As filed with the Securities and Exchange Registration No. 333-27337
Commission on September 22, 1998 Registration No. 811-4536
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
- --------------------------------------------------------------------------------
FORM S-6
POST-EFFECTIVE AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
- --------------------------------------------------------------------------------
Variable Life Account B of Aetna Life Insurance and Annuity Company
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, RE4A, Hartford, Connecticut 06l56
Depositor's Telephone Number, including Area Code: (860) 273-4686
- --------------------------------------------------------------------------------
Julie E. Rockmore, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, RE4A, Hartford, Connecticut 06l56
(Name and Complete Address of Agent for Service)
- --------------------------------------------------------------------------------
It is proposed that this filing will become effective:
______ immediately upon filing pursuant to paragraph (b) of Rule 485
X on September 30, 1998 pursuant to paragraph (b) of Rule 485
______
<PAGE>
VARIABLE LIFE ACCOUNT B
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
Cross Reference Sheet
<TABLE>
<CAPTION>
N-8B-2
Item No. Part I Prospectus
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<S> <C>
1 Cover Page; The Separate Account; The Company
2 Cover Page; The Separate Account; The Company
3 Not Applicable
4 Cover Page; The Company; Additional Information - Distribution of the Policy;
5 The Separate Account; The Company
6 The Separate Account; The Company
7 Not Applicable
8 Financial Statements
9 Additional Information - Legal Matters
10 The Separate Account; Charges and Fees; Policy Choices; Policy Values; Policy Rights;
Additional Information
11 Allocation of Premiums - Fund Additions, Deletions or Substitutions; Policy Choices
12 Cover Page; Allocation of Premiums - The Funds
13 Charges & Fees; Additional Information - Distribution of the Policy
14 Policy Values; Additional Information; Miscellaneous Policy Provisions
15 Policy Summary; Allocation of Premiums; Policy Choices; Policy Values
16 Policy Summary; Allocation of Premiums - The Funds; Policy Values
17 Policy Rights
18 Allocation of Premiums; Policy Choices; Policy Rights; Tax Matters
19 Additional Information - Reports to Policy Owners
20 Not Applicable
21 Policy Rights - Policy Loans
22 Not Applicable
23 Directors & Officers
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-8B-2
Item No. Part I Prospectus
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<S> <C>
24 Not Applicable
25 The Company
26 Charges and Fees
27 The Company
28 Directors & Officers
29 The Company
30 Not Applicable
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Not Applicable
35 Additional Information - State Regulation
36 Not Applicable
37 Not Applicable
38 Additional Information - Distribution of the Policy
39 The Company
40 Charges and Fees
41 The Company
42 Director and Officers
43 Financial Statements
44 Policy Values; Financial Statements
45 Not Applicable
46 The Separate Account; Policy Values
47 The Separate Account; Policy Choices; Policy Values
48 Not Applicable
49 Not Applicable
50 The Separate Account
51 Cover Page; Policy Choices
52 The Separate Account; Allocation of Premiums - Fund Additions, Deletions or Substitutions
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-8B-2
Item No. Part I Prospectus
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<S> <C>
53 Tax Matters
54 Not Applicable
55 Not Applicable
56 Not Applicable
57 Not Applicable
58 Not Applicable
59 Financial Statements
</TABLE>
<PAGE>
Variable Life Account B
Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
800 334-7586
Prospectus Dated September 30, 1998
Flexible Premium Variable Life Insurance Policy on the Lives of Two Insureds
The Policy offered in connection with this Prospectus is the AetnaVest Estate
Protector II Policy, a flexible premium variable life insurance policy on the
lives of two Insureds (the "Policy") issued and underwritten by Aetna Life
Insurance and Annuity Company (the "Company"). The Policy is intended to provide
life insurance and pay a benefit, as described in this Prospectus, upon
surrender, maturity or Second Death. The Policy is designed to allow flexible
premium payments, Policy Loans, Partial Surrenders, a choice of two Death
Benefit Options and account values that may be invested on either a fixed or
variable or a combination of fixed and variable basis. Net Premiums may be
allocated to Variable Life Account B, and/or the Fixed Account, or both
Accounts. The Variable Options of Variable Life Account B support the benefits
provided by the variable portion of the Policy. The Fund Account Value in each
Variable Option is not guaranteed and will vary with the investment performance
of the associated Fund. Net Premiums allocated to the Fixed Account will
accumulate at rates of interest We determine. Such rates will not be less than
4% a year. Net Premiums allocated to Variable Life Account B must be allocated
to one or more of the Variable Options We make available. Sufficient premiums
must be paid to continue the Policy in force or to qualify for the Guaranteed
Death Benefit. Premium reminder notices will be sent for Planned Premiums and
for premiums required to continue the Policy in force. The Policy may be
reinstated.
The Policy has a free look period during which You may return the Policy or
rescind an increase in the Specified Amount. (See Right of Policy Examination)
This Prospectus also describes the Variable Options used to fund the Policy
through Variable Life Account B (the "Separate Account"). The Variable Options
are:
<TABLE>
<S> <C>
[bullet] Aetna Ascent VP [bullet] Fidelity VIP Equity-Income Portfolio
(formerly Aetna Ascent Variable Portfolio) [bullet] Fidelity VIP II Contrafund Portfolio
[bullet] Aetna Balanced VP, Inc. [bullet] Janus Aspen Aggressive Growth Portfolio
(formerly Aetna Investment Advisers Fund, Inc.) [bullet] Janus Aspen Balanced Portfolio
[bullet] Aetna Income Shares d/b/a Aetna Bond VP [bullet] Janus Aspen Growth Portfolio
[bullet] Aetna Crossroads VP [bullet] Janus Aspen Worldwide Growth Portfolio
(formerly Aetna Crossroads Variable Portfolio) [bullet] Oppenheimer Global Securities Fund
[bullet] Aetna Variable Fund [bullet] Oppenheimer Strategic Bond Fund
d/b/a Aetna Growth and Income VP [bullet] Portfolio Partners MFS Emerging Equities Portfolio
[bullet] Aetna Index Plus Large Cap VP [bullet] Portfolio Partners MFS Research Growth Portfolio
(formerly Aetna Variable Index Plus Portfolio.) [bullet] Portfolio Partners MFS Value Equity Portfolio
[bullet] Aetna Legacy VP [bullet] Portfolio Partners Scudder International Growth Portfolio
(formerly Aetna Legacy Variable Portfolio) [bullet] Portfolio Partners T. Rowe Price Growth Equity Portfolio
[bullet] Aetna Variable Encore Fund
d/b/a Aetna Money Market VP
</TABLE>
i
<PAGE>
Unless specifically mentioned, this Prospectus only describes the Variable
Options.
Not all Funds may be available under all Policies or in all jurisdictions. The
Statement of Additional Information ("SAI") for any of the Funds may be
obtained by calling (800) 334-7586.
Replacing existing insurance or supplementing an existing flexible premium
variable life insurance policy with the Policy may not be to your advantage.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
THE FUNDS. THIS PROSPECTUS AND THE UNDERLYING FUND PROSPECTUSES SHOULD BE READ
AND RETAINED FOR FUTURE REFERENCE.
THIS PROSPECTUS AND OTHER INFORMATION ABOUT VARIABLE LIFE ACCOUNT B REQUIRED TO
BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION CAN BE FOUND IN THE SEC'S
WEB SITE AT http://www.sec.gov.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ii
<PAGE>
Table of Contents
<TABLE>
<S> <C>
Definitions ....................................................... v
Policy Summary .................................................... 1
The Separate Account .............................................. 1
Charges & Fees .................................................... 2
Charges & Fees Assessed Against Premium ......................... 2
Charges & Fees Assessed Against the Total Account Value......... 2
Charges & Fees Assessed Against the Separate Account ............ 3
Charges Assessed Against the Underlying Funds ................... 4
Charges Deducted Upon Surrender ................................. 5
Allocation of Premiums ............................................ 6
The Funds ....................................................... 6
Investment Advisers of the Funds ................................ 8
Mixed and Shared Funding; Conflicts of Interest ................. 8
Fund Additions, Deletions or Substitutions ...................... 8
Fixed Account ................................................... 9
Policy Choices .................................................... 10
Premium Payments ................................................ 10
Guaranteed Death Benefit ........................................ 11
No Lapse Coverage ............................................... 11
Death Benefit Options ........................................... 11
Transfers and Allocations to Funding Options .................... 12
Telephone Transfers ............................................. 12
Automated Transfers (Dollar Cost Averaging) ..................... 12
Policy Values ..................................................... 13
Total Account Value ............................................. 13
Accumulation Unit Value ......................................... 14
Maturity Value .................................................. 14
Surrender Value ................................................. 14
Policy Rights ..................................................... 14
Full Surrenders ................................................. 14
Partial Surrenders .............................................. 14
Paid-Up Nonforfeiture Option .................................... 15
Grace Period .................................................... 15
Reinstatement of a Lapsed Policy ................................ 15
Coverage Beyond Maturity ........................................ 16
Right to Defer Payment .......................................... 16
Policy Loans .................................................... 16
Policy Changes .................................................. 17
Right of Policy Examination ..................................... 18
Supplemental Benefits ........................................... 18
Death Benefit ..................................................... 19
Policy Settlement ................................................. 20
Settlement Options .............................................. 20
The Company ....................................................... 21
Directors & Officers .............................................. 21
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Additional Information ..................................................... 24
Reports to Policyowners .................................................. 24
Right to Instruct Voting of Fund Shares .................................. 24
Disregard of Voting Instructions ......................................... 24
State Regulation ......................................................... 25
Legal Matters ............................................................ 25
The Registration Statement ............................................... 25
Distribution of the Policy ............................................... 25
Independent Auditors ..................................................... 26
Year 2000 ................................................................ 26
Tax Matters ................................................................ 26
General .................................................................. 26
Federal Tax Status of the Company ........................................ 26
Life Insurance Qualification ............................................. 27
General Rules ............................................................ 27
Modified Endowment Contracts ............................................. 27
Diversification Standards ................................................ 28
Investor Control ......................................................... 28
Other Tax Considerations ................................................. 29
Withholding .............................................................. 29
Miscellaneous Policy Provisions ............................................ 30
The Policy ............................................................... 30
Payment of Benefits ...................................................... 30
Suicide and Incontestability ............................................. 30
Protection of Proceeds ................................................... 31
Nonparticipation ......................................................... 31
Changes in Owner and Beneficiary; Assignment ............................. 31
Misstatement as to Age and/or Sex ........................................ 31
Performance Reporting and Advertising .................................... 31
Illustrations of Death Benefit, Total Account Values and Surrender Values. 32
Financial Statements of the Separate Account ............................... S-1
Financial Statements of the Company ........................................ F-1
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT BE LAWFULLY MADE. NO DEALER, SALESMAN OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THE PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE INSURANCE
PROTECTION. LIFE INSURANCE IS A LONG-TERM INVESTMENT. POLICYOWNERS SHOULD
CONSIDER THEIR NEED FOR INSURANCE COVERAGE AND THE POLICY'S LONG-TERM
INVESTMENT POTENTIAL. NO CLAIM IS MADE THAT THE POLICY IS ANY WAY SIMILAR OR
COMPARABLE TO AN INVESTMENT IN A MUTUAL FUND.
iv
<PAGE>
Definitions
Accumulation Unit: A unit used to measure the value of the Policyowner's
interest in each applicable Variable Option. An Accumulation Unit is used to
calculate the value of the variable portion of the Policy before the election
of a Settlement Option.
Additional Premiums: Any premiums paid in addition to Planned Premiums.
Amount at Risk: The Death Benefit divided by 1.0032737, minus the Total Account
Value on that date before computing the monthly deductions for the Cost of
Insurance for this Policy.
Annuitant: A person who receives annuity payments.
Annuity: A series of payments for life or for a definite period.
Attained Age: Issue Age of the Insured increased by the number of Policy Years
elapsed.
Basic Monthly Premium: The amount of premium to assure that the Policy remains
in force for a period of at least 5 Policy Years beginning on the Issue Date or
the Issue Date of an Increase even if the Surrender Value is insufficient to
satisfy the current Monthly Deduction.
Company: Aetna Life Insurance and Annuity Company.
Cost of Insurance: A charge related to the Company's expected mortality cost
for Your basic insurance coverage under the Policy, not including any
supplemental benefit provision that You may elect through a Policy rider. It is
equal to the Amount at Risk multiplied by a monthly Cost of Insurance rate.
Death Benefit: The amount described in the Policy Choices section which is
payable on the date of the Second Death, subject to all provisions contained in
the Policy.
Death Benefit Options: Either of the two methods for determining the Death
Benefit.
Fixed Account: A non-variable funding option available on the Policy that
guarantees a minimum interest rate of 4% per year.
Fixed Account Value: The non-loaned portion of the Policy's Total Account Value
attributable to the non-variable portion of the Policy. The Fixed Account Value
is part of the general assets of the Company.
Full Surrender: A Policy right whereby You may terminate the Policy in exchange
for payment of its Full Surrender Value.
Full Surrender Value: Equals the Total Account Value on the date of surrender
less any Surrender Charge, less the Loan Account Value and less any accrued
interest.
v
<PAGE>
Fund(s): One or more of the underlying variable funding options available under
the Policy (as described in this Prospectus). Each of the Funds is an open-end
management investment company (mutual fund) whose shares are purchased by the
Separate Account to fund the benefits provided by the policy.
Grace Period: The 61-day period beginning on the Monthly Deduction Day on which
the Policy's Surrender Value is insufficient to cover the current Monthly
Deduction. The Policy will lapse without value at the end of the 61-day period
unless a sufficient payment is received by the Company.
Guaranteed Death Benefit: A provision of the Policy which assures that the
Policy will stay in force, even if the Total Account Value is insufficient to
cover the current Monthly Deductions. The Guaranteed Death Benefit is available
to the younger Insured's Attained Age 100.
Guaranteed Death Benefit Premium: The amount of premium that must be paid to
assure that the Policy remains in force until the younger Insured's Attained
Age 100.
Home Office: The Company's principal executive offices at 151 Farmington
Avenue, Hartford, Connecticut 06156.
Insureds: The two persons on whose lives the Policy is issued.
Issue Age: The age of each Insured on his/her birthday nearest to the Policy's
Issue Date.
Issue Date: The effective date on which coverage begins under the Policy.
Loan Account Value: The sum of all unpaid Policy Loans. The amount necessary to
repay Policy Loans in full is the Loan Account Value plus any accrued interest.
Loan Value: Is 90% of the sum of the Fixed Account Value and the Separate
Account Value.
Maturity Date: The Policy Anniversary on which the younger Insured reaches
Attained Age 100.
Maturity Value: The Total Account Value on the Maturity Date, less the amount
necessary to repay any Policy Loans in full, including interest.
Monthly Deduction: A charge assessed against the Total Account Value which
includes the Cost of Insurance, a monthly administrative charge and any charges
for supplemental benefit riders. Monthly Deductions begin on the Issue Date and
occur on each Monthly Deduction Day thereafter.
Monthly Deduction Day: The first Monthly Deduction Day is the Issue Date.
Monthly Deduction Days occur each month thereafter on the same day as the Issue
Date.
Net Premium: The Net Premium is equal to the amount of the premium paid less
the deduction for Premium Load.
Net Single Premium: The amount required to purchase a guaranteed benefit
assuming the Policy's Total Account Value is allocated to the Fixed Account,
using the Insureds' Attained Ages and premium classes. The Net Single Premium
is determined using guaranteed interest of 4% per year and guaranteed maximum
Cost of Insurance rates.
vi
<PAGE>
Partial Surrenders: The amount You can receive in cash by surrendering a part
of the Policy.
Planned Premiums: Premiums We agree to bill.
Policy: The life insurance contract described in this Prospectus, under which
flexible premium payments are permitted and the Death Benefit may and Total
Account Values will vary with the investment performance of the Fund(s).
Policy Loan: The amount received by borrowing from the Total Account Value.
Policyowner: The person or persons having rights to the benefits under the
Policy; referred to as "You".
Policy Year/Policy Anniversary: The first Policy Year is the twelve month
period beginning on the Issue Date. Your Policy Anniversary is equal to the
Issue Date plus 1 Year, 2 Years, etc.
Premium Loads: A charge assessed against the premium to cover certain expenses
associated with start-up and maintenance costs of the Policy.
Second Death: Death of the Surviving Insured.
SEC: Securities and Exchange Commission.
Separate Account(s): A separate account established by Aetna Life Insurance and
Annuity Company for the purpose of funding the Policy: Variable Life Account B.
Separate Account Value: The portion of the Policy's Total Account Value
attributable to the variable portion of the Policy.
Settlement Option(s): The method by which payment may be made to a beneficiary
due from a Death Benefit or upon the Full Surrender of the Policy.
Specified Amount: The amount chosen by the Policyowner at application and used
in determining the Death Benefit. It may be increased or decreased as described
in this Prospectus.
Surrender Charge: An amount retained by the Company upon the Full or Partial
Surrender of the Policy.
Surrender Value: The amount You can receive in cash by surrendering the Policy.
Surviving Insured: The Insured living after the first death.
Total Account Value: The sum of the Fixed Account Value, the Separate Account
Value and the Loan Account Value.
Valuation Date: The date and time at which the Accumulation Unit Value of a
variable investment option is calculated. Currently, this calculation occurs
after the close of business of the New York Stock Exchange on any normal
business day, Monday through Friday, that the New York Stock Exchange is open.
vii
<PAGE>
Valuation Period: The period of time from when the Company determines the
Accumulation Unit Value of a variable investment option until the next time it
determines such unit value. Currently, the calculation occurs after the close
of business of the New York Stock Exchange on any normal business day, Monday
through Friday, that the New York Stock Exchange is open.
Variable Account Value: The Accumulation Unit Value for a Variable Option
multiplied by the number of Accumulation Units for that Variable Option
credited to the Policy.
Variable Option: One or more of the variable funding options available under
the Policy (as described in this Prospectus).
We, Our, Us, Company: Aetna Life Insurance and Annuity Company, its successors,
or assigns.
Written Request: A request in writing, in a form satisfactory to Us and
received by Us at the Home Office.
viii
<PAGE>
Policy Summary
The Policy offered in connection with this Prospectus is a flexible premium
variable life insurance policy issued on the lives of two Insureds. The Policy
is intended to provide life insurance and pay a benefit (subject to adjustment
under the Policy's Age and/or Sex, Suicide and Incontestability, and Grace
Period provisions) upon surrender, maturity or Second Death. The Policy is
designed to allow flexible premium payments, Policy Loans, Partial Surrenders,
a choice of two Death Benefit Options and account values that may be either
fixed or variable or a combination of fixed and variable.
Charges and fees will be assessed against premium payments, the Total Account
Value, the Separate Account, the underlying Funds and upon surrender. These
charges and fees are described within this Prospectus.
You must purchase Your variable life insurance policy from a registered
representative. The Policy, the initial application on the Insureds, any
subsequent applications and any riders constitute the entire contract.
At the time of application, You must choose a Death Benefit Option, decide on
the amount of premium We agree to bill and determine how to allocate Net
Premiums. You may elect to supplement the benefits afforded by the Policy
through the addition of riders We make available.
The proceeds payable upon the Second Death are based on the Death Benefit
Option chosen. Under Option 1 the Death Benefit would be the greater of the
Specified Amount or a percentage of the Total Account Value. Under Option 2,
the Death Benefit would be the greater of the Specified Amount plus the Total
Account Value on the date of death or a percentage of the Total Account Value.
Although the Policy is designed to allow flexible premiums, sufficient premiums
must be paid to continue the Policy in force to the Maturity Date or to qualify
for a Guaranteed Death Benefit. Premium reminder notices will be sent for
Planned Premiums and for premiums required to continue the Policy. Should Your
Policy lapse, it may be reinstated.
Net Premiums may be allocated to the Separate Account, the Fixed Account or
both Accounts. Net Premiums allocated to the Separate Account must be allocated
to one or more Variable Options and allocations must be in whole percentages.
The variable portion of the Policy is supported by the Variable Options you
choose and will vary with the investment performance of the associated Fund.
Net Premiums allocated to the Fixed Account will accumulate at rates of
interest We determine. Such rates will not be less than 4% a year.
The Separate Account
The Separate Account established for the purpose of providing Variable Options
to fund the Policy is Variable Life Account B. Amounts allocated to the
Separate Account are invested in the Funds. Each of the Funds is an open-end
management investment company (mutual fund) whose shares are purchased by the
Separate Account to fund the benefits provided by the Policy. The Funds
currently available under the Separate Account, including their investment
objectives and their investment advisers, are described in this Prospectus.
Complete descriptions of the Funds' investment objectives and restrictions and
other material information relating to an investment in the Funds are contained
in the prospectuses for each of the Funds which are delivered with this
Prospectus.
Variable Life Account B was established pursuant to a June 18, 1986, resolution
of the Board of Directors of the Company. Under Connecticut Insurance Law, the
income, gains or losses of the Separate Account is credited
1
<PAGE>
without regard to the other income, gains or losses of the Company. These assets
are held for the Company's variable life insurance policies. Any and all
distributions made by the Funds with respect to shares held by the Separate
Account will be reinvested in additional shares at net asset value. The assets
maintained in the Separate Account will not be charged with any liabilities
arising out of any other business conducted by the Company. The Company is,
however, responsible for meeting the obligations of the Policy to the
Policyowner.
No stock certificates are issued to the Separate Account for shares of the Funds
held in the Separate Account. Ownership of Fund shares is documented on the
books and records of the Funds and of the Company for the Separate Account.
The Separate Account is registered with the SEC as a unit investment trust under
the Investment Company Act of 1940 and meets the definition of separate account
under the federal securities laws. Such registration does not involve any
approval or disapproval by the Commission of the Separate Account or the
Company's management or investment practices or policies. The Company does not
guarantee the Separate Account's investment performance.
Charges & Fees
Charges & Fees Assessed Against Premium
Premium Load
Before a premium is allocated to the Policy's Total Account Value, a percentage
of the premium is deducted to cover certain expenses associated with start-up
and maintenance costs of the Policy. These expenses include a current sales load
of 4.65% up to the Guaranteed Death Benefit Premium and 1.65% of the excess
(never to exceed 6.65% of all premiums), a current 2.1% state premium tax charge
and a current 1.25% federal income tax charge. The state premium tax charge
reimburses the Company for taxes it pays to states and municipalities in which
the Policy is sold. The amount of tax assessed by a state or municipality may be
more or less than the charge. The federal income tax charge reimburses the
Company for its increased federal tax liability under the federal tax laws. The
Company has determined that these state and federal tax charges are reasonable
in relation to its tax liability, but subject to state law, reserves the right
to increase these tax charges due to changes in the state or federal tax laws
that increase the Company's tax liability. The total current Premium Load is
equal to 8.00% up to the Guaranteed Death Benefit Premium and 5% of the excess.
Charges & Fees Assessed Against the Total Account Value
Charges and fees assessed against the Total Account Value will be deducted from
the Separate Account Value and the Fixed Account Value in the same proportion
that these values bear to the sum of the Fixed Account Value and the Separate
Account Value on the date of the deduction. This is accomplished by liquidating
Accumulation Units and withdrawing the value of the liquidated Accumulation
Units from each Variable Option in the same proportion as their respective
values have to the sum of Your Fixed Account and Separate Account Values. (See
Accumulation Units)
Transfers within Accounts
You may transfer all or part of each Fund to any other Fund or to the Fixed
Account Value at any time. We reserve the right to charge an administrative fee
of $25 for each transfer over twelve transfers per year and limit the number of
Funds you may elect over the lifetime of the Policy to seventeen.
Monthly Deductions
The Monthly Deduction includes the Cost of Insurance, a Policy fee, a monthly
administrative expense charge and any charges for Supplementary Benefits.
Monthly Deductions begin on the Issue Date, even if the Issue Date is
2
<PAGE>
earlier than the date the application is signed, and occur on each Monthly
Deduction Day thereafter. If the Policy's issuance is delayed due to
underwriting requirements, the charges will not be assessed until the
underwriting is complete and the application for the Policy is approved. (See
Premium Payments)
Cost of Insurance
The Cost of Insurance charge is related to the Company's expected mortality
cost for Your basic insurance coverage under the Policy, not including any
supplemental benefit provisions that You may elect through a Policy rider. The
Cost of Insurance charge is equal to the Amount at Risk multiplied by a monthly
Cost of Insurance rate. The Cost of Insurance rate is variable and is based on
both Insureds' issue ages, sex (where permitted by law), number of Policy Years
elapsed and premium class. Because the Total Account Value and, under certain
circumstances, the Death Benefit of the Policy may vary from month to month,
the Cost of Insurance charge may also vary on each Monthly Deduction Day. In
addition, You should note that the Cost of Insurance charge is related to the
difference between the Death Benefit payable under the Policy and the Total
Account Value of the Policy. An increase in the Total Account Value or a
decrease in the Death Benefit may result in a smaller Cost of Insurance charge
while a decrease in the Total Account Value or an increase in the Death Benefit
may result in a larger cost of insurance charge.
The Cost of Insurance rate for standard risks will not exceed those based on
the 1980 Commissioners Standard Ordinary Mortality Tables (1980 Tables).
Substandard risks will have monthly deductions based on Cost of Insurance rates
which may be higher than those set forth in the 1980 Tables. A table of
guaranteed maximum Cost of Insurance rates per $1,000 of the Amount at Risk
will be included in each Policy. The Monthly Cost of Insurance rates may be
adjusted by Us from time to time. Adjustments will be on a class basis and will
be based on Our estimates for future factors such as mortality, investment
income, expenses, and the length of time Policies stay in force. Any
adjustments will be made on a nondiscriminatory basis.
Policy Fee and Monthly Administrative Expense Charge
The Monthly Deduction amount also includes a current Policy fee of $32.50 a
month during the first Policy Year and $7.50 a month during subsequent Policy
Years (We reserve the right to charge $39.00 a month during the first Policy
Year and $14 a month during subsequent Policy Years). The Monthly Deduction
amount also includes a current administrative expense charge of $0.08 a month
per $1,000 of Specified Amount up to a maximum of $400 for Policy Years 1
through 5 and $0.05 a month per $1,000 of Specified Amount up to a maximum of
$250 for Policy Years 6 through 10. Separate and identical administrative
expense charges, durations and maximums apply to any increase in Specified
Amount, but the charges and maximums are based on the number of years from the
date of increase. We reserve the right to charge $0.08 a month per $1,000 of
Specified Amount up to maximums of $400 for the basic administrative expense
charge and $400 for increases regardless of the numbers of Policy Years or
years from date of increase. These charges are for items such as underwriting
and issuance, premium billing and collection, policy value calculation,
confirmations and periodic reports.
Charges for Supplemental Benefits
If You elect any supplemental benefits through adding riders to the Policy, a
supplemental benefits charge will be included in the Monthly Deduction amount.
The amount of the charge will vary depending upon the actual supplemental
benefits selected and is described on each applicable Policy rider.
Charges & Fees Assessed Against the Separate Account
Mortality and Expense Risk Charge
A mortality and expense risk charge will be deducted from the Separate Account
Value to compensate the Company for the aggregate mortality and expense risks
assumed in connection with the Policy. The mortality risk assumed by the
Company is that Insureds, as a group, may live for a shorter period of time
than estimated and
3
<PAGE>
that the Company will, therefore, pay a Death Benefit before collecting a
sufficient Cost of Insurance charge. The expense risk assumed is that expenses
incurred in issuing and administering the Policies and operating the Separate
Account will be greater than the administrative charges estimated for such
expenses.
The mortality and expense risk charge will be deducted daily and currently
equals an annual rate of 0.65% of the average daily net assets of the Separate
Account during Policy Years 1 through 10 or, if later, until the younger
Insured's Attained Age 65, 0.25% beginning in Policy Year 11 or, if later, at
the younger Insured's Attained Age 65, and 0.00% beginning in Policy Year 21 or,
if later, at the younger Insured's Attained Age 75. The Company reserves the
right to increase or decrease the mortality and expense risk charge if it
believes that circumstances have changed so that current charges are no longer
appropriate. However, in no event will the charge exceed 0.90% of average daily
net assets on an annual basis.
The Separate Account is not subject to any taxes. However, if taxes are assessed
against the Separate Account, We reserve the right to assess taxes against the
Separate Account Value.
Charges Assessed Against the Underlying Funds
The following table illustrates the investment advisory fees, other expenses and
total expenses paid by each of the Funds as a percentage of average net assets
based on figures for the year ended December 31, 1997, unless otherwise noted:
<TABLE>
<CAPTION>
Investment
Advisory Fees(1) Other Expenses Total Fund
(after expense (after expense Annual
reimbursement) reimbursement) Expenses
------------------ ---------------- -----------
<S> <C> <C> <C>
Aetna Ascent VP(2)(3) 0.57% 0.23% 0.80%
Aetna Balanced VP, Inc.(3) 0.50% 0.10% 0.60%
Aetna Bond VP(3) 0.40% 0.10% 0.50%
Aetna Crossroads VP(2)(3) 0.55% 0.25% 0.80%
Aetna Growth and Income VP(3) 0.50% 0.09% 0.59%
Aetna Index Plus Large Cap VP(2)(3) 0.32% 0.23% 0.55%
Aetna Legacy VP(2)(3) 0.49% 0.31% 0.80%
Aetna Money Market VP(3) 0.25% 0.10% 0.35%
Fidelity VIP Equity-Income Portfolio(4) 0.50% 0.08% 0.58%
Fidelity VIP II Contrafund Portfolio(4) 0.60% 0.11% 0.71%
Janus Aspen Aggressive Growth Portfolio(5) 0.73% 0.03% 0.76%
Janus Aspen Balanced Portfolio(5) 0.76% 0.07% 0.83%
Janus Aspen Growth Portfolio(5) 0.65% 0.05% 0.70%
Janus Aspen Worldwide Growth Portfolio(5) 0.66% 0.08% 0.74%
Oppenheimer Global Securities Fund 0.70% 0.06% 0.76%
Oppenheimer Strategic Bond Fund 0.75% 0.08% 0.83%
Portfolio Partners MFS Emerging Equities Portfolio(6)(7) 0.68% 0.13% 0.81%
Portfolio Partners MFS Research Growth Portfolio(6)(7) 0.70% 0.15% 0.85%
Portfolio Partners MFS Value Equity Portfolio(6) 0.65% 0.25% 0.90%
Portfolio Partners Scudder International Growth Portfolio(6) 0.80% 0.20% 1.00%
Portfolio Partners T. Rowe Price Growth Equity Portfolio(6) 0.60% 0.15% 0.75%
</TABLE>
(1) Certain of the Fund advisers reimburse the Company for administrative costs
incurred in connection with administering the Funds as variable funding
options under the Contract. These reimbursements are paid out of the
investment advisory fees and are not charged to investors.
(2) Effective May 1, 1998, the Portfolios' adviser has agreed to waive a portion
of its fee or to reimburse certain expenses so that aggregate expenses do
not exceed the total expenses shown above. These fee waiver/expense
reimbursement arrangements will increase total return and may be modified or
terminated at any time.
4
<PAGE>
Without these fee waiver/expense reimbursement arrangements Management Fees and
Total Expenses for the Portfolio would be higher. Management Fees and Total
Expenses would be as follows: 0.60% and 0.83% for Ascent VP; 0.60% and 0.85%
for Crossroads VP; 0.35% and 0.58% for Index Plus Large Cap VP and 0.60% and
0.91% for Legacy VP, respectively.
(3) Prior to May 1, 1998, the investment adviser provided administrative
services to the Fund and assumed the Fund's ordinary recurring direct costs
under an Administrative Services Agreement. Effective May 1, 1998, the
investment adviser will continue to provide administrative services to the
Fund but will no longer assume all of the Fund's ordinary recurring direct
costs under the Administrative Services Agreement. The Administrative Fee is
0.075% on the first $5 billion of the Fund's average daily net assets and
0.050% on all remaining net assets over $5 billion. The "Other Expenses"
shown are not based on actual figures for the year ended December 31, 1997,
but reflect the fee payable under the new Administrative Services Agreement
and estimates of the Fund's ordinary recurring direct costs.
(4) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds have entered into
arrangements with their custodian whereby credits realized, as a result of
uninvested cash balances were used to reduce custodian expenses. Including
these reductions, the total operating expenses would have been 0.57% for
Equity-Income Portfolio and 0.68% for Contrafund Portfolio.
(5) Management fees for Aggressive Growth, Balanced, Growth and Worldwide Growth
Portfolios reflect a reduced fee schedule effective July 1, 1997. The
management fees shown above are based on the new rate applied to net assets
as of December 31, 1997. Other expenses are based on gross expenses of the
Shares before expense offset arrangements for the fiscal year ended December
31, 1997. The information for each Portfolio is net of fee waivers or
reductions from Janus Capital. Fee reductions for the Aggressive Growth,
Balanced, Growth and Worldwide Growth Portfolios reduce the management fee
to the level of the corresponding Janus retail fund. Other waivers, if
applicable, are first applied against the management fee and then against
other expenses. Without such waivers or reductions, the Management Fee,
Other Expenses and Total Operating Expenses for the Shares would have been
0.74%, 0.04%, and 0.78% for Aggressive Growth Portfolio; 0.77%, 0.06%, and
0.83% for Balanced Portfolio; 0.74%, 0.04%, and 0.78% for Growth Portfolio;
0.72%, 0.09%, and 0.81% for Worldwide Growth Portfolio, respectively. Janus
Capital may modify or terminate the waivers or reductions at any time upon
at least 90 days' notice to the Trustees.
(6) Each Portfolio's aggregate expenses are contractually limited to the
advisory and administrative fees disclosed above. The investment adviser
will not seek an increase in its advisory or administrative fee at any time
prior to May 1, 1999.
(7) The advisory fee is 0.70% of the first $500 million in assets and 0.65% on
the excess.
For further details on each Fund's expenses please refer to that Fund's
prospectus. Additional copies of each Fund's prospectus and the Statement of
Additional Information for each Fund may be obtained free of charge by calling
(800)-334-7586.
Charges Deducted Upon Surrender
If, during the first 20 Policy Years, the Policy is totally surrendered or
lapses, or a Partial Surrender reduces the Specified Amount, a Surrender Charge
will be deducted from the Total Account Value. This charge is imposed in part to
recoup distribution expenses and in part to recover certain first year
administrative costs. The maximum Surrender Charges are included in each Policy
and are in compliance with each state's nonforfeiture law.
The maximum Surrender Charge, as specified in the Policy, is based on the
Specified Amount. It also depends on the Issue Age, risk classification and, in
most states, sex of the Insureds.
If You increase the Specified Amount, a new Surrender Charge will be applicable,
in addition to the then existing Surrender Charge. This charge will be effective
on the Issue Date for the increase and remain in effect for twenty years.
Supplemental Policy Specifications will be sent to You once the change is
complete and will reflect the maximum additional Surrender Charge in the Table
of Maximum Surrender Charges.
Any decrease in the Specified Amount will not reduce the original or any
additional Surrender Charge.
5
<PAGE>
Surrender Charges on Full and Partial Surrenders All applicable Surrender
Charges are imposed on Full surrenders.
A proportional percentage of all Surrender Charges is imposed on Partial
Surrenders. The proportional percentage is the amount of the net Partial
Surrender divided by the sum of the Separate Account Value and the Fixed Account
Value less full Surrender Charges. When a Partial Surrender is made, any
applicable remaining Surrender Charges will be reduced in the same proportion. A
transaction charge of $25 may be made against the Separate Account for each
Partial Surrender. (See Partial Surrenders)
Allocation of Premiums
You may allocate all or a part of Your Net Premiums to the Funds currently
available through the Separate Account in connection with the Policy and/or You
may allocate all or a part of Your Net Premiums to the Fixed Account.
The Funds
The Separate Account currently invests in shares of the Funds listed below. Net
Premiums applied to the Separate Account will be invested in the Funds in
accordance with the selection made by the Policyowner. Funds may be added or
withdrawn as permitted by applicable law. We reserve the right to limit the
total number of Funds You may elect to 17 over the lifetime of the Policy.
Shares of the Funds are not sold directly to the general public. Each of the
Funds is available only through the purchase of variable annuities or variable
life insurance policies. (See Mixed and Shared Funding)
The investment results of the Funds, whose investment objectives are described
below, are likely to differ significantly. There is no assurance that any of the
Funds will achieve their respective investment objectives. Investment in some of
the Funds involves special risks, which are described in their respective
prospectuses. You should read the prospectuses for the Funds and consider
carefully, and on a continuing basis, which Fund or combination of Funds is best
suited to Your long-term investment objectives. Except where otherwise noted,
all of the Funds are diversified, as defined in the Investment Company Act of
1940:
[bullet] Aetna Balanced VP, Inc. (formerly Aetna Investment Advisers Fund,
Inc.) seeks to maximize investment return, consistent with reasonable
safety of principal by investing in a diversified portfolio of one or
more of the following asset classes: stocks, bonds and cash
equivalents, based on the investment adviser's judgment of which of
those sectors or mix thereof offers the best investment prospects.(1)
[bullet] Aetna Income Shares d/b/a Aetna Bond VP seeks to maximize total return,
consistent with reasonable risk, through investments in a diversified
portfolio consisting primarily of debt securities.(1)
[bullet] Aetna Variable Fund d/b/a Aetna Growth and Income VP seeks to maximize
total return through investments in a diversified portfolio of common
stocks and securities convertible into common stock.(1)
[bullet] Aetna Variable Encore Fund d/b/a Aetna Money Market VP seeks to provide
high current return, consistent with preservation of capital and
liquidity, through investment in high-quality money market instruments.
An investment in the Fund is neither insured nor guaranteed by the U.S.
Government.(1)
[bullet] Aetna Generation Portfolios, Inc.--Aetna Ascent VP (formerly Aetna
Ascent Variable Portfolio) seeks to provide capital appreciation. The
Portfolio is designed for investors who have an investment horizon
exceeding 15 years and who have a high level of risk tolerance.(1)
6
<PAGE>
[bullet] Aetna Generation Portfolios, Inc.--Aetna Crossroads VP (formerly Aetna
Crossroads Variable Portfolio) seeks to provide total return (i.e.,
income and capital appreciation, both realized and unrealized). The
Portfolio is designed for investors who have an investment horizon
exceeding 10 years and who have a moderate level of risk tolerance.(1)
[bullet] Aetna Generation Portfolios, Inc.--Aetna Legacy VP (formerly Aetna
Legacy Variable Portfolio) seeks to provide total return consistent
with preservation of capital. The Portfolio is designed for investors
who have an investment horizon exceeding five years and who have a low
level of risk tolerance.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Index Plus Large Cap VP
(formerly Aetna Variable Index Plus Portfolio) seeks to outperform the
total return performance of publicly traded common stocks represented
in the S&P 500 Composite Stock Price Index.(1)
[bullet] Fidelity Investments Variable Insurance Products Fund Equity-Income
Portfolio seeks reasonable income by investing primarily in
income-producing equity securities. In selecting investments, the Fund
also considers the potential for capital appreciation.(2)
[bullet] Fidelity Investments Variable Insurance Products Fund II Contrafund
Portfolio seeks maximum total return over the long term by investing
mainly in securities of companies whose value the investment adviser
believes is not fully recognized by the public.(2)
[bullet] Janus Aspen Series--Aggressive Growth Portfolio is a nondiversified
portfolio that seeks long-term growth of capital. The Portfolio pursues
its investment objective by normally investing at least 50% of its
equity assets in securities issued by medium-sized companies.
Medium-sized companies are those whose market capitalizations fall
within the range of companies in the S&P MidCap 400 Index, which as of
December 31, 1997 included companies with capitalizations between
approximately $213 million and $13.7 billion, but which is expected to
change on a regular basis.(3)
[bullet] Janus Aspen Series--Balanced Portfolio seeks long-term capital growth,
consistent with preservation of capital and balanced by current income.
The Portfolio pursues its investment objective by, under normal
circumstances, investing 40%-60% of its assets in securities selected
primarily for their growth potential and 40%-60% of its assets in
securities selected primarily for their income potential.(3)
[bullet] Janus Aspen Series--Growth Portfolio seeks long-term growth of capital
in a manner consistent with the preservation of capital. The Portfolio
pursues its investment objective by investing primarily in common
stocks of issuers of any size. This Portfolio generally invests in
larger, more established issuers.(3)
[bullet] Janus Aspen Series--Worldwide Growth Portfolio seeks long-term growth
of capital in a manner consistent with preservation of capital. The
Portfolio pursues its investment objective primarily through
investments in common stocks of foreign and domestic issuers.(3)
[bullet] Oppenheimer Global Securities Fund seeks long-term capital appreciation
by investing a substantial portion of its assets in securities of
foreign issuers, "growth-type" companies, cyclical industries and
special situations which are considered to have appreciation
possibilities but which may be considered to be speculative.(4)
[bullet] Oppenheimer Strategic Bond Fund seeks a high level of current income
principally derived from interest on debt securities and seeks to
enhance such income by writing covered call options on debt securities.
The Fund intends to invest principally in (i) foreign government and
corporate debt securities, (ii) securities of the U.S. Government and
its agencies and instrumentalities ("U.S. Government securities"), and
(iii) lower-rated high yield domestic debt securities, commonly known
as "junk bonds," which are subject to a greater risk of loss of
principal and nonpayment of interest than higher-rated securities.
