in the accompanying
balance sheet represent funds that are separately administered, principally
for the benefit of certain policyholders who bear the investment risk. The
separate account assets and liabilities, as reported as of December 31, 1999,
are carried at fair value, based on quoted market prices. Revenues and
expenses related to the separate account assets and liabilities, to the extent
of benefits paid or provided to the separate account policyholders, are
excluded from the amounts reported in the accompanying statements of
operations.
62
<PAGE>
SAGE LIFE ASSURANCE OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Policy Liabilities
The Company has no policy liabilities in its General Account at December 31,
1999 and 1998. All policy liabilities are in the Separate Account and are
comprised of all payments received plus credited interest, less accumulated
policyholder charges, assessments and withdrawals related to annuities of a
nonguaranteed return nature.
Goodwill
Goodwill represents the excess of the fair value of assets exchanged over the
net assets acquired. Goodwill is being amortized on a straight-line basis over
thirty years. The carrying value of goodwill is regularly reviewed for
indications of impairment in value, which, in the view of management, is other
than temporary. Accumulated amortization at December 31, 1999 and December 31,
1998 was $703,403 and $468,935, respectively.
Development Costs
Pursuant to the adoption of Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities", (SOP 98-5), the Company is required to charge
to expense all start-up costs incurred. In addition, the Company was required
to write-off any unamortized capitalized development costs on January 1, 1999.
Development costs incurred for the year ended December 31, 1999 charged to
expense were $3,827,887. The one time write-off of the unamortized capitalized
development costs was $4,269,488.
Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires that management makes estimates and assumptions
that affect the reported amount of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Income Taxes
Income taxes are accounted for using the liability method. Using this method,
deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax basis of assets and liabilities and
are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
Reclassifications
Certain reclassifications have been made to prior year's financial statement
amounts to conform to the 1999 presentation.
63
<PAGE>
SAGE LIFE ASSURANCE OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. Investments
Investments in fixed maturity securities as of December 31 consist of the
following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1999
U.S. Government Obligations...... $ 9,260,132 $12,577 $ 641,663 $ 8,631,046
Corporate Obligations............ 8,036,278 -- 487,574 7,548,704
----------- ------- ---------- -----------
$17,296,410 $12,577 $1,129,237 $16,179,750
=========== ======= ========== ===========
1998
U.S. Government Obligations...... $ 9,356,479 $89,549 $ 54,974 $ 9,391,054
Corporate Obligations............ 3,610,543 4,282 12,962 3,601,863
----------- ------- ---------- -----------
$12,967,022 $93,831 $ 67,936 $12,992,917
=========== ======= ========== ===========
</TABLE>
The amortized cost and fair value of fixed maturity securities by contractual
maturity at December 31, 1999 are summarized below. Actual maturities will
differ from contractual maturities because certain borrowers have the right to
call or prepay obligations.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less............................. $ 2,550,942 $ 2,563,519
Due after one year through five years............... 5,129,073 4,896,658
Due after five years through ten years.............. 9,616,395 8,719,573
----------- -----------
Total............................................. $17,296,410 $16,179,750
=========== ===========
</TABLE>
Investment income by major category of investment for the years ended December
31, 1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
Bonds.......................................... $ 907,068 $ 261,781 $ 255,778
Short-term investments......................... 438,951 787,873 720,556
Cash and cash equivalents...................... 22,416 239,700 49,035
---------- ---------- ---------
Total investment income........................ 1,368,435 1,289,354 1,025,369
Investment expenses............................ 78,239 45,832 35,875
---------- ---------- ---------
Net investment income.......................... $1,290,196 $1,243,522 $ 989,494
========== ========== =========
</TABLE>
At December 31, 1999 and 1998, investment securities with an amortized cost of
$6,602,056 and $6,678,745, respectively, and a fair value of $5,960,476 and
$6,623,770, respectively, are held by trustees in various amounts in
accordance with the statutory requirements of certain states in which the
Company is licensed to conduct business.
3. Income Taxes
The Company files a separate life insurance company Federal income tax return
and will continue to do so through the year 2001. Beginning in the year 2002,
the Company will be included in the consolidated Federal income tax return of
Sage Holdings (U.S.A.), Inc. and its subsidiaries.
