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PROSPECTUS
FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICIES
VARIABLE ACCOUNT II
OF
AIG LIFE INSURANCE COMPANY
ONE ALICO PLAZA, P.O. BOX 8718
WILMINGTON, DE 19899
TELEPHONE (800) 340-2765
This prospectus describes an individual flexible premium variable universal
life insurance Policy (the "Policy") offered by AIG Life Insurance Company
("Company"). The Policy is designed to provide lifetime insurance protection on
the Insured named in the Policy and at the same time provide flexibility to vary
the amount and timing of Premiums and to change the amount of Death Benefits
payable under the Policy. This flexibility allows you to provide for changing
insurance needs under a single insurance Policy.
You also have the opportunity to allocate Net Premiums and Policy Account
Value to one or more subaccounts of Variable Account II (the "Separate Account")
and the Company's general account (the "Guaranteed Account"), within limits.
This prospectus generally describes only that portion of the Policy Account
Value allocated to the Separate Account. For a brief summary of the Guaranteed
Account, see "The Guaranteed Account," page 17
The assets of each subaccount are invested in a corresponding portfolio
(each a "Fund") as selected by the Owner from the following choices: the
Conservative Investors Portfolio, Growth Investors Portfolio, Growth Portfolio,
or Growth and Income Portfolio, of the ALLIANCE VARIABLE PRODUCTS SERIES FUND,
INC. ("Alliance Funds"); High Income Portfolio, Growth Portfolio, Money Market
Portfolio, or Overseas Portfolio, of the FIDELITY INVESTMENTS VARIABLE INSURANCE
PRODUCTS FUND ("Fidelity Fund") and the Asset Manager Portfolio, and Investment
Grade Bond Portfolio of the FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS
FUND II ("Fidelity Fund II"); the Zero Coupon 2000 Portfolio of the DREYFUS
VARIABLE INVESTMENT FUND ("Dreyfus Fund"); the Gold and Natural Resources
Portfolio, and the Worldwide Balanced Portfolio of the VAN ECK INVESTMENT TRUST
("Van Eck Funds"); the Short-Term Retirement Portfolio, Medium-Term Retirement
Portfolio or the Long-Term Retirement Portfolio of the TOMORROW FUNDS RETIREMENT
TRUST ("Tomorrow Funds"); or the DREYFUS STOCK INDEX FUND.
The accompanying prospectuses for Alliance Funds, Fidelity Fund, Fidelity
Fund II, Dreyfus Fund, Dreyfus Stock Index Fund, Tomorrow Funds and Van Eck
Funds describe their respective portfolios, including the risks of investing in
the Funds, and provide other information on the Funds and on their managers.
The Policy provides for a Net Cash Surrender Value that can be obtained by
surrendering the Policy. Because this value is based on the investment
performance of the subaccounts, to the extent of allocations to the Separate
Account, there is no guaranteed Net Cash Surrender Value. If the Net Cash
Surrender Value is insufficient to cover the charges due under the Policy, the
Policy will lapse without value. The Policy also provides for Policy loans and
permits partial surrenders within limits.
It may not be advantageous to replace existing insurance with the Policy.
Within certain limits, you may return the Policy or exchange it for another life
insurance Policy with benefits that do not vary with the investment results of a
separate account.
A Policy may be returned according to the terms of its Period to Examine and
Cancel (see "Period to Examine and Cancel Policy, " page 14), during which time
Net Premium payments allocated to the Separate Account will be invested in the
Money Market subaccount.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED ON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY OR PRECEDED BY A CURRENT
PROSPECTUS FOR EACH OF THE ALLIANCE FUNDS, FIDELITY FUND, FIDELITY FUND II,
DREYFUS FUND, DREYFUS STOCK INDEX FUND, TOMORROW FUNDS, AND VAN ECK FUNDS, AS
IDENTIFIED ABOVE.
THIS PROSPECTUS SHOULD BE RETAINED FOR FUTURE REFERENCE.
Date of Prospectus: May 1, 1996
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TABLE OF CONTENTS
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PAGE
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DEFINITIONS OF TERMS....................................................................................... 3
SUMMARY OF THE POLICY...................................................................................... 5
PERFORMANCE INFORMATION.................................................................................... 7
GENERAL INFORMATION ABOUT THE COMPANY, THE SEPARATE ACCOUNT AND THE FUNDS.................................. 8
PREMIUMS AND ALLOCATIONS................................................................................... 14
GUARANTEED ACCOUNT......................................................................................... 17
CHARGES AND DEDUCTIONS..................................................................................... 18
HOW YOUR POLICY ACCOUNT VALUES VARY........................................................................ 23
DEATH BENEFIT AND CHANGES IN FACE AMOUNT................................................................... 24
CASH BENEFITS.............................................................................................. 26
ILLUSTRATIONS OF POLICY VALUES, NET CASH SURRENDER VALUES, DEATH BENEFITS AND ACCUMULATED PREMIUMS......... 29
OTHER POLICY BENEFITS AND PROVISIONS....................................................................... 36
TAX CONSIDERATIONS......................................................................................... 37
SUPPLEMENTAL BENEFITS AND RIDERS........................................................................... 42
MANAGEMENT OF THE COMPANY.................................................................................. 43
DISTRIBUTION OF POLICY..................................................................................... 44
STATE REGULATIONS.......................................................................................... 44
LEGAL PROCEEDINGS.......................................................................................... 45
EXPERTS.................................................................................................... 45
LEGAL OPINIONS............................................................................................. 45
FINANCIAL STATEMENTS....................................................................................... 45
APPENDICES................................................................................................. A-1
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DEFINITIONS OF TERMS
ADMINISTRATIVE OFFICE -- One Alico Plaza, Wilmington, DE 19801
ALLOCATION DATE -- The first business day after the Free Look Period expires.
ATTAINED AGE -- The Insured's age on the Policy Date plus the number of full
years since the Policy Date.
BENEFICIARY -- The person(s) who is entitled to the Insurance Benefit of this
Policy.
CASH SURRENDER VALUE -- Policy Account Value less any applicable surrender
charge that would be deducted upon surrender.
COMPANY, WE, OUR, US -- AIG Life Insurance Company
DEATH BENEFIT -- The amount of money payable to the Beneficiary if the Insured
dies while the Policy is in force. The calculation of the Death Benefit is
described on page .
FACE AMOUNT -- The amount of insurance specified by the Owner and from which the
Death Benefit will be determined. The initial Face Amount is shown in the Policy
Application.
GRACE PERIOD -- The period of time following a Monthly Anniversary during which
this Policy will continue in force while the Net Cash Surrender Value is not
sufficient to cover the total monthly deduction then due.
GUARANTEED ACCOUNT -- An account within the general account which consists of
all of the Company's assets other than the assets of the Separate Account and
any other separate accounts of the Company.
INSURED -- The person whose life is covered by the Policy.
ISSUE DATE -- The date the Policy is issued. It may be a later date than the
Policy Date if the initial Premium is received at Our Administrative Office and
invested before underwriting has been completed. Once issued, Policy coverage is
retroactive to the Policy Date. The Issue Date is used to measure contestability
periods. See page .
MATURITY DATE -- The Policy anniversary following the Insured's attained age 99.
MONTHLY ANNIVERSARY -- The same day as the Policy Date for each succeeding
month. If the Policy Date is the 29th, 30th or 31st of a month, in any month
that has no such day, the Monthly Anniversary is deemed to be the last day of
that month. The monthly deduction is deducted on each Monthly Anniversary.
NET CASH SURRENDER VALUE -- The Cash Surrender Value less any Outstanding Loans.
NET PREMIUM -- A premium less any expense charges deducted from the premium.
OUTSTANDING LOAN -- The total amount of Policy loans, including both principal
and accrued interest.
OWNER, YOU, YOUR -- The person who purchased the Policy as shown in the
application, unless later changed. The Owner may be someone other than the
Insured.
PLANNED PERIODIC PREMIUM -- The premium designated at the time of application as
the amount planned to be paid at specific intervals until the maturity date.
POLICY -- This Flexible Premium Variable Life Insurance contract between AIG
Life Insurance Company and You.
POLICY ACCOUNT VALUE -- The total amount credited to a Policy. The Policy
Account Value is described on Page .
POLICY ANNIVERSARY -- An anniversary of the Policy Date.
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POLICY DATE -- The first date as of which We have received the initial Premium
and an application in good order. If a Policy is issued, insurance is effective
as of the Policy Date.
POLICY LOAN ACCOUNT -- The portion of the Policy Account Value held in the
Guaranteed Account as collateral for Policy loans.
POLICY MONTH -- The month commencing with the Policy Date and ending on the day
before the first Monthly Anniversary, or any following month commencing with a
Monthly Anniversary and ending on the day before the next Monthly Anniversary.
POLICY YEAR -- The year commencing with the Policy Date and ending on the day
before the first Policy Anniversary, or any following year commencing with a
Policy Anniversary and ending on the day before the next Policy Anniversary.
PREMIUM -- The total consideration paid by You in exchange for Our obligations
under the Policy. The initial Premium is due on or before delivery of the
Policy.
SEPARATE ACCOUNT -- Variable Account II, a separate investment account of AIG
Life Insurance Company.
SUBACCOUNT -- A division of the Separate Account established to invest in shares
of a corresponding portfolio of a fund that is available for investment under
the Policy.
VALUATION DATE -- Each day the New York Stock Exchange is open for business.
VALUATION PERIOD -- A period commencing with the close of business on the New
York Stock Exchange on any particular day and ending at the close of business on
the New York Stock Exchange for the next succeeding Valuation Date.
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SUMMARY OF THE POLICY
This summary is intended to provide a brief overview of the more significant
aspects of the Policy. Further detail is provided in this prospectus and in the
Policy. Unless the context indicates otherwise, the discussion in this summary
and the remainder of the prospectus relates to the portion of the Policy
involving the Separate Account. The Guaranteed Account is briefly described
under THE GUARANTEED ACCOUNT, on page 17 and in the Policy.
PURPOSE OF THE POLICY
The Policy offers an Owner insurance protection on the life of the Insured
through the Maturity Date for so long as the Policy is in force. Like
traditional life insurance, the Policy provides for an initial death benefit
equal to its Face Amount, accumulation of cash value, and surrender and loan
privileges. Unlike traditional life insurance, the Policy offers a choice of
investment alternatives and an opportunity for the Policy Account Value and, if
elected by the Owner and under certain circumstances, its Death Benefit to grow
based on investment results. The Policy is a flexible premium Policy, so that,
unlike many other insurance policies and subject to certain limitations, an
Owner may choose the amount and frequency of premium payments.
POLICY VALUES
An Owner may allocate Net Premium payments among the various Subaccounts
that comprise the Separate Account and that invest in the Dreyfus Stock Index
Fund, or in corresponding portfolios of the Alliance Funds, Fidelity Fund,
Fidelity Fund II, Dreyfus Fund, Tomorrow Funds, or Van Eck Funds. An Owner may
also allocate Net Premium payments to the Guaranteed Account.
Depending on the investment experience of the selected Subaccounts, the
Policy Account Value may increase or decrease on any day. The Death Benefit may
or may not increase or decrease depending upon several factors, including the
Death Benefit Option selected by the Owner. There is no guarantee that the
Policy Account Value and Death Benefit will increase. The Owner bears the
investment risk on that portion of the Net Premiums and Policy Account Value
allocated to the Separate Account.
The Policy will remain in force until the earliest of the Maturity Date, the
death of the Insured, or a full surrender of the Policy, unless, before any of
these events, the Net Cash Surrender Value is insufficient to pay the current
monthly deduction on a Monthly Anniversary Date and a Grace Period expires
without sufficient additional premium payment or loan repayment by the Owner.
POLICY CHARGES
There are charges and deductions which the Company will deduct from each
Policy. The deductions from Premium are the sales charge of 5% plus the specific
state and local premium tax (a typical state premium tax rate would be in the
range of 2% to 2.5%).
See CHARGES AND DEDUCTIONS, Page 18.
On the Issue Date and each Monthly Anniversary, the following deductions are
made from the Policy Account Value:
(a) administrative charges
(b) insurance charges
(c) supplemental benefit charges.