These securities may be considered to be speculative. Current income is
not an objective.(4)
7
<PAGE>
[bullet] Portfolio Partners, Inc.--MFS Emerging Equities Portfolio seeks to
provide long-term growth of capital. Dividend and interest income from
portfolio securities, if any, is incidental to the Portfolio's
investment objective.(5a)
[bullet] Portfolio Partners, Inc.--MFS Research Growth Portfolio seeks
long-term growth of capital and future income.(5a)
[bullet] Portfolio Partners, Inc.--MFS Value Equity Portfolio seeks capital
appreciation. Dividend income, if any, is a consideration incidental
to the Portfolio's objective of capital appreciation.(5a)
[bullet] Portfolio Partners, Inc.--Scudder International Growth Portfolio seeks
long-term growth of capital primarily through a diversified portfolio
of marketable foreign equity securities.(5b)
[bullet] Portfolio Partners, Inc.--T. Rowe Price Growth Equity Portfolio seeks
long-term growth of capital and, secondarily, to increase dividend
income by investing primarily in common stocks of well established
growth companies.(5c)
Investment Advisers for each of the Funds:
(1)Aeltus Investment Management, Inc.
(2)Fidelity Management & Research Company
(3)Janus Capital Corporation
(4)OppenheimerFunds, Inc.
(5)Aetna Life Insurance and Annuity (Adviser);
(a)Massachusetts Financial Services Company (Subadviser)
(b)Scudder Kemper Investments, Inc. (Subadviser)
(c)T. Rowe Price Associates, Inc. (Subadviser)
Some of the above Funds may use instruments known as derivatives as part of
their investment strategies, as described in their respective prospectuses. The
use of certain derivatives such as inverse floaters and principal only debt
instruments may involve higher risk of volatility to a Fund. The use of leverage
in connection with derivatives can also increase risk of losses. See the
prospectus for the Fund for a discussion of the risks associated with an
investment in those Funds. You should refer to the accompanying prospectuses of
the Funds for more complete information about their investment policies and
restrictions.
Mixed and Shared Funding; Conflicts of Interest
Shares of the Funds are available to insurance company separate accounts which
fund variable annuity contracts and variable life insurance policies, including
the Policy described in this Prospectus. Because Fund shares are offered to
separate accounts of both affiliated and unaffiliated insurance companies, it is
conceivable that, in the future, it may not be advantageous for variable life
insurance separate accounts and variable annuity separate accounts to invest in
these Funds simultaneously, since the interests of such Policyowners or
contractholders may differ. Although neither the Company nor the Funds currently
foresees any such disadvantages either to variable life insurance or to variable
annuity Policyowners, each Fund's Board of Trustees/Directors has agreed to
monitor events in order to identify any material irreconcilable conflicts which
may possibly arise and to determine what action, if any, should be taken in
response thereto. If such a conflict were to occur, one of the separate accounts
might withdraw its investment in a Fund. This might force that Fund to sell
portfolio securities at disadvantageous prices.
Fund Additions, Deletions or Substitutions
The Company reserves the right, subject to compliance with appropriate state and
federal laws, to add additional Fund(s) or cease to make Fund shares available
under the Policy prospectively. The Company may substitute
8
<PAGE>
shares of one Fund for shares of another Fund if, among other things, (a) it is
determined that a Fund no longer suits the purpose of the Policy due to a
change in its investment objectives or restrictions; (b) the shares of a Fund
are no longer available for investment; or (c) in the Company's view, it has
become inappropriate to continue investing in the shares of the Fund.
Substitution may be made with respect to both existing investments and the
investment of any future premium payments. However, no substitution of
securities will be made without prior notice to Policyowners, and without prior
approval of the SEC or such other regulatory authorities as may be necessary,
all to the extent required and permitted by the Investment Company Act of 1940
or other applicable law.
Fixed Account
Interests in the Fixed Account have not been registered with the SEC in
reliance upon exemptions under the Securities Act of 1933, as amended. However,
disclosure in this Prospectus regarding the Fixed Account may be subject to
certain generally applicable provisions of the federal securities laws relating
to the accuracy and completeness of the statements. Disclosure in this
Prospectus relating to the Fixed Account has not been reviewed by the SEC.
The Fixed Account is a fixed funding option available under the Policy. The
Company guarantees a minimum interest rate on amounts in the Fixed Account and
assumes the risk of investment gain or loss. The investment gain or loss of the
Separate Account or any of the Funds does not affect the Fixed Account Value.
The Fixed Account is secured by the general assets of the Company. The general
assets of the Company include all assets of the Company other than those held
in separate accounts sponsored by the Company or its affiliates. The Company
will invest the assets of the Fixed Account in those assets chosen by the
Company, as allowed by applicable law. Investment income of such Fixed Account
assets will be allocated by the Company between itself and those policies
participating in the Fixed Account.
The Company guarantees that, at any time, the Fixed Account Value will not be
less than the amount of the Net Premiums allocated to the Fixed Account, plus
interest at an annual rate of not less than 4%, less the amount of any Partial
Surrenders, Policy Loans or Monthly Deductions.
9
<PAGE>
Policy Choices
Premium Payments
The Policy is a flexible premium life insurance policy in that the Policyowner
has the right to decide when to make premium payments and in what amounts. Your
Policy provides various premium levels at which You may make payments. They are
the Planned Premium, Basic Monthly Premium and the Guaranteed Death Benefit
Premium. The amount of each of Your premium levels will be shown in Your Policy.
Alternatively, You may make any other premium payments You wish as Additional
Premiums. (See Guaranteed Death Benefit)
Payment of the Basic Monthly Premium, Guaranteed Death Benefit Premium, Planned
Premiums, or Additional Premiums in any amount will not, except as noted below,
guarantee that Your policy will remain in force. Conversely, failure to pay
Basic Monthly Premiums, Planned Premiums or Additional Premiums will not
necessarily cause Your Policy to lapse. Not paying Your Guaranteed Death Benefit
Premium will, however, cause the Guaranteed Death Benefit to terminate. Also,
not paying the Basic Monthly Premium will cause the No Lapse Coverage not to be
applicable. (See Guaranteed Death Benefit and No Lapse Coverage)
Planned Premiums are those premiums You request and We agree to bill on an
annual, semiannual or quarterly basis. Pre-authorized automatic monthly check
payments may also be arranged. Planned Premium due dates are measured from the
Issue Date. The Planned Premium is also due on the Issue Date. You may request
as Your Planned Premium for Your Policy the Basic Monthly Premium or the
Guaranteed Death Benefit Premium. Currently, there is no minimum Planned
Premium.
You may increase Your Planned Premium at any time by submitting a Written
Request to us or by paying Additional Premium. We may require evidence of
insurability if the Additional Premium or the new Planned Premium during the
current Policy Year would increase the difference between the Death Benefit and
the Total Account Value. If satisfactory evidence of insurability is requested
and not provided, We will refund the increase in premium without interest and
without participation of such amounts in the Funds.
Payment of an excess amount of premiums may cause the Policy to be classified
as a "Modified Endowment Contract" for federal income tax purposes. (See Tax
Matters)
Section 7702 of the Code includes a definition of life insurance for tax
purposes. These rules generally place limits on the amount of premiums that may
be paid under the policy and the relationship between the death benefit and the
account value. If necessary, We will return excess premiums or increase your
death benefit in order to maintain compliance with Section 7702. An increase in
death benefit may be a "material change" and may trigger a test to determine
whether the Policy has become a "Modified Endowment Contract" (See--Tax
Matters--Modified Endowment Contracts). An increase in death benefit will also
trigger an increase in Cost of Insurance charges.
At the time You apply for a Policy, if You have paid at least the amount equal
to Your Basic Monthly Premium prior to the Issue Date and have answered
favorably certain questions relating to each Insured's health, a temporary
insurance agreement (where approved for use and subject to certain maximums)
will be provided.
Under limited circumstances, We may backdate a Policy, upon request, by
assigning an Issue Date earlier than the date the application is signed but no
earlier than six months prior to state approval of the Policy. Backdating may be
desirable, for example, so that You can purchase a particular Policy Specified
Amount for lower Cost of Insurance Rates based on a younger insurance age. For a
backdated Policy, You must pay the premium for the period between the Issue Date
and the date the application is received at the Home Office. Backdating of Your
Policy will not affect the date on which Your premium payments are credited to
the Separate Account and You
10
<PAGE>
are credited with Accumulation Units. You cannot be credited with Accumulation
Units until Your Net Premium is actually deposited in the Separate Account.
(See Accumulation Units)
The initial premium equal to at least your Basic Monthly Premium should be made
by check or money order and made payable to the Company and given to the agent
with Your application. After the first premium payment, all premiums must be
sent directly to our Home Office and will be deemed received when actually
received at the Home Office. All Your premium payments, including Your first
premium payment, will be allocated as You have directed, and amounts allocated
to the Funds will be credited to your Policy at the Accumulation Unit Value
computed on the Valuation Date following receipt of your premium at the Home
Office. (See Right of Policy Examination)
You may reallocate Your future premium payments at any time by Your request to
us. Allocations must be changed in whole percentages. The change will be
effective as of the date of the next premium payment after You notify Us. We
will send You confirmation of the change. (See Transfers and Allocations to
Funding Options)
Guaranteed Death Benefit
The Guaranteed Death Benefit provision assures that the Policy will not lapse
if certain premiums are paid when due. As long as there are no outstanding
Policy Loans, have been no Partial Surrenders and all the Guaranteed Death
Benefit premiums due since the Issue Date are paid on or before each Monthly
Deduction Day, the Policy will not lapse even if the Surrender Value is
insufficient to satisfy the current Monthly Deductions. If on a Monthly
Deduction Day, all or part of the applicable Guaranteed Death Benefit premiums
have not been paid, You will have 61 days from the Monthly Deduction Day to pay
the amount of the applicable Guaranteed Death Benefit premiums due. Failure to
do so will cause the corresponding Guaranteed Death benefit to terminate. The
Guaranteed Death Benefit is available to the younger Insured's Attained Age
100. The Guaranteed Death Benefit assures that Your Policy will not lapse prior
to the younger Insured's Attained Age 100. The premium for this Guaranteed
Death Benefit is the Guaranteed Death Benefit Premium.
The Guaranteed Death Benefit may not be available in all circumstances and is
only available in those states where it is approved. The Guaranteed Death
Benefit to the Younger Insured's Attained Age 100 is not available to contracts
issued in the Commonwealth of Massachusetts. Once terminated, the Guaranteed
Death Benefit provision cannot be reinstated.
No Lapse Coverage
The Policy will not terminate within the 5-year period after its Issue Date or
the Issue Date of any increase if sufficient premiums have been paid. The
Policy will not terminate if on any Monthly Deduction Day within that period
the sum of premiums paid within that period equals or exceeds (a) the sum of
the Basic Monthly Premiums for each Policy Month from the start of the period,
including the current month; plus (b) any Partial Surrenders; plus (c) any
increase in the Loan Account Value since the start of the period.
If on any Monthly Deduction Day within the 5-year period the sum of premiums
paid is less than the sum of items (a), (b) and (c) above and the Total Account
Value is less than the Monthly Deduction the Policy will enter the Grace
Period. Additional premiums payments must be paid to prevent the termination of
the Policy. (See Grace Period)
After the 5-year period expires, on each Monthly Deduction Day, the Surrender
Value must be greater than the Monthly Deduction to prevent activation of the
Grace Period provision of the Policy, unless the Guaranteed Death Benefit is in
force. (See Guaranteed Death Benefit and Grace Period)
The No Lapse Coverage provision is available to contracts issued in the
Commonwealth of Massachusetts.
Death Benefit Options
At the time of purchase, You must choose between the two available Death
Benefit Options. The amount payable upon the Second Death is based upon one of
the following Death Benefit Options You choose.
11
<PAGE>
Under Option 1 the Death Benefit will be the greater of: (a) the Specified
Amount or (b) a percentage of the Total Account Value. This Percentage is 1
divided by the Net Single Premium per dollar of Specified Amount.
Under Option 2 the Death Benefit will be the greater of: (a) the Specified
Amount plus the Total Account Value on the date of death or (b) a percentage of
the Total Account Value. This percentage is 1 divided by the Net Single Premium
per dollar of Specified Amount. Option 2 provides a varying Death Benefit which
increases or decreases over time, depending upon the amount of premium paid and
the investment performance of the Fund(s) You choose. Under both Option 1 and
Option 2, the Death Benefit may be affected by Partial Surrenders. The Death
Benefit payable under either Option will be reduced by the amount necessary to
repay the Loan Account Value in full and, if the Policy is within the Grace
Period, any payment required to keep the Policy in force. (See Partial
Surrenders)
Transfers and Allocations to Funding Options
At any time prior to the Maturity Date, You may transfer all or part of each
Fund Account Value to any other Fund or to the Fixed Account Value at any time.
Funds may be transferred between the Funds or from the Funds to the Fixed
Account. We reserve the right to charge an administrative fee of $25 for more
than twelve transfers per year.
Within the forty-five days following the Policy Anniversary, You may request a
transfer of a portion of the Fixed Account Value to one or more of the Funds.
This type of transfer is allowed only once within this forty-five day period,
and We must receive Your request at the Home Office within the forty-five day
period. The transfer will be effective on the Valuation Date that Your request
is received by the Home Office. The amount of such transfer cannot exceed 25%
of the Fixed Account Value. However, if the Fixed Account Value is less than or
equal to $500, the transfer amount may equal the full Fixed Account Value.
Accumulation Units for each Variable Option will be added to or subtracted from
Your Separate Account Value, based on each Variable Option's Accumulation Unit
Value computed on the next Valuation Date following our receipt of your request
for transfer. A dollar amount will be added to or subtracted from the Fixed
Account Value according to the terms of Your request for transfer. You should
carefully consider current market conditions and each Fund's investment
policies and related risks before allocating money to the Funds. (See Premium
Payments and Accumulation Units)
Telephone Transfers
You may request a transfer of Account Values either in writing or by telephone.
In order to make telephone transfers, a written telephone transfer
authorization form must be completed by the Policyowner and returned to the
Company at its Home Office. Once the form is processed, the Policyowner may
request a transfer by telephoning the Company at 800-334-7586. All transfers
must be in accordance with the terms of the Policy.
Transfer instructions are currently accepted on each Valuation Date. Once
instructions have been accepted, they may not be rescinded; however, new
telephone instructions may be given on the following day. If the transfer
instructions are not in good order, the Company will not execute the transfer
and You will be notified.
We will use reasonable procedures, such as requiring identifying information
from callers, recording telephone instructions, and providing written
confirmation of transactions, in order to confirm that telephone instructions
are genuine. Any telephone instructions which We reasonably believe to be
genuine will be Your responsibility, including losses arising from any errors
in the communication of instructions. As a result of this procedure, the
Policyowner will bear the risk of loss. If the Company does not use reasonable
procedures, as described above, it may be liable for losses due to unauthorized
instructions.
Automated Transfers (Dollar Cost Averaging)
Dollar Cost Averaging describes a system of investing a uniform sum of money at
regular intervals over an extended period of time. Dollar Cost Averaging is
based on the economic fact that buying a security with a
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<PAGE>
constant sum of money at fixed intervals results in acquiring more of the item
when prices are low and less of it when prices are high.
You may establish automated transfers of Fund Account Values on a monthly or
quarterly basis from the Aetna Money Market VP to any other Fund or to the Fixed
Account through Written Request or other method acceptable to the Company. You
must have a minimum of $5,000 allocated to the Aetna Money Market VP in order to
enroll in the Dollar Cost Averaging program. The minimum automated transfer
amount is $50 per month.
There is no additional charge for the program. You may start or stop
participation in the Dollar Cost Averaging program at any time, but You must
give the Company at least 30 days' notice to change any automated transfer
instructions that are currently in place. The Company reserves the right to
suspend or modify automated transfer privileges at any time.
Before participating in the Dollar Cost Averaging program, You should consider
the risks involved in switching between investments available under the Policy.
Dollar Cost Averaging requires regular investments regardless of fluctuating
price levels, and does not guarantee profits or prevent losses. Therefore, You
should carefully consider market conditions and each Fund's investment policies
and related risks before electing to participate in the Dollar Cost Averaging
Program.
Policy Values
Total Account Value
Once Your Policy has been issued, each Net Premium allocated to a Variable
Option of the Separate Account is credited in the form of Accumulation Units of
the Variable Option based on that Variable Option's Accumulation Unit Value.
Each Net Premium will be credited to Your Policy at the Accumulation Unit
Value(s) computed on the next Valuation Date following our receipt of the
premium at Our Home Office following the Issue Date of the Policy. The number of
Accumulation Units credited is determined by dividing the Net Premium by the
value of an Accumulation Unit computed after the premium is received and
accepted by Us. Since each Variable Option has a unique Accumulation Unit Value,
if You have elected a combination of Variable Options You will have Accumulation
Units credited to Your Separate Account Value for each Variable Option.
The Total Account Value of Your Policy is determined by: (a) multiplying the
total number of Accumulation Units credited to the Policy for each applicable
Variable Option by its appropriate current Accumulation Unit Value; (b) if You
have elected a combination of Variable Options, totaling the resulting value;
and (c) adding any values attributable to the Fixed Account and any values
attributable to the Loan Account Value.
The number of Accumulation Units credited to a Policy will not be changed by any
subsequent change in the value of an Accumulation Unit. The number is increased
by subsequent contributions to or transfers into a Variable Option, and
decreased by charges and withdrawals from that Variable Option.
The Fixed Account Value reflects amounts allocated to the general account
through payment of premiums or transfers from the Separate Account. Amounts
allocated to the Fixed Account Value are guaranteed; however there is no
assurance that the Separate Account Value of the Policy will equal or exceed the
Net Premiums paid and allocated to the Separate Account.
You will be advised at least annually as to the number of Accumulation Units
which remain credited to the Policy, the current Accumulation Unit Values, the
Separate Account Value, the Fixed Account Value, and the Total Account Value.
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<PAGE>
Accumulation Unit Value
The value of an Accumulation Unit is determined on the Valuation Date. A
Valuation Period is the time from one Valuation Date to the next Valuation
Date. The value of an Accumulation Unit for any Valuation Period is determined
by multiplying the value of an Accumulation Unit for the immediately preceding
Valuation Period by the net investment factor for the current period for the
appropriate Variable Option. The net investment factor equals the net
investment rate plus 1.0. The net investment rate is determined separately for
each Variable Option as follows:
The net investment rate equals (a) the net assets of the Variable Option held
in Variable Life Account B at the end of a Valuation Period; minus (b) the net
assets of the Variable Option held in Variable Life Account B at the beginning
of that Valuation Period, adjusted by any taxes or provisions for taxes
attributable to the operation of Variable Life Account B; divided by (c) the
value of the Variable Option's Accumulation Units held in Variable Life Account
B at the beginning of the Valuation Period; minus (d) a daily charge for
mortality and expense risk expenses.
Maturity Value
The Maturity Value of the Policy is the Total Account Value less the Loan
Account Value less any unpaid accrued interest.
Surrender Value
The Surrender Value of the Policy is the amount You can receive in cash by
surrendering the Policy. All or part of the Surrender Value may be applied to
one or more of the Settlement Options described in this Prospectus or in any
manner to which We agree and that We make available. (See Charges Deducted Upon
Surrender)
Policy Rights
Full Surrenders
By Written Request, You may surrender the Policy for its Full Surrender Value
at any time before the Maturity Date while one or both Insureds is alive. All
insurance coverage under the Policy will end on the date of the Full Surrender.
The Full Surrender Value will equal (a) the Total Account Value on the date of
surrender; less (b) the Surrender Charge; less (c) the Loan Account Value plus
any accrued interest. We will require return of the Policy. (See Right to Defer
Payment, Policy Settlement and Payment of Benefits)
Partial Surrenders
By Written Request, You may, at any time after the expiration of the Right of
Policy Examination, partially surrender the Policy. A Partial Surrender Charge
will be deducted from the amount of the Total Account Value which is
surrendered. The minimum amount of any Partial Surrender after any Partial
Surrender charge is applied is $500. We may also charge an administrative fee
of $25.
The Partial Surrender charge will be in proportion to the Surrender Charge that
would apply to a Full Surrender. The proportion will be computed as the amount
of the net Partial Surrender divided by the sum of the Fixed Account Value and
the Separate Account Value less the Full Surrender Charge. When the Partial
Surrender is made, any future Surrender Charge will be reduced in the same
proportion.
The Partial Surrender Charge, and the net amount surrendered will reduce the
Policy's values as described in the Charges Deducted Upon Surrender section.
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<PAGE>
If the Death Benefit Option for the Policy is Option 1, a Partial Surrender
will reduce the Total Account Value, Death Benefit, and Specified Amount. The
Specified Amount and Total Account Value will be reduced by equal amounts.
However, We will not allow a Partial Surrender if the Specified Amount will be
reduced below the minimum Specified Amount of $500,000.
If the Death Benefit Option for the Policy is Option 2, a Partial Surrender
will reduce the Total Account Value and the Death Benefit. The Specified Amount
will not be reduced.
If the Death Benefit for the Policy is determined as the Total Account Value
divided by the Net Single Premium, the Partial Surrender may not reduce the
Specified Amount.
A reduction in the Specified Amount will cause a reduction in the required
premiums for the Guaranteed Death Benefit. The future premium required to
maintain the Guaranteed Death Benefit will be based on the new Specified
Amount.
If, at the time of a Partial Surrender, Your Total Account Value is
attributable to the Separate Account and the Fixed Account, the Surrender
Charge, the transaction charge and the amount paid to You upon the Partial
Surrender will be deducted from the Separate Account Value and the Fixed
Account Value in the same proportion as these values bear to the sum of the
Fixed Account Value and the Separate Account Value on the date of the
deduction. This is accomplished by liquidating Accumulation Units and
withdrawing the value of the liquidated Accumulation Units from each Variable
Option in the same proportion as their respective values have to the sum of
Your Fixed Account and Separate Account Values. (See Right to Defer Payment,
Policy Changes and Payment of Benefits)
Paid-Up Nonforfeiture Option
By Written Request, You may elect, at any time before the Maturity Date, to
continue the Policy as paid-up life insurance.
The Surrender Value will be applied as a Net Single Premium to determine the
Specified Amount of the paid-up insurance. The cost of the paid-up insurance
will be based on the guaranteed maximum Cost of Insurance Rates in the Policy
and an interest rate of 4.0% compounded annually. However, the Specified Amount
of the paid-up insurance cannot exceed the Death Benefit under the Policy as of
the effective date of the paid-up insurance. Any excess Surrender Value will be
refunded to You.
Full and Partial Surrenders and Policy Loans, as described in this Prospectus,
will be allowed if the Policy is continued in force as paid up insurance.
Proceeds payable under this option upon death or maturity will equal the
Specified Amount less debt of the paid up insurance. (See Tax Matters)
Grace Period
If the Surrender Value is insufficient to satisfy a Monthly Deduction on the
Monthly Deduction Day, We will allow You 61 days of grace for payment of an
amount sufficient to continue coverage. We may require payment of the amount
necessary to keep the Policy in force for the current month plus two additional
months.
Written notice will be mailed to Your last known address, according to Our
records, not less than 61 days before termination of the Policy. This notice
will also be mailed to the last known address of any assignee of record.
During the days of grace the Policy will stay in force. If the Second Death
occurs during the days of grace, We will deduct an amount required to keep the
Policy in force from the Death Benefit.
If payment is not made within 61 days after the Monthly Deduction Day, the
Policy will terminate without value at the end of the Grace Period. The
termination will be effective on the Monthly Deduction Day for the first unpaid
Monthly Deduction.
Reinstatement of a Lapsed Policy
If the Policy terminates as provided in its Grace Period benefit, it may be
reinstated. To reinstate the Policy, the following conditions must be met:
- -- The Policy has not been fully surrendered.
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<PAGE>
- -- You must apply for reinstatement within 5 years after the date of
termination and before the Maturity Date.
- -- We must receive evidence of insurability, satisfactory to Us, on each
Insured.
- -- We must receive a premium payment sufficient to keep the Policy in force for
the current month plus two additional months.
Supplemental Benefits will be reinstated only with Our consent. (See Grace
Period and Premium Payments)
Coverage Beyond Maturity
Prior to the younger Insured's Attained Age 100, you may elect to continue
coverage beyond the Maturity Date provided the Policy is in force on the
Maturity Date. If elected, on the Maturity Date no proceeds will be paid and
the Separate Account Value of the Policy will be transferred to the Fixed
Account where it will continue to earn interest as described in the Policy
(extra benefit riders terminate at the younger Insured's Attained Age 100).
Monthly Deduction amounts will continue to be deducted, with a Cost of
Insurance rate equal to zero. Only payments required to keep the Policy in
force will be accepted beyond the Maturity Date.
The Policy may be subject to certain adverse tax consequences when continued
beyond the Maturity Date.
All rights and benefits as described in the Policy will be available before the
Second Death, and Proceeds will be payable on the Second Death.
Coverage beyond the Maturity Date may not be available in all states.
Right to Defer Payment
Payments of any Separate Account Value will be made within 7 days after Our
receipt of Your Written Request. However, the Company reserves the right to
suspend or postpone the date of any payment of any benefit or values for any
Valuation Period (1) when the New York Stock Exchange is closed (except
holidays or weekends); (2) when trading on the Exchange is restricted; (3) when
an emergency exists as determined by the SEC so that disposal of the securities
held in the Funds is not reasonably practicable or it is not reasonably
practicable to determine the value of the Funds' net assets; or (4) during any
other period when the SEC, by order, so permits for the protection of security
holders. For payment from the Separate Account in such instances, We may defer
payment of Full Surrender and Partial Surrender Values, any Death Benefit in
excess of the current Specified Amount, and any portion of the Loan Value.
Payment of any Fixed Account Value may be deferred for up to six months, except
when used to pay amounts due Us.
Policy Loans
We will grant loans at any time after the expiration of the Right of Policy
Examination and before the Maturity Date. The amount of the loan will not be
more than the Loan Value. Unless otherwise required by state law, the Loan
Value for this Policy is 90% of the sum of the Fixed Account Value and the
Separate Account Value less the Surrender Charge applicable at the time of the
loan.
The amount of the loan will be transferred out of the Fixed Account and
Separate Account Values in proportion to the value of the Fixed Account and
each Variable Option. The loan amount increases the Loan Account Value. The
loan may be repaid in full or in part at any time prior to the Maturity Date as
long as this Policy is in force and one or both Insureds is alive. The amount
necessary to repay all loans in full is the Loan Account Value plus any accrued
interest. Loan repayments will be allocated to the Fixed Account Value and the
Separate Account Value in the same proportion in which the loan was taken. The
Loan Account Value will be reduced by payments You identify as loan repayments.
All other payments will be considered premium payments.
The amount of interest earned on the Loan Account Value and the amount of
interest charged to You on a loan depends on whether the loan is considered
preferred. A preferred loan is a loan beginning in the 11th Policy Year
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<PAGE>
or upon the younger Insured's Attained Age 65, whichever is later, and on each
Policy Anniversary thereafter, that is taken from the Separate Account Value.
The interest rate charged on the preferred loan is 4.5%, and the interest rate
credited to the Loan Account Value is 4%.
For all other loans, the loan interest rate charged is 8%. The Loan Account
Value will earn interest at the guaranteed rate of 4%; however, We may credit
interest in excess of this rate.
Interest is due and payable on the next Policy Anniversary, the date this
Policy ends or upon full repayment of the Loan Account Value. Any interest not
paid when due will be added to the Loan Account Value on the Policy Anniversary
and will itself bear interest on the same terms.
An outstanding loan amount will decrease the Surrender Value available under
the Policy. For example, if a Policy has a Surrender Value of $10,000, You may
take a loan of 90% or $9,000, leaving a new Surrender Value of $1,000. If a
loan is not repaid, it will permanently decrease the Surrender Value which
could cause the Policy to lapse. In addition, the Death Benefit will be
decreased because of an outstanding Policy Loan. Furthermore, even if the loan
is repaid, the amount of the Death Benefit and the Policy's Surrender Value may
be permanently affected since the Loan Account Value is not credited with the
investment experience of the Funds.
Policy Changes
You may make changes to Your Policy, as described below, by submitting a
Written Request to Our Home Office. Supplemental Policy Specifications and/or a
notice confirming the change will be sent to You once the change is completed.
Increase in Specified Amount
Increases will be allowed at any time while this Policy is in force while both
Insureds are alive subject to the following conditions. The increase may be
rescinded by You within 10 days of receipt of the supplemental Policy
Specifications or notice of the right to rescind the increase, whichever is
later.
- -- Satisfactory evidence of insurability on both Insureds will be required.
- -- The Issue Date for any increase will be shown in the supplemental Policy
Specifications.
- -- The minimum increase is $10,000.
- -- The Surrender Value immediately after an increase must be at least three
times the sum of (a) the most recent Monthly Deduction from the Total Account
Value and (b) the Specified Amount of the increase multiplied by the
applicable Cost of Insurance Rate divided by 1000.
- -- An increase in the Specified Amount will increase the Surrender Charge.
- -- The 5-year period as described in the No Lapse Coverage provision will
restart on the Issue Date of the increase.
- -- The Basic Monthly Premium and the Guaranteed Death Benefit Premium will be
adjusted when the Specified Amount is increased.
Decrease in Specified Amount
You may decrease the Specified Amount of this Policy after the 5th Policy Year,
however:
- -- We will not allow a decrease in the Specified Amount if the Specified Amount
would be reduced below the minimum Specified Amount of $500,000.
- -- For a decrease in the Specified Amount, the Issue Date will be the Monthly
Deduction Day on or next following the date on which Your Written Request is
received.
- -- The decrease will reduce any past increases in the reverse order in which
they occurred.
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<PAGE>
- -- The Basic Monthly Premium and Guaranteed Death Benefit Premium will be based
on the new Specified Amount.
- -- There will be no change in the Surrender Charge.
Change in Death Benefit Option
Any change in the Death Benefit Option is subject to the following conditions:
- --If the change decreases the Specified Amount below the minimum of $500,000,
We will increase the Specified Amount to $500,000.
- --The change will take effect on the Monthly Deduction Day on or next following
the date on which Your Written Request is received.
- -- There will be no change in the Surrender Charge.
- -- Evidence of insurability may be required.
- --Changes from Option 1 to 2 will be allowed at any time while this Policy is
in force. The Specified Amount will be reduced to equal the Specified Amount
less the Total Account Value at the time of the change. In certain
circumstances, the change may result in loss of the assurance that the
Guaranteed Death Benefit Premium will keep the Policy in force to the younger
Insured's Attained Age 100.
- --Changes from Option 2 to 1 will be allowed at any time while this policy is
in force. The new Specified Amount will be increased to equal the Specified
Amount plus the Total Account Value as of the date of the change.
(See Surrender Charge and Right of Policy Examination)
Right of Policy Examination
The Policy has a free look period during which You may examine the Policy. If
for any reason You are dissatisfied, it may be returned to Aetna or its
representative within 10 days of receipt of the Policy or within a different
period if required by State law. Return the Policy to Aetna, Individual Life
Insurance, at 151 Farmington Avenue, Hartford, Connecticut 06156. Upon its
return, the Policy will be deemed void from its beginning. The amount refunded
will be (a) the difference between payments made and amounts allocated to
Variable Life Account B plus (b) the value of amount allocated to Variable Life
Account B on the date the returned contract is received by Aetna plus (c) any
charges made under this Policy's terms on the amounts allocated to Variable Life
Account B or (d) where required by State law, the entire payment made.
The Right of Policy Examination also applies to Increases in the Specified
Amount. The increase may, for any reason, be rescinded by You within 10 days of
receipt of the Supplemental Policy Specifications or within a different period
if required by state law.
Supplemental Benefits
The supplemental benefits currently available as riders to the Policy include
the following (may not be available in all states):
- - Disability Benefit Rider--provides for a credit of the benefit amount
described in the Policy in the event of the total disability of the covered
Insured.
- - Split Option Amendment Rider--allows You, upon election, to exchange the
Policy for two individual policies, one on each Insured named in the Policy,
subject to the terms of the rider.
The exercise of the option provided by this Rider may have tax consequences.
You should consult a competent tax advisor if you are considering purchasing
this rider or exercising its option.
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<PAGE>
[square] Four Year Term Rider--provides non-participating term insurance for the
first four Policy Years. The benefit amount described in the Policy
increases the Policy's Death Benefit.
Other riders for supplemental benefits may become available under the Policy
from time to time. The charges for each of these riders are illustrated in Your
Policy.
Death Benefit
The Death Benefit under the Policy will be paid in a lump sum unless You or the
beneficiary have elected that it be paid under one or more of the Settlement
Options.
Payment of the Death Benefit may be delayed if the Policy is being contested.
You may elect a Settlement Option for the beneficiary and deem it irrevocable.
You may revoke or change a prior election. The beneficiary may make or change
an election within 90 days of the Second Death, unless You have made an
irrevocable election. The beneficiary who has elected Settlement Option 1 may
elect another option after the Second Death.
All or part of the Death Benefit may be applied under one of the Settlement
Options, or such options as We may choose to make available in the future.
If the Policy is assigned as collateral security, We will pay any amount due
the assignee in a lump sum. Any excess Death Benefit due will be paid as
elected.
(See Right to Defer Payment and Policy Settlement)
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<PAGE>
Policy Settlement
Proceeds in the form of Settlement Options are payable by the Company upon the
death of the Surviving Insured or upon Full Surrender or upon maturity and may
be paid in a lump sum, in whole or in part, under any of the Settlement Options
available under the Policy.
A Written Request may be made to elect, change or revoke a Settlement Option
before payments begin under any Settlement Option. This request will take effect
upon its filing at our Home Office. If no Settlement Option has been elected by
You when the Death Benefit becomes payable to the beneficiary, that beneficiary
may make the election.
The first variable Settlement Option payment will be as of the tenth Valuation
Period following Our receipt of the properly-completed election form.
Settlement Options are funded by Variable Annuity Account B, a separate account
of the Company established in 1976 in accordance with the insurance laws of the
State of Connecticut. Variable Annuity Account B was formed for the purpose of
segregating assets attributable to the variable portion of the variable annuity
contracts and variable life settlement options from the Company's other assets.
Variable Annuity Account B is registered as a unit investment trust under the
Investment Company Act of 1940, and meets the definition of separate account
under the federal securities laws. A Variable Annuity Account B prospectus will
be provided in connection with selecting a Settlement Option.
Settlement Options
The following Settlement Options are available under the Policy:
Option 1--Payment of interest on the sum left with Us.
Option 2--Payments for a stated number of years, but no more than thirty.
Option 3--Payments for the lifetime of the Annuitant. If also chosen, We will
guarantee payments for 60, 120, 180, or 240 months.
Option 4--Life Income Based Upon the Lives of Two Payees--an annuity will be
paid during the joint lifetimes of two Annuitants. Payments will continue until
both Annuitants have died. When this option is chosen, a choice must be made
of:
a) 100% of the payment to continue after the first death;
b) 66-2/3% of the payment to continue after the first death;
c) 50% of the payment to continue after the first death;
d) Payments for a minimum of 120 months, with 100% of the payment to continue
after the first death; or
e) 100% of the payment to continue to the survivor if the survivor is the
original payee, and 50% of the payment to continue to the survivor if the
survivor is the second payee.
In most states, no election may be made that would result in a first payment of
less than $25 or that would result in total yearly payments of less than $120.
If the value of the Policy is insufficient to elect an option for the minimum
amount specified, a lump-sum payment must be elected.
Calculation of Settlement Option Values
The value of the Settlement Options will be calculated as set forth in the
Policy.
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The Company
The Aetna Life Insurance and Annuity Company is a stock life insurance company
organized under the insurance laws of the State of Connecticut in 1976. Through
a merger, it succeeded to the business of Aetna Variable Annuity Life Insurance
Company (formerly Participating Annuity Life Insurance Company organized in
1954). The Company is engaged in the business of issuing life insurance policies
and annuity contracts in all states of the United States. The Company is a
wholly owned subsidiary of Aetna Retirement Holdings Inc., which is in turn a
wholly owned subsidiary of Aetna Retirement Services, Inc. and an indirect
wholly owned subsidiary of Aetna Inc.
The Company is registered as a broker-dealer under the Securities Exchange Act
of 1934 and is a member of the National Association of Securities Dealers. As
such it serves as the principal underwriter for the securities offered hereunder
and also acts as the principal underwriter for Variable Annuity Accounts B, C
and G (separate accounts of the Company registered as unit investment trusts),
and Variable Annuity Account I (a separate account of Aetna Insurance Company of
America registered as a unit investment trust). Additionally, the Company is
registered as an investment adviser under the Investment Advisers Act of 1940
and, as such, is the investment adviser for Portfolio Partners, Inc. The Company
is also the depositor of Variable Annuity Accounts B, C and G
Directors & Officers
<TABLE>
<CAPTION>
Name and Address* Position with Company Business Experience During Past 5 Years
- --------------------- ----------------------------------- ------------------------------------------------
<S> <C> <C>
Thomas J. McInerney Director, President and Chairman, President (since September 1997), Aetna Life
Executive Committee Insurance and Annuity Company; President
(Principal Executive Officer) (since September 1997), Aetna Insurance
Company of America; Director and President (since
September 1997), Aetna Retirement Holdings, Inc.;
President (since August 1997), Aetna Retirement
Services, Inc.; Executive Vice President (since
August 1997), Aetna Inc., Aetna Services, Inc.
and Aetna Life Insurance Company; Vice President,
Strategy (March 1997 - August 1997) Aetna Inc.,
Aetna Services, Inc. and Aetna Life Insurance
Company; Vice President, Sales (December 1996 -
March 1997) and Vice President National Accounts
(April 1996 - March 1997), Aetna US Healthcare
Inc.; Vice President, Strategy, Finance, &
Administration (July 1995 - April 1996), Aetna
Inc.; Vice President, Guaranteed Products
(November 1992 - July 1995), Aetna Life Insurance
Company.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name and Address* Position with Company Business Experience During Past 5 Years
- ---------------------- ----------------------------------- -------------------------------------------------
<S> <C> <C>
Shaun P. Mathews Director and Senior Vice Senior Vice President, Product Management
President (since September 1997), Vice President,
Products Group (February 1996 - September 1997),
Senior Vice President, Strategic Markets and
Products (February 1993 - February 1996).
Catherine Hale Smith Director, Chief Financial Officer Chief Financial Officer and Senior Vice
and Senior Vice President President, Strategy and Finance (since February
1998), Aetna Life Insurance and Annuity Company;
Chief Financial Officer (since February 1998),
Aetna Retirement Services, Inc.; Vice President,
Strategy, Finance and Administration, Financial
Relations (September 1996 - February 1998),
Aetna Inc.; Chief of Staff, Health/Group Life,
Strategy and Communication (April 1993 -
September 1996).
Kirk P. Wickman Vice President, General Counsel Vice President, General Counsel and Corporate
and Corporate Secretary Secretary (since November 1996), Aetna Life
Insurance and Annuity Company; Vice President
and Counsel (June 1992 - November 1996), Aetna
Life Insurance Company.
Deborah Koltenuk Vice President, Treasurer and Vice President, Treasurer and Corporate
Corporate Controller Controller (since July 1996), Aetna Life
Insurance and Annuity Company and Aetna
Retirement Holdings, Inc.; Vice President,
Investment Financial Reporting and Securities
Operations (April 1996 - July 1996), Aetna Life
Insurance Company; Vice President, Investment
Planning and Financial Reporting (October 1994 -
April 1996), The Aetna Casualty and Surety
Company and The Standard Fire and Insurance
Company; Assistant Vice President, Finance and
Administration (June 1994 - October 1994), Aetna
Life Insurance Company; Controller (September
1993 - June 1994), Aetna Information Technology;
Assistant Vice President (December 1990 -
September 1993), Aetna Life and Casualty
Company.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name and Address* Position with Company Business Experience During Past 5 Years
- ---------------------- -------------------------- ------------------------------------------------
<S> <C> <C>
Frederick D. Kelsven Vice President and Chief Vice President, Chief Compliance Officer (since
Compliance Officer April 1998), Aetna Insurance Agency Holding
Company, Inc., Aetna Insurance Agency of
Massachusetts, Inc. and Aetna Insurance
Agency, Inc.; Vice President, Chief Compliance
Officer (since September 1997), Aetna
Retirement Holdings, Inc.; Vice President and
Chief Compliance Officer (since April 1997),
Aetna Insurance Company of America; Vice
President, Chief Compliance Officer (since
February 1997), Aetna Life Assignment
Company; Vice President & Chief Compliance
Officer (since November 1996), Aetna
Investment Services, Inc.; Director of
Compliance (January 1985 - September 1996),
Nationwide Life Insurance Company.
</TABLE>
*The address of all Directors and Officers listed is 151 Farmington Avenue,
Hartford, Connecticut. These individuals may also be directors and/or officers
of other affiliates of the Company.
Directors, officers and employees of the Company are covered by a blanket
fidelity bond in the amount of $60 million issued by Aetna Casualty and Surety
Company.
23
<PAGE>
Additional Information
Reports to Policyowners
The Company will maintain all records relating to the Separate Account. At least
once in each Policy Year, the Company will send You a statement containing the
following information:
(1) A statement of changes (including a statement of monthly deductions and
investment results and any interest earnings for the report period) in the
Total Account Value and Surrender Value since the prior report or since the
Issue Date, if there has been no prior report;
(2) Surrender Value, Death Benefit, and any Loan Account Value as of the Policy
Anniversary; and
(3) A projection of the Total Account Value, Loan Account Value and Surrender
Value as of the succeeding Policy Anniversary.