64
<PAGE>
SAGE LIFE ASSURANCE OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The provision for income taxes varies from the amount which would be computed
using the federal statutory income tax rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Pre-tax loss............................... $(8,696,414) $(568,974) $(351,786)
Application of the federal statutory tax
rate--34%................................. (2,956,781) (193,451) (119,607)
Change in valuation allowance.............. 2,907,523 193,451 119,532
Other...................................... 49,258 -- (75)
----------- --------- ---------
Total income tax provision................. $ -- $ -- $ --
=========== ========= =========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $3,501,308 $1,967,528
Unrealized loss on depreciation of investments........ 376,461 --
---------- ----------
Total deferred tax assets.............................. 3,877,769 1,967,528
Deferred tax liabilities:
Unrealized gain on appreciation of investments........ -- (8,804)
Amortization of goodwill and development costs........ (261,185) (1,634,928)
Other................................................. (19,617) (19,617)
---------- ----------
Total deferred tax liabilities......................... (280,802) (1,663,349)
Valuation allowance for deferred tax assets............ (3,220,506) (312,983)
---------- ----------
Net deferred tax asset (liability)..................... $ 376,461 $ (8,804)
========== ==========
</TABLE>
Based upon the lack of historical operating results and the uncertainty of
operating earnings in the future, management has determined that it is not
more likely than not that the deferred tax assets will be fully recognized.
Accordingly, a valuation allowance has been recorded.
The Company has a separate company net operating loss carryforward of
approximately $10.3 million as of December 31, 1999, of which $4.7 million
expires in the year 2019, $3.7 million which expires in 2018 and $1.9 million
which expires in the year 2012.
4. Retained Deficit and Dividend Restrictions
Statutory-basis net (loss) income and surplus of the Company are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net (loss) income........................ $ (389,023) $ 27,002 $ 51,133
Surplus.................................. 23,473,747 23,109,097 25,017,752
</TABLE>
The Company is subject to state regulatory restrictions that limit the maximum
amount of dividends payable. Subject to certain net income carryforward
provisions as described below, the Company must obtain approval of the
Insurance Commissioner of the State of Delaware in order to pay, in any 12-
month period, "extraordinary" dividends which are defined as those in excess
of the greater of 10% of surplus as regards policyholders as of the prior
year-end and statutory net income less realized capital gains for such prior
year. Dividends may be paid
65
<PAGE>
SAGE LIFE ASSURANCE OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
by the Company only out of earned surplus. In addition, the Company must
provide notice to the Insurance Commissioner of the State of Delaware of all
dividends and other distributions to stockholders within five business days
after declaration and at least ten days prior to payment. At December 31,
1999, the Company could not pay a dividend to SLHA without prior approval from
state regulatory authorities as the Company currently does not have earned
surplus.
5. Related Party Transactions
In 1997, the Company entered into a Cost Sharing Agreement with Sage Insurance
Group, Inc. (SIGI), the parent of SLHA, to share the personnel costs, office
rent and equipment costs. These costs are allocated between the companies
based upon the estimated time worked, square footage of space utilized and
upon monitored usage of the equipment, respectively. Pursuant to this
agreement, the Company has received $903,757 and $151,348 from SIGI for the
years ended December 31, 1999 and 1998, respectively. The Company paid SIGI
$76,048 for the year ended December 31, 1997. At December 31, 1999 the amount
due from SIGI relating to this agreement was $594,432. There was no amount due
at December 31, 1998. In addition, SIGI provides funds to the Company to meet
various operating expenses. As these amounts are paid back to SIGI at the end
of each quarter, no amounts remained payable at December 31, 1999 and 1998.
All non-recurring development costs of the Company are paid by SIGI or its
parent, Sage Group Limited, and treated as capital contributions. The amount
of development costs paid for by affiliated companies at December 31, 1999,
1998 and 1997 were $7,098,106, $3,270,219 and $1,504,558, respectively.
6. Impact of Year 2000 (unaudited)
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission
critical information technology and non-information technology systems and
believes those systems successfully responded to the Year 2000 date change.
The Company expenses related to this effort were not materials. The Company is
not aware of any material problems resulting from Year 2000 issues, either
with its products, its internal systems, or the products and services of third
parties. The Company will continue to monitor its mission critical computer
applications and those of its suppliers and vendors throughout the year 2000
to ensure that any latent Year 2000 matters that may arise are addressed
promptly.