The monthly deduction is made from the Subaccounts pro rata on the basis of
the portion of Policy Account Value in each Subaccount. The administrative
charge varies by current Policy Face Amount. There is also an additional monthly
deduction during the first Policy year and the 12 months immediately following
an increase in Face Amount.
See CHARGES AND DEDUCTIONS, Page 18.
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Deductions are also made on a daily basis against the assets of each
Subaccount. Daily charges calculated at a current annual rate of 0.90% are
charged for mortality and expense risks. This charge may be decreased to not
less than 0.50% in Policy years 11 and later. It is guaranteed not to exceed
0.90% for the duration of the Policy.
If the Policy is surrendered during the first 14 Policy Years, We will
deduct a Surrender Charge for the Initial Face Amount. If a Policy is
surrendered within 14 years immediately following an increase in Face Amount, we
will deduct a surrender charge for the increase in Face Amount. The surrender
charge will be deducted before any surrender proceeds are paid.
A charge for partial surrenders is equal to a pro rata portion of the
surrender charge that would apply to a full surrender. A partial surrender
charge is also deducted from the Policy Account Value upon a decrease in Face
Amount.
The administrative charge upon a partial surrender will be equal to the
lesser of $25 or 2% of the amount surrendered.
See CHARGES AND DEDUCTIONS, Page 18.
THE DEATH BENEFIT
The Policy provides for the payment of benefits upon the death of the
Insured. Upon application for a Policy, the Owner designates a Planned Periodic
Premium. The Policy indicates the initial Face Amount of insurance. The Owner
also elects in the application to have the Death Benefit determined under one of
two available options. Under Option I, the Death Benefit will equal the Face
Amount on the date of the Insured's death or, if greater, the Policy Account
Value on the date of the Insured's death increased by the applicable percentage
set forth in the Policy. Under Option II, the Death Benefit will equal the Face
Amount on the date of the Insured's death plus the Policy Account Value or, if
greater, the Policy Account Value on the date of the Insured's death increased
by the applicable percentage set forth in the Policy.
See DEATH BENEFIT and CHANGES in DEATH BENEFIT OPTION, pages 24 and 25,
respectively.
PREMIUM FEATURES
A. Basic Minimum Premium
A Table of Basic Minimum Premiums for various ages, sex and Face Amount
in the nonsmoker class is provided in the Appendix. The Premium for the
initial Face Amount must be at least as great as the Basic Minimum
Premium at the time of application adjusted for the Attained Age, any
substandard Premium, and any supplemental benefits riders.
B. Planned Periodic Premium
The Planned Periodic Premium is the Premium designated at the time of
application as the amount planned to be paid at specific intervals until
the Maturity Date.
C. Flexibility:
In general Premiums are flexible as to both timing and amount. If
Premiums cease at any time, the insurance provided under the Policy will
continue for as long as the Net Cash Surrender Value is sufficient to
keep the Policy in force (see Grace Period). See PREMIUMS and
ALLOCATIONS, Page 14.
When applying for a Policy, an Owner will determine a Planned Periodic
Premium that provides for the payment of level Premiums over a specified period
of time. Each Owner will receive a Premium reminder notice on either an annual,
semi-annual, quarterly, or monthly basis; however, the Owner is not required to
pay Planned Periodic Premiums.
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Payment of the Planned Periodic Premiums will not guarantee that a Policy
will remain in force. Instead, the duration of the Policy depends upon the
Policy's Net Cash Surrender Value. Even if Planned Periodic Premiums are paid,
the Policy will lapse any time the Net Cash Surrender Value is insufficient to
pay the current monthly deduction and a Grace Period expires without sufficient
payment. Any payment of additional Premium must be at least $50.00. The Company
also may reject or limit any Premium that would result in an immediate increase
in the net amount at risk under the Policy.
For information regarding the taxation of the Policy under federal income
tax law, see TAX CONSIDERATIONS, Page 37.
PERFORMANCE INFORMATION
The Company from time to time may advertise the "total return" and the
"average annual total return" of the Subaccounts and the Funds. BOTH TOTAL
RETURN AND AVERAGE TOTAL RETURN FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE
NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
"Total Return" for a portfolio refers to the total of the income generated
by the portfolio net of total portfolio operating expenses plus capital gains
and losses, realized or unrealized. "Total Return" for the Subaccounts refers to
the total of the income generated by the portfolio net of total portfolio
operating expenses plus capital gains and losses, realized or unrealized, and
the monthly deduction charge. "Average Annual Total Return" reflects the
hypothetical annually compounded return that would have produced the same
cumulative return if the Funds portfolio's or Subaccount's performance had been
constant over the entire period. Because average annual total returns tend to
smooth out variations in the return of the portfolio, they are not the same as
actual year-by-year results.
Performance information may be compared, in reports and promotional
literature, to: (i) the Standard & Poor's 500 Stock Index ("S & P 500"), Dow
Jones Industrial Average ("DJIA"), Shearson Lehman Aggregate Bond Index or other
unmanaged indices so that investors may compare the Subaccount results with
those of a group of unmanaged securities widely regarded by investors as
representative of the securities markets in general; (ii) other groups of
variable life separate accounts or other investment products tracked by Lipper
Analytical Services, a widely used independent research firm which ranks mutual
funds and other investment products by overall performance, investment
objectives, and assets, or tracked by other services, companies, publications,
or persons, such as Morningstar, Inc., who rank such investment products on
overall performance or other criteria; or (iii) the Consumer Price Index (a
measure for inflation) to assess the real rate of return from an investment in
the Subaccount. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.
The Company may provide in advertising, sales literature, periodic
publications or other materials information on various topics of interest to
Owners and prospective Owners. These topics may include the relationship between
sectors of the economy and the economy as a whole and its effect on various
securities markets, investment strategies and techniques (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer and account rebalancing), the advantages and disadvantages of
investing in tax-deferred and taxable investments, customer profiles and
hypothetical purchase and investment scenarios, financial management and tax and
retirement planning, and investment alternatives to certificates of deposit and
other financial instruments, including comparisons between the Policies and the
characteristics of and market for such financial instruments.
The Policies were first offered to the public in 1995. However, total return
data may be advertised based on the period of time that the portfolios have been
in existence. The results for any period prior to the Policies being offered
will be calculated as if the Policies had been offered during that period of
time, with all charges assumed to be those applicable to the Policies.
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Performance information for any Subaccount in any advertising, will reflect
only the performance of a hypothetical investment in the Subaccount during the
particular time period on which the calculations are based. Performance
information should be considered in light of the investment objectives and
policies, characteristics and quality of the portfolio in which the Subaccount
invests and the market conditions during the given time period, and should not
be considered as a representation of what may be achieved in the future. Actual
returns may be more or less than those shown in any advertising and will depend
on a number of factors, including the investment allocations by an Owner and the
different investment rates of return for the portfolios.
AVERAGE ANNUAL TOTAL RETURNS*
AS OF DECEMBER 29, 1995
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INCEPTION SINCE
PORTFOLIO DATE 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
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ALLIANCE
Conservative Investors.................... 10/28/94 15.95% N/A N/A N/A 14.01%
Growth Investors.......................... 10/28/94 19.41% N/A N/A N/A 14.82%
Growth.................................... 09/15/94 34.02% N/A N/A N/A 30.41%
Growth & Income........................... 01/14/91 34.55% 13.75% N/A N/A 10.14%
DREYFUS
Stock Index............................... 09/29/89 33.13% 13.01% 14.53% N/A 11.00%
Zero Coupon 2000.......................... 08/31/90 15.50% 7.90% 10.03% N/A 10.66%
FIDELITY
Asset Manager............................. 09/06/89 15.93% 9.05% 11.76% N/A 10.26%
Growth.................................... 10/09/86 34.14% 16.32% 19.70% N/A 13.81%
Overseas.................................. 01/28/87 8.68% 14.28% 7.15% N/A 6.35%
Investment Grade Bond..................... 12/05/88 16.28% 6.86% 8.26% N/A 7.96%
High Income............................... 09/19/85 19.43% 11.60% 17.83% 10.46% 10.79%
Money Market.............................. 04/01/82 4.47% 3.36% 3.63% 5.09% 6.12%
VAN ECK
Gold & Natural Resources.................. 09/01/89 10.08% 19.31% 9.20% N/A 5.84%
Worldwide Balanced........................ 12/23/94 (0.99)% N/A N/A N/A (1.00)%
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*This performance information reflects the total of the income generated by the
portfolio net of the total portfolio operating expenses, plus capital gains and
losses, realized or unrealized, and net of the mortality and expense risk
charge. The performance results do not reflect: monthly deductions; cost of
insurance; surrender charges; sales loads and any state or local premium taxes
(see charges and deductions in the prospectus). If these charges were included,
the total return figures would be lower. The data assumes the policy's
subaccounts were in existence on the portfolio's inception date. The policy was
first offered on May 4, 1995. Data for the Tomorrow Funds has not been provided
since they were not in existence on December 29, 1995.
GENERAL INFORMATION ABOUT THE COMPANY,
THE SEPARATE ACCOUNT AND THE FUNDS
THE COMPANY
AIG Life Insurance Company is a stock life insurance company which is
organized under the laws of the State of Delaware. The Company provides a full
range of individual and group life, disability, annuities, accidental death and
dismemberment policies. The Company is a subsidiary of American International
Group, Inc., which serves as the holding company for a number of companies
engaged in the international insurance business, both life and general, in
approximately 130 countries and jurisdictions around the world.
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The Company may from time-to-time publish in advertisements, sales
literature and reports to Owners, the ratings and other information assigned to
it by one or more independent rating organizations such as A. M. Best Company,
Moody's, and Standard & Poor's. The purpose of the ratings is to reflect the
financial strength and/or claims-paying ability of the Company and should not be
considered as bearing on the investment performance of assets held in the
Separate Account. Each year the A. M. Best Company reviews the financial status
of thousands of insurers, culminating in the assignment of Best's Ratings. These
ratings reflect A. M. Best's current opinion of the relative financial strength
and operating performance of an insurance company in comparison to the norms of
the life/ health insurance industry. In addition, the claims-paying ability of
the Company as measured by Standard & Poor's Insurance Ratings Services, and the
financial strength of the Company as measured by Moody's Investors Services, may
be referred to in advertisements, sales literature or in reports to Owners.
These ratings are their opinions of an operating insurance company's financial
capacity to meet the obligations of its life insurance policies and annuity
contracts in accordance with their terms. In regard to their ratings of the
Company, these ratings are explicitly based on the existence of a Support
Agreement, dated as of December 31, 1991, between the Company and its parent
American International Group, Inc. ("AIG"), pursuant to which AIG has agreed to
cause the Company to maintain a positive net worth and to provide the Company
with funds on a timely basis sufficient to meet the Company's obligations to its
policyholders. The Support Agreement is not, however, a direct or indirect
guarantee by AIG to any person of the payment of any of the Company's
indebtedness, liabilities or other obligations (including obligations to the
Company's policyholders).
The ratings are not recommendations to purchase the Company's life insurance
or annuity products, or to hold or sell these products, and the ratings do not
comment on the suitability of such products for a particular investor. There can
be no assurance that any rating will remain in effect for any given period of
time or that any rating will not be lowered or withdrawn entirely by a rating
organization if, in such organization's judgment, future circumstances relating
to the Support Agreement, such as a lowering of AIG's long-term debt rating, so
warrant. The ratings do not reflect the investment performance of the Separate
Account or the degree of risk associated with an investment in the Separate
Account.
THE SEPARATE ACCOUNT
We established Variable Account II (the "Separate Account") as a separate
investment account on June 5, 1986. It may be used to support the Policies as
well as other variable life insurance policies, and for other purposes permitted
by law. The Separate Account is registered with the Securities and Exchange
Commission as a unit investment trust under the Investment Company Act of 1940
(the "1940 Act") and qualifies as a "separate account" within the meaning of the
federal securities law.
We own the assets in the Separate Account. The Separate Account is divided
into Subaccounts. The Subaccounts available under the Policies invest in shares
of a specific series of Alliance Variable Products Series Fund, Inc. ("Alliance
Funds"); of Fidelity Investments Variable Insurance Products Fund ("Fidelity
Fund") and Fidelity Investments Variable Insurance Products Fund II ("Fidelity
Fund II"); Dreyfus Variable Investment Fund ("Dreyfus Fund"); the Tomorrow Funds
Retirement Trust ("Tomorrow Funds"); and Van Eck Investment Trust ("Van Eck
Funds"), or in shares of the Dreyfus Stock Index Fund. The Separate Account may
include other Subaccounts which are not available under the Policies and are not
otherwise discussed in this prospectus.