If any portion of Your Total Account Value is allocated to the Separate Account,
You will receive such additional periodic reports as may be required by the SEC.
Some state laws require additional reports; these requirements vary from state
to state.
Right to Instruct Voting of Fund Shares
In accordance with our view of present applicable law, We will vote the shares
of each of the Funds held in the Separate Account in accordance with
instructions received from Policyowners having a voting interest in the Funds.
Policyowners having such an interest will receive periodic reports relating to
the Fund, proxy material and a form for giving voting instructions. The number
of shares which You have a right to vote will be determined as of a record date
established by the Fund. The number of votes that You are entitled to direct
with respect to a Fund will be determined by dividing the portion of Your Total
Account Value attributable to that Fund by the net asset value of one share in
the Fund. Voting instructions will be solicited by written communication at
least 14 days before such meeting.
The votes will be cast at meetings of the shareholders of the Fund and will be
based on instructions received from Policyowners. However, if the Investment
Company Act of 1940 or any regulations thereunder should be amended or if the
present interpretation thereof should change, and as a result We determine that
We are permitted to vote the shares of the Fund in our own right, We may elect
to do so.
Fund shares for which no timely instructions are received and Fund shares which
are not otherwise attributable to Policyowners will be voted by Us in the same
proportion as the voting instructions which are received for all Policies
participating in each Fund through the Separate Account.
Disregard of Voting Instructions
When required by state insurance regulatory authorities, We may disregard voting
instructions if the instructions require that the shares be voted so as to cause
a change in the sub-classification or investment objectives of a Fund or to
approve or disapprove an investment advisory contract for a Fund. In addition,
We may disregard voting instructions initiated by a Policyowner in favor of
changes in the investment policy or the investment adviser of the Fund if We
reasonably disapprove of such changes.
A change would be disapproved only if the proposed change is contrary to state
law or prohibited by state regulatory authorities or if We determine that the
change would have an adverse effect on the Separate Account if the proposed
investment policy for a Fund would result in overly speculative or unsound
investments. In the event that We do disregard voting instructions, a summary of
that action and the reasons for such action will be included in the next annual
report to Policyowners.
24
<PAGE>
State Regulation
With the exception of Guam, Puerto Rico and the Virgin Islands, the Policy will
be offered for sale in all jurisdictions where the Company is authorized to do
business and where the Policy has been approved by the appropriate Insurance
Department or regulatory authorities.
The Company is subject to regulation and supervision by the Insurance Department
of the State of Connecticut, which periodically examines its affairs. The
Company is also subject to the insurance laws and regulations of all
jurisdictions where it is authorized to do business. We are required to submit
annual statements of our operations, including financial statements, to the
insurance departments of the various jurisdictions in which We do business, for
the purposes of determining solvency and compliance with local insurance laws
and regulations.
Legal Matters
The Company knows of no material legal proceedings pending to which either the
Separate Account or the Company is a party or which would materially affect the
Separate Account. The legal validity of the securities described in the
prospectus has been passed on by Counsel for the Company.
The Registration Statement
A Registration Statement under the Securities Act of 1933 has been filed with
the SEC relating to the offering described in this Prospectus. This Prospectus
does not include all of the information set forth in the Registration Statement,
certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. The omitted information may be obtained at the SEC's
principal office in Washington, D C, upon payment of the SEC's prescribed fees.
Distribution of the Policy
The Company will serve as underwriter of the securities offered hereunder as
defined by the federal securities laws. The Company is registered as a
broker-dealer with the SEC and is a member of the National Association of
Securities Dealers, Inc. The Company will contract with one or more registered
broker-dealers, including broker-dealers affiliated with it ("Distributors"), to
offer and sell the Policies. The Company may also offer and sell policies
directly. All persons selling the Policies will be registered representatives of
the Distributors, and will also be licensed as insurance agents to sell variable
life insurance.
The Company may also contract with independent third party broker-dealers who
will act as wholesalers by assisting the Company in finding broker-dealers to
offer and sell the Policies. These parties may also provide training, marketing
and other sales related functions for the Company and other broker-dealers and
may provide certain administrative services to the Company in connection with
the Policies. The Company may pay such parties compensation based on premium
payments for the Policies purchased through broker-dealers selected by the
wholesaler. In addition, some sales personnel may receive various types of
non-cash compensation as special sales incentives, including trips and
educational and/or business seminars. Supervisory and other management personnel
of the Company may receive compensation that will vary based on the relative
profitability to the Company of the funding options you select. Funding options
that invest in Funds advised by the Company or its affiliates are generally more
profitable to the Company.
Salespersons and their supervising broker-dealers will be compensated for sales
of the Policy on a commission and service fee basis. Commissions will equal 50%
of the sum of the first-year premiums up to a premium amount ("target premium")
established by the Company and 3% for that part of the sum that is greater than
the target premium. We may also pay commissions of 3% of any additional premiums
paid during Policy Years 2 through 10, or may pay an equivalent amount based on
Total Account Value. In the event of an increase in Specified Amount, the
commission will equal 47% of the target premium for the additional Specified
Amount in the year of an increase and 3% for premiums paid until the tenth year
from the increase or an equivalent amount based on Total Account Value. In
addition, certain production, persistency and managerial bonuses, as well as
expense allowances, may be paid.
25
<PAGE>
Independent Auditors
KPMG Peat Marwick LLP, CityPlace II, Hartford, Connecticut, are the independent
auditors for the Separate Account and for the Company. The services provided to
the Separate Account include primarily the examination of the Separate Account's
financial statements and the review of filings made with the SEC.
Year 2000
As a healthcare and financial services enterprise, Aetna Inc. (referred to
collectively with its affiliates and subsidiaries as Aetna), is dependent on
computer systems and applications to conduct its business. Aetna has developed
and is currently executing a comprehensive risk-based plan designed to make its
computer systems, applications and facilities Year 2000 ready. The plan covers
four stages including (i) inventory, (ii) assessment, (iii) remediation and (iv)
testing and certification. At year end 1997, Aetna, including the Company, had
substantially completed the inventory and assessment stages. The remediation of
mission-critical systems is currently underway and targeted for completion by
December 31, 1998. Testing and certification of all systems and applications are
targeted for completion by mid-1999. The costs of these efforts will not affect
the Separate Account.
The Company, its affiliates and the mutual funds that serve as investment
options for the Separate Account also have relationships with investment
advisers, broker dealers, transfer agents, custodians or other securities
industry participants or other service providers that are not affiliated with
Aetna. Aetna, including the Company, is initiating communication with its
critical external relationships to determine the extent to which Aetna may be
vulnerable to such parties failure to resolve their own Year 2000 issues. Where
practicable Aetna and the Company will assess and attempt to mitigate their
risks with respect to the failure of these parties to be Year 2000 ready. There
can be no assurance that failure of third parties to complete adequate
preparations in a timely manner, and any resulting systems interruptions or
other consequences, would not have an adverse effect, directly or indirectly, on
the Separate Account, including, without limitation, its operation or the
valuation of its assets and units.
Tax Matters
General
The following is a discussion of the federal income tax considerations relating
to the Policy. This discussion is based on the Company's understanding of
federal income tax laws as they now exist and are currently interpreted by the
Internal Revenue Service ("IRS"). These laws are complex, and tax results may
vary among individuals. A person or persons contemplating the purchase of or the
exercise of elections under the Policy described in this Prospectus should seek
competent tax advice.
Federal Tax Status of the Company
The Company is taxed as a life insurance company in accordance with the Internal
Revenue Code of 1986, as amended ("Code"). For federal income tax purposes, the
operations of each Separate Account form a part of the Company's total
operations and are not taxed separately, although operations of each Separate
Account are treated separately for accounting and financial statement purposes.
Under existing federal income tax law, the Company believes that the Separate
Account investment income and realized net capital gains will not be taxed to
the extent that such income and gains are applied to increase the reserves under
the contracts. Accordingly, the Company does not anticipate that it will incur
any federal income tax liability attributable to the Separate Account investment
income or realized net capital gains. Therefore, the Company does not intend to
make provisions for any such taxes. However, the Company reserves the right to
make a deduction for such taxes should they be imposed with respect to such
items in the future.
26
<PAGE>
Life Insurance Qualification
Section 7702 of the Code includes a definition of life insurance for tax
purposes. These rules place limits on the amount of premiums that may be paid
under the policy and the relationship between the death benefit and the account
value. If necessary, we will return excess premiums or increase your death
benefit in order to maintain compliance with Section 7702. An increase in death
benefit may be a "material change" and may trigger a test to determine whether
the Policy has become a "Modified Endowment Contract" (See--Tax
Matters--Modified Endowment Contracts). An increase in death benefit will also
trigger an increase in Cost of Insurance charges. The Secretary of the Treasury
has been granted authority to prescribe regulations to carry out the purposes of
Section 7702, and proposed regulations governing mortality charges were issued
in 1991. The Company believes that the Policy meets the statutory definition of
life insurance. As such, and assuming the diversification standards of Section
817(h) (discussed below) are satisfied, then except in limited circumstances (a)
death benefits paid under the Policy should generally be excluded from the gross
income of the beneficiary for federal income tax purposes under Section
101(a)(1) of the Code, and (b) a Policyowner should not generally be taxed on
the cash value under a Policy, including increments thereof, prior to actual
receipt. The principal exceptions to these rules are corporations that are
subject to the alternative minimum tax, and thus may be subject to tax on
increments in the Policy's Total Account Value, and Policyowners who acquire a
Policy in a "transfer for value" and thus can become subject to tax on the
portion of the Death Benefit which exceeds the total of their cost of
acquisition and subsequent premium payments.
The Company intends to comply with any future final regulations issued under
Sections 7702 and 817(h) of the Code, and therefore reserves the right to make
such changes as it deems necessary to ensure such compliance. Any such changes
will apply uniformly to affected Policyowners and will be made only after
advance written notice.
General Rules
Upon the surrender or cancellation of any Policy, whether or not it is a
Modified Endowment Contract, the Policyowner will be taxed on the Surrender
Value only to the extent that it exceeds the gross premiums paid less prior
untaxed withdrawals. The amount of any unpaid Policy Loans will, upon surrender,
be added to the Surrender Value and will be treated for this purpose as if it
had been received.
Assuming the Policy is not a Modified Endowment Contract, the proceeds of any
Partial Surrenders are generally not taxable unless the total amount received
due to such surrenders exceeds total premiums paid less prior untaxed Partial
Surrender amounts. However, Partial Surrenders made within the first 15 Policy
Years may be taxable in limited circumstances where the Surrender Value plus any
unpaid Policy debt exceeds the total premiums paid less the untaxed portion of
any prior Partial Surrenders. This result may occur even if the total amount of
any Partial Surrenders does not exceed total premiums paid to that date.
Loans received under the Policy will ordinarily be considered indebtedness of
the Policyowner, and assuming the Policy is not considered a Modified Endowment
Contract, Policy Loans will not be treated as current distributions subject to
tax. Generally, amounts of loan interest paid by individuals will be considered
nondeductible "personal interest."
Modified Endowment Contracts
A class of contracts known as "Modified Endowment Contracts" has been created
under Section 7702A of the Code. The tax rules applicable to loan proceeds and
proceeds of a Partial Surrender of any Policy that is considered to be a
Modified Endowment Contract will differ from the general rules noted above.
A contract will be considered a Modified Endowment Contract if it fails the
"7-pay test." A Policy fails the 7-pay test if, at any time in the first seven
Policy Years, the amount paid into the Policy exceeds the amount that would have
been paid had the Policy provided for the payment of seven (7) level annual
premiums.
27
<PAGE>
Each Policy is subject to testing under the 7-pay test during the first seven
Policy Years and for the seven Policy Years following the time a material change
takes effect. A material change, for these purposes, includes the exchange of a
life insurance policy for another life insurance policy or the conversion of a
term life insurance policy into a whole life or universal life insurance policy.
In addition, an increase in the future benefits provided constitutes a material
change unless the increase is attributable to (1) the payment of premiums
necessary to fund the lowest Death Benefit payable in the first seven Policy
Years or (2) the crediting of interest or other earnings with respect to such
premiums. A reduction in death benefits during the first seven Policy Years, or
after the seventh year where the reduced death benefit is lower than the lowest
death benefit provided during the first seven years, may also cause a Policy to
be considered a Modified Endowment Contract.
If the Policy is considered to be a Modified Endowment Contract, the proceeds of
any Partial Surrenders, any Policy Loans and most assignments will be currently
taxable to the extent that the Policy's Total Account Value immediately before
payment exceeds gross premiums paid (increased by the amount of loans previously
taxed and reduced by untaxed amounts previously received). These rules may also
apply to Policy Loans or Partial Surrender proceeds received during the two-year
period prior to the time that a Policy becomes a Modified Endowment Contract. If
the Policy becomes a Modified Endowment Contract, it may be aggregated with
other Modified Endowment Contracts purchased by You from the Company (and its
affiliates) during any one calendar year for purposes of determining the taxable
portion of withdrawals from the Policy. In the event of a distribution under the
Policy, the Company will notify the Policyowner if the Policy is a Modified
Endowment Contract.
A penalty tax equal to 10% of the amount includable in income will apply to the
taxable portion of the proceeds of any Policy Surrender or Policy Loan received
by any Policyowner of a Modified Endowment Contract who is not an individual.
Taxable policy distributions made to an individual who has not reached the age
of 591/2 will also be subject to the penalty tax unless those distributions are
attributable to the individual becoming disabled, or are part of a series of
equal periodic payments made not less frequently than annually for the life or
life expectancy of such individual (i.e., an annuity).
Diversification Standards
Section 817(h) of the Code provides that separate account investments (or the
investments of a mutual fund, the shares of which are owned by separate accounts
of insurance companies) underlying the Policy must be "adequately diversified"
in accordance with Treasury regulations in order for the Policy to qualify as
life insurance. The Treasury Department has issued regulations prescribing the
diversification requirements in connection with variable contracts. The Separate
Account, through the Funds, intends to comply with these requirements.
Investor Control
In certain circumstances, owners of variable contracts may be considered the
owners for federal income tax purposes of the assets of the separate account
used to support their contracts. In those circumstances, income and gains from
separate account assets would be includable in the variable contractowner's
gross income. In several rulings published prior to the enactment of Section
817(h), the IRS stated that a variable contractowner will be considered the
owner of separate account assets if the contractowner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations under Section 817(h) concerning diversification,
that those regulations "do not provide guidance concerning the circumstances in
which investor control of the investments of a segregated asset account may
cause the investor (i.e., You), rather than the insurance company, to be treated
as the owner of the assets in the account." This announcement also stated that
guidance would be issued by way of regulations or rulings on the "extent to
which policyholders may direct their investments to particular Funds without
being treated as owners of the underlying assets." As of the date of this
Prospectus, no such guidance has been issued.
28
<PAGE>
The ownership rights under the Policy are similar to, but different in certain
respects from those described by the IRS in pre-Section 817(h) rulings in which
it was determined that Policyowners were not owners of separate account assets.
For example, a Policyowner has additional flexibility in allocating premium
payments and account values. While the Company does not believe that these
differences would result in a Policyowner being treated as the owner of a pro
rata portion of the assets of the Separate Account, there is no regulation or
ruling of the IRS that confirms this conclusion. In addition, the Company does
not know what standards will be set forth, if any, in the regulations or rulings
which the Treasury Department has stated it expects to issue. The Company
therefore reserves the right to modify the Policy as necessary to attempt to
prevent a Policyowner from being considered the owner of a pro rata share of the
assets of the Separate Account.
Other Tax Considerations
Business-owned life insurance may be subject to certain additional rules.
Section 264(a)(1) of the Code generally prohibits employers from deducting
premiums on policies covering officers, employees or other financially
interested parties where the employer is a beneficiary under the Policy.
Additions to the Policy's Total Account Value may also be subject to tax under
the corporation alternative minimum tax provisions. In addition, Section
264(a)(4) of the Code limits the Policyowner's deduction for interest on loans
taken against life insurance covering the lives of officers, employees, or
others financially interested in the Policyowner's trade or business. Under
current tax law, interest may generally be deducted on an aggregate total of
$50,000 of loans per covered life only with respect to life insurance policies
covering each officer, employee or others who may have a financial interest in
the Policyowner's trade or business, and are considered key persons.
Generally, a key person means an officer or a 20 percent owner. However, the
number of key persons will be limited to the greater of (a) 5 individuals, or
(b) the lesser of 5 percent of the total officers and employees of the tax payor
or 20 individuals. Deductible interest for these contracts will be capped based
on applicable Moody's Corporate Bond Rate.
Section 264 (f) of the Code denies a deduction for a portion of a Policyowner's
otherwise deductible interest that is allocable to unborrowed policy cash
values. The nondeductible interest amount is the amount that bears the same
ratio to such interest as the company's average unborrowed cash values of life
insurance and annuity policies issued after June 8, 1997 bears to the sum of the
average unborrowed cash values of policies plus the average adjusted tax basis
of other assets owned by the company. This provision does not apply to policies
in which the insured is a 20 percent owner, officer, director or employee of the
business, including policies jointly covering such individual and his or her
spouse. The rule also will not apply where the Policyowner is a natural person,
unless a trade or business is directly or indirectly the beneficiary of the
policy.
Depending on the circumstances, the exchange of a policy, a change in the
Policy's Death Benefit Option, a Policy Loan, a Full or Partial Surrender, a
change in Ownership or an assignment of the Policy may have federal income tax
consequences. In addition, federal, state and local transfer, estate,
inheritance and other tax consequences of policy ownership, premium payments and
receipt of policy proceeds depend on the circumstances of each Policyowner or
beneficiary. Any person concerned about these tax implications should consult a
competent tax adviser before initiating any transaction.
Withholding
Generally, unless you provide us with a written election to the contrary before
We make the distribution, We are required to withhold income tax from any
portion of a distribution We make to you that is includable in your income. If
you do not wish us to withhold tax from the payment, or if enough is not
withheld, you may have to pay later. You may also have to pay penalties if your
withholding and estimated tax payments are insufficient.
29
<PAGE>
Misc. Policy Provisions
The Policy
The Policy which You receive, the application You make when You purchase the
Policy, any applications for any changes approved by Us and any riders
constitute the whole contract. Copies of all applications are attached to and
made a part of the Policy.
Application forms are completed by the applicants and forwarded to the Company
for acceptance. Upon acceptance the Policy is prepared, executed by duly
authorized officers of the Company, and forwarded to You.
We reserve the right to make a change in the Policy; however, We will not change
any terms of the Policy beneficial to You. Only the President, Executive Vice
President or the Corporate Secretary may agree to a change in the Policy, and
then only in writing.
Payment of Benefits
All benefits are payable at Our Home Office. We may require submission of the
Policy before We grant Policy Loans, make changes or pay benefits.
Suicide and Incontestability
Suicide Exclusion
In most states, if one or both Insureds die by suicide, while sane or insane,
within 2 years from the Issue Date of this Policy, this Policy will end and We
will pay:
1. the difference between payments made and amounts allocated to the Separate
Account; plus
2. the Separate Account Value; plus
3. any charges made under this Policy's terms on the Separate Account Value;
less
4. the sum of:
(a) the Loan Account Value transferred from the Fixed Account Value; plus (b)
the interest due on the Loan Account Value; plus (c) the value of any Partial
Surrenders transferred from the Fixed Account
Value; plus
(d) any interest earned on the Loan Account Value transferred to the Separate
Account Value.
In most states, if one or both Insureds die by suicide while sane or insane,
within 2 years from the Issue Date of any increase in coverage, We will pay only
the Monthly Deductions for the increase in coverage.
In most states, if one or both Insureds die by suicide while sane or insane,
more than 2 years from the Issue Date of this Policy but within 2 years from the
Issue Date of any increase in coverage, We will pay:
1. the Proceeds on death for any coverage in effect more than 2 years from the
Issue Date of this Policy; plus
2. the Monthly Deductions for the increase in coverage.
All amounts will be calculated as of the date of the suicide.
Incontestability
In most states, with respect to statements made in the initial application or
any Subsequent Application for each Insured: We will not contest this Policy
after it has been in force during the lifetime of each Insured for 2 years from
its Issue Date.
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<PAGE>
In most states, with respect to statements made in any subsequent application
for one or both Insureds: We will not contest coverage relating to subsequent
applications after coverage has been in force during the lifetime of each
Insured for 2 years from the Issue Date of such coverage or from the effective
date of any reinstatement.
If this Policy is contested, Your rights or the Beneficiary's rights may be
affected.
Protection of Proceeds
To the extent provided by law, the proceeds of the Policy are subject neither
to claims by a beneficiary's creditors nor to any legal process against any
beneficiary.
Nonparticipation
The Policy is not entitled to share in the divisible surplus of the Company. No
dividends are payable.
Changes in Owner and Beneficiary; Assignment
Unless otherwise stated in the Policy, You may change the Policyowner and the
beneficiary, or both, at any time while the Policy is in force. A request for
such change must be made in writing and sent to the Company at the Home Office.
After We have agreed, in writing, to the change, it will take effect as of the
date on which Your Written Request was signed.
The Policy may also be assigned. No assignment of a Policy will be binding on
Us unless made in writing and sent to Us at our Home Office. The Company will
use reasonable procedures to confirm that the assignment is authentic,
including verification of signature. Otherwise, We are not responsible for the
validity of any assignment. The rights of the Policyowner and the interest of
the beneficiary will be subject to the rights of any assignee of record.
Misstatement as to Age and/or Sex
If the age and/or the sex of one or both Insureds is misstated, the amount of
the Death Benefit will be adjusted to reflect the coverage that would have been
purchased by the most recent pre-Maturity Date Monthly Deduction at the correct
age and/or sex.
Performance Reporting and Advertising
From time to time, the Company may report different types of historical
performance for the Variable Options of the Separate Account available under
the Policy. The Company may report the average annualized total returns of the
Funds over various time periods. Such returns will reflect an annual reduction
for investment management fees and fund expenses, but not deductions at the
separate account or policy level for mortality and expense risk charges and
policy expenses, which, if included, would reduce performance. The Company will
accompany the returns of the Funds with at least one of the following: (i)
returns of the variable options for the same periods as shown for the Funds,
which will include, in addition to deduction for investment management fees and
Fund expenses, deductions under the Separate Account for the current mortality
and expense risk charge, but not other charges under the policy; or (ii) an
illustration of Total Account Value and Surrender Values as of the performance
reporting date for hypothetical Insureds of a given age, sex, underwriting
classification, premium level and policy amount. Such illustrations will assume
for each Variable Option that 100% of each Net Premium was allocated to that
option. The illustrations of the Surrender Value will assume that all Fund
charges, the mortality and expense risk charge and all other Policy charges are
deducted, including Premium Loads, Cost of Insurance charges, administrative
charges, Policy fees and Surrender Charges. The illustrations of the Total
Account Value will assume that all such charges except the Surrender Charge are
deducted.
We may also distribute sales literature that compares the percentage change in
the net asset values of the Funds or in Accumulation Unit Values for any of the
Variable Options to established market indices such as the Standard & Poor's
500 Stock Index and the Dow Jones Industrial Average or to the percentage
change in values of other mutual funds or variable options that have investment
objectives similar to the Fund or Variable Option being compared.
31
<PAGE>
Illustrations of Death Benefit, Total Account Values and Surrender Values
The following pages provide hypothetical illustrations of how the Death Benefit,
Total Account Values, and Surrender Values of a Policy can change over time for
a Policy issued to two opposite gender 65-year old Insureds if the investment
return on the assets held in each Fund were a uniform, gross, annual rate of 0%,
6% and 12%, respectively, and are based upon a number of assumptions.
There are two pages of values. The first page illustrates the assumption that
the Guaranteed Maximum Cost of Insurance rates and other charges at guaranteed
rates are charged in all years. The second page illustrates the assumption that
the current scale of Cost of Insurance rates and other charges at current rates
are charged in all years. The Cost of Insurance rates vary by age and sex (where
permitted by state law).
The values shown in these illustrations vary according to assumptions used for
charges and gross rates of investment returns. The actual investment returns
experienced by the Policy and the charges deducted may be higher or lower than
those illustrated. The charges reflected on the first page consist of the
maximum allowable charges under the Policy, including 0.90% for mortality and
expense risks in all Policy Years and 10.00% for Premium Loads (assuming no
change in state premium tax and federal tax laws); the first page also reflects
0.72% for expenses of the Funds based on the allocation described below. The
charges reflected on the second page consist of the current charges imposed
under the Policy, including 0.65% for mortality and expense risks in Policy
Years 1 through 10, 0.25% for mortality and expense risks in Policy Years 11
through 20, 0.00% for mortality and expense risks in Policy Years 21 and later,
and 8% for Premium Loads; the second page also reflects 0.72% for Fund expenses
based on the allocation described below. The charge for the Fund expenses
reflected in the illustrations assumes that Total Account Values have been
allocated equally among all Funds and represent a fixed average of the
investment advisory fees and other expenses charged by each of the Funds.
After deduction of these amounts, the illustrated gross annual investment rates
of return of 0%, 6%, and 12% correspond to approximate net annual rates of
- -1.37%, 4.63%, and 10.63%, respectively, during the first 10 Policy Years,
- -.97%, 5.03%, and 11.03%, respectively, during Policy Years 11 through 20, and
- -0.72%, 5.28%, and 11.28%, respectively, thereafter on a current basis. On a
guaranteed basis, the illustrated gross annual investment rates of return of 0%,
6%, and 12% correspond to approximate net annual rates of -1.62%, 4.38%, and
10.38%, respectively.
The Death Benefit, Total Account Values, and Surrender Values would be different
from those shown if the gross annual investment rates of return averaged 0%, 6%,
and 12% over a period of years, but fluctuated above and below those averages
for individual Policy Years. The illustrations also assume that premiums are
paid as indicated, no Policy Loans are made, no increases or decreases in
Specified Amount are requested, no Death Benefit Option changes, and no Partial
Surrenders are made.
The hypothetical values shown in the tables do not reflect any Separate Account
charges for federal income taxes, since We are not currently making such
charges. However, such charges may be made in the future, and in that event, the
gross annual investment rate of return would have to exceed 0%, 6%, or 12% by an
amount sufficient to cover the tax charges in order to produce the Death
Benefit, Total Account Values, and Surrender Values illustrated.
Upon request, We will provide a comparable personalized illustration based upon
the age, sex (if necessary), and underwriting classification of the proposed
Insureds, including the Specified Amount and premium requested, the proposed
frequency of premium payments and any available riders requested. A fee of $25
may be charged for each such illustration. The hypothetical gross annual
investment return assumed in such an illustration will not exceed 12%.
32
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ON THE LIVES OF TWO INSUREDS
FEMALE AND MALE ISSUE AGE 65 PREFERRED NONSMOKER RISK
$30,330 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
GUARANTEED CHARGES
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value*
at Returns of Annual Investment Returns of Annual Investment Returns of
5% Interest ----------------------------------- --------------------------------- ----------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------ ------------ ----------- ----------- ----------- ---------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 31,847 1,000,000 1,000,000 1,000,000 25,164 26,747 28,331 0 0 0
2 65,285 1,000,000 1,000,000 1,000,000 49,592 54,329 59,258 4,482 9,219 14,148
3 100,396 1,000,000 1,000,000 1,000,000 72,882 82,362 92,626 29,802 39,282 49,546
4 137,262 1,000,000 1,000,000 1,000,000 94,933 110,757 128,591 53,923 69,747 87,581
5 175,972 1,000,000 1,000,000 1,000,000 115,636 139,416 167,333 76,736 100,516 128,433
6 216,617 1,000,000 1,000,000 1,000,000 134,844 168,211 209,043 98,104 131,471 172,303
7 259,294 1,000,000 1,000,000 1,000,000 152,369 196,978 253,925 117,819 162,428 219,375
8 304,106 1,000,000 1,000,000 1,000,000 167,947 225,491 302,191 135,627 193,171 269,871
9 351,157 1,000,000 1,000,000 1,000,000 181,240 253,463 354,088 151,170 223,393 324,018
10 400,562 1,000,000 1,000,000 1,000,000 191,849 280,576 409,950 164,069 252,796 382,170
15 687,202 1,000,000 1,000,000 1,071,859 188,192 392,201 774,259 172,422 376,431 758,489
20 1,053,035 1,000,000 1,000,000 1,640,877 5,010 418,826 1,307,140 5,010 418,826 1,307,140
25 1,519,941 1,000,000 1,000,000 2,370,026 0 163,864 2,019,090 0 163,864 2,019,090
30 2,115,845 1,000,000 1,000,000 3,300,419 0 0 2,980,501 0 0 2,980,501
</TABLE>
Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk and administrative expense charges
assumed.
If premiums are paid more frequently than annually, the Death Benefit could be,
and the Account Values and Surrender Values would be, less than those
illustrated.
These investment results are illustrative only and should not be considered a
representation of past or future investment results.
Actual investment results may be more or less than those shown and will depend
on a number of factors including the Policyowner's allocations, and the Fund's
rates of return. The Total Account Value and Surrender Value for a Policy would
be different from those shown if the actual investment rates of return averaged
0%, 6%, and 12% over a period of years, but fluctuated above or below those
averages for individual Policy Years. No representations can be made that these
rates of return will definitely be achieved for any one year or sustained over
a period of time.
* The Cash Surrender Values reflect the application of the maximum Surrender
Charge under the Contract and allowed in most states. The Surrender Charge
may be limited to a lower amount in certain states.
33
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ON THE LIVES OF TWO INSUREDS
FEMALE AND MALE ISSUE AGE 65 PREFERRED NONSMOKER RISK
$30,330 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
CURRENT CHARGES
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value*
at Returns of Annual Investment Returns of Annual Investment Returns of
5% Interest ----------------------------------- ----------------------------------- ------------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------ ------------ ----------- ----------- ----------- ---------- ------------ ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 31,847 1,000,000 1,000,000 1,000,000 25,906 27,528 29,150 0 0 0
2 65,285 1,000,000 1,000,000 1,000,000 51,129 55,995 61,057 6,569 11,435 16,497
3 100,396 1,000,000 1,000,000 1,000,000 75,266 85,024 95,587 32,716 42,474 53,037
4 137,262 1,000,000 1,000,000 1,000,000 98,215 114,536 132,927 57,705 74,026 92,417
5 175,972 1,000,000 1,000,000 1,000,000 119,863 144,443 173,290 81,443 106,023 134,870
6 216,617 1,000,000 1,000,000 1,000,000 140,886 175,459 217,743 104,596 139,169 181,453
7 259,294 1,000,000 1,000,000 1,000,000 161,682 208,031 267,126 127,552 173,901 232,996
8 304,106 1,000,000 1,000,000 1,000,000 182,256 242,242 321,994 150,326 210,312 290,064
9 351,157 1,000,000 1,000,000 1,000,000 202,610 278,181 382,968 172,910 248,481 353,268
10 400,562 1,000,000 1,000,000 1,000,000 222,749 315,939 450,736 195,309 288,499 423,296
15 687,202 1,000,000 1,000,000 1,300,390 329,021 548,527 939,338 313,441 532,947 923,758
20 1,053,035 1,000,000 1,060,847 2,195,572 415,881 845,082 1,749,017 415,881 845,082 1,749,017
25 1,519,941 1,000,000 1,434,272 3,627,674 463,174 1,221,896 3,090,515 463,174 1,221,896 3,090,515
30 2,115,845 1,000,000 1,860,756 5,831,637 437,283 1,680,388 5,266,361 437,283 1,680,388 5,266,361
</TABLE>
Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk and administrative expense charges
assumed.
If premiums are paid more frequently than annually, the Death Benefit could be,
and the Account Values and Surrender Values would be, less than those
illustrated.
These investment results are illustrative only and should not be considered a
representation of past or future investment results.
Actual investment results may be more or less than those shown and will depend
on a number of factors including the Policyowner's allocations, and the Fund's
rates of return. The Total Account Value and Surrender Value for a Policy would
be different from those shown if the actual investment rates of return averaged
0%, 6%, and 12% over a period of years, but fluctuated above or below those
averages for individual Policy Years. No representations can be made that these
rates of return will definitely be achieved for any one year or sustained over
a period of time.
* The Cash Surrender Values reflect the application of the maximum Surrender
Charge under the Contract and allowed in most states. The Surrender Charge
may be limited to a lower amount in certain states.
34
<PAGE>
FINANCIAL STATEMENTS
VARIABLE LIFE ACCOUNT B
Index
<TABLE>
<S> <C>
Statement of Assets and Liabilities as of June 30, 1998 (unaudited) .................... S-2
Statements of Operations and Changes in Net Assets for the six months
ended June 30, 1998 and June 30, 1997 (unaudited) ................................... S-5
Condensed Financial Information for the six months ended June 30, 1998 (unaudited) ..... S-6
Notes to Financial Statements--June 30, 1998 (unaudited) ............................... S-11
Statement of Assets and Liabilities--December 31, 1997 ................................. S-18
Statements of Operations and Changes in Net Assets for the years ended
December 31, 1997 and 1996 .......................................................... S-20
Condensed Financial Information for the year ended December 31, 1997 ................... S-21
Notes to Financial Statements--December 31, 1997 ....................................... S-25
Independent Auditors' Report ........................................................... S-27
</TABLE>
S-1
<PAGE>
Variable Life Account B
Statement of Assets and Liabilities--June 30, 1998 (Unaudited)
ASSETS:
Investments, at net asset value: (Note 1)
<TABLE>
<CAPTION>
Shares Cost Assets
------ ------ -------
<S> <C> <C> <C>
Aetna Ascent VP: ........................................ 166,392 $ 2,376,371 $ 2,554,102
Aetna Balanced VP, Inc.: ................................ 2,000,676 31,639,598 30,542,242
Aetna Bond VP: .......................................... 2,018,518 26,164,985 26,383,260
Aetna Crossroads VP: .................................... 107,074 1,439,171 1,510,546
Aetna Growth and Income VP: ............................. 4,129,017 134,496,170 153,600,383
Aetna Index Plus Large Cap VP: .......................... 495,388 7,647,288 8,191,285
Aetna Legacy VP: ........................................ 74,593 921,619 958,255
Aetna Money Market VP: .................................. 1,964,443 25,461,530 25,606,101
Aetna Small Company VP: ................................. 66,047 900,231 900,384
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: ............................... 1,186,549 28,435,239 29,865,440
Growth Portfolio: ...................................... 342,807 12,123,888 13,136,377
High Income Portfolio: ................................. 22,835 288,632 288,404
Overseas Portfolio: .................................... 106,141 2,068,715 2,188,635
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: ............................... 150,588 2,533,025 2,597,638
Contrafund Portfolio: .................................. 1,380,520 27,627,446 30,302,404
Janus Aspen Series:
Aggressive Growth Portfolio: ........................... 626,000 12,774,693 15,086,609
Balanced Portfolio: .................................... 799,175 14,488,996 15,903,582
Growth Portfolio: ...................................... 875,967 15,661,881 18,132,521
Worldwide Growth Portfolio: ............................ 1,341,912 31,718,985 38,512,867
Oppenheimer Global Securities Fund: ..................... 6,131 133,514 133,048
Oppenheimer Strategic Bond Fund: ........................ 41,630 213,727 213,980
Portfolio Partners, Inc. (PPI):
PPI MFS Emerging Equities Portfolio: ................... 487,838 24,675,636 25,138,291
PPI MFS Research Growth Portfolio: ..................... 831,192 9,382,022 9,525,457
PPI MFS Value Equity Portfolio: ........................ 8,271 293,074 293,769
PPI Scudder International Growth Portfolio: ............ 944,732 15,632,256 16,098,225
PPI T. Rowe Price Growth Equity Portfolio: ............. 9,150 457,728 465,027
------------
NET ASSETS: (Cost $429,556,416) .......................... $468,128,831
============
</TABLE>
See Notes to Financial Statements
S-2
<PAGE>
Variable Life Account B
Statement of Assets and Liabilities--June 30, 1998 (Unaudited) (continued)
<TABLE>
<S> <C>
Net assets represented by:
Policyholders' account values: (Notes 1 and 5)
Aetna Ascent VP:
Policyholders' account values .......................... $ 2,554,102
Aetna Balanced VP, Inc.:
Policyholders' account values .......................... 30,542,242
Aetna Bond VP:
Policyholders' account values .......................... 26,383,260
Aetna Crossroads VP:
Policyholders' account values .......................... 1,510,546
Aetna Growth and Income VP:
Policyholders' account values .......................... 153,600,383
Aetna Index Plus Large Cap VP:
Policyholders' account values .......................... 8,191,285
Aetna Legacy VP:
Policyholders' account values .......................... 958,255
Aetna Money Market VP:
Policyholders' account values .......................... 25,606,101
Aetna Small Company VP:
Policyholders' account values .......................... 900,384
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio:
Policyholders' account values ......................... 29,865,440
Growth Portfolio:
Policyholders' account values ......................... 13,136,377
High Income Portfolio:
Policyholders' account values ......................... 288,404
Overseas Portfolio:
Policyholders' account values ......................... 2,188,635
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio:
Policyholders' account values ......................... 2,597,638
Contrafund Portfolio:
Policyholders' account values ......................... 30,302,404
Janus Aspen Series:
Aggressive Growth Portfolio:
Policyholders' account values ......................... 15,086,609
Balanced Portfolio:
Policyholders' account values ......................... 15,903,582
Growth Portfolio:
Policyholders' account values ......................... 18,132,521
Worldwide Growth Portfolio:
Policyholders' account values ......................... 38,512,867
</TABLE>
S-3
<PAGE>
Variable Life Account B
Statement of Assets and Liabilities--June 30, 1998 (Unaudited) (continued)
<TABLE>
<S> <C>
Oppenheimer Global Securities Fund:
Policyholders' account values ............. $ 133,048
Oppenheimer Strategic Bond Fund:
Policyholders' account values ............. 213,980
Portfolio Partners, Inc.:
PPI MFS Emerging Equities Portfolio:
Policyholders' account values ............ 25,138,291
PPI MFS Research Growth Portfolio:
Policyholders' account values ............ 9,525,457
PPI MFS Value Equity Portfolio:
Policyholders' account values ............ 293,769
PPI Scudder International Growth Portfolio:
Policyholders' account values ............ 16,098,225
PPI T. Rowe Price Equity Portfolio:
Policyholders' account values ............ 465,027
------------
$468,128,831
============
</TABLE>
See Notes to Financial Statements
S-4
<PAGE>
Variable Life Account B
Statements of Operations and Changes in Net Assets
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
(Unaudited) (Unaudited)
------------------ -----------------
<S> <C> <C>
INVESTMENT INCOME:
Income: (Notes 1, 3 and 5)
Dividends ...................................................... $ 15,690,494 $ 11,181,934
Expenses: (Notes 2 and 5)
Valuation period deductions .................................... (1,857,853) (997,893)
------------- -------------
Net investment income ........................................... 13,832,641 10,184,041
------------- -------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1, 4 and 5)
Proceeds from sales ............................................ 226,002,118 59,623,673
Cost of investments sold ....................................... 209,097,437 57,979,237
------------- -------------
Net realized gain ............................................. 16,904,681 1,644,436
Net unrealized gain on investments: (Note 5)
Beginning of period ............................................ 16,987,228 14,132,669
End of period .................................................. 38,572,414 31,101,610
------------- -------------
Net change in unrealized gain ................................. 21,585,186 16,968,941
------------- -------------
Net realized and unrealized gain on investments ................. 38,489,867 18,613,377
------------- -------------
Net increase in net assets resulting from operations ............ 52,322,508 28,797,418
------------- -------------
FROM UNIT TRANSACTIONS:
Variable life premium payments .................................. 0 58,671,717
Sales and administrative charges deducted by the Company ........ 0 (2,085,289)
Premiums allocated to the fixed account ......................... 0 (1,815,334)
------------- -------------
Net premiums allocated to the variable account ................. 88,586,572 54,771,094
Transfers to the Company for monthly deductions ................. (14,049,985) (10,113,895)
Redemptions by contract holders ................................. (8,789,995) (4,774,132)
Transfers on account of policy loans ............................ (2,204,208) (932,289)
Other ........................................................... (261,208) (28,048)
------------- -------------
Net increase in net assets from unit transactions (Note 5) ..... 63,281,176 38,922,730
------------- -------------
Change in net assets ............................................ 115,603,684 67,720,148
NET ASSETS:
Beginning of period ............................................. 352,525,147 223,173,883
------------- -------------
End of period ................................................... $ 468,128,831 $ 290,894,031
============= =============
</TABLE>
See Notes to Financial Statements
S-5
<PAGE>
Variable Life Account B
Condensed Financial Information--Six Month Period Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Value
Per Unit Increase (Decrease) Units
------------------------ in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Period Period Unit of Period of Period
----------- ------------ --------------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Aetna Ascent VP
Aetna Vest ............................. $ 14.055 $ 15.341 9.16% 18,121.1 $ 277,999.8
Aetna Vest Estate Protector ............ 14.077 15.366 9.16% 17,547.8 269,642.8
Aetna Vest Estate Protector II ......... 10.441 10.584 1.37%(3) 1,366.6 14,463.2
Aetna Vest II .......................... 14.040 15.310 9.07% 9,922.1 151,951.6
Aetna Vest Plus ........................ 14.040 15.314 9.07% 120,151.2 1,840,044.5
Aetna Balanced VP, Inc.