66
<PAGE>
APPENDIX A
MARKET VALUE ADJUSTMENT
We will apply a Market Value Adjustment to amounts surrendered, withdrawn,
transferred or applied to an income plan when taken from a Fixed Sub-Account
more than 30 days before its Expiration Date. We apply a Market Value
Adjustment separately to each Fixed Sub-Account. Surrender charges also may
apply.
For a surrender, withdrawal, transfer, borrowed amount or amount applied to
an income plan, we will calculate the Market Value Adjustment by applying the
factor below to the total amount (including any applicable surrender charge)
that must be surrendered, withdrawn, transferred, borrowed or applied to an
income plan in order to provide the amount requested.
[(1 + I) / (1 + J + .0025)] to the power of N divided by the 365th power - 1
Where
. I is the Index Rate for a maturity equal to the Fixed Sub-Account's
Guarantee Period at the time that we established the Sub-Account;
. J is the Index Rate for a maturity equal to the time remaining (rounded
up to the next full year) in the Fixed Sub-Account's Guarantee Period,
at the time of surrender, withdrawal, transfer, loan, or application to
an income plan; and
. N is the remaining number of days in the Guarantee Period at the time of
calculation.
We will apply Market Value Adjustments as follows:
If the Market Value Adjustment is negative, we first deduct it from any
remaining value in the Fixed Sub-Account. We then deduct any remaining
negative Market Value Adjustment from the amount you surrender, withdraw,
transfer, borrow, or apply to an income plan.
If the Market Value Adjustment is positive, we add it to any remaining value
in the Fixed Sub-Account or the amount you surrender. If you withdraw,
transfer, borrow, or apply to an income plan the full amount of the Fixed Sub-
Account, we add the Market Value Adjustment to the amount you withdraw,
transfer, borrow, or apply to an income plan.
MVA EXAMPLES
Example #1: Surrender--Example of a Negative Market Value Adjustment
Assume you invest $100,000 in a Fixed Sub-Account with a Guarantee Period of
ten years, with a Guaranteed Interest Rate of 7.5% and an Index Rate ("I") of
7.0% based on the U.S. Treasury Constant Maturity Series at the time we
established the Sub-Account. You request a surrender three years into the
Guarantee Period, the Index Rate based on the U.S. Treasury Constant Maturity
Series for a seven-year Guarantee Period ("J") is 8.0% at the time of the
surrender, no prior transfers, loans or withdrawals affecting this Fixed Sub-
Account have been made, and no surrender charge is applicable.
Calculate the Market Value Adjustment
1. The Account Value of the Fixed Sub-Account on the date of surrender is
$124,230 ($100,000 X 1.075(3))
2. N = 2,555 (365 X 7)
A-1
<PAGE>
3. Market Value Adjustment = $124,230 X {[(1.07) / (1.0825)] / 2555 / 365 -
1) = -$9,700
Therefore, the amount paid on full surrender is $114,530 ($124,230 - $9,700).
Example #2: Surrender--Example of a Positive Market Value Adjustment
Assume you invest $100,000 in a Fixed Sub-Account with a Guarantee Period of
ten years, with a Guaranteed Interest Rate of 7.5% and an Index Rate ("I") of
7.0% based on the U.S. Treasury Constant Maturity Series at the time we
established the Sub-Account. You request a surrender three years into the
Guarantee Period, the Index Rate based on the U.S. Treasury Constant Maturity
Series for a seven-year Guarantee Period ("J") is 6.0% at the time of the
surrender, no prior transfers, loans or withdrawals affecting this Fixed Sub-
Account have been made, and no surrender charge is applicable.
Calculate the Market Value Adjustment
1. The Account Value of the Fixed Sub-Account on the date of surrender is
$124,230 ($100,000 X 1.075(3))
2. N = 2,555 (365 X 7)
3. Market Value Adjustment = $124,230 X {[(1.07) / (1.0625)] / 2555/365 -1)
= + $6,270
Therefore, the amount paid on full surrender is $130,500 ($124,230 + $6,270).