Income, gains and losses, realized or unrealized, of a Subaccount are
credited to or charged against the Subaccount without regard to any other
income, gains or losses of the Company. Assets equal to the reserves and other
contract liabilities with respect to each Subaccount are not chargeable with
liabilities arising out of any other business or account of the Company. If the
assets exceed the required reserves and other liabilities, we may transfer the
excess to our general account. We are obligated to pay all benefits provided
under the Policies.
Subject to compliance with all applicable regulatory requirements, we have
reserved certain rights. We have the right to change, add or delete designated
investment companies. We have the right
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to add or remove Subaccounts. We have the right to withdraw assets of a class of
policies to which the Policy belongs from a Subaccount and put them in another
Subaccount. We also have the right to combine any two or more Subaccounts. The
term Subaccount in the Policy shall then refer to any other Subaccount in which
the assets of a class of policies to which the Policy belongs were placed.
We have the right to register other separate accounts or deregister the
Separate Account under the Investment Company Act of 1940. We have the right to
run the Separate Account under the direction of a committee, and discharge such
committee at any time. We have the right to restrict or eliminate any voting
rights of Owners, or other persons who have voting rights as to the Separate
Account. We also have the right to operate the Separate Account or one or more
of the Subaccounts by making direct investments or in any other form. If We do
so, We may invest the assets of the Separate Account or one or more of the
Subaccounts in any legal investments. We will rely upon Our own or outside
counsel for advice in this regard. Also, unless otherwise required by law or
regulation, an investment advisor or any investment of a Subaccount of Our
Separate Account will not be changed by Us unless approved by the Commissioner
of Insurance of the State of Delaware or deemed approved in accordance with such
law or regulation. If so required, the process for getting such approval is on
file with the insurance supervisory official of the jurisdiction in which this
Policy is delivered.
If any of these changes result in a material change in the underlying
investments of a Subaccount of Our Separate Account, We will notify You of such
change, as required by law. If You have value in that Subaccount, We will
transfer it at Your written direction from that Subaccount (without charge) to
another Subaccount of Our Separate Account or to Our Guaranteed Account, and You
may then change Your Premium allocation percentages.
THE FUNDS AND THE INVESTMENT ADVISORS
Alliance Funds, Fidelity Fund, Fidelity Fund II, Dreyfus Fund, Tomorrow
Funds, and Van Eck Funds are each registered with the SEC as a diversified
open-end management investment company under the 1940 Act. Each is a series
fund-type mutual fund made up of different series or funds ("Funds"). The
Dreyfus Stock Index Fund (also a "Fund" herein) is an open-end, non-diversified,
management investment company, intended to be a funding vehicle for separate
accounts of life insurance companies. Shares of the Funds are sold only to
separate accounts of life insurance companies. The investment objectives of each
of the Funds in which Subaccounts invest are set forth below. There is, of
course, no assurance that these objectives will be met. The Fund prospectuses
may include series or funds which are not available under this Policy.
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
CONSERVATIVE INVESTORS PORTFOLIO -- seeks the highest total return without
undue risk to principal by investing in a diversified mix of publicly traded
equity and fixed-income securities.
GROWTH INVESTORS PORTFOLIO -- seeks the highest total return available with
reasonable risk by investing in a diversified mix of publicly traded equity and
fixed-income securities.
GROWTH PORTFOLIO -- seeks the long term growth of capital by investing
primarily in common stocks and other equity securities.
GROWTH AND INCOME PORTFOLIO -- seeks to balance the objectives of reasonable
current income and opportunities for appreciation through investments primarily
in dividend-paying common stocks of good quality.
Alliance Variable Products Series Fund, Inc., is managed by Alliance Capital
Management L.P., ("Alliance"). The Fund also includes other portfolios which are
not available for use by the Separate Account. More detailed information
regarding management of the Fund, investment objectives, investment advisory
fees and other charges, may be found in the current Alliance Funds Prospectus
which contains a discussion of the risks involved in investing. The Alliance
Funds Prospectus is included with this Prospectus.
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DREYFUS VARIABLE INVESTMENT FUND
ZERO COUPON 2000 PORTFOLIO -- seeks to provide as high an investment return
as is consistent with the preservation of capital. This portfolio invests
primarily in debt obligations of the U.S. Treasury that have been stripped of
their unmatured interest coupons, interest coupons that have been stripped from
debt obligations issued by the U.S. Treasury, receipts and certificates for such
stripped debt obligations, and stripped coupons and zero coupon securities
issued by domestic corporations. This portfolio's assets will consist primarily
of portfolio securities which will mature on or about December 31, 2000, at
which time the portfolio will be liquidated. Prior to December 31, 2000, you
will be offered the opportunity to exchange your investment to another
Subaccount.
DREYFUS STOCK INDEX FUND
The Fund seeks to provide investment results that correspond to the price
and yield performance of publicly traded common stocks in the aggregate, as
represented by the Standard & Poor's 500 Composite Stock Price Index. In
anticipation of taking a market position, the fund is permitted to purchase and
sell stock index futures. The Fund is neither sponsored by nor affiliated with
Standard & Poor's Corporation.
The Dreyfus Corporation serves as the investment adviser for the Zero Coupon
2000 Portfolio which is the available portfolio of the Dreyfus Variable
Investment Fund. The fund also includes other portfolios which are not available
under this prospectus as funding vehicles for the Policies. Wells Fargo Nikko
Investment Advisers ("WFNIA") serves as the index fund manager of the Dreyfus
Stock Index Fund. More detailed information regarding management of the funds,
investment objectives, investment advisory fees and other charges assessed by
the funds, are contained in the prospectuses of the Dreyfus Variable Investment
Fund and of the Dreyfus Stock Index Fund, each of which is included with this
Prospectus.
FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND
GROWTH PORTFOLIO -- seeks to aggressively achieve capital appreciation
through investments primarily in common stock.
HIGH INCOME PORTFOLIO -- seeks to obtain a high level of current income by
investing primarily in high-yielding, lower-rated, fixed-income securities,
while also considering growth of capital.
OVERSEAS PORTFOLIO -- seeks the long-term growth of capital primarily
through investments in securities of companies and economies outside of the
United States.
MONEY MARKET PORTFOLIO -- seeks to obtain as high a level of current income
as is consistent with preserving capital and providing liquidity. The fund will
invest only in high quality U.S. dollar-denominated money market securities of
domestic and foreign issuers. AN INVESTMENT IN MONEY MARKET PORTFOLIO IS NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE
THAT THE FUND WILL MAINTAIN A STABLE $1.00 SHARE PRICE.
FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND II
ASSET MANAGER PORTFOLIO -- seeks to provide a high total return with reduced
risk over the long term by allocating its assets among stocks, bonds and
short-term income instruments.
INVESTMENT GRADE BOND PORTFOLIO -- seeks as high a level of current income
as in consistent with the preservation of capital by investing in a broad range
of investment-grade fixed-income securities. The fund will maintain a
dollar-weighted average portfolio maturity of ten years or less.
Fidelity Management & Research Company ("FMR") is the investment advisor for
both the Variable Insurance Products Fund and Variable Insurance Products Fund
II. FMR has entered into a sub-advisory agreement with FMR Texas, Inc., on
behalf of the Money Market Portfolio. On behalf of the Overseas Portfolio, FMR
has entered into sub-advisory agreements with Fidelity Management & Research
(U.K.) Inc. (FMR U.K.), Fidelity Management & Research (Far East) Inc. (FMR Far
East), and Fidelity International Investment Advisors (FIIA). FMR U.K. and FMR
Far East also are sub-
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advisors to the Asset Manager Portfolio. Both Fidelity Fund and Fidelity Fund II
include other portfolios which are not available under this prospectus as
funding vehicles for the Policies. More detailed information regarding
management of the funds, investment objectives, investment advisory fees and
other charges assessed by the Fidelity Fund, are contained in the prospectuses
of the funds, each of which is included with this Prospectus.
TOMORROW FUNDS RETIREMENT TRUST
SHORT-TERM RETIREMENT FUND -- seeks to satisfy the retirement goals of
investors who are currently between 51 and 65 years of age and with an average
remaining life expectancy in the range of 20-30 years.
MEDIUM-TERM RETIREMENT FUND -- seeks to satisfy the retirement goals of
investors who are currently between 36 and 50 years of age and with an average
remaining life expectancy in the range of 35-50 years.
LONG-TERM RETIREMENT FUND -- seeks to satisfy the retirement goals of
investors who are currently between 22 and 35 years of age and with an average
remaining life expectancy in the range of 50 years of more.
Each Tomorrow Funds portfolio invests its assets, in varying amounts, in
equity and fixed-income securities of all types. The amount of assets allocated
to equity securities is currently invested, in varying amounts, among large
capitalization stocks, medium capitalization stocks, small capitalization stocks
and, indirectly through other investment companies, foreign securities.
Typically, the longer the average life expectancy of the target class of
investors in a Tomorrow Funds portfolio, the greater the allocation of assets of
that portfolio to securities with high growth potential and, correspondingly,
more risk, such as small capitalization stocks. Conversely, the shorter the
average life expectancy of the target class of investors in a Tomorrow Funds
portfolio, the greater the emphasis on current income and capital preservation
of assets and, therefore, the greater the allocation of assets of that portfolio
to fixed-income securities. Each Tomorrow Funds portfolio will be managed more
conservatively as the average age of its target class of investors increases.
Weiss, Peck & Greer, L.L.C. is the investment adviser for the Tomorrow Funds
portfolios. Tomorrow Funds include other portfolios which are not available
under this Prospectus as funding vehicles for the Contracts. More detailed
information regarding management of the funds, investment objectives, investment
advisory fees and other charges assessed by the Tomorrow Funds, are contained in
the prospectuses of the Tomorrow Funds, included with this Prospectus.
THERE IS NO ASSURANCE THAT ANY OF THE PORTFOLIOS WILL ACHIEVE THEIR STATED
OBJECTIVE.
VAN ECK INVESTMENT TRUST
WORLDWIDE BALANCED FUND -- seeks long term capital appreciation together
with current income.
GOLD AND NATURAL RESOURCES FUND -- seeks long-term capital appreciation by
investing in equity and debt securities of companies engaged in the exploration,
development, production and distribution of gold and other natural resources,
such as strategic and other metals, minerals, forest products, oil, natural gas
and coal. Current income is not an investment objective.
Van Eck Associates Corporation is the investment adviser and manager of The
Van Eck Investment Trust ("Van Eck Funds"). Van Eck Associates Corporation
serves as investment adviser to the Gold and Natural Resources Fund, and has
entered into sub-advisory agreements to provide investment advice for certain
portfolios. Fiduciary International Inc. ("FII") serves as a sub-adviser to the
Worldwide Balanced Fund. Van Eck Funds include other portfolios which are not
available under this prospectus as funding vehicles for the Policies. More
detailed information regarding management of the funds, investment objectives,
investment advisory fees and other charges assessed by the Van Eck Funds, are
contained in the prospectus for the funds included with this Prospectus.
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The shares of Alliance Funds, Fidelity Fund, Fidelity Fund II, Dreyfus Fund,
the Dreyfus Stock Index Fund, Tomorrow Funds, and Van Eck Funds are sold not
only to the Separate Account, but may be sold to other separate accounts of the
Company that fund benefits under variable annuity policies. The shares of
Alliance Funds, Fidelity Fund, Fidelity Fund II, Dreyfus Fund, the Dreyfus Stock
Index Fund, the Tomorrow Funds and Van Eck Funds are also sold to separate
accounts of other insurance companies. It is conceivable that in the future it
may become disadvantageous for variable life and variable annuity Policy
separate accounts to invest in the same underlying mutual fund. Although neither
we nor Alliance Funds, Fidelity Fund, Fidelity Fund II, Dreyfus Fund, the
Dreyfus Stock Index Fund, Tomorrow Funds, and Van Eck Funds currently perceive
or anticipate any such disadvantage, the Company will monitor events to
determine whether any material conflict between variable annuity Owners and
variable life Owners.