Aetna Vest ............................. 21.286 23.459 10.21% 106,697.1 2,502,975.9
Aetna Vest Estate Protector ............ 13.554 14.945 10.26% 32,904.6 491,773.4
Aetna Vest Estate Protector II ......... 10.434 10.672 2.28%(1) 2,283.4 24,367.2
Aetna Vest II .......................... 21.515 23.706 10.18% 229,320.8 5,436,321.0
Aetna Vest Plus ........................ 18.044 19.881 10.18% 519,023.2 10,318,695.5
Corporate Specialty Market ............. 15.708 17.308 10.18% 679,922.7 11,767,947.8
NYSUT Individual Life .................. 12.865 12.854 -.09%(4) 12.5 161.0
Aetna Bond VP
Aetna Vest ............................. 23.428 24.218 3.37% 260,887.2 6,318,283.5
Aetna Vest Estate Protector ............ 11.224 11.611 3.45% 20,246.7 235,090.3
Aetna Vest Estate Protector II ......... 10.069 10.230 1.59%(2) 962.0 9,841.4
Aetna Vest II .......................... 15.752 16.283 3.37% 71,324.4 1,161,369.7
Aetna Vest Plus ........................ 12.613 13.039 3.37% 214,477.3 2,796,533.7
Corporate Specialty Market ............. 12.175 12.585 3.37% 1,260,373.8 15,861,903.2
NYSUT Individual Life .................. 11.028 11.038 .09%(4) 21.6 238.2
Aetna Crossroads VP
Aetna Vest ............................. 13.369 14.412 7.80% 6,191.1 89,225.0
Aetna Vest Estate Protector ............ 13.391 14.435 7.80% 191.8 2,768.4
Aetna Vest Estate Protector II ......... 10.470 10.505 .33%(2) 1,621.2 17,030.2
Aetna Vest II .......................... 13.356 14.387 7.72% 6,901.0 99,282.1
Aetna Vest Plus ........................ 13.356 14.387 7.72% 90,517.8 1,302,239.9
Aetna Growth and Income VP
Aetna Vest ............................. 44.936 50.426 12.22% 1,347,236.0 67,935,538.0
Aetna Vest Estate Protector ............ 15.037 16.882 12.27% 102,086.4 1,723,401.6
Aetna Vest Estate Protector II ......... 10.767 10.834 .63%(1) 41,757.4 452,412.4
Aetna Vest II .......................... 25.085 28.142 12.19% 799,245.8 22,492,469.1
Aetna Vest Plus ........................ 21.075 23.644 12.19% 2,027,179.1 47,930,970.5
Corporate Specialty Market ............. 19.039 21.360 12.19% 611,635.5 13,064,278.1
NYSUT Individual Life .................. 13.251 13.473 1.67%(4) 97.5 1,313.3
</TABLE>
S-6
<PAGE>
Variable Life Account B
Condensed Financial Information--Six Month Period Ended June 30, 1998
(Unaudited & continued)
<TABLE>
<CAPTION>
Value
Per Unit Increase (Decrease) Units
------------------------ in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Period Period Unit of Period of Period
----------- ------------ --------------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Aetna Index Plus Large Cap VP
Aetna Vest ............................. $ 13.081 $ 15.446 18.07% 22,303.6 $ 344,494
Aetna Vest Estate Protector ............ 13.102 15.482 18.16% 43,041.4 666,355.7
Aetna Vest Estate Protector II ......... 10.794 11.215 3.90%(1) 22,110.3 247,965.9
Aetna Vest II .......................... 13.081 15.446 18.07% 9,969.8 153,990.0
Aetna Vest Plus ........................ 13.081 15.446 18.07% 207,831.4 3,210,099.6
Corporate Specialty Market ............. 13.081 15.446 18.07% 230,922.1 3,566,752.2
NYSUT Individual Life .................. 14.077 14.353 1.96%(4) 113.4 1,627.7
Aetna Legacy VP
Aetna Vest Estate Protector ............ 12.638 13.411 6.12% 2,946.0 39,506.9
Aetna Vest Estate Protector II ......... 10.310 10.377 .65%(2) 3,370.3 34,972.6
Aetna Vest II .......................... 12.604 13.365 6.04% 910.5 12,168.7
Aetna Vest Plus ........................ 12.604 13.365 6.04% 65,214.1 871,606.6
Aetna Money Market VP
Aetna Vest ............................. 17.310 17.687 2.17% 138,224.4 2,444,725.2
Aetna Vest Estate Protector ............ 10.807 11.050 2.25% 90,345.3 998,330.9
Aetna Vest Estate Protector II ......... 10.045 10.172 1.26%(1) 19,061.1 193,889.5
Aetna Vest II .......................... 12.653 12.928 2.17% 32,142.1 415,539.8
Aetna Vest Plus ........................ 11.892 12.150 2.17% 545,579.8 6,628,936.9
Corporate Specialty Market ............. 11.377 11.624 2.17% 1,283,770.0 14,922,614.3
NYSUT Individual Life .................. 10.603 10.609 .06%(4) 194.6 2,064.2
Aetna Small Company VP
Corporate Specialty Market ............. 11.484 10.741 -6.47%(2) 83,826.2 900,383.7
Fidelity Investments Variable
Insurance Porducts Funds:
Equity-Income Portfolio
Aetna Vest ............................. 13.788 15.164 9.98% 16,999.9 257,785.7
Aetna Vest Estate Protector ............ 13.824 15.215 10.06% 78,049.5 1,187,543.1
Aetna Vest Estate Protector II ......... 10.851 10.662 -1.74%(2) 13,928.4 148,502.4
Aetna Vest II .......................... 13.788 15.164 9.98% 16,680.9 252,948.7
Aetna Vest Plus ........................ 13.788 15.164 9.98% 547,403.4 8,300,788.1
Corporate Specialty Market ............. 15.869 17.453 9.98% 1,129,712.2 19,716,972.4
NYSUT Individual Life .................. 12.924 12.958 .26%(4) 69.4 899.8
Growth Portfolio
Corporate Specialty Market ............. 13.760 16.310 18.54% 805,416.0 13,136,376.8
High Income Portfolio
Corporate Specialty Market ............. 10.575 10.556 -.17%(3) 27,320.6 288,403.5
Overseas Portfolio
Corporate Specialty Market ............. 12.415 14.325 15.38% 152,781.9 2,188,635.2
</TABLE>
S-7
<PAGE>
Variable Life Account B
Condensed Financial Information--Six Month Period Ended June 30, 1998
(Unaudited & continued)
<TABLE>
<CAPTION>
Value
Per Unit Increase (Decrease) Units
------------------------ in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Period Period Unit of Period of Period
----------- ------------ --------------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Fidelity Investments Variable
Insurance Porducts Funds II:
Asset Manager Portfolio
Corporate Specialty Market ............. $ 14.361 $ 15.620 8.74% 166,339.6 $ 2,597,637.7
Contrafund Portfolio
Aetna Vest ............................. 14.166 16.455 16.16% 36,299.5 597,292.1
Aetna Vest Estate Protector ............ 14.203 16.510 16.25% 60,429.4 997,701.7
Aetna Vest Estate Protector II ......... 10.825 11.189 3.36%(1) 3,178.7 35,566.1
Aetna Vest II .......................... 14.166 16.455 16.16% 17,354.9 285,567.6
Aetna Vest Plus ........................ 14.166 16.455 16.16% 468,933.0 7,716,075.5
Corporate Specialty Market ............. 15.236 17.698 16.16% 1,167,911.1 20,669,910.2
NYSUT Individual Life .................. 13.745 13.850 .77%(4) 21.0 290.9
Janus Aspen Series:
Aggressive Growth Portfolio
Aetna Vest ............................. 18.017 21.025 16.69% 47,900.8 1,007,130.2
Aetna Vest Estate Protector ............ 10.944 12.781 16.78% 71,938.6 919,417.2
Aetna Vest Estate Protector II ......... 10.705 11.266 5.24%(3) 3,334.8 37,569.4
Aetna Vest II .......................... 18.017 21.025 16.69% 23,026.2 484,133.5
Aetna Vest Plus ........................ 18.017 21.025 16.69% 354,684.4 7,457,382.2
Corporate Specialty Market ............. 13.519 15.775 16.69% 328,420.8 5,180,976.7
Balanced Portfolio
Aetna Vest ............................. 16.883 19.731 16.87% 10,018.5 197,675.2
Aetna Vest Estate Protector ............ 13.440 15.719 16.96% 25,725.9 404,375.6
Aetna Vest Estate Protector II ......... 10.519 11.076 5.29%(2) 7,415.0 82,129.5
Aetna Vest II .......................... 17.015 19.885 16.87% 10,845.9 215,670.6
Aetna Vest Plus ........................ 16.875 19.722 16.87% 315,023.3 6,212,901.7
Corporate Specialty Market ............. 14.799 17.295 16.87% 508,265.6 8,790,630.5
NYSUT Individual Life .................. 13.283 13.350 .50%(4) 14.9 198.7
Growth Portfolio
Aetna Vest ............................. 18.105 21.481 18.65% 34,857.3 748,777.0
Aetna Vest Estate Protector ............ 13.214 15.690 18.74% 57,269.1 898,576.1
Aetna Vest Estate Protector II ......... 10.474 11.080 5.78%(3) 2,319.7 25,700.7
Aetna Vest II .......................... 18.088 21.462 18.65% 62,328.0 1,337,666.2
Aetna Vest Plus ........................ 18.063 21.431 18.65% 517,850.6 11,098,260.7
Corporate Specialty Market ............. 14.865 17.637 18.65% 228,129.7 4,023,540.7
</TABLE>
S-8
<PAGE>
Variable Life Account B
Condensed Financial Information--Six Month Period Ended June 30, 1998
(Unaudited & continued)
<TABLE>
<CAPTION>
Value
Per Unit Increase (Decrease) Units
------------------------ in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Period Period Unit of Period of Period
----------- ------------ --------------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Worldwide Growth Portfolio
Aetna Vest ............................. $ 19.790 $ 25.012 26.39% 112,226.2 $ 2,807,033.6
Aetna Vest Estate Protector ............ 14.305 18.093 26.48% 80,463.2 1,455,858.1
Aetna Vest Estate Protector II ......... 11.034 11.879 7.65%(1) 11,303.8 134,273.5
Aetna Vest II .......................... 19.795 25.019 26.39% 51,704.7 1,293,605.6
Aetna Vest Plus ........................ 19.770 24.988 26.39% 716,968.4 17,915,598.0
Corporate Specialty Market ............. 16.277 20.573 26.39% 724,558.5 14,906,358.5
NYSUT Individual Life .................. 14.268 14.313 .31%(4) 9.8 139.6
Oppenheimer Global Securities Fund
Aetna Vest ............................. 10.531 10.700 1.61%(2) 734.4 7,857.9
Aetna Vest Estate Protector ............ 10.759 10.706 -.49%(3) 1,327.5 14,212.3
Aetna Vest Estate Protector II ......... 10.892 10.932 .37%(2) 431.9 4,721.4
Aetna Vest Plus ........................ 10.718 10.700 -.16%(2) 9,930.2 106,256.6
Oppenheimer Strategic Bond Fund
Aetna Vest ............................. 10.117 10.117 .00%(4) 247.1 2,500.0
Aetna Vest Estate Protector ............ 10.112 10.122 .10%(3) 476.3 4,821.3
Aetna Vest Estate Protector II ......... 10.083 10.108 .25%(2) 7,677.2 77,602.1
Aetna Vest Plus ........................ 10.071 10.117 .45%(1) 12,756.5 129,056.7
Portfolio Partners, Inc.:
PPI MFS Emerging Equities Portfolio
Aetna Vest ............................. 17.357 20.746 19.52% 70,661.9 1,465,944.7
Aetna Vest Estate Protector ............ 10.810 12.931 19.61% 114,885.4 1,485,528.4
Aetna Vest Estate Protector II ......... 10.616 10.759 1.35%(3) 3,654.6 39,318.1
Aetna Vest II .......................... 17.359 20.748 19.52% 24,682.7 512,110.7
Aetna Vest Plus ........................ 17.349 20.737 19.52% 538,507.9 11,166,787.4
Corporate Specialty Market ............. 14.275 17.062 19.52% 613,554.3 10,468,601.8
PPI MFS Research Growth Portfolio
Aetna Vest ............................. 12.042 14.143 17.44% 61,022.3 863,009.7
Aetna Vest Estate Protector ............ 9.152 10.756 17.53% 20,502.7 220,523.9
Aetna Vest Estate Protector II ......... 10.650 11.088 4.12%(3) 478.3 5,303.6
Aetna Vest II .......................... 12.096 14.206 17.44% 23,981.0 340,671.4
Aetna Vest Plus ........................ 11.931 14.012 17.44% 415,616.6 5,823,645.7
Corporate Specialty Market ............. 10.912 12.815 17.44% 177,306.1 2,272,203.5
NYSUT Individual Life .................. 11.944 11.944 .00%(4) 8.3 98.9
</TABLE>
S-9
<PAGE>
Variable Life Account B
Condensed Financial Information--Six Month Period Ended June 30, 1998
(Unaudited & continued)
<TABLE>
<CAPTION>
Value
Per Unit Increase (Decrease) Units
-------------------------- in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Period Period Unit of Period of Period
----------- ------------ --------------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
PPI MFS Value Equity Portfolio
Aetna Vest ............................. $ 10.779 $ 10.743 -.33%(2) 59.1 $ 635.3
Aetna Vest Estate Protector ............ 10.562 10.749 1.77%(2) 7,116.7 76,496.8
Aetna Vest Estate Protector II ......... 11.017 10.998 -.17%(2) 7,410.8 81,506.1
Aetna Vest II .......................... 10.910 10.743 -1.53%(2) 86.9 934.0
Aetna Vest Plus ........................ 10.757 10.743 -.13%(2) 12,491.1 134,196.8
PPI Scudder International Growth Portfolio
Aetna Vest ............................. 15.692 18.871 20.25% 115,914.2 2,187,384.1
Aetna Vest Estate Protector ............ 11.777 14.173 20.34% 28,214.3 399,877.7
Aetna Vest Estate Protector II ......... 11.304 11.401 .86%(3) 3,951.7 45,052.4
Aetna Vest II .......................... 15.596 18.754 20.25% 33,380.8 626,035.3
Aetna Vest Plus ........................ 15.509 18.650 20.25% 466,803.6 8,705,820.4
Corporate Specialty Market ............. 12.995 15.627 20.25% 264,542.1 4,134,055.1
PPI T. Rowe Price Equity Portfolio
Aetna Vest ............................. 10.689 10.591 -.92%(2) 1,369.7 14,506.4
Aetna Vest Estate Protector ............ 10.452 10.597 1.38%(3) 11,807.4 125,119.4
Aetna Vest Estate Protector II ......... 10.805 10.847 .39%(2) 952.2 10,328.4
Aetna Vest Plus ........................ 10.422 10.591 1.62%(1) 29,748.3 315,073.2
</TABLE>
Notes to Condensed Financial Information:
(1)--Reflects less than a full year of performance activity. Funds were first
received in this option during March 1998.
(2)--Reflects less than a full year of performance activity. Funds were first
received in this option during April 1998.
(3)--Reflects less than a full year of performance activity. Funds were first
received in this option during May 1998.
(4)--Reflects less than a full year of performance activity. Funds were first
received in this option during June 1998.
See Notes to Financial Statements
S-10
<PAGE>
Variable Life Account B
Notes to Financial Statements--June 30, 1998 (Unaudited)
1. Summary of Significant Accounting Policies
Variable Life Account B (the "Account") is a separate account established
by Aetna Life Insurance and Annuity Company (the "Company") and is
registered under the Investment Company Act of 1940 as a unit investment
trust. The Account is sold exclusively for use with variable life insurance
product contracts as defined under the Internal Revenue Code of 1986, as
amended.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported therein. Although actual results
could differ from these estimates, any such differences are expected to be
immaterial to the net assets of the Account.
a. Valuation of Investments
Investments in the following Funds are stated at the closing net asset
value per share as determined by each fund on June 30, 1998:
Aetna Ascent VP
Aetna Balanced VP, Inc.
Aetna Bond VP
Aetna Crossroads VP
Aetna Growth and Income VP
Aetna Index Plus Large Cap VP
Aetna Legacy VP
Aetna Money Market VP
Aetna Small Company VP
Fidelity Investments Variable Insurance
Products Fund:
[bullet] Equity-Income Portfolio
[bullet] Growth Portfolio
[bullet] High Income Portfolio
[bullet] Overseas Portfolio
Fidelity Investments Variable Insurance
Products Fund II:
[bullet] Asset Manager Portfolio
[bullet] Contrafund Portfolio
Janus Aspen Series:
[bullet] Aggressive Growth Portfolio
[bullet] Balanced Portfolio
[bullet] Growth Portfolio
[bullet] Worldwide Growth Portfolio
Oppenheimer Global Securities Fund
Oppenheimer Strategic Bond Fund
Portfolio Partners, Inc. (PPI):
[bullet] PPI MFS Emerging Equities Portfolio
[bullet] PPI MFS Research Growth Portfolio
[bullet] PPI MFS Value Equity Portfolio
[bullet] PPI Scudder International Growth Portfolio
[bullet] PPI T. Rowe Price Growth Equity Portfolio
b. Other
Investment transactions are accounted for on a trade date basis and
dividend income is recorded on the ex-dividend date. The cost of
investments sold is determined by specific identification.
c. Federal Income Taxes
The operations of the Account form a part of, and are taxed with, the total
operations of the Company which is taxed as a life insurance company under
the Internal Revenue Code of 1986, as amended.
2. Valuation Period Deductions
Deductions by the Account for mortality and expense risk charges are made
in accordance with the terms of the policies and are paid to the Company.
S-11
<PAGE>
Variable Life Account B
Notes to Financial Statements--June 30, 1998 (Unaudited and continued):
3. Dividend Income
On an annual basis the Funds distribute substantially all of their taxable
income and realized capital gains to their shareholders. Distributions paid
to the Account are automatically reinvested in shares of the Funds. The
Account's proportionate share of each Fund's undistributed net investment
income (distributions in excess of net investment income) and accumulated
net realized gain (loss) on investments is included in net unrealized gain
(loss) on investments in the Statements of Operations and Changes in Net
Assets.
4. Purchases and Sales of Investments
The cost of purchases and proceeds from sales of investments other than
short-term investments for the six month periods ended June 30, 1998 and
1997 aggregated $303,194,194 and $226,002,118 and $108,730,444 and
$59,623,673, respectively.
S-12
<PAGE>
[This page intentionally left blank]
<PAGE>
Variable Life Account B
Notes to Financial Statements--June 30, 1998 (Unaudited & continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets Period Ended June 30, 1998
<TABLE>
<CAPTION>
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
------------ ------------ ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Aetna Ascent VP: $ 20,464 ($ 9,368) $ 74,698 $ 61,258 $ 13,440
PolicyHolders' account values
Aetna Balanced VP, Inc.: 4,253,335 (124,199) 6,244,603 4,696,622 1,547,981
PolicyHolders' account values
Aetna Bond Fund VP: 550,573 (106,060) 3,233,044 3,101,961 131,083
PolicyHolders' account values
Aetna Crossroads VP: 6,047 (5,390) 143,317 122,861 20,456
PolicyHolders' account values
Aetna Growth and Income VP: 2,857,042 (629,867) 8,809,272 7,398,639 1,410,633
PolicyHolders' account values
Aetna Index Plus Large Cap VP: 47,679 (22,796) 1,685,992 1,471,684 214,308
PolicyHolders' account values
Aetna Legacy VP: 3,447 (3,286) 101,199 93,647 7,552
PolicyHolders' account values
Aetna Money Market VP: 940,509 (114,775) 62,951,108 63,294,082 (342,974)
PolicyHolders' account values
Aetna Small Company VP: 3,120 (502) 283,153 297,022 (13,869)
PolicyHolders' account values
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 1,381,671 (114,780) 6,229,469 5,095,749 1,133,720
PolicyHolders' account values
Growth Portfolio: 1,011,596 (47,393) 2,040,480 1,857,491 182,989
PolicyHolders' account values
High Income Portfolio: 0 (151) 4,700 4,705 (5)
PolicyHolders' account values
Overseas Portfolio: 141,761 (9,535) 304,069 267,239 36,830
PolicyHolders' account values
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 329,918 (14,818) 2,000,641 1,851,504 149,137
PolicyHolders' account values
Contrafund Portfolio: 1,313,979 (114,991) 6,291,368 4,803,294 1,488,074
PolicyHolders' account values
Janus Aspen Series:
Aggressive Growth Portfolio: 0 (59,881) 5,798,570 5,029,328 769,242
PolicyHolders' account values
Balanced Portfolio: 476,510 (53,993) 3,240,833 2,316,002 924,831
PolicyHolders' account values
</TABLE>
S-14
<PAGE>
<TABLE>
<CAPTION>
Net Increase
Net Unrealized Net (Decrease) In
Gain (Loss) Change in Net Assets Net Assets
Beginning End Unrealized from Unit Beginning End
of Period of Period Gain (Loss) Transactions of Period of Period
- ------------- --------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 27,927 $ 177,731 $ 149,804 $ 577,209
$ 1,802,553 $ 2,554,102
1,971,257 (1,097,356) (3,068,613) 3,597,667
24,336,071 30,542,242
(12,114) 218,275 230,389 4,472,471
21,104,804 26,383,260
5,069 71,374 66,305 712,836
710,292 1,510,546
6,207,999 19,104,211 12,896,212 4,687,340
132,379,023 153,600,383
(23,927) 543,997 567,924 5,422,625
1,961,545 8,191,285
618 36,635 36,017 264,386
650,139 958,255
70,857 144,571 73,714 4,729,426
20,320,201 25,606,101
0 153 153 911,482
0 900,384
1,523,698 1,430,202 (93,496) 7,374,875
20,183,450 29,865,440
380,110 1,012,489 632,379 4,236,662
7,120,144 13,136,377
0 (228) (228) 288,788
0 288,404
(8,270) 119,921 128,191 101,674
1,789,714 2,188,635
281,699 64,613 (217,086) (184,240)
2,534,727 2,597,638
1,505,359 2,674,958 1,169,599 6,225,715
20,220,028 30,302,404
844,868 2,311,916 1,467,048 507,835
12,402,365 15,086,609
885,469 1,414,587 529,118 5,821,475
8,205,641 15,903,582
</TABLE>
S-15
<PAGE>
Variable Life Account B
Notes to Financial Statements--June 30, 1998 (Unaudited & continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets--Period Ended June 30, 1998 (continued)
<TABLE>
<CAPTION>
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
------------- ---------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Growth Portfolio: $ 1,052,263 ($ 65,655) $ 1,595,425 $ 1,164,466 $ 430,959
PolicyHolders' account values
Worldwide Growth Portfolio: 1,300,477 (142,875) 3,661,194 2,473,938 1,187,256
PolicyHolders' account values
Oppenhiemer Global Securities Fund: 0 (84) 866 873 (7)
PolicyHolders' account values
Oppenhiemer Strategic Bond Fund: 104 (120) 1,016 1,034 (18)
PolicyHolders' account values
Portfolio Partners Inc.:
PPI MFS Emerging Equities Portfolio 0 (107,083) 65,317,394 61,768,869 3,548,525
PolicyHolders' account values
PPI MFS Research Growth Portfolio 0 (37,687) 15,030,677 13,804,212 1,226,465
PolicyHolders' account values
PPI MFS Value Equity 0 (122) 4,884 4,950 (66)
PolicyHolders' account values
PPI Scudder International Growth Portfolio 0 (72,061) 30,948,655 28,110,435 2,838,220
PolicyHolders' account values
PPI T. Rowe Price Growth Equity Portfolio 0 (381) 5,491 5,572 (81)
----------- --------- ----------- ----------- -----------
PolicyHolders' account values
Total Variable Life Account B $15,690,494 ($1,857,853) $226,002,118 $209,097,437 $16,904,681
=========== ============ ============ ============ ===========
</TABLE>
S-16
<PAGE>
<TABLE>
<CAPTION>
Net Increase
Net Unrealized Net (Decrease) In
Gain (Loss) Change in Net Assets Net Assets
Beginning End Unrealized from Unit Beginning End
of Period of Period Gain (Loss) Transactions of Period of Period
- --------------- --------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 1,360,430 $ 2,470,640 $ 1,110,210 $ 3,624,744
$ 11,980,000 $ 18,132,521
1,817,349 6,793,883 4,976,534 6,888,188
24,303,287 38,512,867
0 (465) (465) 133,604
0 133,048
0 253 253 213,761
0 213,980
42,515 462,655 420,140 2,214,837
19,061,872 25,138,291
(86,245) 143,435 229,680 958,818
7,148,181 9,525,457
0 695 695 293,262
0 293,769
192,560 465,970 273,410 (1,252,454)
14,311,110 16,098,225
0 7,300 7,300 458,189
0 465,027
----------- ----------- ----------- ------------ ------------ ------------
$16,987,228 $38,572,414 $21,585,187 $ 63,281,176 $352,525,147 $468,128,831
=========== =========== =========== ============ ============ ============
</TABLE>
S-17
<PAGE>
Variable Life Account B
Statement of Assets and Liabilities--December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments, at net asset value: (Note 1)
Aetna Variable Fund; 3,935,729 shares (cost $126,171,024) ............................ $132,379,023
Aetna Income Shares; 1,642,350 shares (cost $21,116,917) ............................. 21,104,804
Aetna Variable Encore Fund; 1,520,490 shares (cost $20,249,343) ...................... 20,320,201
Aetna Investment Advisers Fund, Inc.; 1,517,909 shares (cost $22,364,815) ............ 24,336,071
Aetna Ascent Variable Portfolio; 127,672 shares (cost $1,774,627) .................... 1,802,553
Aetna Crossroads Variable Portfolio; 54,282 shares (cost $705,224) ................... 710,292
Aetna Legacy Variable Portfolio; 53,730 shares (cost $649,521) ....................... 650,139
Aetna Variable Index Plus Portfolio; 139,939 shares (cost $1,985,472) ................ 1,961,545
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio; 831,279 shares (cost $18,659,751) .......................... 20,183,450
Growth Portfolio; 191,918 shares (cost $6,740,034) .................................. 7,120,144
Overseas Portfolio; 93,214 shares (cost $1,797,983) ................................. 1,789,714
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio; 140,740 shares (cost $2,253,029) ........................... 2,534,727
Contrafund Portfolio; 1,014,044 shares (cost $18,714,668) ........................... 20,220,028
Janus Aspen Series:
Aggressive Growth Portfolio; 603,521 shares (cost $11,557,498) ...................... 12,402,365
Balanced Portfolio; 469,699 shares (cost $7,320,172) ................................ 8,205,641
Growth Portfolio; 648,268 shares (cost $10,619,569) ................................. 11,980,000
Worldwide Growth Portfolio; 1,039,046 shares (cost $22,485,938) ..................... 24,303,287
Portfolio Partners, Inc.:
PPI MFS Emerging Equities Portfolio; 444,333 shares (cost $19,019,357) .............. 19,061,872
PPI MFS Research Growth Portfolio; 736,167 shares (cost $7,234,426) ................. 7,148,181
PPI Scudder International Growth Portfolio; 1,014,972 shares (cost $14,118,551) ..... 14,311,110
------------
NET ASSETS (cost $335,537,919) ........................................................ $352,525,147
============
Net assets represented by:
Policyholders' account values: (Notes 1 and 5)
Aetna Variable Fund:
Policyholders' account values ........................................................ $132,379,023
Aetna Income Shares:
Policyholders' account values ........................................................ 21,104,804
Aetna Variable Encore Fund:
Policyholders' account values ........................................................ 20,320,201
Aetna Investment Advisers Fund, Inc.:
Policyholders' account values ........................................................ 24,336,071
Aetna Ascent Variable Portfolio:
Policyholders' account values ........................................................ 1,802,553
Aetna Crossroads Variable Portfolio:
Policyholders' account values ........................................................ 710,292
</TABLE>
S-18
<PAGE>
Variable Life Account B
Statement of Assets and Liabilities--December 31, 1997 (continued):
<TABLE>
<S> <C>
Aetna Legacy Variable Portfolio:
Policyholders' account values ....................... $ 650,139
Aetna Variable Index Plus Portfolio:
Policyholders' account values ....................... 1,961,545
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio:
Policyholders' account values ...................... 20,183,450
Growth Portfolio:
Policyholders' account values ...................... 7,120,144
Overseas Portfolio:
Policyholders' account values ...................... 1,789,714
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio:
Policyholders' account values ...................... 2,534,727
Contrafund Portfolio:
Policyholders' account values ....................... 20,220,028
Janus Aspen Series:
Aggressive Growth Portfolio:
Policyholders' account values ...................... 12,402,365
Balanced Portfolio:
Policyholders' account values ...................... 8,205,641
Growth Portfolio:
Policyholders' account values ...................... 11,980,000
Worldwide Growth Portfolio:
Policyholders' account values ...................... 24,303,287
Portfolio Partners, Inc.:
PPI MFS Emerging Equities Portfolio:
Policyholders' account values ...................... 19,061,872
PPI MFS Research Growth Portfolio:
Policyholders' account values ...................... 7,148,181
PPI Scudder International Growth Portfolio:
Policyholders' account values ...................... 14,311,110
------------
$352,525,147
============
</TABLE>
See Notes to Financial Statements
S-19
<PAGE>
Variable Life Account B
Statements of Operations and Changes in Net Assets
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1997 1996
--------------- ----------------
<S> <C> <C>
INVESTMENT INCOME:
Income: (Notes 1, 3 and 5)
Dividends .......................................................... $ 35,222,623 $ 13,813,478
Expenses: (Notes 2 and 5)
Valuation Period Deductions ........................................ (2,713,203) (1,905,137)
------------- -------------
Net investment income ............................................... 32,509,420 11,908,341
------------- -------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1, 4 and 5)
Proceeds from sales ................................................ 260,329,704 29,656,908
Cost of investments sold ........................................... 245,858,726 26,434,292
------------- -------------
Net realized gain ................................................. 14,470,978 3,222,616
Net unrealized gain on investments: (Note 5)
Beginning of year .................................................. 14,132,669 4,391,574
End of year ........................................................ 16,987,228 14,132,669
------------- -------------
Net change in unrealized gain ..................................... 2,854,559 9,741,095
------------- -------------
Net realized and unrealized gain on investments ..................... 17,325,537 12,963,711
------------- -------------
Net increase in net assets resulting from operations ................ 49,834,957 24,872,052
------------- -------------
FROM UNIT TRANSACTIONS:
Variable life premium payments ...................................... 135,098,143 101,416,302
Sales and administrative charges deducted by the Company ............ (4,620,884) (3,032,151)
Premiums allocated to the fixed account ............................. (2,741,149) (3,127,437)
------------- -------------
Net premiums allocated to the variable account ..................... 127,736,110 95,256,714
Transfers to the Company for monthly deductions ..................... (21,545,914) (15,491,673)
Redemptions by contract holders ..................................... (24,062,185) (4,154,465)
Transfers on account of policy loans ................................ (2,875,077) (3,783,533)
Other ............................................................... 263,373 (40,991)
------------- -------------
Net increase in net assets from unit transactions (Note 5) ......... 79,516,307 71,786,052
------------- -------------
Change in net assets ................................................ 129,351,264 96,658,104
NET ASSETS:
Beginning of year ................................................... 223,173,883 126,515,779
------------- -------------
End of year ......................................................... $ 352,525,147 $ 223,173,883
============= =============
</TABLE>
See Notes to Financial Statements
S-20
<PAGE>
Variable Life Account B
Condensed Financial Information--Year Ended December 31, 1997
<TABLE>
<CAPTION>
Value
Per Unit Increase (Decrease) Units
-------------------------- in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Period of Year
----------- ------------ --------------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Aetna Variable Fund:
Aetna Vest .......................... $ 34.932 $ 44.936 28.64% 1,403,227.0 $63,055,847
Aetna Vest II ....................... 19.507 25.085 28.60% 805,944.5 20,216,852
Aetna Vest Plus ..................... 16.389 21.075 28.58% 1,783,619.4 37,590,494
Aetna Vest Estate Protector ......... 11.675 15.037 28.79% 70,938.6 1,066,670
Corporate Specialty Market .......... 14.805 19.039 28.60% 548,828.8 10,449,160
Aetna Income Shares:
Aetna Vest .......................... 21.850 23.428 7.22% 257,674.2 6,036,890
Aetna Vest II ....................... 14.691 15.752 7.22% 61,987.6 976,413
Aetna Vest Plus ..................... 11.764 12.613 7.22% 187,384.8 2,363,574
Aetna Vest Estate Protector ......... 10.452 11.224 7.38% 18,991.8 213,166
Corporate Specialty Market .......... 11.354 12.175 7.22% 945,807.8 11,514,761
Aetna Variable Encore Fund:
Aetna Vest .......................... 16.577 17.310 4.43% 151,657.5 2,625,230
Aetna Vest II ....................... 12.117 12.653 4.43% 13,650.7 172,723
Aetna Vest Plus ..................... 11.388 11.892 4.43% 566,497.4 6,736,612
Aetna Vest Estate Protector ......... 10.333 10.807 4.58% 36,266.4 391,929
Corporate Specialty Market .......... 10.895 11.377 4.43% 913,597.2 10,393,707
Aetna Investment Advisers Fund, Inc.:
Aetna Vest .......................... 17.547 21.286 21.31% 106,658.2 2,270,280
Aetna Vest II ....................... 17.742 21.515 21.27% 234,300.7 5,041,082
Aetna Vest Plus ..................... 14.880 18.044 21.27% 493,793.3 8,909,876
Aetna Vest Estate Protector ......... 11.340 13.554 19.53%(1) 11,121.3 150,741
Corporate Specialty Market .......... 12.954 15.708 21.27% 506,998.4 7,964,092
Aetna Ascent Variable Portfolio:
Aetna Vest .......................... 11.828 14.055 18.84% 16,408.7 230,615
Aetna Vest II ....................... 11.828 14.040 18.70% 10,217.2 143,453
Aetna Vest Plus ..................... 11.828 14.040 18.70% 96,649.5 1,356,995
Aetna Vest Estate Protector ......... 11.886 14.077 18.43%(1) 5,078.4 71,490
Aetna Crossroads Variable Portfolio:
Aetna Vest .......................... 11.474 13.369 16.52% 5,240.7 70,064
Aetna Vest II ....................... 11.544 13.356 15.69%(1) 5,740.1 76,663
Aetna Vest Plus ..................... 11.474 13.356 16.40% 40,129.7 535,965
Aetna Vest Estate Protector ......... 11.487 13.391 16.58% 2,061.1 27,600
Aetna Legacy Variable Portfolio:
Aetna Vest II ....................... 11.263 12.604 11.91%(2) 894.7 11,277
Aetna Vest Plus ..................... 11.118 12.604 13.37% 48,206.0 607,607
Aetna Vest Estate Protector ......... 11.344 12.638 11.40%(3) 2,473.2 31,255
</TABLE>
S-21
<PAGE>
Variable Life Account B
Condensed Financial Information--Year Ended December 31, 1997 (continued):
<TABLE>
<CAPTION>
Value
Per Unit Increase (Decrease) Units
-------------------------- in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Period Unit of Period of Period
----------- ------------ --------------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Aetna Variable Index Plus Portfolio:
Aetna Vest .......................... $ 12.017 $ 13.081 8.86%(4) 11,393.3 $ 149,038
Aetna Vest II ....................... 11.345 13.081 15.30%(4) 7,240.3 94,713
Aetna Vest Plus ..................... 11.172 13.081 17.09%(3) 86,063.0 1,125,815
Aetna Vest Estate Protector ......... 12.371 13.102 5.91%(5) 17,901.0 234,541
Corporate Specialty Market .......... 12.785 13.081 2.32%(6) 27,324.3 357,438
Fidelity Investments Variable
Insurance Products Fund:
Equity-Income Portfolio:
Aetna Vest .......................... 10.871 13.788 26.83% 16,476.3 227,168
Aetna Vest II ....................... 10.871 13.788 26.83% 5,186.7 71,513
Aetna Vest Plus ..................... 10.871 13.788 26.83% 545,391.4 7,519,612
Aetna Vest Estate Protector ......... 10.883 13.824 27.02% 62,365.5 862,136
Corporate Specialty Market .......... 12.512 15.869 26.83% 724,876.8 11,503,021
Fidelity Investments Variable
Insurance Products Fund:
Growth Portfolio:
Corporate Specialty Market .......... 11.255 13.759 22.25% 517,477.9 7,120,144
Overseas Portfolio:
Corporate Specialty Market .......... 11.241 12.415 10.45% 144,152.5 1,789,714
Fidelity Investments Variable
Insurance Products Fund II:
Asset Manager Portfolio:
Corporate Specialty Market .......... 12.022 14.361 19.46% 176,505.1 2,534,727
Contrafund Portfolio:
Aetna Vest .......................... 11.525 14.166 22.91% 34,241.1 485,043
Aetna Vest II ....................... 11.525 14.166 22.91% 7,039.4 99,717
Aetna Vest Plus ..................... 11.525 14.166 22.91% 319,136.2 4,520,728
Aetna Vest Estate Protector ......... 11.538 14.203 23.09% 44,043.2 625,540
Corporate Specialty Market .......... 12.396 15.236 22.91% 950,961.4 14,489,000
Janus Aspen Series:
Aggressive Growth Portfolio:
Aetna Vest .......................... 16.153 18.017 11.54% 62,426.4 1,124,758
Aetna Vest II ....................... 16.153 18.017 11.54% 29,971.2 540,002
Aetna Vest Plus ..................... 16.153 18.017 11.54% 340,401.2 6,133,150
Aetna Vest Estate Protector ......... 9.797 10.944 11.71% 65,486.4 716,682
Corporate Specialty Market .......... 12.120 13.519 11.54% 287,588.9 3,887,773
</TABLE>
S-22
<PAGE>
Variable Life Account B
Condensed Financial Information--Year Ended December 31, 1997 (continued):
<TABLE>
<CAPTION>
Value
Per Unit Increase (Decrease) Units
-------------------------- in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Period Unit of Period of Period
----------- ------------ --------------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balanced Portfolio:
Aetna Vest .......................... $ 13.966 $ 16.883 20.89% 7,765.1 $ 131,096
Aetna Vest II ....................... 14.075 17.015 20.89% 10,401.5 176,977
Aetna Vest Plus ..................... 13.960 16.875 20.89% 247,390.9 4,174,751
Aetna Vest Estate Protector ......... 11.101 13.440 21.07% 17,145.8 230,433
Corporate Specialty Market .......... 12.242 14.799 20.89% 235,992.1 3,492,384
Growth Portfolio:
Aetna Vest .......................... 14.898 18.105 21.53% 37,937.8 686,846
Aetna Vest II ....................... 14.884 18.088 21.53% 61,620.8 1,114,603
Aetna Vest Plus ..................... 14.863 18.063 21.53% 431,965.3 7,802,391
Aetna Vest Estate Protector ......... 10.857 13.214 21.71% 44,074.0 582,402
Corporate Specialty Market .......... 12.232 14.865 21.53% 120,672.6 1,793,758
Worldwide Growth Portfolio:
Aetna Vest .......................... 16.364 19.790 20.94% 108,747.3 2,152,075
Aetna Vest II ....................... 16.368 19.795 20.94% 55,876.7 1,106,085
Aetna Vest Plus ..................... 16.348 19.770 20.94% 557,760.6 11,027,190
Aetna Vest Estate Protector ......... 11.811 14.305 21.12% 58,328.9 834,389
Corporate Specialty Market .......... 13.459 16.277 20.94% 564,191.6 9,183,548
Portfolio Partners, Inc.:
PPI MFS Emerging Equities Portfolio:
Aetna Vest .......................... 17.571 17.357 (1.22%)(7) 70,564.4 1,224,807
Aetna Vest II ....................... 17.573 17.359 (1.22%)(7) 34,713.7 602,592
Aetna Vest Plus ..................... 17.563 17.349 (1.22%)(7) 477,392.0 8,282,500
Aetna Vest Estate Protector ......... 10.942 10.810 (1.21%)(7) 66,830.1 722,463
Corporate Specialty Market .......... 14.451 14.275 (1.22%)(7) 576,485.2 8,229,510
PPI MFS Research Growth Portfolio:
Aetna Vest .......................... 12.277 12.042 (1.91%)(7) 64,898.6 781,537
Aetna Vest II ....................... 12.332 12.096 (1.91%)(7) 23,240.4 281,124
Aetna Vest Plus ..................... 12.163 11.931 (1.91%)(7) 352,781.7 4,209,155
Aetna Vest Estate Protector ......... 9.329 9.152 (1.90%)(7) 10,326.6 94,508
Corporate Specialty Market .......... 11.124 10.912 (1.91%)(7) 163,291.1 1,781,857
</TABLE>
S-23
<PAGE>
Variable Life Account B
Condensed Financial Information--Year Ended December 31, 1997 (continued):
<TABLE>
<CAPTION>
Value
Per Unit Increase (Decrease) Units
-------------------------- in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Period Unit of Period of Period
----------- ------------ --------------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PPI Scudder International Growth Portfolio:
Aetna Vest ............................... $ 15.495 $ 15.692 1.27%(7) 131,667.0 $2,066,166
Aetna Vest II ............................ 15.399 15.596 1.27%(7) 44,659.7 696,495
Aetna Vest Plus .......................... 15.314 15.509 1.27%(7) 449,154.4 6,965,802
Aetna Vest Estate Protector .............. 11.627 11.777 1.29%(7) 21,515.0 253,383
Corporate Specialty Market ............... 12.832 12.995 1.27%(7) 333,144.4 4,329,264
</TABLE>
Notes to Condensed Financial Information:
(1)--Reflects less than a full year of performance activity. Funds were first
received in this option during January 1997.