Example #3: Withdrawal--Example of a Negative Market Value Adjustment
Assume you invest $200,000 in a Fixed Sub-Account with a Guarantee Period of
ten years, with a Guaranteed Interest Rate of 7.5% and an Index Rate ("I") of
7.0% based on the U.S. Treasury Constant Maturity Series at the time we
established the Sub-Account. You request a withdrawal of $100,000 three years
into the Guarantee Period, the Index Rate based on the U.S. Treasury Constant
Maturity Series for a seven-year Guarantee Period ("J") is 8.0% at the time of
withdrawal, no prior transfers, loans or withdrawals affecting this Fixed Sub-
Account have been made and no surrender charge is applicable.
Calculate the Market Value Adjustment
1. The Account Value of the Fixed Sub-Account on the date of withdrawal is
$248,459 ($200,000 X 1.075(3)).
2. N = 2,555 (365 X 7)
3. Market Value Adjustment = $100,000 X {[(1.07) / (1.0825)] / 2555/365 -1)
= -$7,808
Therefore, the amount of the withdrawal paid is $100,000, as requested. The
Fixed Sub-Account will be reduced by the amount of the withdrawal paid
($100,000) and by the Market Value Adjustment ($7,808), for a total reduction
in the Fixed Sub-Account of $107,808.
Example #4: Withdrawal--Example of a Positive Market Value Adjustment
Assume you invest $200,000 in a Fixed Sub-Account with a Guarantee Period of
ten years, with a Guaranteed Interest Rate of 7.5% and an initial Index Rate
("I") of 7.0% based on the U.S. Treasury Constant Maturity Series at the time
we established the Sub-Account. You request a withdrawal of $100,000 three
years into the Guarantee Period, the Index Rate based on the U.S. Treasury
Constant Maturity Series for a seven-year Guarantee Period ("J") is 6.0% at
the time of the withdrawal, no prior transfers, loans or withdrawals affecting
this Fixed Sub-Account have been made, and no surrender charge is applicable.
A-2
<PAGE>
Calculate the Market Value Adjustment
1. The Account Value of the Fixed Sub-Account on the date of withdrawal is
$248,459 ($200,000 X 1.075(3))
2. N = 2,555 (365 X 7)
3. Market Value Adjustment = $100,000 X {[(1.07) / (1.0625)] / 2555 / 365 -
1) = + $5,047
Therefore, the amount of the withdrawal paid is $100,000, as requested. The
Fixed Sub-Account will be reduced by the amount of the withdrawal paid
($100,000) and increased by the amount of the Market Value Adjustment
($5,047), for a total reduction of $94,953.
A-3
<PAGE>
APPENDIX B
DOLLAR-COST AVERAGING PROGRAM
Below is an example of how the Dollar-Cost Averaging Program works.
Assume that the Dollar-Cost Averaging Program has been elected and that
$24,000 is invested in a DCA Fixed Sub-Account with a Guarantee Period of two
years and an annual Guaranteed Interest Rate of 6.0%.
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Beginning Beginning of Month Dollar Cost Averaging Amount Dollar Interest Credited End of Month
of Month Account Value Monthly Factor Cost Averaged For Month Account Value
- --------- ------------------ --------------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
1 24,000 -- -- 117 24,117
2 24,117 1/24 1,005 112 23,224
3 23,224 1/23 1,010 108 22,323
4 22,323 1/22 1,015 104 21,412
5 21,412 1/21 1,020 99 20,492
6 20,492 1/20 1,025 95 19,562
7 19,562 1/19 1,030 90 18,622
8 18,622 1/18 1,035 86 17,673
9 17,673 1/17 1,040 81 16,715
10 16,715 1/16 1,045 76 15,746
11 15,746 1/15 1,050 72 14,768
12 14,768 1/14 1,055 67 13,780
13 13,780 1/13 1,060 62 12,782
14 12,782 1/12 1,065 57 11,774
15 11,774 1/11 1,070 52 10,756
16 10,756 1/10 1,076 47 9,727
17 9,727 1/9 1,081 42 8,688
18 8,688 1/8 1,086 37 7,639
19 7,639 1/7 1,091 32 6,580
20 6,580 1/6 1,097 27 5,510
21 5,510 1/5 1,102 21 4,429
22 4,429 1/4 1,107 16 3,338
23 3,338 1/3 1,113 11 2,236
24 2,236 1/2 1,118 5 1,124
25 1,124 1/1 1,124 -- --
</TABLE>
Note:
Column (3) = Column (1) X Column (2)
Column (5) = Column (1) - Column (3) + Column (4)
B-1