Material conflicts could result from such occurrences as: (1) changes in
state insurance laws; (2) changes in federal income tax law; (3) changes in the
investment management of any Fund; or (4) differences between voting
instructions given by variable annuity Owners and those given by variable life
Owners. In the event of a material irreconcilable conflict, We will take the
steps necessary to protect our variable annuity and variable life Owners. This
could include discontinuance of investment in a Fund.
Each Fund sells and redeems its shares at Net Asset Value without any sales
charge. Any dividends or distributions from security transactions of a Fund are
reinvested at Net Asset Value in shares of the same Fund; however, there are
sales and additional charges associated with the purchase of the Policies. See
PREMIUMS AND ALLOCATIONS, Page 14.
Further information about the Funds and the managers is contained in the
accompanying prospectuses, which You should read in conjunction with this
prospectus.
SUBSTITUTION OF SECURITIES
If investment in a Subaccount should no longer be possible or, if in Our
judgment, becomes inappropriate to the purposes of the Policies, or, if in Our
judgment, investment in another Subaccount or insurance company separate account
is in the interest of Owners, We may substitute another Subaccount or insurance
company separate account. No substitution may take place without notice to
Owners and prior approval of the SEC and insurance regulatory authorities, to
the extent required by the 1940 Act and applicable law.
VOTING RIGHTS
We are the legal owner of shares held by the Subaccounts and as such have
the right to vote on all matters submitted to shareholders of the Funds.
However, as required by law, We will vote shares held in the Subaccounts at
regular and special meetings of shareholders of the Funds in accordance with
instructions received from Owners with a Policy Account Value in the
Subaccounts. Should the applicable federal securities laws, regulations or
interpretations thereof change so as to permit Us to vote shares of the Funds in
Our own right, We may elect to do so.
To obtain voting instructions from Owners, before a meeting We will send
Owners voting instruction material, a voting instruction form and any other
related material. The number of shares held by each Subaccount for which an
Owner may give voting instructions is currently determined by dividing the
portion of the Owners Policy Account Value in the Subaccount by the Net Asset
Value of one share of the applicable Fund. Fractional votes will be counted. The
number of votes for which an Owner may give instructions will be determined as
of a date chosen by the Company but not more than 90 days prior to the meeting
of shareholders. Shares held by a Subaccount for which no timely instructions
are received will be voted by the Company in the same proportion as those shares
for which voting instructions are received.
We may, if required by state insurance officials, disregard Owner voting
instructions if such instructions would require shares to be voted so as to
cause a change in sub-classification or investment objectives of one or more of
the Funds, or to approve or disapprove an investment advisory
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agreement. In addition, We may under certain circumstances disregard voting
instructions that would require changes in the investment Policy or investment
adviser of one or more of the Funds, provided that We reasonably disapprove of
such changes in accordance with applicable federal regulations. If We ever
disregard voting instructions, We will advise Owners of that action and of Our
reasons for such action in the next semiannual report. Finally, We reserve the
right to modify the manner in which We calculate the weight to be given to pass
through voting instructions where such a change is necessary to comply with
current federal regulations or the current interpretation thereof.
PREMIUMS AND ALLOCATIONS
APPLYING FOR A POLICY
If You want to purchase a Policy, You must complete an application and
submit it to one of Our authorized agents. The minimum Policy size will be
$50,000 of Face Amount at issue. You must pay an initial Premium at least equal
to the minimum required. See PREMIUMS, below. Your Premium may be submitted with
the application or at a later date, but Policy coverage will not become
effective until the initial Premium is received at Our Administrative Office.
We require satisfactory evidence of the Insureds insurability, which may
include a medical examination of the Insured. Generally, We will issue a Policy
covering an Insured up to age 75 if evidence of insurability satisfies Our
underwriting rules. Acceptance of an application depends on Our underwriting
rules. We reserve the right to reject an application for any reason.
PERIOD TO EXAMINE AND CANCEL POLICY
The Policy provides for an initial period during which the Owner may examine
the Policy and cancel it for any reason. The Owner may cancel the Policy before
the latest of: (a) 45 days after Part I of the Application for the Policy is
signed; (b) 10 days after the Owner receives the Policy; and (c) 10 days after
the Company mails or personally delivers a Notice of Withdrawal Right to the
Owner. The period will be extended beyond 10 days after Policy delivery, if
required by the state where the Owner resides. Upon returning the Policy to the
Administrative Office or to an agent of the Company within such time with a
written request for cancellation, the Owner will receive a refund equal to the
gross premium paid on the Policy and will not reflect the investment experience
of the Separate Account.
The Period to Examine and Cancel also applies after a requested increase in
Face Amount as to the amount of the increase and the Premium paid for the
increased Face Amount.
PREMIUMS
The minimum initial Premium required depends on a number of factors, such as
the age, sex and underwriting rate class of the proposed Insured, the desired
Face Amount ($50,000 minimum amount) and any supplemental benefits. The minimum
initial Premium must be at least equal to two monthly payments of the Planned
Periodic Premium. See PLANNED PERIODIC PREMIUMS, below. Sample Basic Minimum
Premiums are shown in the Appendix.
Additional Premiums may be paid in any amount and at any time, subject to
the following limits. First, a Premium must be at least $50 and must be sent to
Our Administrative Office. We may require satisfactory evidence of insurability
before accepting any Premium which results in an increase in the net amount at
risk (defined on page 20).
In addition, total Premiums paid may not exceed guideline Premium
limitations for life insurance set forth in the Internal Revenue Code. We will
refund any portion of any Premium which is determined to be in excess of the
Premium limit established by law to qualify a Policy as a Policy for life
insurance. (The amount refunded will be the excess Premium.) In addition, We
will monitor Policies and will attempt to notify the Owner on a timely basis if
his or her Policy is in jeopardy of becoming a modified endowment contract under
the Internal Revenue Code. See TAX CONSIDERATIONS, page 37.
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Lastly, no Premium will be accepted after the Maturity Date.
We will send You a reminder notice for Your Planned Periodic Premiums.
PLANNED PERIODIC PREMIUM. When applying for a Policy, You select a plan for
paying level Premiums at specified intervals, e.g., monthly, quarterly,
semi-annually or annually, until the Maturity Date. You are not required to pay
Premiums in accordance with this plan; rather, You can pay more or less than
planned or skip a Planned Periodic Premium entirely. You can change the amount
and frequency of Planned Periodic Premiums whenever You want by sending written
notice to Our Administrative Office. However, We reserve the right to limit the
amount of a Premium or the total Premiums paid, as discussed above.
The Planned Periodic Premium may be recalculated if the Policy Face Amount
is increased or decreased.
The first year minimum Premium payable must be at least as great as the
Planned Periodic Premium. If Premiums cease at any time, the insurance provided
under the Policy will continue for as long as the Net Cash Surrender Value in
the Policy is sufficient to keep it in force (see GRACE PERIOD).
PREMIUMS UPON INCREASE IN SPECIFIED FACE AMOUNT. Depending on the Policy
Account Value at the time of an increase in the Face Amount and the amount of
the increase requested, an additional premium or change in the amount of Planned
Periodic Premiums may be advisable. See CHANGES IN FACE AMOUNT, page 25.
PREMIUMS TO PREVENT LAPSE
Failure to pay Planned Periodic Premiums will not necessarily cause a Policy
to lapse. Conversely, paying all Planned Periodic Premiums will not necessarily
guarantee that a Policy will not lapse. Rather, whether a Policy lapses depends
on whether its Net Cash Surrender Value is insufficient to cover the monthly
deduction (see page 19) when due.
If the Net Cash Surrender Value on a Monthly Anniversary is less than the
amount of the monthly deduction to be deducted on that date, the Policy will be
in default and a Grace Period will begin. This could happen if investment
experience has been sufficiently unfavorable that it has resulted in a decrease
in the Net Cash Surrender Value or the Net Cash Surrender Value has decreased
because of any combination of the following: outstanding loans, partial
surrenders, expense charges, or insufficient Premiums paid to offset the monthly
deduction.
GRACE PERIOD. If Your Policy goes into default, You will be allowed a
61-day Grace Period to pay a Premium sufficient to keep the Policy in force for
3 months. We will send notice of the amount required to be paid during the Grace
Period ("Grace Period Premium") to Your last known address and to any assignee
of record. The Grace Period will begin when the notice is sent. Your Policy will
remain in effect during the Grace Period. If the Insured should die during the
Grace Period or before the Grace Period Premium is paid, the Death Benefit will
still be payable to the Beneficiary, although the amount paid will reflect a
reduction for the monthly deductions due on or before the date of the Insureds
death. See Amount of Death Benefit, page 37. If the Grace Period Premium has not
been paid before the Grace Period ends, Your Policy will lapse. It will have no
value and no benefits will be payable. See REINSTATEMENT, page 37.
A Grace Period also may begin if Outstanding Loans exceed the Policy limit.
See LOAN REPAYMENT; EFFECT IF NOT REPAID, page 26.
NET PREMIUM ALLOCATIONS
In the application, You specify the percentage of a Net Premium to be
allocated to each Subaccount. This allocation must comply with the allocation
rules described in the following paragraph. However, until the Period to Examine
and Cancel expires, all Net Premiums received are invested in
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the Money Market Subaccount. The first business day after the period expires,
the Policy Account Value in the Money Market Subaccount is transferred and
allocated based on the Premium allocation percentages in the application. See
DETERMINING THE POLICY VALUE, page 23.
The Premium allocation percentages specified in the application will apply
to subsequent Premiums until You change them. You can change the allocation
percentages at any time, subject to the rules below, by sending written notice
to Our Administrative Office. The change will apply to all Premiums received
with or after Your notice.
DOLLAR COST AVERAGING
If elected, this option allows for automatic transfer from the Money Market
Subaccount into other Subaccounts for a specified dollar amount or number of
months not in excess of 24. This option can be elected at any time provided
there is a minimum balance of $2,000 in the Money Market Subaccount at the time
of election. The allocation to the Subaccounts will be based on Your Premium
allocation that is in effect at the time of each transfer. The automatic
transfers will begin on the first Monthly Anniversary following the end of Your
Free Look Period; or, if You elect the option after Your application has been
submitted, the automatic transfers will begin on the second Monthly Anniversary
following the receipt of Your request at Our Administrative Office.
If You elect to transfer a specific dollar amount each month, the automatic
transfers will continue until Your Money Market Subaccount is depleted. If You
elect to have Your funds transferred over a specific number of months, We will
transfer a fraction equal to one divided by the number of months remaining in
the period. For example, if You elect to transfer over a 12 month period, the
first transfer will be 1/12 of Your Money Market Subaccount value, the second
transfer will be for 1/11, the third will be for 1/10 and so on until the end of
the requested period.
Automatic transfers will remain in effect until one of the following
conditions occur:
1. The funds in the Money Market Subaccount are depleted
2. We receive Your written request at Our Administrative Office to
cancel future transfers
3. We receive notification of death of the Insured
4. The Policy lapses
Use of Dollar Cost Averaging does not guarantee investment gains or protect
against loss in a declining market.
The allocation and transfer provisions discussed below do not apply to
transfers effected under the Dollar Cost Averaging Option.
ALLOCATION RULES. No less than 5% of a Premium may be allocated to any one
Subaccount. The sum of Your allocations must equal 100% and each allocation
percentage must be a whole number.
CREDITING PREMIUMS
The initial Net Premium will be credited to the Policy as of the Policy
Date. Subsequent Planned Periodic Premiums and accepted unplanned premiums will
be credited to the Policy and the Net Premiums will be invested as of the date
the Premium or notification of deposit is received at Our Administrative Office.
However, any Net Premiums requiring underwriting will be allocated to the Money
Market Subaccount until underwriting has been completed. When accepted or at the
end of the Period to Examine and Cancel, the Policy Account Value in the Money
Market Subaccount attributable to the resulting Net Premium will be credited to
the Policy and allocated in accordance with the specified allocation
percentages. Net Premiums not requiring underwriting will be invested in the
Subaccounts according to the specified allocation percentages directly. If
additional Premium is rejected, We will refund the excess amount.