(2)--Reflects less than a full year of performance activity. Funds were first
received in this option during March 1997.
(3)--Reflects less than a full year of performance activity. Funds were first
received in this option during May 1997.
(4)--Reflects less than a full year of performance activity. Funds were first
received in this option during June 1997.
(5)--Reflects less than a full year of performance activity. Funds were first
received in this option during July 1997.
(6)--Reflects less than a full year of performance activity. Funds were first
received in this option during August 1997.
(7) - Reflects less than a full year of performance activity. Funds were first
received in this option during November 1997.
See Notes to Financial Statements
S-24
<PAGE>
Variable Life Account B
Notes to Financial Statements--December 31, 1997
1. Summary of Significant Accounting Policies
Variable Life Account B (the "Account") is a separate account established
by Aetna Life Insurance and Annuity Company (the "Company") and is
registered under the Investment Company Act of 1940 as a unit investment
trust. The Account is sold exclusively for use with variable life insurance
product contracts as defined under the Internal Revenue Code of 1986, as
amended.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported therein. Although actual results
could differ from these estimates, any such differences are expected to be
immaterial to the net assets of the Account.
a. Valuation of Investments
Investments in the following Funds are stated at the closing net asset
value per share as determined by each fund on December 31, 1997:
Aetna Variable Fund
Aetna Income Shares
Aetna Variable Encore Fund
Aetna Investment Advisers Fund, Inc.
Aetna Ascent Variable Portfolio
Aetna Crossroads Variable Portfolio
Aetna Legacy Variable Portfolio
Aetna Variable Index Plus Portfolio
Fidelity Investments Variable Insurance
Products Fund:
[bullet] Equity-Income Portfolio
[bullet] Growth Portfolio
[bullet] Overseas Portfolio
Fidelity Investments Variable Insurance
Products Fund II:
[bullet] Asset Manager Portfolio
[bullet] Contrafund Portfolio
Janus Aspen Series:
[bullet] Aggressive Growth Portfolio
[bullet] Balanced Portfolio
[bullet] Growth Portfolio
[bullet] Worldwide Growth Portfolio
Portfolio Partners, Inc.:
[bullet] PPI MFS Emerging Equities Portfolio
[bullet] PPI MFS Research Growth Portfolio
[bullet] PPI Scudder International Growth Portfolio
b. Other
Investment transactions are accounted for on a trade date basis and
dividend income is recorded on the ex-dividend date. The cost of
investments sold is determined by specific identification.
c. Federal Income Taxes
The operations of the Account form a part of, and are taxed with, the total
operations of the Company which is taxed as a life insurance company under
the Internal Revenue Code of 1986, as amended.
2. Valuation Period Deductions
Deductions by the Account for mortality and expense risk charges are made
in accordance with the terms of the policies and are paid to the Company.
S-25
<PAGE>
Variable Life Account B
Notes to Financial Statements--December 31, 1997 (continued):
3. Dividend Income
On an annual basis the Funds distribute substantially all of their taxable
income and realized capital gains to their shareholders. Distributions paid
to the Account are automatically reinvested in shares of the Funds. The
Account's proportionate share of each Fund's undistributed net investment
income (distributions in excess of net investment income) and accumulated
net realized gain (loss) on investments is included in net unrealized gain
(loss) on investments in the Statements of Operations and Changes in Net
Assets.
4. Purchases and Sales of Investments
The cost of purchases and proceeds from sales of investments other than
short-term investments for the years ended December 31, 1997 and 1996
aggregated $372,355,431 and $260,329,704 and $113,349,117 and $29,656,908,
respectively.
S-26
<PAGE>
Independent Auditors' Report
The Board of Directors of Aetna Life Insurance and Annuity Company and
Policyholders of Variable Life Account B:
We have audited the accompanying statement of assets and liabilities of Aetna
Life Insurance and Annuity Company Variable Life Account B (the "Account") as
of December 31, 1997, and the related statements of operations and changes in
net assets for each of the years in the two-year period then ended and
condensed financial information for the year ended December 31, 1997. These
financial statements and condensed financial information are the responsibility
of the Account's management. Our responsibility is to express an opinion on
these financial statements and condensed financial information based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and condensed
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and condensed financial information. Our procedures
included confirmation of securities owned as of December 31, 1997, by
correspondence with the custodian. 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 and condensed financial information
referred to above present fairly, in all material respects, the financial
position of Aetna Life Insurance and Annuity Company Variable Life Account B as
of December 31, 1997, the results of its operations and changes in its net
assets for each of the years in the two-year period then ended and condensed
financial information for the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 27, 1998
S-27
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
Consolidated Statements of Income for the three and six months ended June 30, 1998 and
June 30, 1997 (unaudited) ............................................................. F-2
Consolidated Balance sheets as of June 30, 1998 (unaudited) and December 31, 1997 ........ F-3
Consolidated Statements of Changes in Shareholder's Equity for the six months ended June
30, 1998 and June 30, 1997 (unaudited) ................................................ F-4
Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and June 30,
1997 (unaudited) ...................................................................... F-5
Condensed Notes to Consolidated Financial Statements as of June 30, 1998 (unaudited) ..... F-7
Independent Auditors' Report ............................................................. F-11
Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 ... F-12
Consolidated Balance Sheets as of December 31, 1997 and 1996 ............................. F-13
Consolidated Statements of Changes in Shareholder's Equity for the Years Ended December
31, 1997, 1996 and 1995 ............................................................... F-14
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and F-15
1995
Notes to Consolidated Financial Statements as of December 31, 1997 ....................... F-17
</TABLE>
F-1
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, (unaudited) June 30, (unaudited)
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Premiums $ 17.1 $ 16.4 $ 34.4 $ 34.2
Charges assessed against policyholders 84.4 60.4 162.0 117.9
Net investment income 214.5 218.0 428.2 435.6
Net realized capital gains 10.2 3.6 6.6 8.1
Other income 7.0 7.4 14.0 16.9
------ ------ ------- ------
Total revenue 333.2 305.8 645.2 612.7
------ ------ ------- ------
Benefits and expenses:
Current and future benefits 174.2 176.9 348.0 356.3
Operating expenses 76.2 70.0 150.5 134.5
Amortization of deferred policy acquisition costs 26.8 19.1 50.8 32.8
------ ------ ------- ------
Total benefits and expenses 277.2 266.0 549.3 523.6
------ ------ ------- ------
Income from continuing operations before income taxes 56.0 39.8 95.9 89.1
Income taxes 16.5 10.4 28.2 25.4
------ ------ ------- ------
Income from continuing operations 39.5 29.4 67.7 63.7
Income from discontinued operations, net of tax 23.5 13.7 37.3 29.8
------ ------ ------- ------
Net income $ 63.0 $ 43.1 $ 105.0 $ 93.5
====== ====== ======= ======
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
F-2
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
<TABLE>
<CAPTION>
June 30, 1998
(unaudited) December 31, 1997
--------------- ------------------
<S> <C> <C>
Assets
- ------
Investments:
Debt securities available for sale, at fair value (amortized cost:
$12,536.4 and $12,912.2) $ 13,136.3 $ 13,463.8
Equity securities, available for sale:
Nonredeemable preferred stock (cost: $91.2 and $131.7) 99.9 147.6
Investment in affiliated mutual funds (cost: $135.1 and $78.1) 147.6 83.0
Common stock (cost: $0.3 and $0.2) 1.9 0.6
Short-term investments 81.4 95.6
Mortgage loans 12.7 12.8
Policy loans 498.7 469.6
----------- -----------
Total investments 13,978.5 14,273.0
Cash and cash equivalents 1,058.2 565.4
Short-term investments under securities loan agreement 706.4 --
Accrued investment income 159.3 163.0
Premiums due and other receivables 86.3 63.7
Deferred policy acquisition costs 1,711.6 1,654.6
Reinsurance loan to affiliate 317.5 397.2
Other assets 60.0 46.8
Separate accounts assets 26,968.4 22,982.7
----------- -----------
Total assets $ 45,046.2 $ 40,146.4
=========== ===========
Liabilities and Shareholder's Equity
- ------------------------------------
Liabilities:
Future policy benefits $ 3,832.1 $ 3,785.7
Unpaid claims and claim expenses 28.7 38.0
Policyholders' funds left with the Company 11,083.8 11,121.5
----------- -----------
Total insurance reserve liabilities 14,944.6 14,945.2
Payables under securities loan agreement 706.4 --
Other liabilities 378.7 312.8
Income taxes:
Current 23.9 12.4
Deferred 88.9 72.0
Separate accounts liabilities 26,955.5 22,970.0
----------- -----------
Total liabilities 43,098.0 38,312.4
----------- -----------
Shareholder's equity:
Common stock, par value $50 (100,000 shares authorized;
55,000 shares issued and outstanding) 2.8 2.8
Paid-in capital 418.0 418.0
Accumulated other comprehensive income 104.4 92.9
Retained earnings 1,423.0 1,320.3
----------- -----------
Total shareholder's equity 1,948.2 1,834.0
----------- -----------
Total liabilities and shareholder's equity $ 45,046.2 $ 40,146.4
=========== ===========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
F-3
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
<TABLE>
<CAPTION>
Six Months Ended June 30, (unaudited)
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Shareholder's equity, beginning of period $ 1,834.0 $ 1,609.5
Comprehensive income
Net income 105.0 93.5
Other comprehensive income, net of tax
Unrealized gains on securities
($17.7, $0.2, pretax, respectively) 11.5 0.1
---------- ----------
Total comprehensive income 116.5 93.6
---------- ----------
Other changes 0.7 3.3
Common stock dividends (3.0) (5.3)
---------- ----------
Shareholder's equity, end of period $ 1,948.2 $ 1,701.1
========== ==========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
F-4
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
Six Months Ended June 30, (unaudited)
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 105.0 $ 93.5
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Decrease (increase) in accrued investment income 3.7 (1.6)
Decrease (increase) in premiums due and other receivables 24.5 (16.8)
Increase in policy loans (29.1) (30.9)
Increase in deferred policy acquisition costs (57.0) (78.3)
Decrease in reinsurance loan to affiliate 79.7 102.7
Net increase in universal life account balances 177.5 156.8
Decrease in other insurance reserve liabilities (159.0) (97.7)
Net decrease in other liabilities and other assets (9.9) (76.3)
Increase in income taxes 27.1 3.0
Net accretion of discount on investments (26.5) (34.9)
Net realized capital gains (7.9) (9.1)
---------- ----------
Net cash provided by operating activities 128.1 10.4
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 3,859.7 2,274.8
Equity securities 59.1 30.5
Mortgage loans 0.1 0.1
Investment maturities and repayments of:
Debt securities available for sale 799.1 716.1
Short-term investments 89.8 10.4
Cost of investment purchases in:
Debt securities available for sale (4,237.4) (2,699.5)
Equity securities (71.8) (37.5)
Short-term investments (75.4) (107.6)
---------- ----------
Net cash provided by investing activities 423.2 187.3
---------- ----------
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
F-5
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows (Continued)
(millions)
<TABLE>
<CAPTION>
Six Months Ended June 30, (unaudited)
-------------------------
1998 1997
------------ ----------
<S> <C> <C>
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 776.2 819.4
Withdrawals of investment contracts (833.0) (607.2)
Capital Contribution to Separate Account -- (25.0)
Return of capital from Separate Account 1.3 --
Dividends paid to shareholder (3.0) (5.3)
-------- ------
Net cash (used for) provided by financing activities (58.5) 181.9
-------- ------
Net increase in cash and cash equivalents 492.8 379.6
Cash and cash equivalents, beginning of period 565.4 459.1
-------- ------
Cash and cash equivalents, end of period $ 1,058.2 $ 838.7
========= ========
Supplemental cash flow information:
Income taxes paid, net $ 28.2 $ 44.6
========= ========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
F-6
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements
1. Basis of Presentation
The consolidated financial statements include Aetna Life Insurance and Annuity
Company and its wholly owned subsidiary, Aetna Insurance Company of America
(collectively, the "Company"). The Company has agreed to sell its individual
life insurance operations to Lincoln National Corporation ("Lincoln") and
accordingly, they are classified as Discontinued Operations. (Please refer to
Note 2 below). Aetna Life Insurance and Annuity Company is a wholly owned
subsidiary of Aetna Retirement Holdings, Inc. ("HOLDCO"). HOLDCO is a wholly
owned subsidiary of Aetna Retirement Services, Inc., whose ultimate parent is
Aetna Inc. ("Aetna").
These consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and are unaudited. Certain
reclassifications have been made to 1997 financial information to conform to
the 1998 presentation. These interim statements necessarily rely heavily on
estimates, including assumptions as to annualized tax rates. In the opinion of
management, all adjustments necessary for a fair statement of results for the
interim periods have been made. All such adjustments are of a normal, recurring
nature. The accompanying condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and related
notes as presented in the Company's 1997 Annual Report on Form 10-K. Certain
financial information that is normally included in annual financial statements
prepared in accordance with generally accepted accounting principles, but that
is not required for interim reporting purposes, has been condensed or omitted.
2. Discontinued Operations--Individual Life Insurance
On May 21, 1998, the Company agreed to sell its domestic individual life
insurance business to Lincoln for approximately $1 billion in cash. The
operating results of the individual life business are presented as Discontinued
Operations. Results of the Discontinued Operations will be included in the
Company's net income until the completion of the sale. All prior year income
statement data has been restated to reflect the presentation as Discontinued
Operations. The transaction is generally in the form of an indemnity
reinsurance arrangement, under which Lincoln will contractually assume from the
Company certain policyholder liabilities and obligations, although the Company
will remain directly obligated to policyholders. Future policy benefit
insurance reserves were approximately $3 billion as of June 30, 1998. Assets
related to and supporting the life policies will be transferred to Lincoln and
the Company will record a reinsurance receivable from Lincoln. The transaction
is expected to result in an after-tax gain of approximately $170 million, of
which a significant portion will be deferred and amortized over approximately
15 years. The amount of the gain will depend on the actual amount of assets
transferred and liabilities contractually assumed from the Company and the
remaining related deferred acquisition cost at the closing date.
Completion of the sale, which is anticipated to occur in the fall of 1998, is
subject to state regulatory approvals and other customary conditions. In July
1998, the Federal Trade Commission granted early termination to the waiting
period for the transaction under the Hart-Scott-Rodino Antitrust Improvements
Act.
F-7
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (Continued)
2. Discontinued Operations--Individual Life Insurance (Continued)
Revenues for the individual life segment were $135.7 million and $165.9 million
for the second quarters of 1998 and 1997, respectively, and $280.7 million and
$303.6 million for the six months ended June 30, 1998 and 1997, respectively.
Net income was $23.5 million and $13.7 million for the second quarters of 1998
and 1997, respectively, and $37.3 million and $29.8 million for the six months
ended June 30, 1998 and 1997, respectively.
3. New Accounting Standards
On January 1, 1998, the Company adopted Statement of Position ("SOP") 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use, issued by the American Institute of Certified Public Accountants
("AICPA"). This statement requires that certain costs incurred in developing
internal-use computer software be capitalized, and provides guidance for
determining whether computer software is considered to be for internal use. The
Company will amortize these costs over a period of 3 to 5 years. Previously,
the Company expensed the cost of internal-use computer software as incurred.
The adoption of this statement resulted in an increase to net income of $1.7
million and $3.4 million for the three and six months ended June 30, 1998,
respectively.
Financial Accounting Standard ("FAS") No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, was issued in
June 1996 and provides accounting and reporting standards for transfers of
financial assets and extinguishments of liabilities.
FAS No. 125 was effective for 1997 financial statements; however, certain
provisions relating to accounting for repurchase agreements and securities
lending were not effective until January 1, 1998. The adoption of those
provisions effective in 1998 did not have a material effect on the Company's
financial position or results of operations.
4. Future Application of Accounting Standards
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This standard
requires companies to record all derivatives on the balance sheet as either
assets or liabilities and measure those instruments at fair value. The manner
in which companies are to record gains or losses resulting from changes in the
values of those derivatives depends on the use of the derivative and whether it
qualifies for hedge accounting. This standard is effective at the beginning of
2000, with early adoption permitted. The Company is currently evaluating the
impact of the adoption of this statement and the potential effect on its
financial position or results of operations.
In December 1997, the AICPA issued SOP 97-3, Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments, which provides guidance for
determining when an insurance or other enterprise should recognize a liability
for guaranty-fund and other insurance-related assessments and guidance for
measuring the liability. This statement is effective for 1999 financial
statements, with early adoption permitted. The Company does not expect adoption
of this statement to have a material effect on its financial position or
results of operations.
F-8
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (Continued)
5. Financial Instruments
The Company engages in hedging activities to manage interest rate risk. Such
hedging activities have principally consisted of using off-balance-sheet
instruments such as treasury futures. (See General Account Investments on page
20 of the Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 3 of the Notes to the Financial Statements in
the Company's 1997 Annual Report on Form 10-K for a description of the
Company's hedging activities). The notional amounts, carrying values and
estimated fair values of the Company's open treasury futures as of June 30,
1998 are $1,782.4 million, ($3.0) million, and ($3.0) million, respectively.
These open treasury futures are related to hedging the interest rate risk on
the assets supporting the individual life business that is expected to be sold
to Lincoln. (See Note 2 above for further discussion on the sale of the
individual life business).
6. Additional Information--Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income related to changes in
unrealized gains on securities (excluding those related to experience rated
contractholders) were as follows:
<TABLE>
<CAPTION>
Six Months Ended June
30,
-----------------------
1998 1997
(Millions) ---------- ----------
<S> <C> <C>
Unrealized holding gains arising during the period (1) .............. $ 33.9 $ 28.7
Less: reclassification adjustments for amortization of net investment
discounts and gains included in net income (2) ...................... 22.4 28.6
------- -------
Net unrealized gains on securities .................................. $ 11.5 $ 0.1
======= =======
</TABLE>
(1) Pretax unrealized holding gains arising during the period were $52.1
million and $44.2 million for 1998 and 1997, respectively.
(2) Pretax reclassification adjustments for amortization of net investment
discounts and gains included in net income were $34.4 million and $44.0
million for 1998 and 1997, respectively.
F-9
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (Continued)
7. Severance and Facilities Charges
During 1996, the Company was allocated severance and facilities reserves from
Aetna to reflect actions taken or to be taken to reduce the level of corporate
expenses and other costs previously absorbed by Aetna's property-casualty
operations.
Also during 1996, the Company established severance and facilities reserves in
the Financial Services and Individual Life Insurance segments to reflect
actions taken or to be taken in order to make its businesses more competitive.
Activity for the six months ended June 30, 1998 within the severance and
facilities reserves (pretax, in millions) and positions eliminated related to
such actions were as follows:
<TABLE>
<CAPTION>
Reserve Positions
--------- ----------
<S> <C> <C>
Balance at December 31, 1997 ......... $ 20.8 361
Actions taken (1) .................... (7.2) (63)
------- ---
Balance at June 30, 1998 ............. $ 13.6 298
</TABLE>
(1) Includes $5.3 million of severance-related actions and $1.4 million of
corporate allocation-related actions.
The Company's severance actions are expected to be substantially completed by
September 30, 1998. The corporate allocation actions were substantially
completed in 1997.
F-10
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (Continued)
(8) Litigation
The Company is involved in numerous lawsuits arising, for the most part, in
the ordinary course of its business operations. While the ultimate outcome
of litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related
reserves established, it is not expected to result in a liability for
amounts material to the financial condition of the Company, although it may
adversely affect results of operations in future periods.
(9) Dividends
On January 30, 1998, the Company paid a $3.0 million dividend to HOLDCO.
The additional amount of dividends that may be paid by the Company to
HOLDCO in 1998 without prior approval by the Insurance Commissioner of the
State of Connecticut is $74.6 million.
F-11
<PAGE>
Independent Auditors' Report
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
We have audited the accompanying consolidated balance sheets of Aetna Life
Insurance and Annuity Company and Subsidiary as of December 31, 1997 and 1996,
and the related consolidated statements of income, changes in shareholder's
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statements presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aetna Life
Insurance and Annuity Company and Subsidiary at December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 3, 1998
F-12
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Premiums $ 267.1 $ 133.6 $ 212.7
Charges assessed against policyholders 475.0 396.5 318.9
Net investment income 1,080.5 1,045.6 1,004.3
Net realized capital gains 36.0 19.7 41.3
Other income 39.7 45.4 42.0
-------- -------- --------
Total revenue 1,898.3 1,640.8 1,619.2
-------- -------- --------
Benefits and expenses:
Current and future benefits 1,127.8 968.6 997.2
Operating expenses 347.4 342.2 310.8
Amortization of deferred policy acquisition costs 128.4 69.8 48.0
Severance and facilities charges -- 61.3 --
-------- -------- --------
Total benefits and expenses 1,603.6 1,441.9 1,356.0
-------- -------- --------
Income before income taxes 294.7 198.9 263.2
Income taxes 89.4 57.8 87.3
-------- -------- --------
Net income $ 205.3 $ 141.1 $ 175.9
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-13
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
<TABLE>
<CAPTION>
December 31,
-------------------------------
Assets 1997 1996
- ------ -------------- --------------
<S> <C> <C>
Investments:
Debt securities available for sale, at fair value (amortized cost:
$12,912.2 and $12,539.1) $ 13,463.8 $ 12,905.5
Equity securities, available for sale:
Nonredeemable preferred stock (cost: $131.7 and $107.6) 147.6 119.0
Investment in affiliated mutual funds (cost: $78.1 and $77.3) 83.0 81.1
Common stock (cost: $0.2 and $0.0) .6 .3
Short-term investments 95.6 34.8
Mortgage loans 12.8 13.0
Policy loans 469.6 399.3
----------- -----------
Total investments 14,273.0 13,553.0
Cash and cash equivalents 565.4 459.1
Accrued investment income 163.0 159.0
Premiums due and other receivables 63.7 26.6
Deferred policy acquisition costs 1,654.6 1,515.3
Reinsurance loan to affiliate 397.2 628.3
Other assets 46.8 33.7
Separate accounts assets 22,982.7 15,318.3
----------- -----------
Total assets $ 40,146.4 $ 31,693.3
=========== ===========
Liabilities and Shareholder's Equity
- ------------------------------------
Liabilities:
Future policy benefits $ 3,763.7 $ 3,617.0
Unpaid claims and claim expenses 38.0 28.9
Policyholders' funds left with the Company 11,143.5 10,663.7
----------- -----------
Total insurance reserve liabilities 14,945.2 14,309.6
Other liabilities 312.8 354.7
Income taxes:
Current 12.4 20.7
Deferred 72.0 80.5
Separate accounts liabilities 22,970.0 15,318.3
----------- -----------
Total liabilities 38,312.4 30,083.8
----------- -----------
Shareholder's equity:
Common stock, par value $50 (100,000 shares authorized; 55,000
shares issued and outstanding) 2.8 2.8
Paid-in capital 418.0 418.0
Accumulated other comprehensive income 92.9 60.5
Retained earnings 1,320.3 1,128.2
----------- -----------
Total shareholder's equity 1,834.0 1,609.5
----------- -----------
Total liabilities and shareholder's equity $ 40,146.4 $ 31,693.3
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-14
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Shareholder's equity, beginning of year $ 1,609.5 $ 1,583.0 $ 1,088.5
Comprehensive income
Net income 205.3 141.1 175.9
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
($50.1 million, $(110.8) million and
$494.6 million, pretax, respectively) 32.4 (72.0) 321.5
---------- ---------- ----------
Total comprehensive income 237.7 69.1 497.4
---------- ---------- ----------
Capital contributions -- 10.4 0.0
Other changes 4.1 (49.5) 0.0
Common stock dividends (17.3) (3.5) (2.9)
---------- ---------- ----------
Shareholder's equity, end of year $ 1,834.0 $ 1,609.5 $ 1,583.0
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-15
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 205.3 $ 141.1 $ 175.9
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
(Increase) decrease in accrued investment income (4.0) 16.5 (33.3)
(Increase) decrease in premiums due and other
receivables (33.3) 1.6 25.4
Increase in policy loans (70.3) (60.7) (89.9)
Increase in deferred policy acquisition costs (139.3) (174.0) (177.0)
Decrease in reinsurance loan to affiliate 231.1 27.2 34.8
Net increase in universal life account balances 286.4 243.2 393.4
(Decrease) increase in other insurance reserve liabilities (249.6) (211.5) 79.0
Net (decrease) increase in other liabilities and other
assets (41.7) 3.1 13.0
Decrease in income taxes (31.4) (26.7) (4.5)
Net accretion of discount on investments (66.4) (68.0) (66.4)
Net realized capital gains (36.0) (19.7) (41.3)
Other, net -- 1.1 --
---------- ---------- ----------
Net cash provided by (used for) operating activities 50.8 (126.8) 309.1
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 5,311.3 5,182.2 4,207.2
Equity securities 103.1 190.5 180.8
Mortgage loans 0.2 8.7 10.7
Limited partnership -- -- 26.6
Investment maturities and collections of:
Debt securities available for sale 1,212.7 885.2 583.9
Short-term investments 89.3 35.0 106.1
Cost of investment purchases in:
Debt securities available for sale (6,732.8) (6,534.3) (6,034.0)
Equity securities (113.3) (118.1) (170.9)
Short-term investments (149.9) (54.7) (24.7)
Mortgage loans -- -- (21.3)
Other, net -- (17.6) --
---------- ---------- ----------
Net cash used for investing activities (279.4) (423.1) (1,135.6)
---------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-16
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows (Continued)
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,621.2 1,579.5 1,884.5
Withdrawals of investment contracts (1,256.3) (1,146.2) (1,109.6)
Capital contribution to Separate Account (25.0) -- --
Return of capital from Separate Account 12.3 -- --
Capital contribution from HOLDCO -- 10.4 --
Dividends paid to shareholder (17.3) (3.5) (2.9)
-------- -------- --------
Net cash provided by financing activities 334.9 440.2 772.0
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 106.3 (109.7) (54.5)
Cash and cash equivalents, beginning of year 459.1 568.8 623.3
-------- -------- --------
Cash and cash equivalents, end of year $ 565.4 $ 459.1 $ 568.8
======== ======== ========
Supplemental cash flow information:
Income taxes paid, net $ 119.6 $ 85.5 $ 92.8
======= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-17
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Aetna Life Insurance and Annuity Company and its wholly owned subsidiary
(collectively, the "Company") are providers of financial services and life
insurance products in the United States. The Company has two business segments:
financial services and individual life insurance.
Financial services products include annuity contracts that offer a variety of
funding and payout options for individual and employer-sponsored retirement
plans qualified under Internal Revenue Code Sections 401, 403, 408 and 457, and
non-qualified annuity contracts. These contracts may be deferred or immediate
("payout annuities"). Financial services also include investment advisory
services and pension plan administrative services.
Individual life insurance products include universal life, variable universal
life, traditional whole life and term insurance.
Basis of Presentation
The consolidated financial statements include Aetna Life Insurance and Annuity
Company and its wholly owned subsidiary, Aetna Insurance Company of America.
Aetna Life Insurance and Annuity Company is a wholly owned subsidiary of Aetna
Retirement Holdings, Inc. ("HOLDCO"). HOLDCO is a wholly owned subsidiary of
Aetna Retirement Services, Inc., whose ultimate parent is Aetna Inc. ("Aetna").
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. Certain reclassifications have been
made to 1996 and 1995 financial information to conform to the 1997
presentation.
New Accounting Standard
As of December 31, 1997 the Company adopted Financial Accounting Standard
("FAS") No. 130, Reporting Comprehensive Income. This statement establishes
standards for the reporting and presentation of comprehensive income and its
components in a full set of financial statements. Comprehensive income
encompasses all changes in shareholder's equity (except those arising from
transactions with shareholders) and includes net income and net unrealized
capital gains or losses on available-for-sale securities. As this new standard
only requires additional information in a financial statement, it does not
affect the Company's financial position or results of operations.
Future Application of Accounting Standards
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
FAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, was issued in June 1996 and provides accounting
and reporting standards for transfers of financial assets and extinguishments
of liabilities.
F-18
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
FAS No. 125 is effective for 1997 financial statements; however, certain
provisions relating to accounting for repurchase agreements and securities
lending are not effective until January 1, 1998. Provisions effective in 1997
did not have a material effect on the Company's financial position or results
of operations. The Company does not expect adoption of this statement for
provisions effective in 1998 to have a material effect on its financial
position or results of operations.
Accounting by Insurance and Other Enterprises for Insurance-Related Assessments
In December 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-3, Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments, which provides guidance for determining when an
insurance or other enterprise should recognize a liability for guaranty-fund
and other insurance related assessments and guidance for measuring the
liability. This statement is effective for 1999 financial statements with early
adoption permitted. The Company does not expect adoption of this statement to
have a material effect on its financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from reported results using those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity of 90 days or less when purchased.
Investments
Debt and equity securities are classified as available for sale and carried at
fair value. These securities are written down (as realized capital losses) for
other than temporary declines in value. Unrealized capital gains and losses
related to available for sale investments, other than amounts allocable to
experience rated contractholders, are reflected in shareholder's equity, net of
related taxes.
Fair values for debt and equity securities are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are not
available, fair values are measured utilizing quoted market prices for similar
securities or by using discounted cash flow methods. Cost for mortgage-backed
securities is adjusted for unamortized premiums and discounts, which are
amortized using the interest method over the estimated remaining term of the
securities, adjusted for anticipated prepayments.
The company engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. Initial
collateral, primarily cash, is required at a rate of 102% of the market value
of a loaned domestic security and 105% of the market value of a loaned
F-19
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
foreign security. The collateral is deposited by the borrower with a lending
agent, and retained and invested by the lending agent according to the
Company's guidelines to generate additional income. The market value of the
loaned securities is monitored on a daily basis with additional collateral
obtained or refunded as the market value of the loaned securities fluctuates.
At December 31, 1997 and 1996, the Company loaned securities (which are
reflected as invested assets) with a market value of approximately $385.1
million and $444.7 million, respectively.
Purchases and sales of debt and equity securities are recorded on the trade
date.
The investment in affiliated mutual funds represents an investment in Aetna
managed mutual funds which have been seeded by the Company, and is carried at
fair value.
Mortgage loans and policy loans are carried at unpaid principal balances, net
of impairment reserves. Sales of mortgage loans are recorded on the closing
date.
Short-term investments, consisting primarily of money market instruments and
other debt issues purchased with a maturity of 91 days to one year, are
considered available for sale and are carried at fair value, which approximates
amortized cost.
The Company utilizes futures contracts, swap agreements and warrants for other
than trading purposes in order to manage investment returns and price risk and
to align maturities, interest rates, and funds availability with its
obligations. (Refer to Note 3.)
Futures contracts are carried at fair value and require daily cash settlement.
Changes in the fair value of futures contracts that qualify as hedges are
deferred and recognized as an adjustment to the hedged asset or liability.
Deferred gains or losses on such futures contracts are amortized over the life
of the acquired asset or liability as a yield adjustment or through net
realized capital gains or losses upon disposal of an asset. Changes in the fair
value of futures contracts that do not qualify as hedges are recorded in net
realized capital gains or losses. Hedge designation requires specific asset or
liability identification, a probability at inception of high correlation with
the position underlying the hedge, and that high correlation be maintained
throughout the hedge period. If a hedging instrument ceases to be highly
correlated with the position underlying the hedge, hedge accounting ceases at
that date and excess gains and losses on the hedging instrument are reflected
in net realized capital gains or losses.
Interest rate swap agreements which are designated as interest rate risk
management instruments at inception are accounted for using the accrual method.
Accordingly, the difference between amounts paid and received on such
agreements is reported in net investment income. There is no recognition in the
Consolidated Balance Sheets for changes in the fair value of the agreement.
Warrants represent the right to purchase specific securities and are accounted
for as hedges. Upon exercise, the cost of the warrants are added to the basis
of the securities purchased.
F-20
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Deferred Policy Acquisition Costs
Certain costs of acquiring insurance business are deferred. These costs, all of
which vary with and are primarily related to the production of new and renewal
business, consist principally of commissions, certain expenses of underwriting
and issuing contracts, and certain agency expenses. For fixed ordinary life
contracts, such costs are amortized over expected premium-paying periods (up to
20 years). For universal life and certain annuity contracts, such costs are
amortized in proportion to estimated gross profits and adjusted to reflect
actual gross profits over the life of the contracts (up to 20 years). Deferred
policy acquisition costs are written off to the extent that it is determined
that future policy premiums and investment income or gross profits are not
adequate to cover related losses and expenses.
Insurance Reserve Liabilities
Future policy benefits include reserves for universal life, immediate annuities
with life contingent payouts and traditional life insurance contracts. Reserves
for universal life contracts are equal to cumulative deposits less charges and
withdrawals plus credited interest thereon. Reserves for immediate annuities
with life contingent payouts and traditional life insurance contracts are
computed on the basis of assumed investment yield, mortality, and expenses,
including a margin for adverse deviations. Such assumptions generally vary by
plan, year of issue and policy duration. Reserve interest rates range from
2.25% to 12.00% for all years presented. Investment yield is based on the
Company's experience. Mortality and withdrawal rate assumptions are based on
relevant Aetna experience and are periodically reviewed against both industry
standards and experience.
Policyholders' funds left with the Company include reserves for deferred
annuity investment contracts and immediate annuities without life contingent
payouts. Reserves on such contracts are equal to cumulative deposits less
charges and withdrawals plus credited interest thereon (rates range from 3.50%
to 9.50% for all years presented) net of adjustments for investment experience
that the Company is entitled to reflect in future credited interest. Reserves
on contracts subject to experience rating reflect the rights of
contractholders, plan participants and the Company.
Unpaid claims for all lines of insurance include benefits for reported losses
and estimates of benefits for losses incurred but not reported.
Premiums, Charges Assessed Against Policyholders, Benefits and Expenses
For universal life and certain annuity contracts, charges assessed against
policyholders' funds for the cost of insurance, surrender charges, actuarial
margin and other fees are recorded as revenue in charges assessed against
policyholders. Other amounts received for these contracts are reflected as
deposits and are not recorded as revenue. Life insurance premiums, other than
premiums for universal life and certain annuity contracts, are recorded as
premium revenue when due. Related policy benefits are recorded in relation to
the associated premiums or gross profit so that profits are recognized over the
expected lives of
F-21
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
the contracts. When annuity payments with life contingencies begin under
contracts that were initially investment contracts, the accumulated balance in
the account is treated as a single premium for the purchase of an annuity and
reflected as an offsetting amount in both premiums and current and future
benefits in the Consolidated Statements of Income.
Separate Accounts
Assets held under variable universal life and variable annuity contracts are
segregated in Separate Accounts and are invested, as designated by the
contractholder or participant under a contract, in shares of mutual funds which
are managed by the Company, or other selected mutual funds not managed by the
Company.
Separate Accounts assets and liabilities are carried at fair value except for
those relating to a guaranteed interest option. Since the Company bears the
investment risk where the contract is held to maturity, the assets of the
Separate Account supporting the guaranteed interest option are carried at an
amortized cost of $658.6 million for 1997 (fair value $668.7 million) and
$515.6 million for 1996 (fair value $523.0 million). Reserves relating to the
guaranteed interest option are maintained at fund value and reflect interest
credited at rates ranging from 4.10% to 8.00% in both 1997 and in 1996.
Separate Accounts assets and liabilities are shown as separate captions in the
Consolidated Balance Sheets. Deposits, investment income and net realized and
unrealized capital gains and losses of the Separate Accounts are not reflected
in the Consolidated Statements of Income (with the exception of realized
capital gains and losses on the sale of assets supporting the guaranteed
interest option). The Consolidated Statements of Cash Flows do not reflect
investment activity of the Separate Accounts.
Income Taxes
The Company is included in the consolidated federal income tax return of Aetna.
The Company is taxed at regular corporate rates after adjusting income reported
for financial statement purposes for certain items. Deferred income tax
expenses/benefits result from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and liabilities.
F-22
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments
Debt securities available for sale as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ ------------ -------------
(millions)
<S> <C> <C> <C> <C>
U.S. government and government agencies and
authorities $ 1,219.7 $ 74.0 $ 0.1 $ 1,293.6
States, municipalities and political subdivisions 0.3 -- -- 0.3
U.S. corporate securities:
Financial 2,370.7 84.6 1.3 2,454.0
Food & fiber 195.4 9.3 -- 204.7
Healthcare & consumer products 728.5 27.0 2.6 752.9
Media & broadcast 252.9 14.7 0.1 267.5
Natural resources 143.5 5.5 -- 149.0
Transportation & capital goods 528.2 33.2 0.1 561.3
Utilities 521.3 23.5 0.9 543.9
Other corporate securities 96.9 3.2 -- 100.1
---------- ------- ------ ----------
Total U.S. corporate securities 4,837.4 201.0 5.0 5,033.4
Foreign Securities:
Government 612.5 36.7 23.6 625.6
Utilities 177.5 28.7 -- 206.2
Other 857.9 27.7 42.8 842.8
---------- ------- ------ ----------
Total foreign securities 1,647.9 93.1 66.4 1,674.6
Residential mortgage-backed securities:
Pass-throughs 784.4 71.3 2.0 853.7
Collateralized mortgage obligations 2,280.5 137.4 2.0 2,415.9
---------- ------- ------ ----------
Total residential mortgage-backed securities 3,064.9 208.7 4.0 3,269.6
Commercial/Multifamily mortgage-backed securities 1,127.8 34.0 0.4 1,161.4
Other asset-backed securities 1,014.2 17.1 0.4 1,030.9
---------- ------- ------ ----------
Total Debt Securities $ 12,912.2 $ 627.9 $ 76.3 $ 13,463.8
========== ======= ====== ==========
</TABLE>
F-23
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Debt securities available for sale as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ ------------ -------------
(millions)
<S> <C> <C> <C> <C>
U.S. government and government agencies and
authorities $ 1,072.4 $ 20.5 $ 4.5 $ 1,088.4
States, municipalities and political subdivisions 6.0 1.2 -- 7.2
U.S. corporate securities:
Financial 2,143.4 43.1 9.7 2,176.8
Food & fiber 198.2 4.6 1.3 201.5
Healthcare & consumer products 735.9 20.2 6.3 749.8
Media & broadcast 274.9 7.0 2.8 279.1
Natural resources 187.7 4.5 0.4 191.8
Transportation & capital goods 521.9 22.0 1.8 542.1
Utilities 448.8 14.8 2.8 460.8
Other corporate securities 141.5 3.0 -- 144.5
---------- ------- ------ ----------
Total U.S. corporate securities 4,652.3 119.2 25.1 4,746.4
Foreign Securities:
Government 758.6 36.0 5.7 788.9
Utilities 187.8 16.1 -- 203.9
Other 945.5 30.9 6.3 970.1
---------- ------- ------ ----------
Total foreign securities 1,891.9 83.0 12.0 1,962.9
Residential mortgage-backed securities:
Pass-throughs 792.2 78.3 3.1 867.4
Collateralized mortgage obligations 2,227.8 94.9 13.7 2,309.0
---------- ------- ------ ----------
Total residential mortgage-backed securities 3,020.0 173.2 16.8 3,176.4
Commercial/Multifamily mortgage-backed securities 1,008.7 24.8 5.6 1,027.9
Other asset-backed securities 887.8 10.7 2.2 896.3
---------- ------- ------ ----------
Total Debt Securities $ 12,539.1 $ 432.6 $ 66.2 $ 12,905.5
========== ======= ====== ==========
</TABLE>
At December 31, 1997 and 1996, net unrealized appreciation of $551.6 million
and $366.4 million, respectively, on available-for-sale debt securities
included $429.3 million and $288.5 million, respectively, related to experience
rated contracts, which were not reflected in shareholder's equity but in future
policy benefits and policyholders' funds left with the Company.
F-24
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
The carrying and fair value of debt securities for the year ended December 31,
1997 are shown below by contractual maturity. Actual maturities may differ from
contractual maturities because securities may be restructured, called, or
prepaid.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------- -------------
(millions)
<S> <C> <C>
Due to mature:
One year or less ........................... $ 367.3 $ 367.6
After one year through five years .......... 2,165.1 2,195.4
After five years through ten years ......... 2,367.3 2,407.0
After ten years ............................ 2,805.6 3,031.9
Mortgage-backed securities ................. 4,192.7 4,431.0
Other asset-backed securities .............. 1,014.2 1,030.9
---------- ----------
Total .................................... $ 12,912.2 $ 13,463.8
========== ==========
</TABLE>
At December 31, 1997 and 1996, debt securities carried at $8.2 million and $7.6
million, respectively, were on deposit as required by regulatory authorities.
The Company did not have any investments in a single issuer, other than
obligations of the U.S. government, with a carrying value in excess of 10% of
the Company's shareholder's equity at December 31, 1997.
Included in the Company's debt securities were residential collateralized
mortgage obligations ("CMOs") supporting the following:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
Fair Amortized Fair Amortized
Value Cost Value Cost
------------- ------------- ------------- -------------
(millions)
<S> <C> <C> <C> <C>
Total residential CMOs (1) $ 2,415.9 $ 2,280.5 $ 2,309.0 $ 2,227.8
========= ========= ========= =========
Percentage of total:
Supporting experience rated products 81.6% 84.2%
Supporting remaining products 18.4% 15.8%
---------- ----------
100.0% 100.0%
========== ==========
</TABLE>
(1) At December 31, 1997 and 1996, approximately 73% and 71%, respectively, of
the Company's residential CMO holdings were backed by government agencies
such as GNMA, FNMA, FHLMC.