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TRANSFERS
You may transfer Policy Account Value among the Subaccounts subject to the
following rules, some of which depend on whether Policy Account Value is to be
transferred from a Subaccount or the Guaranteed Account. Transfer requests must
be in writing. Transfers may not be requested until after the end of the Period
to Examine and Cancel (see page 14). A transfer will take effect on the date the
request is received at Our Administrative Office. We may, however, defer
transfers under the same conditions as described in the section WHEN PROCEEDS
ARE PAID, page 36. There is no limit on the number of transfers. However, after
six (6) transfers have been made during a Policy Year, We currently impose a $25
transfer charge on each subsequent transfer. See TRANSFER CHARGE, page 21. The
minimum amount of Policy Account Value that may be transferred is $250. If less
than the full amount of Policy Account Value in a Subaccount is being
transferred from the Subaccount, the amount remaining must be at least $250. If
the amount remaining would be less than $250, the full amount of the Policy
Account Value will be transferred. The Company reserves the right to increase or
decrease the number of "free" transfers allowed in any Policy Year.
SUBACCOUNT TRANSFER RULES. Transfers among Subaccounts and from Subaccounts
to the Guaranteed Account may be made at any time after the Period to Examine
and Cancel. All transfers processed on the same business date will count as one
transfer for purposes of determining whether the transfer is free or may be
subject to the $25 charge.
GUARANTEED ACCOUNT TRANSFER RULES. Policy Account Value held in the
Guaranteed Account may be transferred to a Subaccount or Subaccounts only during
the 60-day period within 30 days before and following the end of each Policy
Year. The amount transferred must be at least $250, or the Policy Account Value
held in the Guaranteed Account, whichever is less. If the amount transferred is
less than the Policy Account Value then held in the Guaranteed Account, at least
$250 must remain in the Guaranteed Account. The maximum allowable amount that
can be transferred from the Guaranteed Account, at any one time, is 25% of the
unloaned portion of the Guaranteed Account. See DEDUCTIONS FROM THE GUARANTEED
ACCOUNT, page 18 for additional rules and limits for the Guaranteed Account.
GUARANTEED ACCOUNT
Because of exemptive and exclusionary provisions, interests in the
Guaranteed Account have not been registered under the Securities Act of 1933 nor
has the Guaranteed Account been registered as an investment company under the
Investment Company Act of 1940. Accordingly, neither the Guaranteed Account nor
any interests therein are subject to the provisions of these Acts and, as a
result, the staff of the Securities and Exchange Commission has not reviewed the
disclosure in this Prospectus relating to the Guaranteed Account. The disclosure
regarding the Guaranteed Account may, however, be subject to certain generally
applicable provisions of the federal securities laws relating to the accuracy
and completeness of statements made in prospectuses.
The Guaranteed Account is an account within the general account of the
Company. It is part of Our general account assets. Our general account assets
are used to support Our insurance and annuity obligations other than those
funded by separate accounts. Subject to applicable law, We have sole discretion
over the investment of the assets of the general account. The Policy Loan
Account is part of the Guaranteed Account.
INTEREST CREDITED ON POLICY VALUE IN THE GUARANTEED ACCOUNT
Net Premiums allocated to the Guaranteed Account and Policy Account Values
transferred from the Subaccounts to the Guaranteed Account are credited to the
Guaranteed Account portion of the Policy Account Value. We will credit interest
on these amounts at rates We determine in Our sole discretion, but in no event
will interest credited on these amounts be less than an effective rate of at
least 0.32737% per month, compounded monthly which equates to 4% per year,
compounded annually. The Policy Loan Account portion of the Guaranteed Account
will be credited with interest at an annual rate that is 2.0% less than the then
current Policy loan interest rate.
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However, if at the time of an allocation or transfer to the Guaranteed
Account, We are crediting a rate of interest higher than 4%, the higher rate
will apply to the amount from the date of its allocation or transfer to the
Guaranteed Account through the end of the period during which the excess rate is
effective. If a higher rate of interest is credited, different rates of interest
may apply to amounts allocated or transferred at different times, and different
rates of interest may apply to amounts held in a Policy Loan Account than to the
remaining portion of Policy Account Value held in the Guaranteed Account. YOU
ASSUME THE RISK THAT INTEREST CREDITED MAY NOT EXCEED THE GUARANTEED MINIMUM
RATE OF 4% PER YEAR.
CALCULATING GUARANTEED ACCOUNT VALUE
The Guaranteed Account Value is calculated daily. See GUARANTEED ACCOUNT
VALUE, page 24.
DEDUCTIONS FROM THE GUARANTEED ACCOUNT
Amounts allocated to the Guaranteed Account at different times, whether from
Net Premiums or transfers, may be credited with different rates of interest.
Whenever a charge is deducted from the Policy Account Value in the Guaranteed
Account, or an amount is withdrawn from the Policy Account Value in the
Guaranteed Account to satisfy a partial surrender, transfer or Policy loan
request, the charge or withdrawal will be taken first from the amount most
recently allocated to the Guaranteed Account, then the amount next most recently
allocated, and so forth. See page 17 for limits and restrictions on transfers of
Policy Account Value from the Guaranteed Account.
If there is any Policy Account Value in the Policy Loan Account, it is not
available for transfers, partial surrenders or Policy loans, nor any charges
deducted from this portion of Policy Account Value. Amounts are transferred to
or from the Policy Loan Account only when Policy loans are taken or repayments
made. If an amount is transferred from the Policy Loan Account to the remaining
portion of the Guaranteed Account Value, it will be treated as a new allocation
to the Guaranteed Account and will be credited with interest at the rate then in
effect for Guaranteed Account allocations. See POLICY LOAN ACCOUNT, page 27.
PAYMENTS FROM THE GUARANTEED ACCOUNT
We may defer payment of proceeds from the Guaranteed Account for a partial
surrender, surrender or Policy loan request for up to six months from the date
We receive the written request. If a payment from the Guaranteed Account is
deferred for 30 days or more, it will bear interest at a rate of 4% per year
compounded annually while it is deferred.
CHARGES AND DEDUCTIONS
Periodically, the Company will deduct charges from the Policy Account Value
and also from each Premium to cover certain expenses related to issuing and
administering the Policy. These charges and deductions are described in the
Policy as either guaranteed or current. The Company will never charge more than
the guaranteed amount; however, solely within the Companys discretion, it may on
a current basis charge less than the guaranteed amount.
PREMIUM CHARGES
We will deduct a charge from each Premium. This charge consists of a 5%
sales charge plus an explicit percent of Premium equal to the state and local
premium tax rate applicable to the Policy (i.e., a typical state premium tax
rate would be in the range of 2% to 2.5%). An additional sales charge may be
deducted on a partial surrender or surrender of a Policy during the first 14
Policy Years. See SURRENDER CHARGES, Page 21.
The 5% sales charge partially compensates Us for the expenses of selling and
distributing the Policies, including paying sales commissions, printing
prospectuses, preparing sales literature and paying for other promotional
activities.
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DAILY MORTALITY AND EXPENSE RISK CHARGE
We deduct a daily charge from assets in the Subaccounts attributable to the
Policies for assuming certain mortality and expense risks under the Policy. This
charge does not apply to Guaranteed Account assets attributable to the Policies.
The guaranteed and current charge is at an annual rate of 0.90% of net assets.
Although the charge may be decreased to not less than 0.50% in Policy Years 11
and later, it is guaranteed not to exceed 0.90% for the duration of a Policy.
Starting in Policy Year 11, if the current charge is less than .90%, We will
notify You before We increase this charge. We may realize a profit from this
charge.
The mortality risk We assume is that the Insureds on the Policies may die
sooner than anticipated and that therefore the Company will pay an aggregate
amount of death benefits greater than anticipated. The expense risk we assume is
that expenses incurred in issuing and administering the Policies and the
Separate Account will exceed the amounts realized from the administrative
charges assessed against the Policies.
MONTHLY DEDUCTION
On the Issue Date and each Monthly Anniversary, We deduct the monthly
deduction from the Policy Account Value. The amount deducted on the Issue Date
is for the Policy Date and any Monthly Anniversaries that have elapsed since the
Policy Date. (For this purpose, the Policy Date is treated as a Monthly
Anniversary.) The monthly deduction consists of (1) administrative charges (the
"Monthly Expense Charge"), (2) insurance charges ("Cost of Insurance Charge"),
and (3) any charges for additional benefits added by supplemental agreement to a
Policy ("Supplemental Benefit Charges"), as described below. The monthly
deduction is deducted from the Accounts pro rata on the basis of the portion of
Policy Account Value in each Account. See DEDUCTIONS FROM THE GUARANTEED
ACCOUNT, page 18.
CURRENT AND GUARANTEED EXPENSE CHARGES. The monthly expense charge varies
by current Policy Face Amount. There is also an additional monthly charge (see
"First Year Additional Charge" in table below) during the first Policy year and
the twelve months immediately following an increase in Face Amount.
The monthly expense charges per Policy varying by the Policy Face Amount and
the additional monthly charge during the first Policy Year and every twelve
months immediately following an increase in Face Amount for current and
guaranteed expense charges are shown below:
<TABLE>
<CAPTION>
CURRENT GUARANTEED
MONTHLY EXPENSE CHARGE PER POLICY CHARGE CHARGE
- -------------------------------------------------------------------- --------- -----------
<S> <C> <C>
If Face Amount is between $50,000 and $199,999...................... $ 7.50 $ 15.00
If Face Amount is between $200,000 and $499,999..................... $ 5.00 $ 10.00
If Face Amount is $500,000 or greater............................... $ 4.00 $ 10.00
First Year Additional Charge........................................ $ 20.00 $ 25.00
</TABLE>
These charges compensate Us for administrative expenses associated with the
Policies and the Separate Account. These expenses relate to Premium billing and
collection, recordkeeping, processing Death Benefit claims, Policy Loans, Policy
changes, reporting and overhead costs, processing applications and establishing
Policy records.
COST OF INSURANCE CHARGE. This charge compensates Us for providing
insurance coverage. The charge depends on a number of factors, such as Attained
Age, sex and rate class of the Insured, and therefore will vary from Policy to
Policy and from Monthly Anniversary to Monthly Anniversary. For any Policy the
cost of insurance on a Monthly Anniversary is calculated by multiplying the cost
of insurance rate for the Insured by the net amount at risk under the Policy for
that Monthly Anniversary.
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<PAGE>
The Net Amount at Risk is calculated as (a) minus (b) where
(a) is the current Death Benefit at the beginning of the Policy month
divided by 1.0032737.
(b) is current total Policy Account Value.
The cost of insurance rate for a Policy is based on the Attained Age, sex
and rate class of the Insured, and therefore varies from time to time. We
currently place Insureds in one of three basic rate classifications, based on
our underwriting: a smoker, a nonsmoker standard, or a rate class involving a
higher mortality risk (a "substandard class"). Insureds Attained Age 14 and
under are placed in a rate class that does not distinguish between smoker and
nonsmoker, and are assigned to a smoker class at Attained Age 15 unless they
have provided satisfactory evidence that they qualify for a nonsmoker class.
We place the Insured in a rate class when We issue the Policy, based on Our
underwriting of the application. This original rate class applies to the initial
Face Amount. When an increase in Face Amount is requested, We conduct
underwriting before approving the increase (except as noted below) to determine
whether a different rate class will apply to the increase. If the rate class for
the increase has lower cost of insurance rates than the original rate class, the
rate class for the increase also will be applied to the initial Face Amount. If
the rate class for the increase has higher cost of insurance rates than the
original rate class, the rate class for the increase will apply only to the
increase in Face Amount, and the original rate class will continue to apply to
the initial Face Amount.
If there have been increases in the Face Amount, we may use different cost
of insurance rates for the increased portions of the policy Face Amount. For
purposes of calculating the cost of insurance charge after the Face Amount has
been increased, the Policy Account Value will be applied to the initial Face
Amount first and then to any subsequent increases in Face Amount. If at the time
an increase is requested, the Policy Account Value exceeds the initial Face
Amount (or any subsequently increased Face Amount) divided by 1.0032737, the
excess will then be applied to the subsequent increase in Face Amount in the
sequence of the increases.
If the death benefit equals the Policy Account Value multiplied by the
applicable death benefit corridor percentage, any increase in Policy Account
Value will cause an automatic increase in death benefit. The attained age and
underwriting class for such increase will be the same as that used for the most
recent increase in Face Amount (that has not been eliminated through a
subsequent decrease in Face Amount).
If there is a decrease in Face Amount after there had been prior increases
to the Face Amount, then for purposes of calculating the cost of insurance
charge, the decrease will first be applied to reduce any prior increases in Face
Amount, starting with the most recent increase in Face Amount and then to each
prior increase.
The guaranteed cost of insurance rates for substandard policies issued on a
table rated basis are based on multiples of the 1980 CSO tables. The substandard
multiple applicable depends on the substandard underwriting classification
assigned to the insured. Currently, multiples range from 125% to 500% of the
1980 CSO tables.
The guaranteed cost of insurance charges at any given time for a substandard
policy with flat extra charges will be based on the guaranteed maximum cost of
insurance rate for the policy (including table rating multiples if applicable,
the current net amount at risk at the time the deduction is made, plus the
actual dollar amount of the flat extra charge.
Our current cost of insurance rates may be less than the guaranteed rates.
Our current cost of insurance rates will be determined based on Our expectations
as to future mortality, investment, expense and persistency experience. These
rates may change from time to time. In the Companys discretion, the current
charge may be increased in any amount up to the maximum guaranteed charge shown
in the table.
20
<PAGE>
Cost of insurance rates (whether guaranteed or current) for an Insured in a
nonsmoker standard class are lower than guaranteed rates for an Insured of the
same age and sex in a smoker standard class. Cost of insurance rates (whether
guaranteed or current) for an Insured in a nonsmoker or smoker standard class
are generally lower than guaranteed rates for an Insured of the same age and sex
and smoking status in a substandard class.
We do not conduct underwriting for an increase in Face Amount if the
increase is requested as part of a conversion from a term Policy issued by the
Company. See SUPPLEMENTAL BENEFITS AND RIDERS, page 42. In the case of a term
conversion, the rate class that applies to the increase is the same rate class
that applied to the term Policy.
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND
BENEFITS. Mortality tables for the Policies generally distinguish between males
and females. Thus, Premiums and benefits under Policies covering males and
females of the same age will generally differ.
We do, however, also offer Policies based on unisex mortality tables if
required by state law. Employers and employee organizations considering purchase
of a Policy should consult their legal advisors to determine whether purchase of
a Policy based on sex-distinct actuarial tables is consistent with Title VII of
the Civil Rights Act of 1964 or other applicable law. Upon request, We may offer
Policies with unisex mortality tables to such prospective purchasers.
SUPPLEMENTAL BENEFIT CHARGES. See SUPPLEMENTAL BENEFITS AND RIDERS, page
42.
TRANSFER CHARGE
We currently impose a $25 transfer charge on any transfer of Policy Account
Value among the subaccounts in excess of six free transfers permitted each
Policy Year. If the charge is imposed, it will be deducted from the amount
requested to be transferred before allocation to the new Subaccount(s) and shown
in the Confirmation of the transaction. If an amount is being transferred from
more than one Subaccount, the transfer charge will be deducted proportionately
from the amount being transferred from each Subaccount. This charge, if imposed,
will reimburse Us for administrative expenses incurred in effecting transfers.
We do not anticipate making any profit on this charge.
SURRENDER CHARGES
If the Policy is surrendered during the first 14 Policy Years, We will
deduct a Surrender Charge for the initial Face Amount. If a Policy is
surrendered within 14 years after an increase in Face Amount, We will deduct a
Surrender Charge for the increase in Face Amount. The Surrender Charge will be
deducted before any surrender proceeds are paid.
SURRENDER CHARGE FOR INITIAL FACE AMOUNT. The surrender charge for the
initial Face Amount will be no greater than the sum of (1) and (2) times a
duration factor (as shown in the table below), where:
(1) is equal to 25% of the first year paid Premium up to the surrender
charge premium (which is an amount calculated separately for each Policy
based on age, sex and smoker/nonsmoker class and is provided in the
Appendix); and
(2) is equal to 4% of the first year paid Premium in excess of the surrender
charge premium
21
<PAGE>
The following table lists the Policy duration factor as described above:
<TABLE>
<CAPTION>
SURRENDER
POLICY DURATION CHARGE FACTOR
- --------------------------------------------------------------- -------------
<S> <C>
1.............................................................. 100%
2.............................................................. 100%
3.............................................................. 100%
4.............................................................. 100%
5.............................................................. 100%
6.............................................................. 90%
7.............................................................. 80%
8.............................................................. 70%
9.............................................................. 60%
10............................................................. 50%
11............................................................. 40%
12............................................................. 30%
13............................................................. 20%
14............................................................. 10%
15+............................................................ 0%
</TABLE>
A Table of Surrender Charge Premiums for various ages, sex and Face Amount
in the nonsmoker class is shown in Appendix B.
An increase in the Face Amount of the Policy will result in an additional
surrender charge during the 14 years. The additional surrender charge period
will begin on the effective date of the increase.
If the Face Amount of the Policy is reduced before the end of the 14th
Policy year or within 14 years immediately following a Face Amount increase, We
may also deduct a pro rata share of any applicable surrender charge from Your
Policy Account Value. Reductions will first be applied against the most recent
increase in the Face Amount of the Policy. They will then be applied to prior
increases in the Face Amount of the Policy in the reverse order in which such
increases took place, and then to the original Face Amount of the Policy.
PARTIAL SURRENDER CHARGE
The Partial Surrender Charge is equal to a pro rata portion of the surrender
charge that would apply to a full surrender, determined by multiplying the
applicable full surrender charge by a fraction (equal to the partial surrender
amount payable plus the Partial Surrender Administrative Charge divided by the
result of subtracting the applicable surrender charge from the unloaned portion
of the Policy Account Value). This amount is assessed against the Subaccounts or
the Guaranteed Account in the same manner as provided for with respect to the
partial surrender amount paid.
A partial surrender charge is also deducted from the Policy Account Value
upon a decrease in Face Amount. The charge is equal to the applicable surrender
charge multiplied by a fraction (equal to the decrease in Face Amount divided by
the Face Amount of the Policy prior to the decrease).
PARTIAL SURRENDER ADMINISTRATIVE CHARGE
We will deduct an administrative charge upon a partial surrender. This
charge is $25. If required by the insurance regulations of any state, the
administrative charge for a partial surrender will be equal to the lesser of $25
or 2% of the amount surrendered. This charge will be deducted from the Policy
Account Value in addition to the amount requested to be surrendered and will be
considered to be part of the partial surrender amount. See page for rules for
allocating the deduction and Partial Surrenders on page . We do not anticipate
making a profit on this charge.
22
<PAGE>
Each partial surrender will reduce the Policy Account Value by the amount of
partial surrender plus the proportional surrender charge and $25 fee. If the
Death Benefit coverage is the Level Death Benefit Option, the Face Amount will
also be reduced by the amount of the partial surrender in the following order:
1. The most recent increase in the Face Amount, if any, will be reduced
first
2. The next most recent increases in the Face Amount, if any, will then be
successively decreased
3. The initial Face Amount will then be decreased.
DISCOUNT PURCHASE PROGRAMS
The amount of the Surrender Charge may be reduced or eliminated when sales
of the Policies are made to individuals or to groups of individuals in a manner
that, in the opinion of the Company, results in savings of sales expenses. For
purchases made by officers, directors and employees of the Company, an
affiliate, or any individual, firm, or company that has executed the necessary
agreements to sell the Policies, and members of the immediate families of such
officers, directors, and employees, the Company may reduce or eliminate the
Surrender Charge.
HOW YOUR POLICY ACCOUNT VALUES VARY
There is no minimum guaranteed Policy Account Value or Net Cash Surrender
Value. These values will vary with the investment experience of the Subaccounts
and/or the crediting of interest in the Guaranteed Account, and will depend on
the allocation of Policy Account Value. If the Net Cash Surrender Value on a
Monthly Anniversary is less than the amount of the monthly deduction to be
deducted on that date (see page 19), the Policy will be in default and a Grace
Period will begin.
DETERMINING THE POLICY ACCOUNT VALUE
On the Policy Date the Policy Account Value is equal to the initial Net
Premium. If the Policy Date and the Issue Date are the same day, the Policy
Account Value is equal to the initial Net Premium, less the monthly deduction.
On each Valuation Date thereafter, the value is the aggregate of the
accumulation values in the Subaccounts and the Guaranteed Account portion of the
Policy Account Value. The Policy Account Value will vary to reflect the
performance of the Subaccounts to which amounts have been allocated, interest
credited on amounts allocated to the Guaranteed Account, charges, transfers,
withdrawals, Policy loans and Policy loan repayments.
ACCUMULATION UNIT VALUES. When You allocate an amount to a Subaccount,
either by Net Premium allocation or transfer of Policy Account Value, Your
Policy is credited with accumulation units in that Subaccount. The number of
accumulation units is determined by dividing the amount allocated to the
Subaccount by the Subaccounts accumulation unit value for the Valuation Date
when the allocation is effected.
The number of Subaccount accumulation units credited to Your Policy will
increase when Net Premiums are allocated to the Subaccount, amounts are
transferred to the Subaccount and loan repayments are credited to the
Subaccount. The number of Subaccount accumulation units credited to a Policy
will decrease when the allocated portion of the monthly deduction is taken from
the Subaccount, a Policy loan is taken from the Subaccount, an amount is
transferred from the Subaccount, or a partial surrender, including the partial
surrender charge, is taken from the subaccount.
A Subaccounts accumulation unit value varies to reflect the investment
experience of the underlying Portfolio, and may increase or decrease from one
Valuation Date to the next. The accumulation unit value for each Subaccount was
arbitrarily set at $10 when the Subaccount was established. For each Valuation
Period after the date of establishment, the accumulation unit value is
determined by multiplying the value of an accumulation unit for a Subaccount for
the prior valuation period by the net investment factor for the Subaccount for
the current valuation period.
23
<PAGE>
NET INVESTMENT FACTOR. The net investment factor is an index used to
measure the investment performance of a Subaccount from one Valuation Period to
the next. It is based on the change in net asset value of the Fund shares held
by the Subaccount, and reflects any dividend or capital gain distributions on
Fund shares and the deduction of the daily mortality and expense risk charge.
GUARANTEED ACCOUNT VALUE. On any Valuation Date, the Guaranteed Account
portion of the Policy Account Value of a Policy is the total of all Net Premiums
allocated to the Guaranteed Account, plus any amounts transferred to the
Guaranteed Account, plus interest credited on such Net Premiums and amounts,
less the amount of any transfers from the Guaranteed Account, less the amount of
any partial surrenders, including the partial surrender charges, taken from the
Guaranteed Account, and less the pro rata portion of the monthly deduction
deducted from the Guaranteed Account. If there have been any Policy Loans, the
Guaranteed Account Value is further adjusted to reflect the amount in the Policy
Loan Account held in the Guaranteed Account, including transfers to and from the
Policy Loan Account as loans are taken and repayments are made, and interest
credited on the Policy Loan Account.
NET POLICY ACCOUNT VALUE
The Net Policy Account Value on a Valuation Date is the Policy Account Value
less Outstanding Loans on that date.
CASH SURRENDER VALUE
The Cash Surrender Value on a Valuation Date is the Policy Account Value
reduced by any surrender charge that would be assessed if the Policy were
surrendered on that date. The Cash Surrender Value is used to calculate the loan
value and to determine whether Outstanding Loans exceed the Policy limits (see
page 27). The loan value may not exceed 90% of the Net Cash Surrender Value at
the time the loan is made.
NET CASH SURRENDER VALUE
The Net Cash Surrender Value on a Valuation Date is equal to the Net Policy
Account Value reduced by any surrender charge that would be imposed if the
Policy were surrendered on that date. It is the amount received upon a full
surrender of the Policy.
DEATH BENEFIT AND CHANGES IN FACE AMOUNT
As long as the Policy remains in force, We will pay the Death Benefit upon
receipt at Our Administrative Office of satisfactory proof of the Insureds
death. We will require return of the Policy. The Death Benefit will be paid in a
lump sum generally within seven days after We receive due proof of the death of
the Insured, (see WHEN PROCEEDS ARE PAID, page 36) or, if elected, under a
payment option (see "PAYMENT OPTIONS," page 28). The Death Benefit will be paid
to the Beneficiary. See SELECTING AND CHANGING THE BENEFICIARY, page 26.