There are various categories of CMOs which are subject to different degrees of
risk from changes in interest rates and, for nonagency-backed CMOs, defaults.
The principal risks inherent in holding CMOs
F-25
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
are prepayment and extension risks related to dramatic decreases and increases
in interest rates resulting in the repayment of principal from the underlying
mortgages either earlier or later than originally anticipated. At December 31,
1997 and 1996, approximately 4% and 3%, respectively, of the Company's CMO
holdings were invested in types of CMOs which are subject to more prepayment
and extension risk than traditional CMOs (such as interest- or principal-only
strips).
Investments in equity securities available for sale were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ -----------
(millions)
<S> <C> <C> <C> <C>
1997
- ----
Equity Securities $ 210.0 $ 21.3 $ 0.1 $ 231.2
------- ------ ----- -------
1996
- ----
Equity Securities $ 184.9 $ 16.3 $ 0.8 $ 200.4
------- ------ ----- -------
</TABLE>
3. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ------------ ------------ ------------
(millions)
<S> <C> <C> <C> <C>
Assets:
Mortgage loans $ 12.8 $ 12.4 $ 13.0 $ 13.2
Liabilities:
Investment contract liabilities:
With a fixed maturity $ 1,030.3 $ 1,005.4 $ 1,014.1 $ 1,028.8
Without a fixed maturity 10,113.2 9,587.5 9,649.6 9,427.6
</TABLE>
Fair value estimates are made at a specific point in time, based on available
market information and judg-ments about the financial instrument, such as
estimates of timing and amount of future cash flows. Such estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular financial instrument, nor do
they consider the tax impact of the realization of unrealized gains or losses.
In many cases, the fair value estimates cannot be substantiated by comparison to
independent markets, nor can the disclosed value be realized in immediate
settlement of the instrument. In evaluating the Company's management of interest
rate, price and liquidity risks, the fair values of all assets and liabilities
should be taken into consideration, not only those presented above.
F-26
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments (Continued)
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
Mortgage loans: Fair values are estimated by discounting expected mortgage loan
cash flows at market rates which reflect the rates at which similar loans would
be made to similar borrowers. The rates reflect management's assessment of the
credit quality and the remaining duration of the loans.
Investment contract liabilities (included in policyholders' funds left with the
Company):
With a fixed maturity: Fair value is estimated by discounting cash flows at
interest rates currently being offered by, or available to, the Company for
similar contracts.
Without a fixed maturity: Fair value is estimated as the amount payable to the
contractholder upon demand. However, the Company has the right under such
contracts to delay payment of withdrawals which may ultimately result in paying
an amount different than that determined to be payable on demand.
Off-Balance-Sheet and Other Financial Instruments (including Derivative
Instruments)
The Company uses off-balance-sheet and other financial instruments primarily to
manage portfolio risks, including interest rate, prepayment/call, credit,
price, and liquidity risks. In 1997 and 1996, Treasury futures contracts were
used to manage interest rate risk in the Company's bond portfolio; and, in
1996, stock index futures contracts were used to manage price risk in the
Company's equity portfolio. In 1996 and 1995, interest rate swaps and forward
commitments to enter into interest rate swaps, respectively, were also used to
manage interest rate risk in the Company's bond portfolio.
Futures Contracts:
Futures contracts represent commitments to either purchase or sell securities
at a specified future date and at a specified price or yield. Futures contracts
trade on organized exchanges and, therefore, have minimal credit risk. Cash
settlements are made daily based on changes in the prices of the underlying
assets. There were no futures contracts open as of December 31, 1997 and 1996.
Interest Rate Swaps:
Under interest rate swaps, the Company agrees with other parties to exchange
interest amounts calculated by reference to an agreed notional principal
amount. Generally, no cash is exchanged at the outset of the contract and no
principal payments are made. A single net payment is usually made by one
counterparty at each due date or upon termination of the contract. The Company
would be exposed to credit-related losses in the event of nonperformance by
counterparties to financial instruments, however, the Company controls its
exposure to credit risk through credit approvals, credit limits and regular
monitoring procedures. The credit exposure of interest rate swaps is
represented by the fair value (market value) of contracts with a positive fair
value (market value) at the reporting date. There were no interest rate swap
agreements open as of December 31, 1997 and 1996.
During 1995, the Company received $0.4 million for writing call options on
underlying securities. The Company did not write any call options in 1997 and
1996.
F-27
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments (Continued)
Warrants:
Warrants are instruments giving the Company the right, but not the obligation
to buy a security at a given price during a specified period. As of December
31, 1997 and 1996, the Company had open warrants to purchase equity securities
with a fair value of $0.6 million and $0.3 million, respectively.
Debt Instruments with Derivative Characteristics:
The Company also had investments in certain debt instruments with derivative
characteristics, including those whose market value is at least partially
determined by, among other things, levels of or changes in domestic and/or
foreign interest rates (short or long term), exchange rates, prepayment rates,
equity markets or credit ratings/spreads. The amortized cost and fair value of
these securities, included in the debt securities portfolio, as of December 31,
1997 was as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------- -------------
(millions)
<S> <C> <C>
Residential collateralized mortgage obligations ......................... $ 2,280.5 $ 2,415.9
Principal-only strips (included above) ................................. 59.0 67.0
Interest-only strips (included above) .................................. 12.8 24.3
Other structured securities with derivative characteristics (1) ......... 107.4 105.2
</TABLE>
(1) Represents non-leveraged instruments whose fair values and credit risk are
based on underlying securities, including fixed income securities and
interest rate swap agreements.
4. Net Investment Income
Sources of net investment income were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(millions)
<S> <C> <C> <C>
Debt securities $ 962.8 $ 945.3 $ 891.5
Nonredeemable preferred stock 13.7 5.9 4.2
Investment in affiliated mutual funds 4.9 14.3 14.9
Mortgage loans 1.3 2.2 1.4
Policy loans 19.9 18.4 13.7
Reinsurance loan to affiliate 37.5 44.1 46.5
Cash equivalents 44.2 29.4 38.9
Other 10.0 2.1 8.4
--------- --------- ---------
Gross investment income 1,094.3 1,061.7 1,019.5
Less investment expenses (13.8) (16.1) (15.2)
--------- --------- ---------
Net investment income $ 1,080.5 $ 1,045.6 $ 1,004.3
========= ========= =========
</TABLE>
F-28
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
4. Net Investment Income (Continued)
Net investment income includes amounts allocable to experience rated
contractholders of $823.1 million, $787.6 million and $744.2 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Interest credited
to contractholders is included in current and future benefits.
5. Dividend Restrictions and Shareholder's Equity
The Company paid $17.3 million and $3.5 million in cash dividends to HOLDCO in
1997 and 1996, respectively.
The amount of dividends that may be paid to the shareholder in 1998 without
prior approval by the Insurance Commissioner of the State of Connecticut is
$77.6 million.
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's capital and surplus those amounts
determined in conformity with statutory accounting practices prescribed or
permitted by the Department, which differ in certain respects from generally
accepted accounting principles. Statutory net income was $80.5 million, $57.8
million and $70.0 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Statutory capital and surplus was $778.7 million and $713.6
million as of December 31, 1997 and 1996, respectively.
As of December 31, 1997 the Company does not utilize any statutory accounting
practices which are not prescribed by state regulatory authorities that,
individually or in the aggregate, materially affect statutory capital and
surplus.
6. Capital Gains and Losses on Investment Operations
Realized capital gains or losses are the difference between the carrying value
and sale proceeds of specific investments sold.
Net realized capital gains on investments were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(millions)
<S> <C> <C> <C>
Debt securities $ 22.5 $ 11.1 $ 32.8
Equity securities 9.9 8.6 8.3
Other 3.6 -- 0.2
------- ------- -------
Pretax realized capital gains $ 36.0 $ 19.7 $ 41.3
------- ------- -------
After tax realized capital gains $ 23.2 $ 13.0 $ 25.8
======= ======= =======
</TABLE>
Net realized capital gains of $96.1 million, $53.1 million and $61.1 million
for 1997, 1996 and 1995, respectively, allocable to experience rated contracts,
were deducted from net realized capital gains and an offsetting amount was
reflected in policyholders' funds left with the Company. Net unamortized gains
were $138.1 million and $53.3 million at December 31, 1997 and 1996,
respectively.
F-29
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
Proceeds from the sale of available-for-sale debt securities and the related
gross gains and losses were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
(millions)
<S> <C> <C> <C>
Proceeds on Sales $ 5,311.3 $ 5,182.2 $ 4,207.2
Gross Gains 25.8 24.3 44.6
Gross Losses 3.3 13.2 11.8
</TABLE>
Changes in shareholder's equity related to changes in accumulated other
comprehensive income (unrealized capital gains and losses on securities)
(excluding those related to experience rated contractholders) were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------------ -----------
(millions)
<S> <C> <C> <C>
Debt securities $ 44.3 $ (100.1) $ 255.9
Equity securities 5.6 ( 10.5) 27.3
Limited partnership -- -- 1.8
------- -------- --------
49.9 (110.6) 285.0
Increase (decrease) in deferred income taxes (See Note 8) 17.5 ( 38.6) ( 36.5)
------- -------- --------
Net changes in accumulated other comprehensive income $ 32.4 $ (72.0) $ 321.5
======= ======== ========
</TABLE>
Net unrealized capital gains allocable to experience rated contracts of $356.7
million and $72.6 million at December 31, 1997 and $245.2 million and $43.3
million at December 31, 1996 are reflected on the Consolidated Balance Sheets
in policyholders' funds left with the Company and future policy benefits,
respectively, and are not included in shareholder's equity.
F-30
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
Shareholder's equity included the following accumulated other comprehensive
income, which are net of amounts allocable to experience rated contractholders,
at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(millions)
<S> <C> <C> <C>
Debt securities
Gross unrealized capital gains $ 140.6 $ 101.7 $ 179.3
Gross unrealized capital losses (18.4) (23.8) (1.3)
-------- -------- --------
122.2 77.9 178.0
Equity securities
Gross unrealized capital gains 21.2 16.3 27.2
Gross unrealized capital losses (0.1) (0.8) (1.2)
-------- -------- --------
21.1 15.5 26.0
Deferred income taxes (See Note 8) 50.4 32.9 71.5
-------- -------- --------
Net accumulated other comprehensive income $ 92.9 $ 60.5 $ 132.5
======== ======== ========
</TABLE>
Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities (excluding those related to experience
rated contractholders) were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
(millions)
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during the period (1) $ 98.8 $ (14.8) $ 390.5
Less: reclassification adjustment for gains and other items included
in net income (2) 66.4 57.2 69.0
------- ------- --------
Net unrealized gains (losses) on securities $ 32.4 $ (72.0) $ 321.5
======= ======= ========
</TABLE>
(1) Pretax unrealized holding gains (losses) arising during the period were
$152.0 million, ($22.8) million and $600.8 million for 1997, 1996 and
1995, respectively.
(2) Pretax reclassification adjustments for gains and other items included in
net income were $102.4 million, $87.7 million and $107.5 million for 1997,
1996 and 1995, respectively.
F-31
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
7. Severance and Facilities Charges
Severance and facilities charges during 1996, as described below, included the
following (pretax):
<TABLE>
<CAPTION>
Vacated
Asset Leased Corporate
(Millions) Severance Write-Off Property Other Allocation Total
- --------------------------- ----------- ----------- ---------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Financial Services $ 29.1 $ 1.0 $ 1.3 $ 1.7 $ -- $ 33.1
Individual Life Insurance 12.5 0.4 0.5 0.8 -- 14.2
Corporate Allocation -- -- -- -- 14.0 14.0
------- ------ ------ ------ ----- -------
Total Company $ 41.6 $ 1.4 $ 1.8 $ 2.5 $ 14.0 $ 61.3
- --------------------------- ------- ------ ------ ------ ------ -------
</TABLE>
In the third quarter of 1996, the Company recorded a $30.7 million after tax
($47.3 million pretax) charge principally related to actions taken or expected
to be taken to improve its cost structure relative to its competitors. The
severance portion of the charge is based on a plan to eliminate 702 positions
(primarily customer service, sales and information technology support staff).
The facilities portion of the charge is based on a plan to consolidate
sales/service field offices.
In addition to the above charge, Aetna recorded a facilities and severance
charge in the second quarter of 1996, primarily as a result of actions taken or
expected to be taken to reduce the level of corporate expenses and other costs
previously absorbed by Aetna's property-casualty operations, which were sold in
April 1996. The cost allocated to the Company associated with this charge was
$9.1 million after tax ($14.0 million pretax).
Activity for 1997 and 1996 within the severance and facilities reserve (pretax,
in millions) and the number of positions eliminated related to such actions
were as follows:
<TABLE>
<CAPTION>
(Millions) Reserve Positions
- ---------------------------------- --------- ----------
<S> <C> <C>
Balance at December 31, 1995 $-- --
Severance and facilities charges 47.3 702
Corporate Allocation 14.0 --
Actions taken (1) (13.4) (178)
----- ----
Balance at December 31, 1996 47.9 524
Actions taken (1) (27.1) (163)
----- ----
Balance at December 31, 1997 $ 20.8 361
- ---------------------------------- ------- ----
</TABLE>
(1) Includes $15.9 million and $8.0 million in 1997 and 1996, respectively, of
severance-related actions and $7.9 million and $4.1 million in 1997 and
1996, respectively, of corporate allocation-related actions.
The Company's severance actions are expected to be substantially completed by
September 30, 1998. The corporate allocation actions were substantially
completed in 1997.
F-32
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes
The Company is included in the consolidated federal income tax return, the
Illinois Unitary return and the Connecticut and the New York combined state
income tax returns of Aetna. Aetna allocates to each member an amount
approximating the tax it would have incurred were it not a member of the
consolidated group, and credits the member for the use of its tax saving
attributes used in the consolidated federal income tax return.
Income taxes for the years ended December 31, consist of:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(millions)
<S> <C> <C> <C>
Current taxes:
Income Taxes:
Federal income tax $ 64.5 $ 50.9 $ 82.9
State income tax 3.7 3.7 3.2
Net realized capital gains 45.6 25.3 28.5
------- ------- -------
113.8 79.9 114.6
------- ------- -------
Deferred taxes (benefits):
Income taxes:
Federal 8.4 ( 3.5) (14.4)
Net realized capital gains (losses) (32.8) (18.6) (12.9)
------- ------- -------
(24.4) (22.1) (27.3)
------- ------- -------
Total $ 89.4 $ 57.8 $ 87.3
======= ======= =======
</TABLE>
Income taxes were different from the amount computed by applying the federal
income tax rate to income before income taxes for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(millions)
<S> <C> <C> <C>
Income before income taxes $ 294.7 $ 198.9 $ 263.2
Tax rate 35% 35% 35%
-------- -------- --------
Application of the tax rate 103.1 69.6 92.1
-------- -------- --------
Tax effect of:
State income tax, net of federal benefit 2.4 2.4 2.1
Excludable dividends (15.9) (8.7) (9.3)
Other, net (0.2) (5.5) 2.4
-------- -------- --------
Income taxes $ 89.4 $ 57.8 $ 87.3
======== ======== ========
</TABLE>
F-33
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at December 31 are presented below:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(millions)
<S> <C> <C>
Deferred tax assets:
Insurance reserves $ 415.8 $ 344.6
Unrealized gains allocable to experience rated contracts 150.1 100.8
Investment losses 6.6 7.5
Postretirement benefits other than pensions 26.3 27.0
Deferred compensation 31.2 25.0
Pension (3.6) 7.6
Restructuring charge 9.5 17.6
Depreciation 3.9 2.6
Other 8.8 9.1
-------- --------
Total gross assets 648.6 541.8
Deferred tax liabilities:
Deferred policy acquisition costs 515.6 482.1
Market discount 5.1 6.8
Net unrealized capital gains 200.5 133.7
Other (0.6) (0.3)
-------- --------
Total gross liabilities 720.6 622.3
-------- --------
Net deferred tax liability $ 72.0 $ 80.5
======== ========
</TABLE>
Net unrealized capital gains and losses are presented in shareholder's equity
net of deferred taxes. As of December 31, 1997 and 1996, no valuation
allowances were required for unrealized capital gains and losses.
The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income that has
not been subject to taxation. As of December 31, 1983, no further additions
could be made to the Policyholders' Surplus Account for tax return purposes
under the Deficit Reduction Act of 1984. The balance in such account was
approximately $17.2 million at December 31, 1997. This amount would be taxed
only under certain conditions. No income taxes have been provided on this
amount since management believes the conditions under which such taxes would
become payable are remote.
The Internal Revenue Service ("Service") has completed examinations of the
consolidated federal income tax returns of Aetna through 1990. Discussions are
being held with the Service with respect to proposed adjustments. Management
believes there are adequate defenses against, or sufficient
F-34
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
reserves to provide for, any such adjustments. The Service has commenced its
examinations for the years 1991 through 1994.
9. Benefit Plans
Employee Pension Plans--The Company, in conjunction with Aetna, has
noncontributory defined benefit pension plans covering substantially all
employees. The plans provide pension benefits based on years of service and
average annual compensation (measured over 60 consecutive months of highest
earnings in a 120-month period). Contributions are determined using the
Projected Unit Credit Method and, for qualified plans subject to ERISA
requirements, are limited to amounts that are tax-deductible. As of December
31, 1997, Aetna's accrued pension cost has been allocated to its subsidiaries,
including the Company, under an allocation based on eligible salaries. Data on
a separate company basis regarding the proportionate share of the projected
benefit obligation and plan assets is not available. The accumulated benefit
obligation and plan assets are recorded by Aetna. As of the measurement date
(i.e., September 30), the accumulated plan assets exceeded accumulated plan
benefits. Allocated pretax charges to operations for the pension plan (based on
the Company's total salary cost as a percentage of Aetna's total salary cost)
were $2.7 million, $4.3 million and $6.1 million for the years ended December
31, 1997, 1996 and 1995, respectively.
Employee Postretirement Benefits--In addition to providing pension benefits,
Aetna currently provides certain health care and life insurance benefits for
retired employees. A comprehensive medical and dental plan is offered to all
full-time employees retiring at age 50 with 15 years of service or at age 65
with 10 years of service. There is a cap on the portion of the cost paid by the
Company relating to medical and dental benefits. Retirees are generally
required to contribute to the plans based on their years of service with Aetna.
The costs to the Company associated with the Aetna postretirement plans for
1997, 1996 and 1995 were $2.7 million, $1.8 million and $1.4 million,
respectively.
As of December 31, 1996, Aetna transferred to the Company approximately $77.7
million of accrued liabilities, primarily related to the pension and
postretirement benefit plans described above, that had been previously recorded
by Aetna. The after tax amount of this transfer (approximately $50.5 million)
is reported as a reduction in retained earnings. In 1997, other changes in
shareholder's equity includes an additional $0.8 million reduction reflecting
revisions to the allocation of these accrued liabilities.
Agent Pension Plans--The Company, in conjunction with Aetna, has a
non-qualified pension plan covering certain agents. The plan provides pension
benefits based on annual commission earnings. As of the measurement date (i.e.,
September 30), the accumulated plan assets exceeded accumulated plan benefits.
Agent Postretirement Benefits--The Company, in conjunction with Aetna, also
provides certain postretirement health care and life insurance benefits for
certain agents. The costs to the Company associated with the agents'
postretirement plans for 1997, 1996 and 1995 were $0.6 million, $0.7 million
and $0.8 million, respectively.
F-35
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
9. Benefits Plans (Continued)
Incentive Savings Plan--Substantially all employees are eligible to participate
in a savings plan under which designated contributions, which may be invested
in common stock of Aetna or certain other investments, are matched, up to 5% of
compensation, by Aetna. Pretax charges to operations for the incentive savings
plan were $4.4 million, $5.4 million and $4.9 million in 1997, 1996 and 1995,
respectively.
Stock Plans--Aetna has a stock incentive plan that provides for stock options,
deferred contingent common stock or equivalent cash awards or restricted stock
to certain key employees. Executive and middle management employees may be
granted options to purchase common stock of Aetna at or above the market price
on the date of grant. Options generally become 100% vested three years after
the grant is made, with one-third of the options vesting each year. Aetna does
not recognize compensation expense for stock options granted at or above the
market price on the date of grant under its stock incentive plans. In addition,
executives may be granted incentive units which are rights to receive common
stock or an equivalent value in cash. The incentive units may vest within a
range from 0% to 175% at the end of a four year period based on the attainment
of performance goals. The costs to the Company associated with the Aetna stock
plans for 1997, 1996 and 1995, were $2.9 million, $8.1 million and $6.3
million, respectively. As of December 31, 1996, Aetna transferred to the
Company approximately $1.1 million of deferred tax benefits related to stock
options. This amount is reported as an increase in retained earnings. In 1997,
other changes in shareholder's equity include an additional increase of $2.3
million reflecting revisions to the allocation of the deferred tax benefit.
10. Related Party Transactions
The Company is compensated by the Separate Accounts for bearing mortality and
expense risks pertaining to variable life and annuity contracts. Under the
insurance contracts, the Separate Accounts pay the Company a daily fee which,
on an annual basis, ranges, depending on the product, from 0.10% to 1.90% of
their average daily net assets. The Company also receives fees from Aetna
managed mutual funds for serving as investment adviser. Under the advisory
agreements, these funds pay the Company a daily fee which, on an annual basis,
ranges, depending on the fund, from 0.25% to 0.85% of their average daily net
assets. The Company also receives fees (expressed as a percentage of the
average daily net assets) from some of its funds for providing administration
services, and from The Aetna Series Fund for providing shareholder services and
promoting sales. The amount of compensation and fees received from the Separate
Accounts and mutual funds, included in charges assessed against policyholders,
amounted to $271.2 million, $186.8 million and $128.1 million in 1997, 1996 and
1995, respectively. The Company may waive advisory fees at its discretion.
The Company acts as an investment adviser for its affiliated mutual funds.
Since August 1996, Aeltus Investment Management, Inc. ("Aeltus"), a wholly
owned subsidiary of HOLDCO and an affiliate of the Company, has been acting as
Subadvisor for affiliated mutual funds and adviser for most of the General
Account assets. Fees paid by the Company to Aeltus, included in both charges
assessed against policyholders and net investment income, on an annual basis,
range from 0.06% to 0.55% of the
F-36
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
average daily net assets under management. For the years ended December 31,
1997 and 1996, the Company paid $45.5 million and $16.0 million in such fees.
The Company may, from time to time, make reimbursements to an Aetna managed
mutual fund for some or all of its operating expenses. Reimbursement
arrangements may be terminated at any time without notice.
Since 1981, all domestic individual non-participating life insurance of Aetna
and its subsidiaries has been issued by the Company. Effective December 31,
1988, the Company entered into a reinsurance agreement with Aetna Life
Insurance Company ("Aetna Life") in which substantially all of the non-
participating individual life and annuity business written by Aetna Life prior
to 1981 was assumed by the Company. A $6.1 million and a $108.0 million
commission, paid by the Company to Aetna Life in 1996 and 1988, respectively,
was capitalized as deferred policy acquisition costs. In consideration for the
assumption of this business, a loan was established relating to the assets held
by Aetna Life which support the insurance reserves. Effective January 1, 1997,
this agreement has been amended to transition (based on underlying investment
rollover in Aetna Life) from a modified coinsurance to a coinsurance
arrangement. As a result of this change, reserves will be ceded to the Company
from Aetna Life as investment rollover occurs and the loan previously
established will be reduced. The Company maintained insurance reserves of
$574.5 million ($397.2 million relating to the modified coinsurance agreement
and $177.3 million relating to the coinsurance agreement) and $628.3 million as
of December 31, 1997 and 1996, respectively, relating to the business assumed.
The fair value of the loan relating to assets held by Aetna Life was $412.3
million and $625.3 million as of December 31, 1997 and 1996, respectively, and
is based upon the fair value of the underlying assets. Premiums of $176.7
million, $25.3 million and $28.0 million and current and future benefits of
$183.9 million, $39.5 million and $43.0 million were assumed in 1997, 1996 and
1995, respectively.
Investment income of $37.5 million, $44.1 million and $46.5 million was
generated from the reinsurance loan to affiliate in 1997, 1996 and 1995,
respectively.
On December 16, 1988, the Company assumed $25.0 million of premium revenue from
Aetna Life for the purchase and administration of a life contingent single
premium variable payout annuity contract. In addition, the Company also is
responsible for administering fixed annuity payments that are made to
annuitants receiving variable payments. Reserves of $32.5 million and $28.9
million were maintained for this contract as of December 31, 1997 and 1996,
respectively.
Effective February 1, 1992, the Company increased its retention limit per
individual life to $2.0 million and entered into a reinsurance agreement with
Aetna Life to reinsure amounts in excess of this limit, up to a maximum of $8.0
million on any new individual life business, on a yearly renewable term basis.
Premium amounts related to this agreement were $5.9 million, $5.2 million and
$3.2 million for 1997, 1996 and 1995, respectively.
F-37
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
Effective October 1, 1997, the Company entered into a reinsurance agreement
with Aetna Life to assume amounts in excess of $0.2 million for certain of its
participating life insurance, on a yearly renewable term basis. Premium amounts
related to this agreement were $0.7 million in 1997.
The Company received a capital contribution of $10.4 million in cash from
HOLDCO in 1996. The Company received no capital contributions in 1997 or 1995.
The Company paid $17.3 million and $3.5 million in cash dividends to HOLDCO in
1997 and 1996, respectively. In 1995, the Company dividended $2.9 million in
the form of two of its subsidiaries, Systematized Benefits Administrators, Inc.
and Aetna Investment Services, Inc., to Aetna Retirement Services, Inc. (the
Company's former parent).
Premiums due and other receivables include $37.0 million and $2.8 million due
from affiliates in 1997 and 1996, respectively. Other liabilities include $1.2
million and $10.7 million due to affiliates for 1997 and 1996, respectively.
As of December 31, 1997, Aetna transferred to the Company $2.5 million based on
its decision not to settle state tax liabilities for the years 1996 and 1997.
This amount has been reported as an other increase in retained earnings.
Substantially all of the administrative and support functions of the Company
are provided by Aetna and its affiliates. The financial statements reflect
allocated charges for these services based upon measures appropriate for the
type and nature of service provided.
11. Reinsurance
The Company utilizes indemnity reinsurance agreements to reduce its exposure to
large losses in all aspects of its insurance business. Such reinsurance permits
recovery of a portion of losses from reinsurers, although it does not discharge
the primary liability of the Company as direct insurer of the risks reinsured.
The Company evaluates the financial strength of potential reinsurers and
continually monitors the financial condition of reinsurers. Only those
reinsurance recoverables deemed probable of recovery are reflected as assets on
the Company's Consolidated Balance Sheets.
F-38
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
11. Reinsurance (Continued)
The following table includes premium amounts ceded/assumed to/from affiliated
companies as discussed in Note 10 above.
<TABLE>
<CAPTION>
Ceded to Assumed
Direct Other from Other Net
Amount Companies Companies Amount
---------- ----------- ------------ -----------
(millions)
<S> <C> <C> <C> <C>
1997
- ----
Premiums:
Life Insurance $ 35.7 $ 15.1 $ 177.4 $ 198.0
Accident and Health Insurance 5.6 5.6 -- --
Annuities 67.9 -- 1.2 69.1
------- ------- -------- --------
Total earned premiums $ 109.2 $ 20.7 $ 178.6 $ 267.1
======= ======= ======== ========
1996
- ----
Premiums:
Life Insurance $ 34.6 $ 11.2 $ 25.3 $ 48.7
Accident and Health Insurance 6.3 6.3 -- --
Annuities 84.3 -- 0.6 84.9
------- ------- -------- --------
Total earned premiums $ 125.2 $ 17.5 $ 25.9 $ 133.6
======= ======= ======== ========
1995
- ----
Premiums:
Life Insurance $ 28.8 $ 8.6 $ 28.0 $ 48.2
Accident and Health Insurance 7.5 7.5 -- --
Annuities 164.0 -- 0.5 164.5
------- ------- -------- --------
Total earned premiums $ 200.3 $ 16.1 $ 28.5 $ 212.7
======= ======= ======== ========
</TABLE>
12. Commitments and Contingent Liabilities
Commitments
Through the normal course of investment operations, the Company commits to
either purchase or sell securities or money market instruments at a specified
future date and at a specified price or yield. The inability of counterparties
to honor these commitments may result in either higher or lower replacement
cost. Also, there is likely to be a change in the value of the securities
underlying the commitments. At December 31, 1997, the Company had commitments
to purchase investments of $38.7 million. The fair value of the investments at
December 31, 1997 approximated $39.0 million.
F-39
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
12. Commitments and Contingent Liabilities (Continued)
Litigation
The Company is involved in numerous lawsuits arising, for the most part, in the
ordinary course of its business operations. While the ultimate outcome of
litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related reserves
established, it is not expected to result in liability for amounts material to
the financial condition of the Company, although it may adversely affect
results of operations in future periods.
13. Segment Information (1)
The Company's operations are reported through two major business segments:
Financial Services and Individual Life Insurance.
Summarized financial information for the Company's principal operations was as
follows:
<TABLE>
<CAPTION>
(millions) 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Financial Services $ 1,277.9 $ 1,195.1 $ 1,211.3
Individual Life Insurance 620.4 445.7 407.9
---------- ---------- ----------
Total revenue $ 1,898.3 $ 1,640.8 $ 1,619.2
- ----------------------------------------------------------------------------------
Income before income taxes: (2)
Financial Services $ 188.2 $ 129.9 $ 160.1
Individual Life Insurance 106.5 83.0 103.1
---------- ---------- ----------
Total income before income taxes $ 294.7 $ 212.9 $ 263.2
- ----------------------------------------------------------------------------------
Net income: (2)
Financial Services $ 137.5 $ 94.3 $ 113.8
Individual Life Insurance 67.8 55.9 62.1
---------- ---------- ----------
Net income $ 205.3 $ 150.2 $ 175.9
- ----------------------------------------------------------------------------------
Assets under management: (3)
Financial Services (4) $ 37,609.3 $ 27,268.1 $ 22,534.4
Individual Life Insurance 3,096.1 2,830.5 2,590.9
- ------------------------------------ ---------- ---------- ----------
Total assets under management 40,705.4 $ 30,098.6 $ 25,125.3
- ----------------------------------------------------------------------------------
</TABLE>
(1) The 1996 results include severance and facilities charges of $30.7 million,
after tax. Of this charge $21.5 million related to the Financial Services
segment and $9.2 million related to the Individual Life Insurance segment.
(2) Excludes any effect of the corporate facilities and severance charge
recorded in 1996 which is not directly allocable to the Financial Services
and Individual Life Insurance segments. (Refer to Note 7).
(3) Excludes net unrealized capital gains (losses) of $551.5 million, $366.4
million and $797.1 million at December 31, 1997, 1996 and 1995,
respectively.
F-40
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
13. Segment Information (1) (Continued)
(4) The December 31, 1997 balance includes the transfer of $4,078.5 million of
assets under management that were previously reported by an affiliate.
F-41
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section.
UNDERTAKING PURSUANT TO RULE 484
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
REPRESENTATION PURSUANT TO SECTION 26(e)(2)(A) OF
THE INVESTMENT COMPANY ACT OF 1940
Aetna Life Insurance and Annuity Company represents that the fees and charges
deducted under the policies covered by this registration statement, in the
aggregate, are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the insurance company.
CONTENTS OF POST-EFFECTIVE AMENDMENT NO. 1 TO
THE REGISTRATION STATEMENT
This Post-Effective Amendment No. 1 to Registration Statement No. 333-27337 is
comprised of the following papers and documents:
o The facing sheet.
o One Prospectus for the AetnaVest Estate Protector II Variable
Life Insurance Policy consisting of 109 pages
o The undertaking to file reports
<PAGE>
o The undertaking pursuant to Rule 484
o Representation pursuant to Section 26(e)(2)(A) of the Investment Company Act
of 1940
o The signatures
o Written consents of the following persons:
A. Consent of Counsel (included as part of Exhibit No. 2 below)
B. Actuarial Consent (included as part of Exhibit No. 6 below)
C. Consent of Independent Auditors (included as Exhibit No. 7 below)
The following Exhibits:
1. Exhibits required by paragraph A of instructions to exhibits for
Form N-8B-2:
(1) Resolution establishing Variable Life Account B(1)
(2) Not Applicable
(3)(i) Master General Agent Agreement(1)
(3)(ii) Life Insurance General Agent Agreement(1)
(3)(iii) Broker Agreement(1)
(3)(iv) Life Insurance Broker-Dealer Agreement(1)
(4) Not Applicable
(5)(i) AetnaVest Estate Protector II Policy (70225-97)
(5)(ii) Disability Benefit Rider (70226-97)
(5)(iii) Split Option Amendment Rider (70227-95)
(5)(iv) Four Year Term Rider (70228-95)
(6)(i) Certificate of Incorporation of Aetna Life Insurance
and Annuity Company(2)
(6)(ii) Amendment of Certificate of Incorporation of Aetna Life
Insurance and Annuity Company(3)
(6)(iii) By-Laws as amended September 17, 1997
of Aetna Life Insurance and Annuity
Company(4)
(7) Not Applicable
(8)(i) Fund Participation Agreement by and
among Aetna Life Insurance and Annuity
Company and Aetna Variable Fund, Aetna
Variable Encore Fund, Aetna Income
Shares, Aetna Balanced VP, Inc., Aetna
GET Fund on behalf of each of its
series, Aetna Generation Portfolios,
Inc. on behalf of each of its series,
and Aetna Variable Portfolios, Inc. on
behalf of each of its series, and
Aeltus Investment Management, Inc.
dated as of May 1, 1998(5)
(8)(ii) Service Agreement between Aeltus
Investment Management, Inc. and Aetna
Life Insurance and Annuity Company in
connection with the sale of shares of
Aetna Variable Fund, Aetna Variable
Encore Fund, Aetna Income Shares, Aetna
Balanced VP, Inc., Aetna GET Fund on
behalf of each of its series, Aetna
Generation Portfolios, Inc. on behalf
of each of its series, and Aetna
Variable Portfolios, Inc. on behalf of
each of its series dated as of May 1,
1998(5)
(8)(iii) Fund Participation Agreement between
Aetna Life Insurance and Annuity Company,
Variable Insurance Products Fund and
Fidelity Distributors
<PAGE>
Corporation dated February 1, 1994 and
amended on December 15, 1994, February 1,
1995, May 1, 1995, January 1, 1996 and
March 1, 1996(3)
(8)(iv) Fifth Amendment, dated as of May 1,
1997, to the Fund Participation
Agreement between Aetna Life Insurance
and Annuity Company, Variable Insurance
Products Fund and Fidelity Distributors
Corporation dated February 1, 1994 and
amended on December 15, 1994, February
1, 1995, May 1, 1995, January 1, 1996
and March 1, 1996(6)
(8)(v) Sixth Amendment dated November 6, 1997
to the Fund Participation Agreement
between Aetna Life Insurance and
Annuity Company, Variable Insurance
Products Fund and Fidelity Distributors
Corporation dated February 1, 1994 and
amended on December 15, 1994, February
1, 1995, May 1, 1995, January 1, 1996,
March 1, 1996 and May 1, 1997(7)
(8)(vi) Seventh Amendment dated as of May 1,
1998 to the Fund Participation
Agreement between Aetna Life Insurance
and Annuity Company, Variable Insurance
Products Fund and Fidelity Distributors
Corporation dated February 1, 1994 and
amended on December 15, 1994, February
1, 1995, May 1, 1995, January 1, 1996,
March 1, 1996, May 1, 1997 and November
6, 1997(8)
(8)(vii) Fund Participation Agreement between
Aetna Life Insurance and Annuity
Company, Variable Insurance Products
Fund II and Fidelity Distributors
Corporation dated February 1, 1994 and
amended on December 15, 1994, February
1, 1995, May 1, 1995, January 1, 1996
and March 1,1996(3)
(8)(viii) Fifth Amendment, dated as of May 1,
1997, to the Fund Participation
Agreement between Aetna Life Insurance
and Annuity Company, Variable Insurance
Products Fund II and Fidelity
Distributors Corporation dated February
1, 1994 and amended on December 15,
1994, February 1, 1995, May 1, 1995,
January 1, 1996 and March 1, 1996(6)
(8)(ix) Sixth Amendment dated as of January 20,
1998 to the Fund Participation
Agreement between Aetna Life Insurance
and Annuity Company, Variable Insurance
Products Fund II and Fidelity
Distributors Corporation dated February
1, 1994 and amended on December 15,
1994, February 1, 1995, May 1, 1995,
January 1, 1996, March 1, 1996 and May
1, 1997(9)
(8)(x) Seventh Amendment dated as of May 1,
1998 to the Fund Participation
Agreement between Aetna Life Insurance
and Annuity Company, Variable Insurance
Products Fund II and Fidelity
Distributors Corporation dated February
1, 1994 and amended on December 15,
1994, February 1, 1995, May 1, 1995,
January 1, 1996, March 1, 1996, May 1,
1997 and January 20, 1998(8)
(8)(xi) Service Agreement between Aetna Life
Insurance and Annuity Company and
Fidelity Investments Institutional
Operations Company dated as of November
1, 1995(10)
(8)(xii) Amendment dated January 1, 1997 to
Service Agreement between Aetna Life
Insurance and Annuity Company and
Fidelity Investments Institutional
Operations Company dated as of November
1, 1995(6)
<PAGE>
(8)(xiii) Fund Participation Agreement among
Janus Aspen Series and Aetna Life
Insurance and Annuity Company and Janus
Capital Corporation dated December 8,
1997(11)
(8)(xiv) Service Agreement between Janus Capital
Corporation and Aetna Life Insurance
and Annuity Company dated December 8,
1997(11)
(8)(xv) Fund Participation Agreement between
Aetna Life Insurance and Annuity
Company and Oppenheimer Variable
Annuity Account Funds and Oppenheimer
Funds, Inc.(12)
(8)(xvi) Service Agreement between Oppenheimer
Funds, Inc. and Aetna Life Insurance
and Annuity Company(12)
(9) Not Applicable
(10)(i) Application (70059-96)(13)
(10)(ii) Application (70059-96ZNY)(13)
(10)(iii) Supplement (70268-97) to Application 70059-96(13)
(11) Issuance, Transfer and Redemption Procedures(14)
2. Opinion and Consent of Counsel
3. Not Applicable
4. Not Applicable
5. Not Applicable
6. Actuarial Opinion and Consent
7. Consent of Independent Auditors
8. Copy of Power of Attorney(15)
1. Incorporated by reference to Post-Effective Amendment No. 2
to Registration Statement on Form S-6 (File No. 33-76004),
as filed electronically on February 16, 1996 (Accession
No. 0000912057-96-0027723).
2. Incorporated by reference to Post-Effective Amendment No.
12 to Registration Statement on Form N-4 (File No.
33-75964), as filed electronically on February 11, 1997
(Accession No. 0000950146-97-000159).
3. Incorporated by reference to Post-Effective Amendment
No. 5 to Registration Statement on Form N-4
(File No. 33-75986), as filed electronically on
April 12, 1996 (Accession No. 0000912057-96-006383).
4. Incorporated by reference to Post-Effective Amendment No.
12 to Registration Statement on Form N-4 (File No.
33-91846), as filed electronically on October 30, 1997
(Accession No. 0000950146-97-001589).
5. Incorporated by reference to Registration Statement on Form
N-4 (File No. 333-56297), as filed electronically on June
8, 1998 (Accession No. 0000950146-98-000983).
6. Incorporated by reference to Post-Effective Amendment No.
30 to Registration Statement on Form N-4 (File No.
33-34370), as filed electronically on September 29, 1997
(Accession No. 0000950146-97-001485).
7. Incorporated by reference to Post-Effective Amendment No.
16 to Registration Statement on Form N-4 (File No.
33-75964), as filed electronically on February 9, 1998
(Accession No. 0000950146-98-000179).
<PAGE>
8. Incorporated by reference to Registration Statement on Form
N-4 (File No. 333-56297), as filed electronically on June
8, 1998 (Accession No. 0000950146-98-000983).
9. Incorporated by reference to Post-Effective Amendment No. 7
to Registration Statement on Form S-6 (File No. 33-75248),
as filed electronically on February 24, 1998 (Accession No.
0000950146-98-000267).
10. Incorporated by reference to Post-Effective Amendment No. 3
to Registration Statement on Form N-4 (File No. 33-88720),
as filed electronically on June 28, 1996 (Accession
No. 0000928389-96-000136).
11. Incorporated by reference to Post-Effective Amendment No.
10 to Registration Statement on Form N-4 (File No.
33-75992), as filed electronically on December 31, 1997
(Accession No. 0000950146-97-001982).
12. Incorporated by reference to Post-Effective Amendment No.
27 to Registration Statement on Form N-4 (File No.
33-34370), as filed electronically on April 16, 1997
(Accession No. 0000950146-97-000617).
13. Incorporated by reference to Post-Effective Amendment No. 3
to Registration Statement on Form N-4 (File No. 33-64277),
as filed electronically on February 25, 1998 (Accession No.
0000950146-98-000271).
14. Incorporated by reference to Registration Statement on Form
S-6 (File No. 333-27337), as filed electronically on May
16, 1997 (Accession No. 001029869-97-000636).