If part or all of the Death Benefit is paid in one sum, the Company will pay
interest on this sum from the date of the Insureds death to the date of payment.
We determine the interest rate, but it will not be less than a rate of 3% per
year compounded annually.
DEATH BENEFIT OPTIONS
The Policy Owner may choose one of two Death Benefit Options, which will
determine the Death Benefit. Under Option I, the Death Benefit is the greater of
the Face Amount or the applicable percentage of Policy Account Value on the date
of the Insureds death. Under Option II, the Death Benefit is the greater of the
Face Amount plus the Policy Account Value, or the applicable percentage of the
Policy Account Value, on the date of the Insureds death.
If investment performance is favorable the amount of the Death Benefit may
increase. However, under Option I, the Death Benefit ordinarily will not change
for several years to reflect any favorable investment performance and may not
change at all, whereas under Option II, the Death Benefit will
24
<PAGE>
vary directly with the investment performance of the Policy Account Value. To
see how and when investment performance may begin to affect the Death Benefit,
please see the illustrations beginning on page 29.
The applicable percentage of Policy Account Value is 250% when the Insured
is Attained Age 40 or less, and decreases each year thereafter to 100% when the
Insured is Attained Age 95. A table showing the applicable percentages for
Attained Ages 0 to 99 is shown below. The Internal Revenue Code requires that
the applicable percentage requirements be met in order for the Policy to qualify
under the Code as life insurance.
TABLE OF APPLICABLE PERCENTAGES
<TABLE>
<CAPTION>
PERCENTAGE OF POLICY
ATTAINED AGE ACCOUNT VALUE
- ---------------------------------------------------------------- ---------------------
<S> <C>
Under 40........................................................ 250%
45.............................................................. 215%
50.............................................................. 185%
55.............................................................. 150%
60.............................................................. 130%
70.............................................................. 115%
75 through 90................................................... 105%
95 through 99................................................... 100%
</TABLE>
The initial Face Amount is set at the time the Policy is issued. You may
increase or decrease the Face Amount from time to time, as discussed below. You
select from Options I or II when you apply for the Policy. You also may change
the Option, as discussed below.
CHANGES IN DEATH BENEFIT OPTIONS
You can change Your Death Benefit Option on Your Policy subject to the
following rules. After any change, We may require that You submit evidence,
satisfactory to Us that the Insured is then insurable. If You ask Us to change
from Option I to Option II, We will decrease the Face Amount of the Policy by
the amount in Your Policy Account Value on the date the change takes effect.
However, We reserve the right to decline to make such change if it would reduce
the Face Amount of this Policy below the minimum Face Amount for which We would
then issue the Policy under Our rules. If You ask Us to change from Option II to
Option I, We will increase the Face Amount of this Policy by the amount in Your
Policy Account Value on the date the change takes effect. Such decreases and
increases in the Face Amount of the Policy are made so that the Death Benefit
remains the same on the date the change takes effect. However, if Your Death
Benefit is determined by a percentage multiple of the Policy Account Value,
there may be an increase in the Death Benefit.
The change will take effect at the beginning of the Policy Month that
coincides with or next follows the date We approve Your request.
We reserve the right to decline to make any change that We determine would
cause the Policy to fail to qualify as life insurance under applicable tax law
as interpreted by Us.
You may ask for a change by completing an Application For Change, which You
can get from Our agent or by writing to Us at Our Administrative Office. A copy
of Your Application For Change will be attached to the new policy information
section of the Policy that We will issue when the change is made. The new
section and the Application For Change will become a part of the Policy. We may
require You to return the Policy to Our Administrative Office to make a Policy
change.
CHANGES IN FACE AMOUNT
At any time after the first Policy Year while the Policy is in force, You
may request a change in the Face Amount, subject to the following conditions. No
change will be permitted that would result in
25
<PAGE>
Your Policy's death benefit not being excludable from gross income due to not
satisfying the requirements of Section 7702 of the Internal Revenue Code. This
may result in the Policy not being deemed as life insurance. (See TAX
CONSIDERATIONS, Page 37.)
Any increase in the Face Amount must be at least $10,000, however, the
resulting Face Amount of the Policy after the increase may not be in excess of
twice the Face Amount of the Policy on the Issue Date. A written application
must be submitted to Our Administrative Office along with evidence of
insurability satisfactory to the Company. A change in the Planned Periodic
Premium may be advisable. See PREMIUMS UPON INCREASE IN SPECIFIED FACE AMOUNT,
page 15. The increase in Face Amount will become effective on the Monthly
Anniversary on or next following the date the increase is approved, and the
Policy Account Value will be adjusted to the extent necessary to reflect a
monthly deduction as of the effective date based on the increase in Face Amount.
You must return Your Policy so We can amend the Policy to reflect the increase.
There will be an additional $20 per month in Monthly Expense Charges imposed on
the contract for the next twelve months immediately following the effective date
of such an increase.
Any decrease in the Face Amount must be at least $5,000 and the Face Amount
after the decrease must be at least $50,000. In addition, no decrease may be
made in the first twelve months following the effective date of an increase in
Face Amount. During the first five Policy years, the Face Amount may not be
decreased by more than 10 percent of the initial Face Amount in any one Policy
Year. A decrease in Face Amount will become effective on the Monthly Anniversary
that coincides with or next follows Our receipt of a request at Our
Administrative Office.
There is an impact on Surrender Charges for both increases and decreases in
Face Amount. (See SURRENDER CHARGES, Page 21.)
SELECTING AND CHANGING THE BENEFICIARY
You select a Beneficiary in Your application. You may later change the
Beneficiary in accordance with the terms of the Policy. If the Insured dies and
there is no surviving Beneficiary, the Owner's estate will be the Beneficiary.
CASH BENEFITS
POLICY LOANS
You may borrow up to the loan value of Your Policy at any time after the
first twelve months of the Policy, or after the first twelve months following
any increase in Face Amount, by submitting a written request to Our
Administrative Office. The minimum amount You may borrow is $500. The loan value
is 90% of Your Net Cash Surrender Value. Outstanding Policy loans reduce the
amount of the loan value available for new Policy loans. Policy loans will be
processed as of the date Your written request is received and loan proceeds
generally will be sent to You within seven days. See WHEN PROCEEDS ARE PAID,
page 36, and PAYMENTS FROM THE GUARANTEED ACCOUNT, page 18.
INTEREST. We will charge interest daily on any outstanding Policy Loan at a
declared annual rate not in excess of 8.00%. The current rate, subject to change
by the Company, is 8.00%. Interest is due and payable at the end of each Policy
Year while a Policy Loan is outstanding. If interest is not paid when due, the
amount of the interest is added to the Loan and becomes part of the outstanding
Policy Loan.
OUTSTANDING LOANS. Unrepaid Policy loans (including unpaid interest added
to the Loan) plus accrued interest not yet due equals the Outstanding Loans.
LOAN REPAYMENT; EFFECT IF NOT REPAID. You may repay all or part of Your
Outstanding Loan at any time while the Insured is living and the Policy is in
force. Loan repayments must be sent to Our Administrative Office and will be
credited as of the date received. If the Death Benefit becomes payable while a
Policy Loan is outstanding, the Outstanding Loan will be deducted in calculating
the Death Benefit. If the Outstanding Loans exceed the Net Cash Surrender Value
on any monthly
26
<PAGE>
anniversary, the Policy will be in default. We will send You, and any assignee
of record, notice of the default. You will have a 61-day Grace Period to submit
a sufficient payment to avoid termination. The notice will specify the amount
that must be repaid to prevent termination.
POLICY LOAN ACCOUNT. When a Policy Loan is made, an amount equal to the
Loan proceeds is withdrawn from the Policy Account Value in the Subaccounts.
This withdrawal is made pro rata on the basis of the Policy Account Value in
each Subaccount unless You direct a different allocation when requesting the
Loan. The Loan amount withdrawn is then transferred to the Policy Loan Account
in the Guaranteed Account. Conversely, when a Loan is repaid, an amount equal to
the repayment will be transferred from the Policy Loan Account to the
Subaccounts in accordance with Your then effective Net Premium allocation
percentages. Thus, a Loan or Loan repayment will have no immediate effect on the
Policy Account Value, but other Policy values, such as the Net Policy Value and
Net Cash Surrender Value, will be reduced or increased immediately by the amount
transferred to or from the Policy Loan Account.
POLICY LOAN NET COST. The maximum net cost of a Loan is 2.00% per year (the
difference between the rate of interest We charge in Policy loans and the amount
We credit on the equivalent amount held in the Policy Loan Account). In
addition, We currently intend to credit 6.00% on the amount held in the Policy
Loan Account during the first 10 Policy Years. The net loan cost during the
first 10 Policy Years will always be no more than 2.00%.
For Policy Years 11 and later, a portion of the maximum loanable amount may
be available on a preferred loan basis. The amount available on a preferred
basis is the excess, if any, of the Policy Account Value over the sum of the
Premiums paid. For a preferred loan, the interest rate charged and credited to
the preferred portion of the loan value will be the same.
EFFECT OF POLICY LOAN. A Policy Loan, whether or not repaid, will have a
permanent effect on the Death Benefit and Policy Account Values because the
investment results of the Subaccounts and current interest rates credited in the
Guaranteed Account will apply only to the non-loaned portion of the Policy
Account Value. The longer the Loan is outstanding, the greater this effect is
likely to be. Depending on the investment results of the Subaccounts or credited
interest rates for the Guaranteed Account while the Policy Loan is outstanding,
the effect could be favorable or unfavorable. Also, Policy Loans could,
particularly if not repaid, make it more likely than otherwise for a Policy to
terminate.
SURRENDERING THE POLICY FOR NET CASH SURRENDER VALUE
You may surrender your Policy at any time for its Net Cash Surrender Value
by submitting a written request to Our Administrative Office. We will require
return of the Policy. A Surrender Charge may apply. See SURRENDER CHARGES, page
21. A surrender request will be processed as of the date Your written request
and all required documents are received and generally will be paid within seven
days. See WHEN PROCEEDS ARE PAID, page 36, and PAYMENTS FROM THE GUARANTEED
ACCOUNT, page 18. The Net Cash Surrender Value may be taken in one sum or it may
be applied to a payment option. See PAYMENT OPTIONS, page 28. Your Policy will
terminate and cease to be in force if it is surrendered for one sum. It cannot
later be reinstated.
PARTIAL SURRENDERS
We will not allow a partial surrender during the first twelve months of the
Policy or during the first twelve Policy months immediately following an
increase in the Face Amount of the Policy. After the first Policy year, You may
make partial surrenders under Your Policy up to a maximum of 90% of the Net Cash
Surrender Value subject to the following conditions. You must submit a written
request to Our Administrative Office. The Net Cash Surrender Value must exceed
$500 after the partial surrender is deducted from the Policy Account Value. No
more than two partial surrenders may be made during a Policy Year, and each
partial surrender must be at least $500. A partial surrender
27
<PAGE>
charge and an administrative charge will be assessed on a partial surrender. See
PARTIAL SURRENDER CHARGE, page 22. This charge will be deducted from Your Policy
Account Value along with the amount requested to be surrendered and will be
considered part of the partial surrender (together, the "partial surrender
amount"). Policy Account Values will be reduced by the partial surrender amount.
When You request a partial surrender, You can direct how the partial
surrender amount will be deducted from Your Policy Account Value in the
Accounts. If You provide no directions, the partial surrender amount will be
deducted from Your Policy Account Value in the Accounts on a pro rata basis. See
DEDUCTIONS FROM THE GUARANTEED ACCOUNT, page 18.
If the Option I is in effect, the Face Amount will also be reduced by the
partial surrender amount. If the Face Amount has been increased, the partial
surrender will reduce first the most recent increase, and then the next most
recent increase, if any, in reverse order, and finally the initial Face Amount.
No partial surrender may be made that would reduce the Face Amount to less than
$50,000.