15. Incorporated by reference to Pre-Effective Amendment No. 1
to Registration Statement on Form N-4 (File No. 333-56297),
as filed electronically on August 4, 1998 (Accession No.
0000950146-98-001283). A certified copy of the Resolution
adopted by the Depositor's Board of Directors authorizing
filings pursuant to a Power of Attorney, as required by
Rule 478 under the Securities Act of 1933 is incorporated
by reference to Post-Effective Amendment No. 5 to
Registration Statement on Form N-4 (File No. 33-75986), as
filed electronically on April 12, 1996 (Accession No.
0000650146-96-006383).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Variable Life Account B of Aetna Life Insurance and Annuity Company, certifies
that it meets the requirements of Securities Act Rule 485(b) for effectiveness
of this Post-Effective Amendment to its Registration Statement on Form S-6 (File
No. 333-27337) and has duly caused this Post-Effective Amendment 1 to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, and the seal of the Depositor to be hereunto affixed and
attested, all in the City of Hartford, and State of Connecticut, on this 22nd
day of September, 1998.
VARIABLE LIFE ACCOUNT B OF
AETNA LIFE INSURANCE AND
ANNUITY COMPANY
(Registrant)
(SEAL)
ATTEST: /s/ Karen A. Peddle
-----------------------------
Karen A. Peddle
Assistant Corporate Secretary
By: AETNA LIFE INSURANCE AND
ANNUITY COMPANY
(Depositor)
By: Thomas J. McInerney*
--------------------------------
Thomas J. McInerney
Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to the Registration Statement has
been signed below by the following persons in the capacities
indicated and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Thomas J. McInerney* Director and President )
- --------------------------- (Principal Executive Officer )
Thomas J. McInerney )
) September
) 22, 1998
Catherine H. Smith Director and )
- --------------------------- Chief Financial Officer )
Catherine H. Smith )
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
)
Shaun P. Mathews* Director )
- --------------------------- )
Shaun P. Mathews )
)
)
Deborah Koltenuk* Vice President, Treasurer and )
- --------------------------- Corporate Controller )
Deborah Koltenuk )
</TABLE>
By: /s/ Julie E. Rockmore
---------------------------
Julie E. Rockmore
*Attorney-in-Fact
<PAGE>
VARIABLE LIFE ACCOUNT B
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
- ----------- ------- ----
<S> <C> <C>
99-1.1 Resolution of the Board of Directors of Aetna Life *
Insurance and Annuity Company establishing Variable
Life Account B
99-1.3(i) Master General Agent Agreement *
99-1.3(ii) Life Insurance General Agent Agreement *
99-1.3(iii) Broker-Dealer Agreement *
99-1.3(iv) Life Insurance Broker-Dealer Agreement *
99-1.5(i) AetnaVest Estate Protector II Policy (70225-97) -------
99-1.5(ii) Disability Benefit Rider (70226-97) -------
99-1.5(iii) Split Option Amendment Rider (70227-95) -------
99-1.5(iv) Four Year Term Rider (70228-95) -------
99-1.6(i) Certification of Incorporation and By-Laws of *
Depositor
99-1.6(ii) Amendment of Certificate of Incorporation of Aetna *
Life Insurance and Annuity Company
99-1.6(iii) By-Laws as amended September 17, 1997 of Aetna Life *
Insurance and Annuity Company
99-1.8(i) Fund Participation Agreement by and among Aetna Life *
Insurance and Annuity Company and Aetna Variable
Fund, Aetna Variable Encore Fund, Aetna Income
Shares, Aetna Balanced VP, Inc., Aetna GET Fund on
behalf of each of its series, Aetna Generation
Portfolios, Inc. on behalf of each of its series,
and Aetna Variable Portfolios, Inc. on behalf of
each of its series, and Aeltus Investment
Management, Inc. dated as of May 1, 1998
</TABLE>
*Incorporated by reference
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
- ----------- ------- ----
<S> <C> <C>
99-1.8(ii) Service Agreement between Aeltus Investment *
Management, Inc. and Aetna Life Insurance and
Annuity Company in connection with the sale of
shares of Aetna Variable Fund, Aetna Variable
Encore Fund, Aetna Income Shares, Aetna Balanced
VP, Inc., Aetna GET Fund on behalf of each of its
series, Aetna Generation Portfolios, Inc. on
behalf of each of its series, and Aetna Variable
Portfolios, Inc. on behalf of each of its series
dated as of May 1, 1998
99-1.8(iii) Fund Participation Agreement between Aetna Life *
Insurance and Annuity Company, Variable
Insurance Products Fund and Fidelity Distributors
Corporation dated February 1, 1994 and amended on
December 15, 1994, February 1, 1995, May 1, 1995,
January 1, 1996 and March 1, 1996
99-1.8(iv) Fifth Amendment, dated as of May 1, 1997, to the *
Fund Participation Agreement between Aetna Life
Insurance and Annuity Company, Variable Insurance
Products Fund and Fidelity Distributors
Corporation dated February 1, 1994 and amended on
December 15, 1994, February 1, 1995, May 1, 1995,
January 1, 1996 and March 1, 1996
99-1.8(v) Sixth Amendment dated November 6, 1997 to the *
Fund Participation Agreement between Aetna Life
Insurance and Annuity Company, Variable Insurance
Products Fund and Fidelity Distributors
Corporation dated February 1, 1994 and amended on
December 15, 1994, February 1, 1995, May 1, 1995,
January 1, 1996, March 1, 1996 and May 1, 1997
99-1.8(vi) Seventh Amendment dated as of May 1, 1998 to the *
Fund Participation Agreement between Aetna Life
Insurance and Annuity Company, Variable Insurance
Products Fund and Fidelity Distributors
Corporation dated February 1, 1994 and amended on
December 15, 1994, February 1, 1995, May 1, 1995,
January 1, 1996, March 1, 1996, May 1, 1997 and
November 6, 1997
</TABLE>
*Incorporated by reference
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
- ----------- ------- ----
<S> <C> <C>
99-1.8(vii) Fund Participation Agreement between Aetna *
Life Insurance and Annuity Company, Variable
Insurance Products Fund II and Fidelity
Distributors Corporation dated February 1, 1994
and amended on December 15, 1994, February 1,
1995, May 1, 1995, January 1, 1996 and March
1,1996
99-1.8(viii) Fifth Amendment, dated as of May 1, 1997, to the *
Fund Participation Agreement between Aetna Life
Insurance and Annuity Company, Variable Insurance
Products Fund II and Fidelity Distributors
Corporation dated February 1, 1994 and amended on
December 15, 1994, February 1, 1995, May 1, 1995,
January 1, 1996, and March 1, 1996
99-1.8(ix) Sixth Amendment dated as of January 20, 1998 to *
the Fund Participation Agreement between Aetna
Life Insurance and Annuity Company, Variable
Insurance Products Fund II and Fidelity
Distributors Corporation dated February 1, 1994
and amended on December 15, 1994, February 1,
1995, May 1, 1995, January 1, 1996, March 1, 1996
and May 1, 1997
99-1.8(x) Seventh Amendment dated as of May 1, 1998 to the *
Fund Participation Agreement between Aetna Life
Insurance and Annuity Company, Variable Insurance
Products Fund II and Fidelity Distributors
Corporation dated February 1, 1994 and amended on
December 15, 1994, February 1, 1995, May 1, 1995,
January 1, 1996, March 1, 1996, May 1, 1997 and
January 20, 1998
99-1.8(xi) Service Agreement between Aetna Life Insurance *
and Annuity Company and Fidelity Investments
Institutional Operations Company dated as of
November 1, 1995
99-1.8(xii) Amendment dated January 1, 1997 to Service *
Agreement between Aetna Life Insurance and Annuity
Company and Fidelity Investments Institutional
Operations Company dated as of November 1, 1995
99-1.8(xiii) Fund Participation Agreement among Janus Aspen *
Series and Aetna Life Insurance and Annuity
Company and Janus Capital Corporation dated
December 8, 1997
</TABLE>
*Incorporated by reference
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
- ----------- ------- ----
<S> <C> <C>
99-1.8(xiv) Service Agreement between Janus Capital *
Corporation and Aetna Life Insurance and Annuity
Company dated December 8, 1997
99-1.8(xv) Fund Participation Agreement between Aetna Life *
Insurance and Annuity Company and Oppenheimer
Variable Annuity Account Funds and Oppenheimer
Funds, Inc.
99-1.8(xvi) Service Agreement between Oppenheimer Funds, *
Inc. and Aetna Life Insurance and Annuity Company
99-1.10(i) Application (70059-96) *
99-1.10(ii) Application (70059-96ZNY) *
99-1.10(iii) Supplement (70268-97) to Application 70059-96 *
99-1.11 Issuance, Transfer and Redemption Procedures *
99-2 Opinion and Consent of Counsel -----
99-6 Actuarial Opinion and Consent -----
99-7 Consent of Independent Auditors -----
99-8 Copy of Power of Attorney *
</TABLE>
*Incorporated by reference
AETNA LIFE INSURANCE AND ANNUITY COMPANY
Hartford, Connecticut 06156
(A STOCK COMPANY)
While this Policy is in force, Aetna will pay Proceeds subject
to all of this Policy's provisions. Other rights and benefits
are provided as described in this Policy. The provisions of this John Doe
and the following pages are part of this Policy. Mary Doe
THIS POLICY IS A LEGAL CONTRACT BETWEEN YOU AND AETNA
PLEASE READ YOUR POLICY CAREFULLY
RIGHT OF POLICY EXAMINATION
This Policy may be returned to Aetna or its representative within 10 days after
its receipt. Return this Policy to Aetna, Individual Life Insurance, at 151
Farmington Avenue, Hartford, Connecticut 06156. Upon its return, this Policy
will be deemed void from its beginning. The amount refunded will be:
1. the difference between payments made and amounts allocated to Variable Life
Account B; plus
2. the value of amounts allocated to Variable Life Account B on the date the
returned contract is received by Aetna; plus
3. any charges made under this Policy's terms on the amounts allocated to
Variable Life Account B.
Signed for Aetna on its Date of Issue.
/s/ Kirk P. Wickman /s/ Thomas J. McInerney
Secretary President
-------------------
Registrar
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY ON THE LIVES OF TWO INSUREDS
o FLEXIBLE PREMIUMS PAYABLE UNTIL MATURITY DATE OR SECOND DEATH
o PROCEEDS PAYABLE UPON THE FIRST EVENT TO OCCUR - SURRENDER, MATURITY OR
SECOND DEATH
o NON-PARTICIPATING - NO DIVIDENDS PAYABLE
The amount or duration of the death benefit may be fixed or variable. The death
benefit is payable as described in the Death Benefit Options and Proceeds
sections of this Policy.
Values in each Fund held in a Separate Account may increase or decrease daily.
Such values are not guaranteed as to dollar amount. Refer to the Policy Values
section of this Policy for more information.
(70225-97)
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
- -------------------------------------------------------------------------------
Page No.
<S> <C>
Policy Specifications . . . . . . . . . . . . . . . . . . . . . . . . . . PS1
Policy Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Attained Age. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Basic Monthly Premium.. . . . . . . . . . . . . . . . . . . . . . . . 1
Date of Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Fixed Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Fixed Account Value . . . . . . . . . . . . . . . . . . . . . . . . . 2
Fund(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Guaranteed Death Benefit. . . . . . . . . . . . . . . . . . . . . . . 2
Home Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Initial Coverage. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Loan Account Value. . . . . . . . . . . . . . . . . . . . . . . . . . 2
Maturity Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Minimum Specified Amount. . . . . . . . . . . . . . . . . . . . . . . 2
Monthly Deduction Day . . . . . . . . . . . . . . . . . . . . . . . . 2
Net Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Net Single Premium . . . . . . . . . . . . . . . . . . . . . . . . . 2
Policy Month. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Policy Year/Policy Anniversary. . . . . . . . . . . . . . . . . . . . 2
Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Second Death. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Separate Account(s) . . . . . . . . . . . . . . . . . . . . . . . . . 3
Separate Account Value. . . . . . . . . . . . . . . . . . . . . . . . 3
Specified Amount. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Subsequent Application(s) . . . . . . . . . . . . . . . . . . . . . . 3
Surviving Insured. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Total Account Value. . . . . . . . . . . . . . . . . . . . . . . . . 3
Valuation Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Valuation Period. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Variable Annuity Account B. . . . . . . . . . . . . . . . . . . . . . 3
Variable Life Account B . . . . . . . . . . . . . . . . . . . . . . . 3
Variable Option . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
We, Our, Us, Company . . . . . . . . . . . . . . . . . . . . . . . . 3
Written Request . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
You, Your . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Changes in Owner and Beneficiary. . . . . . . . . . . . . . . . . . . 4
Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Non-Participating. . . . . . . . . .. . . . . . . . . . . . . . . . . 5
Policy Settlement. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Age and/or Sex . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Change of Address. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Annual Report. . . . . .. . . . . . . . . . . . . . . . . . . . . . . 5
Projection of Benefits. . . . . . . . . . . . . . . . . . . . . . . . 5
Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Coverage Beyond Maturity. . . . . . . . . . . . . . . . . . . . . . . 6
Right to Defer Payment. . . . . . . . . . . . . . . . . . . . . . . . 6
Suicide and Incontestability. . . . . . . . . . . . . . . . . . . . . . . 7
Suicide Exclusion. . . . . . . . . . . . . . . . . . . . . . . . . . 7
Incontestability. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Premiums and Reinstatement . . . . . . . . . . . . . . . . . . . . . . . 8
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Planned Premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Additional Premiums. . . . . . . . . . . . . . . . . . . . . . . . . 8
Allocation of Premium. . . . . . . . . . . . . . . . . . . . . . . . 8
Changes in Allocation Percentages. . . . . . . . . . . . . . . . . . 8
No Lapse Coverage. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Grace Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Reinstatement. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Death Benefit Options. . . . . . . . . . . . . . . . . . . . . . . . . . 10
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Option 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Option 2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Guaranteed Death Benefit. . . . . . . . . . . . . . . . . . . . . . . . . 10
Policy Values. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Basis of Calculation. . . . . . . . . . . . . . . . . . . . . . . . 11
Interest Credited. . . . . . . . . . . . . . . . . . . . . . . . . . 11
Fixed Account Value. . . . . . . . . . . . . . . . . . . . . . . . . 11
Separate Account Value. . . . . . . . . . . . . . . . . . . . . . . . 12
Charges to Policy Values. . . . . . . . . . . . . . . . . . . . . . . 12
Transfers Within Accounts. . . . . . . . . . . . . . . . . . . . . . 13
Monthly Deductions. . . . . . . . . . . . . . . . . . . . . . . . . . 13
Cost of Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . 13
Cost of Insurance Rate. . . . . . . . . . . . . . . . . . . . . . . 13
Nonforfeiture Provisions. . . . . . . . . . . . . . . . . . . . . . . . . 14
Continuation of Coverage . . . . . . . . . . . . . . . . . . . . . . 14
Surrender Value. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Surrender Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Partial Surrender. . . . . . . . . . . . . . . . . . . . . . . . . . 14
Paid-Up Nonforfeiture Option. . . . . . . . . . . . . . . . . . . . . 15
Policy Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Preferred Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Loan Interest Rate Charged. . . . . . . . . . . . . . . . . . . . . . 16
Repayment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Changes in Insurance Coverage . . . . . . . . .. . . . . . . . . . . . . 16
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Increase in Specified Amount. . . . . . . . . . . . . . . . . . . . . 16
Decrease in Specified Amount. . . . . . . . . . . . . . . . . . . . 16
Change in Death Benefit Option. . . . . . . . . . . . . . . . . . . . 17
Change from Option 1 to 2. . . . . . . . . . . . . . . . . . . . . . 17
Change from Option 2 to 1. . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
- --------------------------------------------------------------------------------
Page No.
<S> <C>
Change of Fund(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Separate Account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Settlement Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Income Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Option 1 - Interest . . . . . . . . . . . . . . . . . . . . . . . . . 18
Option 2 - Stated Period . . . . . . . . . . . . . . . . . . . . . . 19
Option 3 - Life Income. . . . . . . . . . . . . . . . . . . . . . . . 20
Option 4 - Life Income for Two Payees . . . . . . . . . . . . . . . . 21
Terms of Options. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Betterment of Payments . . . . . . . . . . . . . . . . . . . . . . . 23
Separate Account. . . . . . . . . . .. . . . . . . . . . . . . . . . 23
Fund(s) Settlement Option Units of Variable
Annuity Account B. . . . . . . . . . . . . . . . . . . . . . . . . 23
Fund(s) Settlement Option Unit Value of
Variable Annuity Account B. . . . . . . . . . . . . . . . . . . . . 23
Withdrawal and Death of the Payee . . . . . . . . . . . . . . . . . . 24
</TABLE>
3
<PAGE>
Policy Summary
It is important that You understand Your insurance policy. We have tried to use
understandable language throughout. However, should You have any questions after
You have read it, please call the representative who sold this Policy to You or
call Us. This summary is not a substitute for the detailed policy provisions.
This is a flexible premium variable life insurance policy on the lives of two
insureds. This Policy provides that account values may be invested on either a
fixed or variable or a combination of fixed and variable basis.
You may allocate Net Premiums to the Fixed Account, Variable Life Account B, or
both Accounts. Net Premiums allocated to Variable Life Account B must be
allocated to one or more Variable Options we make available. The Variable
Options support the benefits provided by the variable portion of this Policy.
The Fund Account Value in each Variable Option is not guaranteed and will vary
with the investment performance of the associated Fund.
If the Fixed Account is selected, Net Premiums allocated to that Account will
accumulate at rates of interest We determine. Such rates will not be less than
4% a year.
Proof of the first death should be sent to Us as soon as reasonably possible.
Proceeds as described in this Policy will be paid upon surrender, maturity, or
Second Death.
Sufficient premiums must be paid to continue this Policy in force or to qualify
for the Guaranteed Death Benefit. Premium reminder notices will be sent for
Planned Premiums and for premiums required to continue this Policy in force.
This Policy may be reinstated.
Other rights and benefits are explained in this Policy.
Definitions
Attained Age
Issue age of the Insured as shown in the Policy Specifications, increased by the
number of Policy Years elapsed. Issue age is each Insured's age on his/her
birthday nearest this Policy's Date of Issue.
Basic Monthly Premium
The amount of premium to assure that this Policy remains in force for a period
of at least 5 Policy Years beginning on the Issue Date or the Issue Date of an
Increase.
Date of Issue
The effective date of initial coverage is the Date of Issue shown in the Policy
Specifications. The Date of Issue and the effective date for any change in
coverage will be the Date of Coverage Change shown in the supplemental Policy
Specifications which will be sent to You. Coverage is contingent upon payment of
the first premium and issue of this Policy as provided in the application.
Death Benefit
The amount described in the Death Benefit Options provision which is payable on
the date of the Second Death, subject to all provisions contained in this
Policy.
Fixed Account
A non-variable option available on this Policy that guarantees a minimum
interest rate of 4% per year.
4
<PAGE>
Fixed Account Value
The non-loaned portion of this Policy's Total Account Value attributable to the
non-variable portion of this Policy. The Fixed Account Value is part of the
general assets of the Company.
Fund(s)
One or more of the underlying variable funding options available under the
policy. Each of the funds is an open-end management investment company (mutual
fund) whose shares are purchased by the Separate Account to fund the benefits
provided by the policy.
Guaranteed Death Benefit
A provision that assures that the Policy will stay in force, even if the Total
Account Value is insufficient to cover the current Monthly Deductions. The
Guaranteed Death Benefit is available to the younger Insured's Attained Age 100.
Home Office
Our main office, located at 151 Farmington Avenue, Hartford, Connecticut 06156.
Initial Coverage
Coverage provided by this Policy prior to any change in coverage.
Loan Account Value
The sum of all unpaid loans. The amount necessary to repay all Policy Loans in
full is the Loan Account Value plus any accrued interest.
Maturity Date
The Policy Anniversary on which the younger Insured reaches Attained Age 100.
Minimum Specified Amount
The Specified Amount for this Policy cannot be decreased below this amount. The
Minimum Specified Amount for this Policy is shown in the Policy Specifications.
Monthly Deduction Day
The first Monthly Deduction Day is the Date of Issue. Monthly Deduction Days
occur each month thereafter on the same day of the month as the Date of Issue.
Net Premium
The Net Premium is equal to the premium paid, less the deduction for premium
load.
Net Single Premium
The Net Single Premium is the amount required to purchase a guaranteed benefit
assuming the Policy's Total Account Value is allocated to the Fixed Account,
using the Insureds' Attained Ages and premium classes. The Net Single Premium is
determined using guaranteed interest of 4.0% per year and guaranteed Cost of
Insurance Rates.
Policy Month
The Policy Month begins each month on the same day of the month as the Date of
Issue.
Policy Year/Policy Anniversary
The first Policy Year is the 12 month period beginning on the Date of Issue.
Your Policy Anniversary is equal to the Date of Issue plus 1 year, 2 years, etc.
Proceeds
The amount We will pay upon the Second Death, the Maturity Date, or upon
surrender of this Policy as described in the Proceeds provision.
5
<PAGE>
Second Death
Death of the Surviving Insured.
Separate Account(s)
A separate account established by Aetna Life Insurance and Annuity Company for
the purpose of funding this Policy: Variable Life Account B; or, when referring
to a settlement option as described in the Settlement Options provisions of this
Policy, Variable Annuity Account B.
Separate Account Value
The portion of this Policy's Total Account Value attributable to the variable
portion of this Policy. This Policy's Separate Account Value is held in Variable
Life Account B.
Specified Amount
The Specified Amount is shown in the Policy Specifications or in the
Supplemental Policy Specifications, if later changed. The Specified Amount is
chosen by the Policyowner and used in determining the Death Benefit. It may be
increased or decreased as described in this Policy.
Subsequent Application(s)
Any application after the initial application initiated by You or by Us.
Surviving Insured
The Insured living after the first death.
Total Account Value
The sum of the Fixed Account Value, the Separate Account Value, and the Loan
Account Value.
Valuation Date
Any day on which the New York Stock Exchange is open for trading.
Valuation Period
The period of time commencing, usually at 4:00 p.m. Eastern Time on each
Valuation Date and ending at 4:00 p.m. Eastern Time on the next Valuation Date.
Variable Annuity Account B
A Separate Account which segregates assets attributable to the variable portion
of annuity contracts and life insurance settlement options from other assets of
the Company. Its assets are invested in shares of the Funds. Variable Annuity
Account B holds all or a portion of the Policy's Proceeds if a variable
settlement option is elected.
Variable Life Account B
A Separate Account which segregates assets attributable to the variable portion
of life insurance from other assets of the Company. Its assets are invested in
shares of the Funds.
Variable Option
One or more of the variable funding options available under this Policy.
We, Our, Us, Company
Refers to Aetna Life Insurance and Annuity Company, its successors, or assigns.
Written Request
A request in writing, in a form satisfactory to Us and received by Us at the
Home Office.
You, Your
Refers to the Owner(s) of this Policy.
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General Provisions
The Contract
This Policy, the initial application on the Insureds, any Subsequent
Applications and any riders constitute the entire contract. Copies of all
applications are attached to and made a part of this Policy.
Only the President, Executive Vice President or the Corporate Secretary may
agree to a change in this Policy, and then only in writing.
All statements made by or for the Insureds are representations and not
warranties. We will not use such statements to void this Policy or defend
against a claim unless it is contained in the initial application or Subsequent
Applications.
Owner
Unless otherwise stated in the application or later changed, this Policy is
owned by both Insureds jointly. After the first death, the Owner is the
Surviving Insured unless otherwise stated.
The Owner is entitled to exercise all rights granted by this Policy while one or
both Insureds are alive.
If this Policy is owned jointly, any exercise of rights granted by this Policy
must be made jointly.
Beneficiary
The individual or entity that will receive any Proceeds on the Second Death is
the Beneficiary. The Beneficiary is as stated in the application, unless later
changed.
If no designated Beneficiary is living at the time of the Second Death, all
benefits will be paid to the Owner or the Owner's executors, administrators, or
assigns.
Changes in Owner and Beneficiary
Unless this Policy states otherwise, the Owner and the Beneficiary, or both, may
be changed. This may be done as often as desired during the lifetime of one or
both of the Insureds and while this Policy is in force.
To change the Owner or Beneficiary, Your Written Request must be sent to Us.
When We give Our written acceptance, the change will take effect as of the date
Your Written Request was signed. The change will be subject to any action We
take before Our written acceptance of the change.
Assignment
A copy of an Assignment must be on file at the Home Office. Until We receive
such notice, We will not be required to take notice of, or be responsible for,
any transfer of interest in this Policy by Assignment, agreement, or otherwise.
We are not responsible for the validity of any Assignment. The rights of the
Policyowner and the interest of the Beneficiary will be subject to the rights of
any assignee of record.
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Non-Participating
No dividends will be paid.
Policy Settlement
All amounts payable by Us will be paid from the Home Office. We will deduct from
the amount payable at settlement any debt plus accrued interest and any overdue
amount necessary to keep this Policy in force to the date that Proceeds are
payable. We may require return of this Policy.
Age and/or Sex
If the age and/or sex of one or both Insureds is misstated, the amount of the
Death Benefit will be adjusted to reflect the coverage that would have been
purchased by the most recent pre-Maturity Date Monthly Deduction at the correct
age and/or sex.
Change of Address
You must notify Us at the Home Office of a change in Your mailing address.
Annual Report
At least once during each Policy Year We will send You a report. The report will
show the Total Account Value, the Surrender Value and the Death Benefit on the
date of the report. It will also show, since the last report, at least the
following information:
1. gross premiums paid;
2. the Cost of Insurance and the cost of riders;
3. interest and investment return credited to the Total Account Value;
4. the amount of any surrenders or Partial Surrenders;
5. the amount of any surrender charges made;
6. a summary of loan activity;
7. a projection of the Total Account Value, Loan Account Value and Surrender
Value as of the succeeding Policy Anniversary; and
8. any other information required by the state in which this Policy was
delivered.
Projection of Benefits
We will provide a projection of illustrative future Death Benefits and Total
Account Values at any time upon Written Request. We reserve the right to charge
a fee of $25 for this service.
Proceeds
Proceeds on the Second Death will equal:
1. the Death Benefit; less
2. the Loan Account Value plus any accrued interest; less
3. any payment required to keep the policy in force.
Proceeds on the Second Death are payable after receipt at the Home Office of due
proof of death of the Surviving Insured.
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Proceeds on maturity of this Policy will equal:
1. the Total Account Value on the Maturity Date; less
2. the Loan Account Value plus any accrued interest.
Proceeds on surrender of this Policy will equal the Surrender Value as described
in the Surrender Value provision.
All Proceeds are subject to adjustment under the Age and/or Sex,
Incontestability, Suicide Exclusion and Grace Period provisions.
Coverage beyond Maturity
You may elect to continue coverage beyond the Maturity Date provided the policy
is in force on the Maturity Date. Any extra benefit riders will be terminated on
the Maturity Date. If elected by Your Written Request, the following will apply:
o We will continue to credit interest to the Total Account Value of this
Policy as described in the Interest Credited provision.
o On the Maturity Date the Separate Account Value of this Policy will be
transferred to the Fixed Account.
o Monthly Deductions will be calculated with a Cost of Insurance Rate equal
to zero.
o Proceeds are payable on the Second Death and will be as described in the
Proceeds provision of this Policy. Proceeds on maturity will not be paid.
o No future premium payments will be accepted except for the amount required
to keep this Policy in force.
Rights and benefits as described in this Policy will be available before the
Second Death.
Right to Defer Payment
Payments of any Separate Account Value will be made within 7 days after Our
receipt of Your Written Request. However, the Company reserves the right to
suspend or postpone the date of any payment of any benefit or values for any
Valuation Period (1) when the New York Stock Exchange is closed (except holidays
or weekends); (2) when trading on the Exchange is restricted; (3) when an
emergency exists as determined by the SEC so that disposal of the securities
held in the Funds is not reasonably practicable or it is not reasonably
practicable to determine the value of the Funds' net assets; or (4) during any
other period when the SEC, by order, so permits for the protection of security
holders. For payment from the Separate Account in such instances, We may defer
payment of:
1. Surrender or Partial Surrender Values;
2. any Proceeds on death in excess of the current Specified Amount; or
3. any portion of the loan value.
Payment of any Fixed Account Value may be deferred for up to six months, except
when used to pay premiums due Us.
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Suicide and Incontestability
Suicide Exclusion
If one or both Insureds die by suicide, while sane or insane, within 2 years
from the Date of Issue of this Policy, this Policy will end and We will pay:
1. the difference between payments made and amounts allocated to the Separate
Account; plus
2. the Separate Account Value; plus
3. any charges made under this Policy's terms on the Separate Account Value;
less
4. the sum of:
(a) the Loan Account Value transferred from the Fixed Account Value; plus
(b) the interest due on the Loan Account Value; plus
(c) the value of any Partial Surrenders transferred from the Fixed Account
Value; plus
(d) any interest earned on the Loan Account Value transferred to the
Separate Account Value.
If one or both Insureds die by suicide while sane or insane, within 2 years from
the Date of Issue of any increase in coverage, We will pay only the Monthly
Deductions for the increase in coverage.
If one or both Insureds die by suicide while sane or insane, more than 2 years
from the Date of Issue of this Policy but within 2 years from the Date of Issue
of any increase in coverage, We will pay:
1. the Proceeds on death for any coverage in effect more than 2 years from the
Date of Issue of this Policy; plus
2. the Monthly Deductions for the increase in coverage.
All amounts will be calculated as of the date of the suicide.
Incontestability
With respect to statements made in the initial application or any Subsequent
Application for each Insured: We will not contest this Policy after it has been
in force during the lifetime of each Insured for 2 years from its Date of Issue.
With respect to statements made in any Subsequent Application for one or both
Insureds: We will not contest coverage relating to Subsequent Applications after
coverage has been in force during the lifetime of each Insured for 2 years from
the Date of Issue of such coverage or from the effective date of any
reinstatement.
If this Policy is contested, Your rights or the Beneficiary's rights may be
affected.
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Premiums and Reinstatement
General
Sufficient premiums must be paid to continue this Policy in force until the
Maturity Date or to qualify for the Guaranteed Death Benefit. The Planned
Premium is due on the Date of Issue. Premium due dates are measured from the
Date of Issue.
Any premiums after the first premium are payable only at our Home Office. Send
Your check or money order, payable to Aetna, to the Home Office. Please be sure
to write Your policy number on Your check.
A receipt signed by an officer of the Company will be given upon request.
We may require satisfactory evidence of insurability if payment of the new
Planned Premium or an Additional Premium during the current Policy Year would
increase the difference between the Death Benefit and the Total Account Value.
Planned Premiums
Planned Premiums are those premiums We agree to bill. Premium reminder notices
for Planned Premiums will be sent at frequencies of 3, 6 or 12 months, or at any
other frequency to which We agree. Planned Premiums as of the Date of Issue are
shown in the Policy Specifications.
You may change the amount and frequency of Planned Premiums by Written Request.
Additional Premiums
Additional Premiums are premium payments in excess of Planned Premiums.
Additional Premiums may be paid at any time while this Policy is in force and
before the Maturity Date.
Allocation of Premium
Each Net Premium will be allocated to the Funds You select under Variable Life
Account B and/or the Fixed Account in the percentages indicated in the Policy
Specifications. If these percentages are changed in accordance with the Changes
in Allocation Percentages provision of this Policy, We will send a letter to You
confirming the change.
Changes in Allocation Percentages
Allocation percentages may be changed at any time by Your request to Us.
Allocations must be changed in whole percentages. The change will be effective
as of the date of the next premium payment after You notify Us.
No Lapse Coverage
This Policy will not terminate within the 5-year period after its Date of Issue
or the Date of Issue of any increase if on every Monthly Deduction Day within
that period the sum of premiums paid within that period equals or exceeds:
1. The sum of the Basic Monthly Premiums for each Policy Month from the start
of the period, including the current month; plus
2. Any Partial Surrenders; plus
3. Any increase in the Loan Account Value since the start of the period.
If on any Monthly Deduction Day within the 5-year period the sum of premiums
paid is less than the sum of items 1, 2 and 3 above, the Grace Period provision
will apply.
After the 5-year period expires, the Total Account Value may be insufficient to
keep this Policy in force. Payment of an Additional Premium may be necessary.
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If the Basic Monthly Premiums have been paid, but outstanding loans have caused
this Policy to enter the Grace Period, this provision will not keep this Policy
in force beyond the Grace Period. The Basic Monthly Premium will continue to be
due and payable if the conditions of the Grace Period are met.
The Basic Monthly Premium is shown in the Policy Specifications.
Grace Period
If the conditions of the No Lapse Coverage or Guaranteed Death Benefit provision
have been met but outstanding loans have caused the Surrender Value to be
insufficient to allow a Monthly Deduction on the Monthly Deduction Day, We will
allow You 61 days of grace for payment of an amount sufficient to allow the
Monthly Deduction. We may require payment of the amount equal to the lesser of
(1) or (2) where:
(1) is the amount necessary to meet the loan related conditions of the No Lapse
Coverage or Guaranteed Death Benefit provision; or
(2) is an amount sufficient to cover the Monthly Deduction(s) that would result
in the Surrender Value being greater than zero.
If the conditions of the No Lapse Coverage or Guaranteed Death Benefit provision
have not been met and the Surrender Value is insufficient to allow a Monthly
Deduction on a Monthly Deduction Day, We will allow You 61 days of grace for
payment of an amount sufficient to allow the Monthly Deduction. We may require
payment of the amount necessary to keep the Policy in force for the current
month plus two additional months.
Written notice will be mailed to Your last known address, according to Our
records, not less than 61 days before termination of this Policy. This notice
will also be mailed to the last known address of any assignee of record.
During the days of grace this Policy will stay in force. If the Second Death
occurs during the days of grace, We will deduct an amount required to keep the
Policy in force from the Death Benefit.
If payment is not made within 61 days after the Monthly Deduction Day, the
Policy will terminate without value at the end of the Grace Period. The
termination will be effective on the Monthly Deduction Day for the first unpaid
Monthly Deduction.
Reinstatement
If this Policy terminates as provided in the Grace Period provision, it may be
reinstated. To reinstate this Policy, the following conditions must be met:
o This Policy has not been fully surrendered.
o You must apply for reinstatement within 5 years after the date of
termination and before the Maturity Date.
o We must receive evidence of insurability, satisfactory to Us, on each
Insured.
o We must receive a premium payment sufficient to keep this Policy in force
for the current month plus two additional months.
If this Policy is reinstated while the No Lapse Coverage provision would have
been in effect if this Policy had not lapsed, all values including the Loan
Account Value would be reinstated to the point they were on the date of lapse.
If this Policy is reinstated after the No Lapse Coverage provision has expired,
this Policy would be reinstated on the Monthly Deduction Day following Our
approval. This Policy's Total Account Value at reinstatement would be the Net
Premium paid less the Monthly Deduction for that day. Any Loan Account Value
would not be reinstated.
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If this Policy's Total Account Value less any Loan Account Value including
accrued interest was not sufficient to cover the full Surrender Charge at the
time of lapse, only the remaining portion of the Surrender Charge would be
reinstated. At the time of this Policy's reinstatement, the remaining portion of
the Surrender Charge will be proportionately reduced by the same pattern as the
original Table of Surrender Charges.
Extra benefit riders will be reinstated only with Our consent.
The Guaranteed Death Benefit provision will not be reinstated.
Death Benefit Options
General
The Proceeds payable upon the Second Death is based upon one of the following
Death Benefit Options You choose. The option for this Policy as of the Date of
Issue is shown in the Policy Specifications. If You have changed the Death
Benefit option, the option is shown in the Supplemental Policy Specifications
which were sent to You.
Option 1
The Specified Amount includes the Total Account Value. Under this option, the
Death Benefit will be the greater of: (a) the Specified Amount or (b) a
percentage of the Total Account Value. This percentage is 1 divided by the Net
Single Premium per dollar.
Option 2
The Specified Amount is in addition to the Total Account Value. Under this
option, the Death Benefit will be the greater of: (a) the Specified Amount plus
the Total Account Value on the date of death or (b) a percentage of the Total
Account Value. This percentage is 1 divided by the Net Single Premium per
dollar.
Guaranteed Death Benefit
Your Policy will remain in force until the younger Insured's Attained Age 100,
even if the Total Account Value is insufficient to satisfy the current Monthly
Deduction, if on each Monthly Deduction Day the sum of all premiums paid equals
or exceeds the sum of all Guaranteed Death Benefit Premiums for each Policy
Month from the Date of Issue, including the current month, plus any Partial
Surrenders.
If We determine on a Monthly Deduction Day that this condition has not been
satisfied, the Guaranteed Death Benefit Provision will terminate. You will have
61 days to pay the amount required to keep the Guaranteed Death Benefit in
force.
If Guaranteed Death Benefit premiums have been paid, but outstanding loans have
caused this Policy to enter the Grace Period, this provision will not keep this
Policy in force beyond the Grace Period. Your Guaranteed Death Benefit premium
will continue to be due and payable if the conditions of the Grace Period are
met.
The Guaranteed Death Benefit premium is shown in the Policy Specifications.
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The Guaranteed Death Benefit may not, depending on the Death Benefit Option
chosen, be available to all risk classes.
Once terminated, the Guaranteed Death Benefit provision cannot be reinstated.
Policy Values
Basis of Calculation
The values of this Policy equal or exceed those required by law in the state
where this Policy is delivered. A detailed statement has been filed with the
state which shows how to compute those values.
Interest Credited
We will credit interest on the Fixed Account Value at the guaranteed rate of
4.0% per year. This guaranteed rate equals 0.0032737, per month, compounded
monthly. We may credit interest in excess of the guaranteed rate.
During Policy Years 1 through 10 the Loan Account Value equal to the
non-Preferred Loan will earn interest at the guaranteed rate. We may credit
interest in excess of the guaranteed rate.
Beginning in Policy Year 11 or, if later, at the younger Insured's Attained Age
65, the interest earned by the portion of the Loan Account Value equal to the
Preferred Loan will be credited at the guaranteed policy loan interest rate.
Interest, at the rates specified, will be earned by the Loan Account Value and
credited to the Fixed Account Value and the Separate Account Value in the same
proportion in which the Loan Account Value was originally deducted from these
values.
Interest credited to the Loan Account Value will never be less than 4.0% per
year.
Fixed Account Value
The Fixed Account Value for this Policy will be:
1. the value of the Net Premiums credited to the Fixed Account Value; less
2. the portion of Monthly Deductions taken from the Fixed Account Value; plus
3. interest credited; less
4. any transfers of value out of the Fixed Account Value; plus
5. any transfers from the Fund(s) to the Fixed Account Value; plus
6. interest earned on the Loan Account Value attributable to the Fixed Account
Value; plus
7. any loan repayments credited to the Fixed Account Value.
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Separate Account Value
The Separate Account Value of this Policy will be the sum of the Fund Account
Values.
A. Fund Account Value
The portion of each Net Premium allocated to a Fund plus any interest
earned on the Loan Account Value which is attributable to that Fund is
credited to this Policy in the form of accumulation units. Accumulation
units measure the value of Your interest in each applicable Variable
Option. The number of accumulation units credited is equal to that portion
of Net Premium divided by the Accumulation Unit Value for that Variable
Option for the Valuation Period in which the premium is received.
The Fund Account Value of each Variable Option will equal the Accumulation
Unit Value for a Variable Option multiplied by the number of accumulation
units for that Variable Option credited to this Policy.
B. Accumulation Unit Value
The Accumulation Unit Value is determined by multiplying the value of the
Variable Option's accumulation unit for the immediately preceding Valuation
Period by the net investment factor for the current period.
The net investment factor equals the net investment rate plus 1.0. The net
investment rate is determined separately for each Variable Option held in
Variable Life Account B as follows:
1. the net assets of the Variable Option held in Variable Life Account B
at the end of a Valuation Period; less
2. the net assets of the Variable Option held in Variable Life Account B
at the beginning of that Valuation Period, adjusted by any taxes or
provisions for taxes attributable to the operation of Variable Life
Account B; divided by
3. the value of the Variable Option's accumulation units held in Variable
Life Account B at the beginning of the Valuation Period; less
4. a daily charge at an annual rate not to exceed .90% of net assets of
the Fund for mortality and expense risks attributable to policies
funded through Variable Life Account B.
Charges to Policy Values
Charges and deductions made according to this Policy's provisions will be
deducted from the Separate Account Value and the Fixed Account Value in the same
proportion that these Values bear to the sum of the Fixed Account Value and the
Separate Account Value on the date of the deduction.
The portion of the deduction attributable to the Separate Account Value will
reduce each Fund Account Value proportionately. The value deducted from each
Fund is determined by dividing the amount of the deduction attributable to that
Fund by the Variable Option's Accumulation Unit Value for the Valuation Period
when the charge was made. The resulting number of Variable Option accumulation
units will be deducted from the total accumulation units for that Fund.
The portion of the deduction attributable to the Fixed Account Value will be
deducted from that Value as a dollar amount.
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Transfers Within Accounts
At any time prior to the Maturity Date, You may transfer all or part of each
Fund Account Value to any other Fund or to the Fixed Account Value at any time.
Funds may be transferred between the Funds or from the Funds to the Fixed
Account. We reserve the right to charge an administrative fee of $25 for more
than 12 transfers per year.
We reserve the right to limit the total number of Funds You may elect to 17 over
the lifetime of this Policy.
Within the forty-five days following the Policy Anniversary, You may request a
transfer of a portion of the Fixed Account Value to one or more of the Funds.
This type of transfer is allowed only once within these forty-five days and We
must receive Your request at the Home Office within the forty-five days. The
transfer will be effective on the Valuation Date that Your request is received
by the Home Office. The amount of such transfer cannot exceed the greater of 25%
of the Fixed Account Value or $500.
Accumulation units for each Variable Option will be added to or subtracted from
Your Separate Account Value, based on each Variable Option's Accumulation Unit
Value at the end of the Valuation Period when request for such transfer is
received by Us. A dollar amount will be added to or subtracted from the Fixed
Account Value according to the terms of Your request for transfer.
Monthly Deductions
Monthly Deductions begin on the Date of Issue and occur on each Monthly
Deduction Day thereafter. The Monthly Deduction will be deducted from this
Policy's values as described in the Charges to Policy Values provision.
The Monthly Deduction is equal to:
1. the Cost of Insurance as calculated below; plus
2. the monthly policy fee, shown in the Policy Specifications; plus
3. the monthly expense charge per $1,000 of Specified Amount, as shown in the
Policy Specifications.
Cost of Insurance
The Cost of Insurance on any Monthly Deduction Day will be (1) multiplied by the
result of (2) minus (3) where:
(1) is the monthly Cost of Insurance Rate on that date divided by 1,000;
(2) is the Death Benefit on that date divided by 1.0032737;
(3) is the Total Account Value on that date before computing the Monthly
Deductions for the Cost of Insurance for this Policy.
Cost of Insurance Rate
The monthly Cost of Insurance is based on both Insured's issue age, sex, number
of Policy Years elapsed and premium class. For an increase, the premium class
for that increase will be used. If an Insured is assigned a premium class which
designates "smoker" and this classification changes, You may, by Written
Request, reclassify the Insured any time after the first Policy Anniversary.
Upon Our acceptance of the change, Supplemental Policy Specifications will be
sent to You.
The monthly Cost of Insurance Rates may be adjusted by Us from time to time.
Adjustments will be on a class basis and will be based on Our estimates for
future factors such as mortality, investment income, expenses, and the length of
time policies stay in force. Any adjustments will be made on a nondiscriminatory
basis.
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The rate during any Policy Year will never exceed the rate shown for that year
in the Table of Guaranteed Maximum Insurance Rates in the Policy Specifications.
Those rates are based on the 1980 Commissioners Standard Ordinary Mortality
Table, Male or Female, Smoker or Nonsmoker.
Nonforfeiture Provisions
Continuation of Coverage
Coverage of this Policy will continue to the Maturity Date as long as the
Surrender Value is sufficient to cover each Monthly Deduction. If the Surrender
Value is insufficient to cover a Monthly Deduction, the Grace Period provision
will apply except as provided under the Guaranteed Death Benefit and No Lapse
Coverage provisions.
Surrender Value
By Written Request, the Owner may surrender this Policy for its full Surrender
Value at any time before the Maturity Date while one or both Insureds is alive.
All insurance coverage under this Policy will end on the date of the full
surrender. Partial Surrenders will also be allowed. We reserve the right to
defer payments as provided under the Right to Defer Payment provision.
The full Surrender Value will equal:
1. the Total Account Value on the date of surrender; less
2. the Surrender Charge; less
3. the Loan Account Value plus any accrued interest.
Surrender Charge
At the time of surrender, We will deduct a Surrender Charge from the Total
Account Value. The applicable Surrender Charge for this Policy is shown in the
Policy Specifications in the Table of Surrender Charges.
Any increase in the Specified Amount will result in additional Surrender
Charges. The charge will be effective on the Date of Issue for the increase.
Supplemental Policy Specifications will be sent to You once the change is
complete and will reflect the additional Surrender Charge in the Table of
Surrender Charges.
Any decrease in the Specified Amount will not reduce the original or any
additional Surrender Charge.
Partial Surrender
Partial Surrenders may be made at any time after the expiration of the Right of
Policy Examination period.
A partial Surrender Charge will be included in the amount of the Total Account
Value which is surrendered. The minimum amount of any Partial Surrender after
any partial Surrender Charge is applied is $500. We may also charge an
administrative fee of $25.
The partial Surrender Charge will be in proportion to the Surrender Charge that
would apply to a full Surrender. The proportion will be computed as the amount
of the net Partial Surrender divided by the sum of the Fixed Account Value and
the Separate Account Value less the full Surrender Charge. When the Partial
Surrender is made, any future Surrender Charge will be reduced in the same
proportion.
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If the Death Benefit option for this Policy is Option 1, a Partial Surrender
will reduce the Total Account Value, Death Benefit, and Specified Amount. The
Specified Amount and Total Account Value will be reduced by equal amounts.
However, We will not allow a Partial Surrender if the Specified Amount will be
reduced below the Minimum Specified Amount.
If the Death Benefit option for this Policy is Option 2, a Partial Surrender
will reduce the Total Account Value and the Death Benefit. The Specified Amount
will not be reduced.
If the Death Benefit option for this Policy is determined as the Total Account
Value divided by the Net Single Premium, the Partial Surrender may not reduce
the Specified Amount.
A reduction in the Specified Amount will cause a reduction in the required
premiums for the Guaranteed Death Benefit provision. The future premium required
to maintain the Guaranteed Death Benefit provision will be based on the new
Specified Amount.
Paid-Up Nonforfeiture Option
By Written Request, You may elect, at any time while one or both Insureds are
alive and before the Maturity Date, to continue this Policy as paid-up life
insurance.
The Surrender Value will be applied as a Net Single Premium to determine the
Specified Amount of the paid-up insurance. The cost of the paid-up insurance
will be based on the guaranteed maximum Cost of Insurance Rates in this Policy
and an interest rate of 4.0% compounded annually. However, the Specified Amount
of the paid-up insurance cannot exceed the Death Benefit under this Policy as of
the effective date of the paid-up insurance. Any excess Surrender Value will be
refunded to You.
The effective date of the paid-up insurance will be the Monthly Deduction Day
which occurs on or immediately after the date Your request is received by Us.
As of the effective date:
o no further premium payments, Monthly Deductions, excess interest credits or
changes in coverage may be made; and
o all extra benefit riders will terminate.
Policy Loans
General
We will grant loans at any time after the expiration of the Right of Policy
Examination period. The amount of the loan will not be more than the Loan Value.
The Loan Value for this Policy is 90% of the sum of the Fixed Account Value and
the Separate Account Value less the Surrender Charge applicable at the time of
the loan.
The amount of the loan will be transferred out of the Fixed Account and Separate
Account Values as described in the Policy Values provision. The loan amount
increases the Loan Account Value.
The Loan Account Value plus accrued interest will reduce any Proceeds under this
Policy. If the Loan Account Value exceeds the sum of the Separate Account Value
plus the Fixed Account Value less the Surrender Charge, the Grace Period
provision will apply.
Preferred Loans
Beginning in the 11th Policy Year or upon the younger Insured's Attained Age 65,
whichever is later, and on each Policy Anniversary thereafter, that portion of
the loan attributable to the Separate Account Value will be treated as
preferred.
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Loan Interest Rate Charged
Interest, at an annual effective rate, will be charged on the Policy's Loan
Account Value. The Loan Interest Rate is 8% per year on the Loan Account Value
that is not treated as a Preferred Loan. The Loan Interest Rate charged on the
Preferred Loan is 4.5%. Interest is due and payable on the next Policy
Anniversary, the date this Policy ends or upon full repayment of the Loan
Account Value. Any interest not paid when due will be added to the Loan Account
Value on the Policy Anniversary and will itself bear interest on the same terms.
Repayment
The loan may be repaid in full or in part at any time prior to the Maturity Date
as long as this Policy is in force and one or both Insureds is alive. The amount
necessary to repay all loans in full is the Loan Account Value plus any accrued
interest.
Loan repayments will be allocated to the Fixed Account Value and the Separate
Account Value in the same proportion in which the loan was taken. The Loan
Account Value will be reduced by the amount of any loan repayment.
Changes in Insurance Coverage
General
For any change in coverage We will require Your Written Request. Supplemental
Policy Specifications confirming the change will be sent to You once the change
is completed.
Increase in Specified Amount
Increases will be allowed at any time while this Policy is in force and both
Insureds are alive. The increase may be rescinded by You within 10 days of
receipt of the Supplemental Policy Specifications.
Satisfactory evidence of insurability on both Insureds will be required.
The Date of Issue for any increase will be shown in the supplemental Policy
Specifications.
The Surrender Value immediately after an increase must be at least three times
the sum of:
(1) the most recent Monthly Deduction from the Total Account Value; and
(2) the Specified Amount of the increase multiplied by the applicable Cost of
Insurance Rate divided by 1000.
Any increase in the Specified Amount will increase the Surrender Charge. The
5-year period as described in the No Lapse Coverage provision will restart on
the Date of Issue of the increase.
The Basic Monthly Premium and the premium required to satisfy the Guaranteed
Death Benefit will be based on the new Specified Amount.
Decrease in Specified Amount
You may decrease the Specified Amount of this Policy after the 5th Policy Year.
We will not allow a decrease in the Specified Amount if the Specified Amount
would be reduced below the Minimum Specified Amount.
For a decrease in the Specified Amount, the Date of Issue will be the Monthly
Deduction Date on or next following the date on which Your Written Request is
received.
The decrease will reduce any past increases in the reverse order in which they
occurred.
19
<PAGE>
The Basic Monthly Premium and the premium required to satisfy the Guaranteed
Death Benefit will be based on the new Specified Amount.
Change in Death Benefit Option
Any change in the Death Benefit option is subject to the following conditions:
We will not allow a change in the Death Benefit option if the Specified Amount
will be reduced below the Minimum Specified Amount.
The change will take effect on the Monthly Deduction Day on or next following
the date on which Your Written Request is received.
There will be no change in the Surrender Charge.
Evidence of insurability may be required.
Change from Option 1 to 2
Changes from Option 1 to 2 will be allowed at any time while this Policy is in
force. The Specified Amount will be reduced to equal the Specified Amount less
the Total Account Value at the time of the change. If a change from Option 1 to
2 would reduce the Specified Amount to below the Minimum Specified Amount, an
increase in Specified Amount would be imposed to bring the new Specified Amount
up to the Minimum Specified Amount.
The Basic Monthly Premium and the premium required to satisfy the Guaranteed
Death Benefit will be based on the new Specified Amount.
Change from Option 2 to 1
Changes from Option 2 to 1 will be allowed at any time while this policy is in
force. The new Specified Amount will equal the Specified Amount plus the Total
Account Value as of the date of the change.
The Basic Monthly Premium and the premium required to satisfy the Guaranteed
Death Benefit will be based on the new Specified Amount.
Change of Fund(s)
If shares of any Fund are no longer available for investment by the Separate
Account or, in Our judgment, further investment in such shares should become
inappropriate in view of the purpose of the Policy, We may cease to make such
Fund shares available under the Policy prospectively, or we may substitute
shares of other Fund(s) for shares already acquired. We may also, from time to
time, add additional Funds. Any elimination, substitution or addition of Funds
will be done in accordance with applicable state or federal securities laws. We
reserve the right to substitute shares of another Fund for shares already
acquired without a proxy vote.
The investment policy of a Separate Account may not be changed without the
approval of the Insurance Commissioner of the State of Connecticut. The approval
process has been filed with the Commissioner.
We will notify You of any change.
20
<PAGE>
Separate Account
Variable Life Account B is a Separate Account established by Us in accordance
with the laws of the State of Connecticut. Income, realized and unrealized gains
and losses from the assets of Variable Life Account B will be credited to or
charged against Variable Life Account B without regard to Our other income,
gains, or losses. Variable Life Account B's liabilities arise from the variable
life insurance policies that it supports. The assets of Variable Life Account B
are available to cover the liabilities of the General Account only to the extent
that Variable Life Account B's assets exceed its liabilities.
The value of the assets of Variable Life Account B is determined whenever the
policy benefits vary and at the end of every Valuation Period.
Settlement Options
Conditions
All or part of the Proceeds of this Policy may be applied under one or more of
the options described below or in any manner to which We agree and that We make
available. An election shall be made by Written Request filed with the Home
Office. The payee of Proceeds may make this election if no prior election has
been made.
Payments will be made at intervals of 1, 3, 6 or 12 months in equal amounts as
elected. Payments under a settlement option may be made on a fixed dollar or
variable basis. However, once payments begin on either the fixed or variable
basis, the option may not be changed to one with payments on the alternate
basis.
Our consent to the election of an option is required if:
1. The payee is not a natural person receiving payments in his or her own right;
2. the payee is an assignee of this Policy; or
3. payments would be less than $25 each or totaling less than $120 in a year.
Income Options
The rates for these Income Options are based on the 1983 rates for Individual
Annuity Mortality Table and a pivotal age of 55. For purposes of calculating
payments, the Adjusted Ages of the payees will be used. The Adjusted Age is the
payee's age on his or her birthday nearest the commencement date of the annuity
and then reduced by one year for annuities commencing in the 1990's, reduced two
years for annuities beginning during 2000-2009, and so on.
Rates for ages and intervals not shown for any of the following income options
will be furnished upon request.
Option 1 - Interest
Payment of interest on Proceeds left with Us. Proceeds held under this option
may be left with Us after the death of the payee only with Our consent. By
Written Request, the payee may later elect to:
o Receive all or a portion of the amount held under this option; or
o apply all or a portion of this amount to options 2, 3 or 4 as described
below.
21
<PAGE>
Option 2 - Stated Period
Payments for a stated number of years, not longer than 30 years. If payments for
this option are made on a variable basis, the present value of any remaining
payments may be withdrawn at any time.
Rates for Fixed Payments with Guaranteed Interest Rate of 3.0%; and
Rates for Variable Payments with Assumed Net Return Rate of 3.0%
<TABLE>
<CAPTION>
---------------------------------------------------------------------
PAYMENT PER $1,000 PROCEEDS
---------------------------------------------------------------------
YEARS OF YEARS OF
STATED STATED
PERIOD MONTHLY PERIOD MONTHLY
---------------------------------------------------
<S> <C> <C> <C>
3 $28.99 15 $6.87
4 22.06 20 5.51
5 17.91 25 4.71
10 9.61 30 4.18
---------------------------------------------------------------------
</TABLE>
Rates for Variable Payments with Assumed Net Return Rate of 5%
<TABLE>
<CAPTION>
---------------------------------------------------------------------
PAYMENT PER $1,000 PROCEEDS
---------------------------------------------------------------------
YEARS OF YEARS OF
STATED STATED
PERIOD MONTHLY PERIOD MONTHLY
---------------------------------------------------
<S> <C> <C> <C>
3 $29.80 15 $7.82
4 22.89 20 6.51
5 18.74 25 5.76
10 10.51 30 5.28
---------------------------------------------------------------------
</TABLE>
22
<PAGE>
Option 3 - Life Income
Payments for the lifetime of the payee. If also chosen, We will guarantee
payments for 60, 120, 180, or 240 months. No payment will be due after death,
except payment for any remaining fixed period.
Rates for Fixed Payments with Guaranteed Interest Rate of 3.0%; and
Rates for Variable Payments with Assumed Net Return Rate of 3.0%
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
MONTHLY LIFE INCOME PER $1,000 PROCEEDS
- -----------------------------------------------------------------------------------------------------------------------------
WITH FIXED PERIOD
------------------------------------------------------------------------------------ WITHOUT
AGE 10 YEARS 15 YEARS 20 YEARS FIXED PERIOD
NEAREST ----------------------------------------------------------------------------------------------------------------
BIRTHDAY Male Female Male Female Male Female Male Female
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
50 $4.22 $3.89 $4.17 $3.86 $4.08 $3.82 $4.27 $3.90
51 4.30 3.95 4.23 3.92 4.14 3.88 4.34 3.97
52 4.37 4.01 4.30 3.98 4.20 3.93 4.43 4.03
53 4.45 4.08 4.37 4.04 4.26 3.99 4.51 4.10
54 4.54 4.15 4.45 4.11 4.32 4.04 4.60 4.18
55 4.62 4.22 4.53 4.18 4.39 4.11 4.70 4.25
56 4.72 4.30 4.61 4.25 4.45 4.17 4.80 4.34
57 4.82 4.38 4.69 4.32 4.51 4.23 4.91 4.42
58 4.92 4.47 4.78 4.40 4.58 4.30 5.03 4.52
59 5.03 4.56 4.87 4.48 4.65 4.37 5.15 4.61
60 5.14 4.66 4.96 4.57 4.71 4.44 5.28 4.72
61 5.27 4.76 5.06 4.66 4.78 4.51 5.43 4.83
62 5.39 4.87 5.16 4.75 4.84 4.58 5.58 4.95
63 5.53 4.98 5.26 4.85 4.90 4.65 5.74 5.08
64 5.66 5.10 5.36 4.95 4.96 4.72 5.91 5.21
65 5.81 5.22 5.46 5.05 5.02 4.79 6.10 5.36
66 5.96 5.36 5.56 5.16 5.08 4.86 6.30 5.51
67 6.12 5.50 5.66 5.26 5.13 4.93 6.51 5.67
68 6.28 5.65 5.77 5.37 5.18 5.00 6.73 5.85
69 6.44 5.80 5.86 5.49 5.23 5.06 6.97 6.04
70 6.61 5.97 5.96 5.60 5.27 5.12 7.23 6.25
71 6.79 6.14 6.05 5.71 5.31 5.18 7.51 6.47
72 6.96 6.32 6.14 5.83 5.34 5.23 7.80 6.71
73 7.14 6.50 6.23 5.94 5.37 5.28 8.12 6.98
74 7.32 6.69 6.31 6.04 5.40 5.32 8.46 7.26
75 7.50 6.89 6.38 6.14 5.42 5.35 8.82 7.57
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
Rates for Variable Payments with Assumed Net Return Rate of 5%
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
MONTHLY LIFE INCOME PER $1,000 PROCEEDS
- ------------------------------------------------------------------------------------------------------------------
WITH FIXED PERIOD
---------------------------------------------------------------- WITHOUT
AGE FOR 120 MONTHS FOR 240 MONTHS FIXED PERIOD
NEAREST ------------------------------------------------------------------------------------------------
BIRTHDAY MALE FEMALE MALE FEMALE MALE FEMALE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
50 $5.41 $5.09 $5.24 $5.01 $5.48 $5.12
51 5.48 5.14 5.29 5.05 5.55 5.17
52 5.55 5.20 5.34 5.10 5.63 5.23
53 5.62 5.26 5.40 5.15 5.71 5.30
54 5.70 5.33 5.45 5.20 5.80 5.37
55 5.79 5.39 5.51 5.25 5.89 5.44
56 5.87 5.47 5.56 5.31 5.99 5.52
57 5.97 5.54 5.62 5.37 6.10 5.60
58 6.06 5.62 5.68 5.42 6.21 5.69
59 6.17 5.71 5.74 5.48 6.33 5.79
60 6.28 5.80 5.79 5.55 6.46 5.89
61 6.39 5.90 5.85 5.61 6.60 6.00
62 6.51 6.00 5.91 5.67 6.75 6.11
63 6.64 6.10 5.96 5.73 6.91 6.23
64 6.77 6.22 6.02 5.80 7.09 6.37
65 6.91 6.34 6.07 5.86 7.27 6.51
66 7.05 6.46 6.12 5.92 7.47 6.66
67 7.20 6.60 6.16 5.99 7.68 6.82
68 7.35 6.74 6.21 6.04 7.91 7.00
69 7.51 6.89 6.25 6.10 8.15 7.19
70 7.67 7.04 6.28 6.15 8.41 7.39
71 7.83 7.21 6.32 6.20 8.69 7.62
72 8.00 7.38 6.35 6.25 8.99 7.86
73 8.16 7.55 6.37 6.29 9.31 8.12
74 8.33 7.73 6.39 6.33 9.65 8.41
75 8.50 7.92 6.41 6.36 10.02 8.72
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Option 4 - Life Income for Two Payees
Payments during the joint lifetimes of two payees. At the death of either,
payments will continue to the survivor. When this option is chosen a choice must
be made of:
1. 100% of the payment to continue to the survivor;
2. 66-2/3% of the payment to continue to the survivor;
3. 50% of the payment to continue to the survivor;
4. payments for a minimum of 120 months, with 100% of the payment to continue
to the survivor; or
5. 100% of the payment to continue to the survivor if the survivor is the
original payee, and 50% of the payment to continue to the survivor if the
survivor is the second payee.
24
<PAGE>
No payment will become due after the death of the surviving payee.
The following tables illustrate the applicable rates if number (3) of option 4
is chosen.
Rates for Fixed Rate Payments with Guaranteed Interest Rate of 3.0%; and
Rates for Variable Rate Payments with Assumed Net Return of 3.0%
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
MONTHLY JOINT LIFE INCOME WITH 1/2 TO SURVIVOR PER $1,000 PROCEEDS
- ------------------------------------------------------------------------------------------------------------------
AGE OF AGE OF FEMALE PAYEE
MALE ----------------------------------------------------------------------------------------------------
PAYEE 50 55 60 65 70 75 80 85
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
50 $4.08 $4.26 $4.48 $4.75 $5.07 $5.46 $5.90 $6.36
55 4.27 4.47 4.71 5.01 5.37 5.80 6.30 6.83
60 4.49 4.71 4.99 5.32 5.73 6.22 6.80 7.42
65 4.76 5.01 5.32 5.70 6.17 6.75 7.44 8.19
70 5.07 5.36 5.71 6.15 6.70 7.40 8.23 9.16
75 5.41 5.74 6.15 6.66 7.32 8.15 9.16 10.34
80 5.77 6.15 6.62 7.22 7.99 8.99 10.24 11.73
85 6.12 6.54 7.08 7.77 8.67 9.86 11.40 13.27
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Rates for Variable Rate Payments with Assumed Net Return Rate of 5%
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
MONTHLY JOINT LIFE INCOME WITH 1/2 TO SURVIVOR PER $1,000 PROCEEDS
- ------------------------------------------------------------------------------------------------------------------
AGE OF AGE OF FEMALE PAYEE
MALE ----------------------------------------------------------------------------------------------
PAYEE 50 55 60 65 70 75 80 85
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
50 $5.29 $5.46 $5.68 $5.95 $6.29 $6.73 $7.25 $7.82
55 5.48 5.66 5.89 6.18 6.56 7.03 7.60 8.24
60 5.71 5.91 6.16 6.49 6.90 7.42 8.06 8.78
65 6.01 6.23 6.51 6.87 7.33 7.93 8.67 9.50
70 6.36 6.61 6.93 7.34 7.87 8.56 9.43 10.43
75 6.78 7.05 7.42 7.89 8.51 9.33 10.35 11.57
80 7.23 7.54 7.96 8.51 9.23 10.20 11.44 12.95
85 7.68 8.05 8.53 9.16 10.00 11.14 12.64 14.51
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Terms of Options
Proceeds applied under option 1 will be held by Us in the General Account.
Proceeds applied under options 2, 3 and 4 will be held:
1. In the General Account if payments on a fixed dollar basis are elected; or
2. in Variable Annuity Account B using any of its Funds available under this
Policy for settlement option purposes if payments on a variable basis are
elected; or
3. in both the General Account and the Variable Annuity Account B.
Proceeds in the General Account will be used to make payments on a fixed dollar
basis. We will add interest to such Proceeds at an annual rate not less than
3.0%. We may add interest daily at any higher rate. As to option 1, we may from
time to time offer higher interest rates with certain conditions on withdrawal
which are currently published by Us.
Proceeds in Variable Annuity Account B will be used to make payments on a
variable basis. An assumed annual net return rate of 5% may be chosen for such
payments. If not chosen, We will use an assumed net return rate of 3.0%. The
assumed annual net return rate is the interest rate used to determine the amount
of the first payment on a variable basis. Variable Annuity Account B must earn
this rate plus enough to cover the mortality and expense risk and administrative
fee charges if future payments on a variable basis are to remain level.
25
<PAGE>
If payments on a variable basis are not to decrease, We must earn a gross return
on the assets of Variable Annuity Account B of:
1. 4.75% on an annual basis, plus an annual return of up to .25% needed to
offset the administrative charge set at the time the settlement option
payments started, if an assumed annual net return rate of 3.0% is chosen;
or
2. 6.25% on an annual basis, plus an annual return of up to .25% needed to
offset the administrative charge set at the time the settlement option
payments started, if an assumed annual net return rate of 5% is chosen.
Payments will not change due to changes in the mortality or expense results or
administrative charges.
Betterment of Payments
If option 2, 3 or 4 is chosen, and if the guaranteed payments are less than
those of Our current single premium immediate annuity on the same plan, those
larger amounts will be paid instead.
Separate Account
Payments on a variable basis will be made from the Proceeds held in Variable
Annuity Account B. Variable Annuity Account B is a Separate Account established
by Us in accordance with the laws of the State of Connecticut. Income, realized
and unrealized gains and losses from the assets of Variable Annuity Account B
will be credited to or charged against Variable Annuity Account B without regard
to Our other income, gains, or losses. Variable Annuity Account B's liabilities
arise from the variable portion of annuity contracts and life insurance
settlement options that it supports. The assets of Variable Annuity Account B
are available to cover the liabilities of the General Account only to the extent
that Variable Annuity Account B's assets exceed its liabilities.
Fund(s) Settlement Option Units of Variable Annuity Account B
If payment on a variable basis is chosen, the first payment is calculated as
follows:
1. The portion of Proceeds applied to make payments on the variable basis;
divided by
2. 1,000; multiplied by
3. the payment rate for the option chosen.
This amount is divided by the Fund settlement option unit value on the tenth
Valuation Period before the due date of the first payment to determine the
number of Fund settlement option units. The number of Fund settlement option
units remains fixed. Each future payment is equal to this number multiplied by
the Fund settlement option unit value on the tenth Valuation Period prior to the
due date of the payment.
Fund(s) Settlement Option Unit Value of Variable Annuity Account B
For any Valuation Period the Fund settlement option unit value is equal to:
1. The value for the previous Period; multiplied by
2. the net return factor(s) for the Period; multiplied by
3. a factor to reflect the assumed annual net return rate. The factor for 3.0%
per year is .9999190 or, for 5% per year, .9998663.
The dollar value of the Fund settlement option unit values and payments may
increase or decrease due to investment gain or loss.
26
<PAGE>
Net Return Factor(s):
The net return factor(s) are used to compute Variable Annuity Account B values
and payments for any of its Funds.
The net return factor for each Fund is equal to 1.0000000 plus the net return
rate.
The net return rate is equal to:
1. The value of the shares of the Fund held by Variable Annuity Account B at
the end of a Valuation Period; less
2. the value of the shares of the Fund at the start of the Valuation Period;
adjusted by any taxes (or provisions for taxes) on Variable Annuity Account
B; divided by
3. the total value of the Fund settlement option units and other Fund
accumulation units of Variable Annuity Account B at the start of the
Valuation Period; less
4. a daily actuarial charge at an annual rate of 1.25% for annuity mortality
and expense risks and profit; and a daily administrative charge which will
not exceed .25% on an annual basis.
A net return rate may be more or less than 0.
The value of a share of the Fund is equal to the net assets of the Fund divided
by the number of shares outstanding.
The administrative charge may not be changed for amounts which have been used to
purchase a settlement option.
Withdrawal and Death of Payee
As to funds held under option 1, withdrawals and change of option may be made if
the payee makes the election. Under option 2, if payments are made on a variable
basis, the present value of any remaining payments may be withdrawn at any time.
Amounts in the General Account under option 2 may not be withdrawn. No
withdrawals or changes of option may be made under options 3 and 4. Upon the
death of the payee, the current value of the amount held under option 1 or the
present value of any guaranteed payments not yet paid will be paid in one sum to
the designated beneficiary. The designated beneficiary may elect to continue the
remaining payments instead of receiving the lump sum amount. If no designated
beneficiary exists, the present value of any remaining payments will be paid in
one sum to the estate of the payee.
The interest rate used to determine the first payment will be used to calculate
the present value of any remaining payments.
27
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY ON THE LIVES OF TWO INSUREDS
o FLEXIBLE PREMIUMS PAYABLE UNTIL MATURITY DATE OR SECOND DEATH
o PROCEEDS PAYABLE UPON THE FIRST EVENT TO OCCUR - SURRENDER, MATURITY OR
SECOND DEATH
o NON-PARTICIPATING - NO DIVIDENDS PAYABLE
The amount or duration of the death benefit may be fixed or variable. The death
benefit is payable as described in the Death Benefit Options and Proceeds
sections of this Policy.
Values in each Fund held in a Separate Account may increase or decrease daily.
Such values are not guaranteed as to dollar amount. Refer to the Policy Values
section of this Policy for more information.
28
[Aetna Logo]
DISABILITY BENEFIT RIDER
This Extra Benefit Rider is attached to and made a part of this Policy. It
provides for credit of the Benefit Amount in the event of Total Disability of
the Insured. We will credit the Benefit Amount subject to the provisions of this
Rider and this Policy.
Definitions
Basic Monthly Premium
The Basic Monthly Premium is the amount of premium to assure that the Policy
remains in force for a period of at least 5 Policy Years beginning on the Issue
Date or the Issue Date of an Increase.
Insured
As stated in the Policy Specifications, the Insured is the individual who has
coverage as provided by this Rider.
Total Disability, Disabled
Total Disability is the inability due to sickness or injury to perform the
substantial and material duties of any Occupation for remuneration or profit.
Occupation
For the first full 24 months of Total Disability, Occupation is the Insured's
occupation when Total Disability starts. After 24 months, Occupation means any
occupation for which the Insured is reasonably suited by education, training or
experience.
Benefit
We will credit the Benefit Amount for this Policy on each Monthly Deduction Day
which occurs during the Total Disability of the Insured. Subject to the
conditions of this Rider, this Benefit will apply retroactively to premium due
dates since the start of the Total Disability.
If the two persons on whose lives the Policy is issued each file a claim subject
to the conditions of this Rider, only one Benefit will be paid. The Benefit
Amount will be the greater of:
(1) the Basic Monthly Premium; or
(2) the Monthly Deduction for that day for this Policy and all Extra Benefit
Riders, if any, except this one.
Conditions
The following conditions apply:
1. the Total Disability of the Insured must start while this Rider is in force
and before the Insured is Attained Age 60;
2. the Total Disability must be continuous for at least 180 days;
3. We must receive Notice and Proof as described in this Rider;
(70226-97) Page 1
<PAGE>
4. Premiums due more than 12 months before We receive Proof of Total
Disability will not be credited unless Proof could not have reasonably been
given sooner;
5. The Specified Amount of this Policy may not be increased during the
Insured's Total Disability, except as specifically provided for under any
Extra Benefit Rider attached to this policy
Notice and Proof of Disability
We will require written Notice and Proof of the Total Disability. Notice and
satisfactory Proof of the Total Disability of the Insured must be given to Us
within 12 months of the commencement of the Insured's Total Disability.
Failure to provide Notice and Proof will not reduce the claim for this Rider's
Benefit if it is shown that Notice of Proof was provided as soon as reasonably
possible.
After a claim is approved and the Benefit is exercised, We may require further
Proof at reasonable intervals. As part of the Proof, we may require that doctors
of Our choice examine the Insured at Our expense. If the required Proof is not
given or if the Insured recovers, no further Benefit Amount will be credited.
Other Provisions
Excluded Disabilities
This Rider does not provide its Benefit for Total Disability which results from:
1. military (land, sea, or air) service by the Insured in time of war,
declared or undeclared;
2. injury that is intentionally self-inflicted.
Reinstatement
In the Insured is Totally Disabled on the date this Policy terminates because of
insufficient value, We will reinstate this Policy if:
1. the requirements of the Notice and Proof section of this Rider are met; and
2. the right to exercise this Rider's Benefit would otherwise have been
granted.
Incontestability
We cannot contest this Rider, except for failure to pay required premiums, after
it has been in force during the lifetime of the Insured for a period of two
years from its Date of Issue with no Total Disability having occurred.
Rider Premium
The Rider Premium is shown in the Policy Specifications and will be calculated
independently of the Policy's premium option.
Monthly Rider Cost
The Monthly Rider Cost for this Rider is equal to the result of (a) multiplied
by (b) where:
(a) is the Rider Rate, as determined by the table below; and
(b) is the Monthly Premium for this Rider's Premium Option.
The monthly deduction for this Policy will be increased by the cost for this
Rider.
There is no cost for this Rider on any Monthly Deduction Day for which benefits
are due under this Rider.
Rider Rate
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Issue Age Rate Issue Age Rate Issue Age Rate
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Under 33 .02 48-49 .06 55-57 .10
- ------------------------------------------------------------------------------------------------------------------
33-39 .03 50-52 .07 58-59 .11
- ------------------------------------------------------------------------------------------------------------------
40-43 .04 53 .08
- ------------------------------------------------------------------------------------------------------------------
44-47 .05 54 .09
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 2
<PAGE>
Policy Loans
This Rider's Benefit does not include the payment of loan interest due during
the period of Total Disability.
Termination
This Rider will terminate on the first of the following events to occur:
1. on the Policy Anniversary that the Insured becomes Attained Age 60, unless
the Benefit Amount is currently being waived according to the terms of this
Rider. After Attained Age 60 this Rider's Premium will no longer be due;
2. on the date this Policy ends;
3. on the next premium due date after We receive Your Written Request to
terminate this Rider.
Termination of this Rider will not prejudice a claim for Total Disability which
exists at that time.
This Rider has no cash value.
This Rider is attached to and made a part of this Policy. It is signed for Aetna
on its Date of Issue.
Aetna Life Insurance and Annuity Company
/s/ Kirk P. Wickman
Secretary
Page 3
Aetna Life Insurance and Annuity Company
[Aetna Logo] Hartford, Connecticut 06156
SPLIT OPTION
AMENDMENT RIDER
This Amendment Rider allows You, upon election, to exchange this Policy for two
individual policies, one on each Insured named in this Policy, subject to the
terms of this Rider.
Exchange
This Policy may be exchanged for two single life permanent policies which we
make available at the time of Exchange.
The Specified Amount of each new policy will be equal to the Specified Amount of
this Policy at the time of the Exchange, multiplied by the stated percentage for
each Insured.
The cash available for payment of the initial premium(s) of each new policy will
be equal to the stated percentage for each Insured, multiplied by this Policy's
Total Account Value at the time of Exchange, less the Loan Account Value plus
accrued interest.
The stated percentage for each Insured is shown in the Policy Specifications. If
the stated percentage is 0 for an Insured, this Policy may be exchanged for only
one policy on the life of the other Insured.
Election
You can elect to exchange this Policy when one of the following events occurs:
1. Marital divorce of the two Insureds; or
2. a change in the Federal Tax Law which reduces the maximum marital deduction
to less than 50% of the value of the estate of one of the Insureds.
Conditions
To elect this option, send Your Written Request and a copy of the divorce
decree, if applicable, to Us.
Both Insureds must be alive on the Date of Issue of the new policies if each
will be the Insured under a new policy. If the stated percentage on one Insured
is 100%, only that Insured must be alive on the Date of Issue of the new policy.
This Policy must be kept in force according to the terms of this Policy until
the Date of Issue of the new policy(ies).
In the event of divorce, You may elect to exercise this option either:
1. within 90 days following a two year waiting period measured from the date of
the divorce decree. Evidence of insurability will not be required; or
2. within 90 days following the date of the divorce decree. Satisfactory
evidence of insurability on each Insured will be required.
In the event of a change in Federal Tax Law, as described above, You may elect
this option within six months after the new law becomes effective. Evidence of
insurability will be required.
(70227-95)
<PAGE>
New Policy
Extra benefit riders may be included on each new policy but only with Our
consent.
The Date of Issue of each new policy will equal the surrender date of this
Policy.
The Issue Age of each Insured on each new policy will be the Insured's Attained
Age on the new policy's Date of Issue.
The first premium for each new policy will be due on its Date of Issue.
This Amendment Rider is attached to and made a part of this Policy. It is signed
for Aetna and effective on the Date of Issue of this Policy.
Aetna Life Insurance and Annuity Company
/s/ Susan W. Schechter
Secretary
Page 2
[Aetna Logo] FOUR YEAR TERM RIDER
This Extra Benefit Rider provides non-participating term insurance for the first
four Policy Years. Its Benefit Amount increases this Policy's Death Benefit. All
definitions and provisions of this Policy apply to this Rider unless amended
within this Rider.
Benefit
As stated in the Policy Specifications. While this Rider is in force, We will
pay the Benefit Amount upon receipt at the Home Office of due proof that the
Second Death occurred within four years after this Policy's Date of Issue.
Other Provisions
Rider Premium
There is no premium for this Rider.
Monthly Rider Cost
The Monthly Rider Cost will be the Benefit Amount for this Rider multiplied by
the Monthly Rider Rate.
The Monthly Rider Cost is included in this Policy's Monthly Deduction.
Monthly Rider Rate
The Monthly Rider Rate is based on each Insured's sex, Attained Age, number of
Policy Years elapsed and premium class.
The Monthly Rider Rate may be adjusted by Us from time to time. Adjustments will
be on a class basis and will be based on Our estimates for future factors such
as mortality, investment income, expenses, and the length of time riders stay in
force. Any adjustments will be made on a nondiscriminatory basis.
The Rate during any Policy Year will never exceed the rate shown for that Year
in the Table of Guaranteed Maximum Insurance Rates in the Policy Specifications.
Those rates are based on the 1980 Commissioners Standard Ordinary Mortality
table, Male or Female, Smoker or Nonsmoker.
Termination
This Rider will end on the first of the following events to occur:
1. the Fourth Policy Anniversary; or
2. the date this Policy ends; or
3. the Monthly Deduction Day following the date We receive Your Written Request
for termination; or
4. the date this Policy is continued as reduced paid up life
insurance.
This Rider is attached to and made a part of this Policy. It is signed for Aetna
on its Date of Issue.
(70228-95) Aetna Life Insurance and Annuity Company
/s/ Kirk P. Wickman
Secretary
[Aetna Letterhead]
[Aetna Logo]
151 Farmington Avenue
Hartford, CT 06156
Julie E. Rockmore
Counsel
Law Division, RE4A
Investments & Financial Services
September 22, 1998 (860) 273-4686
Fax: (860) 273-8340
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Aetna Life Insurance and Annuity Company and its Variable Life Account B
Post-Effective Amendment No. 1 to Registration Statement on Form S-6
Prospectus Title: AetnaVest Estate Protector II
File Nos.: 333-27337 and 811-4536
Dear Sir or Madam:
The undersigned serves as counsel to Aetna Life Insurance and Annuity Company, a
Connecticut life insurance company (the "Company"). It is my understanding that
the Company, as depositor, has registered an indefinite amount of securities
(the "Securities") under the Securities Act of 1933 (the "Securities Act") as
provided in Rule 24f-2 under the Investment Company Act of 1940 (the "Investment
Company Act").
In connection with this opinion, I, or those for whom I have supervisory
responsibility, have reviewed the S-6 Registration Statement, as amended to the
date hereof, and this Post-Effective Amendment No. 1. I have also examined
originals or copies, certified or otherwise identified to my satisfaction, of
such documents, trust records and other instruments I have deemed necessary or
appropriate for the purpose of rendering this opinion. For purposes of such
examination, I have assumed the genuineness of all signatures on original
documents and the conformity to the original of all copies.
I am admitted to practice law in Connecticut, and do not purport to be an expert
on the laws of any other state. My opinion herein as to any other law is based
upon a limited inquiry thereof which I have deemed appropriate under the
circumstances.
<PAGE>
Based upon the foregoing, I am of the opinion that the Securities have been
legally authorized and, assuming that the Securities have been issued and sold
in accordance with the provisions of the prospectus being registered, will be
legally issued.
I consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
/s/ Julie E. Rockmore
Julie E. Rockmore
[Aetna Letterhead]
[Aetna Logo]
151 Farmington Avenue
Hartford, CT 06156
Mark S. Reilly, FSA, MAAA
Pricing Actuary
Life Products Group, TN41
(860) 273-4330
Fax: (860) 273-4438
September 9, 1998
Re: AetnaVest Estate Protector II (File No. 333-27337)
Dear Sir or Madam:
In my capacity as Actuary of Aetna Life Insurance and Annuity Company (ALIAC), I
have provided actuarial advice concerning ALIAC's AetnaVest Estate Protector II
Flexible Premium Variable Universal Life Insurance on the Lives of Two Insureds.
I also provided actuarial advice concerning the preparation of Post-Effective
Amendment No. 1 to Registration Statement on Form S-6, File No. 333-27337 (the
"Registration Statement") for filing with the Securities and Exchange Commission
under the Securities Act of 1933 in connection with the Policy.
In my opinion the illustrations of benefits under the Policy included in the
prospectus under the caption "Illustrations of Death Benefit, Total Account
Values and Surrender Values" are, based on the assumptions stated in the
illustrations, consistent with the provisions of the Policy. Also, in my opinion
the age selected in the illustrations is representative of the manner in which
the Policy operates.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/ Mark S. Reilly
- ------------------
Mark S. Reilly
Pricing Actuary
Consent of Independent Auditors
The Board of Directors of Aetna Life Insurance and Annuity Company
and Policyholders of Aetna Variable Life Account B:
We consent to the use of our reports dated February 3, 1998 and February 27,
1998 included herein this Post-Effective Amendment No. 1 to Registration
Statement (File No. 333-27337) on Form S-6 and to the reference to our firm
under the heading, "Independent Auditors" in the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Hartford, Connecticut
September 22, 1998