Partial surrender requests will be processed as of the date your written
request is received, and generally will be paid within seven days. See WHEN
PROCEEDS ARE PAID, page 36, and PAYMENTS FROM THE GUARANTEED ACCOUNT, page 18.
MATURITY BENEFIT
The Maturity Date is the Policy Anniversary following Insureds Attained Age
99 unless you requested an extended Maturity Date. If the Policy is still in
force on the Maturity Date, the Maturity Benefit will be paid to You. The
Maturity Benefit is equal to the Policy Account Value less Outstanding Loans on
the Maturity Date.
PAYMENT OPTIONS
The Policy offers a wide variety of optional ways of receiving proceeds
payable under the Policy, such as on surrender, death or maturity, other than in
a lump sum. Any agent authorized to sell this Policy can explain these options
upon request. None of these options vary with the investment performance of a
separate account because they are all forms of guaranteed benefit payments.
28
<PAGE>
ILLUSTRATIONS OF POLICY VALUES, NET CASH SURRENDER VALUES,
DEATH BENEFITS AND ACCUMULATED PREMIUMS
The following tables have been prepared to show how certain values under a
Policy change with investment performance over an extended period of time. The
tables illustrate how Policy Values, Net Cash Surrender Values and Death
Benefits under a Policy covering an Insured of a given age on the Issue Date,
would vary over time if planned premiums were paid annually and the return on
the assets in the selected Funds was an average rate of 0%, 6% or 12%. The
tables also show Planned Periodic Premiums accumulated at 5% interest.
The tables reflect the fact that the net investment return on the assets
held in the subaccounts is lower than the gross after tax return of the selected
Funds. The tables assume an average annual expense ratio of 0.82% of the average
daily net assets of the Funds available under the Policies. This average annual
expense ratio is based on the expense ratios of each of the Funds for the last
fiscal year, adjusted, as appropriate, for any material changes in expenses
effective for the current fiscal year of a Fund. For information on Fund
expenses, see the prospectuses for the Funds accompanying this prospectus.
In addition, the tables reflect the daily charge to the Separate Account for
assuming mortality and expense risks, which is equivalent to an effective annual
charge at the guaranteed maximum rate of 0.90% which is also the current rate.
In Policy Years 11 and later, the Company may reduce the effective annual charge
to a current rate of no less than 0.50%. After deduction of Fund expenses and
the mortality and expense risk charge, the illustrated gross annual investment
rates of return of 0%, 6% and 12% would correspond to approximate net annual
rates of 1.74%, 4.26% and 10.26%.
The tables also reflect the deduction of the monthly expense charge and the
monthly Cost of Insurance Charge for the hypothetical Insured. Our current cost
of insurance charges and the higher guaranteed maximum cost of insurance charges
We have the contractual right to charge are reflected in separate tables on each
of the following pages. All the tables reflect the fact that no charges for
federal income taxes are currently made against the Separate Account and assume
no Outstanding Loans or charges for supplemental benefits. The tables also
reflect a state premium tax rate of 2.00%.
The illustrations are based on Our sex distinct rates for nonsmokers. Upon
request, We will furnish a comparable illustration based upon the proposed
Insured's individual circumstances. Such illustrations may assume different
hypothetical rates of return than those illustrated in the following tables.
29
<PAGE>
ILLUSTRATION OF POLICY VALUES
AIG LIFE INSURANCE COMPANY
MALE ISSUE AGE 35 NON SMOKER
$2,000 ANNUAL PREMIUM
$200,000 FACE AMOUNT
DEATH BENEFIT OPTION (LEVEL)
<TABLE>
<CAPTION>
USING CURRENT COST OF INSURANCE RATES
-------------------------------------------------------------------------------------------------------
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED --------------------------------- --------------------------------- ---------------------------------
END OF AT 5.00% POLICY NET CASH POLICY NET CASH POLICY NET CASH
POLICY INTEREST PER ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH
YEAR YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- --------- ------------ --------- ----------- --------- --------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 2,100 $ 1,277 $ 777 $ 200,000 $ 1,369 $ 869 $ 200,000 $ 1,462 $ 962 $ 200,000
2 $ 4,305 $ 2,760 $ 2,260 $ 200,000 $ 3,031 $ 2,531 $ 200,000 $ 3,313 $ 2,813 $ 200,000
3 $ 6,620 $ 4,204 $ 3,704 $ 200,000 $ 4,749 $ 4,249 $ 200,000 $ 5,338 $ 4,838 $ 200,000
4 $ 9,051 $ 5,610 $ 5,110 $ 200,000 $ 6,524 $ 6,024 $ 200,000 $ 7,553 $ 7,053 $ 200,000
5 $ 11,604 $ 6,971 $ 6,471 $ 200,000 $ 8,354 $ 7,854 $ 200,000 $ 9,971 $ 9,471 $ 200,000
6 $ 14,284 $ 8,293 $ 7,843 $ 200,000 $ 10,246 $ 9,796 $ 200,000 $ 12,620 $ 12,170 $ 200,000
7 $ 17,098 $ 9,581 $ 9,181 $ 200,000 $ 12,205 $ 11,805 $ 200,000 $ 15,526 $ 15,126 $ 200,000
8 $ 20,053 $ 10,836 $ 10,486 $ 200,000 $ 14,238 $ 13,888 $ 200,000 $ 18,718 $ 18,368 $ 200,000
9 $ 23,156 $ 12,058 $ 11,758 $ 200,000 $ 16,346 $ 16,046 $ 200,000 $ 22,224 $ 21,924 $ 200,000
10 $ 26,414 $ 13,237 $ 12,987 $ 200,000 $ 18,521 $ 18,271 $ 200,000 $ 26,066 $ 25,816 $ 200,000
11 $ 29,834 $ 14,400 $ 14,200 $ 200,000 $ 20,819 $ 20,619 $ 200,000 $ 30,371 $ 30,171 $ 200,000
12 $ 33,426 $ 15,504 $ 15,354 $ 200,000 $ 23,182 $ 23,032 $ 200,000 $ 35,095 $ 34,945 $ 200,000
13 $ 37,197 $ 16,554 $ 16,454 $ 200,000 $ 25,619 $ 25,519 $ 200,000 $ 40,290 $ 40,190 $ 200,000
14 $ 41,157 $ 17,578 $ 17,528 $ 200,000 $ 28,161 $ 28,111 $ 200,000 $ 46,035 $ 45,985 $ 200,000
15 $ 45,315 $ 18,555 $ 18,555 $ 200,000 $ 30,792 $ 30,792 $ 200,000 $ 52,370 $ 52,370 $ 200,000
16 $ 49,681 $ 19,464 $ 19,464 $ 200,000 $ 33,497 $ 33,497 $ 200,000 $ 59,344 $ 59,344 $ 200,000
17 $ 54,265 $ 20,304 $ 20,304 $ 200,000 $ 36,280 $ 36,280 $ 200,000 $ 67,032 $ 67,032 $ 200,000
18 $ 59,078 $ 21,088 $ 21,088 $ 200,000 $ 39,157 $ 39,157 $ 200,000 $ 75,523 $ 75,523 $ 200,000
19 $ 64,132 $ 21,816 $ 21,816 $ 200,000 $ 42,133 $ 42,133 $ 200,000 $ 84,911 $ 84,911 $ 200,000
20 $ 69,439 $ 22,468 $ 22,468 $ 200,000 $ 45,198 $ 45,198 $ 200,000 $ 95,287 $ 95,287 $ 200,000
25 $ 100,227 $ 23,990 $ 23,990 $ 200,000 $ 61,515 $ 61,515 $ 200,000 $ 166,258 $ 166,258 $ 222,785
30 $ 139,522 $ 22,541 $ 22,541 $ 200,000 $ 80,149 $ 80,149 $ 200,000 $ 282,793 $ 282,793 $ 345,007
</TABLE>
The above illustrations are based on the following:
(1) Assumes no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a state premium tax
rate of 2.00%, a combined administrative charge of $25.00 per month in year
1 and $5.00 per month thereafter, and a mortality and expense risk charge of
0.90% of assets for the first 10 policy years and 0.50% for policy years
eleven and later.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of the policy year. Values
would be different if the premiums are paid with a different frequency or in
different amounts.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
30
<PAGE>
ILLUSTRATION OF POLICY VALUES
AIG LIFE INSURANCE COMPANY
MALE ISSUE AGE 35 NON SMOKER
$2,000 ANNUAL PREMIUM
$200,000 FACE AMOUNT
DEATH BENEFIT OPTION (LEVEL)
<TABLE>
<CAPTION>
USING GUARANTEED COST OF INSURANCE RATES
-------------------------------------------------------------------------------------------------------
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED --------------------------------- --------------------------------- ---------------------------------
END OF AT 5.00% POLICY NET CASH POLICY NET CASH POLICY NET CASH
POLICY INTEREST PER ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH
YEAR YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- --------- ------------ --------- ----------- --------- --------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 2,100 $ 1,073 $ 573 $ 200,000 $ 1,158 $ 658 $ 200,000 $ 1,244 $ 744 $ 200,000
2 $ 4,305 $ 2,409 $ 1,909 $ 200,000 $ 2,656 $ 2,156 $ 200,000 $ 2,914 $ 2,414 $ 200,000
3 $ 6,620 $ 3,702 $ 3,202 $ 200,000 $ 4,196 $ 3,696 $ 200,000 $ 4,731 $ 4,231 $ 200,000
4 $ 9,051 $ 4,950 $ 4,450 $ 200,000 $ 5,777 $ 5,277 $ 200,000 $ 6,709 $ 6,209 $ 200,000
5 $ 11,604 $ 6,152 $ 5,652 $ 200,000 $ 7,401 $ 6,901 $ 200,000 $ 8,863 $ 8,363 $ 200,000
6 $ 14,284 $ 7,304 $ 6,854 $ 200,000 $ 9,063 $ 8,613 $ 200,000 $ 11,205 $ 10,755 $ 200,000
7 $ 17,098 $ 8,405 $ 8,005 $ 200,000 $ 10,764 $ 10,364 $ 200,000 $ 13,754 $ 13,354 $ 200,000
8 $ 20,053 $ 9,454 $ 9,104 $ 200,000 $ 12,505 $ 12,155 $ 200,000 $ 16,531 $ 16,181 $ 200,000
9 $ 23,156 $ 10,449 $ 10,149 $ 200,000 $ 14,283 $ 13,983 $ 200,000 $ 19,557 $ 19,257 $ 200,000
10 $ 26,414 $ 11,387 $ 11,137 $ 200,000 $ 16,099 $ 15,849 $ 200,000 $ 22,854 $ 22,604 $ 200,000
11 $ 29,834 $ 12,264 $ 12,064 $ 200,000 $ 17,948 $ 17,748 $ 200,000 $ 26,447 $ 26,247 $ 200,000
12 $ 33,426 $ 13,077 $ 12,927 $ 200,000 $ 19,830 $ 19,680 $ 200,000 $ 30,367 $ 30,217 $ 200,000
13 $ 37,197 $ 13,824 $ 13,724 $ 200,000 $ 21,743 $ 21,643 $ 200,000 $ 34,645 $ 34,545 $ 200,000
14 $ 41,157 $ 14,501 $ 14,451 $ 200,000 $ 23,685 $ 23,635 $ 200,000 $ 39,317 $ 39,267 $ 200,000
15 $ 45,315 $ 15,103 $ 15,103 $ 200,000 $ 25,653 $ 25,653 $ 200,000 $ 44,423 $ 44,423 $ 200,000
16 $ 49,681 $ 15,624 $ 15,624 $ 200,000 $ 27,640 $ 27,640 $ 200,000 $ 50,006 $ 50,006 $ 200,000
17 $ 54,265 $ 16,053 $ 16,053 $ 200,000 $ 29,640 $ 29,640 $ 200,000 $ 56,110 $ 56,110 $ 200,000
18 $ 59,078 $ 16,379 $ 16,379 $ 200,000 $ 31,643 $ 31,643 $ 200,000 $ 62,788 $ 62,788 $ 200,000
19 $ 64,132 $ 16,589 $ 16,589 $ 200,000 $ 33,636 $ 33,636 $ 200,000 $ 70,099 $ 70,099 $ 200,000
20 $ 69,439 $ 16,673 $ 16,673 $ 200,000 $ 35,611 $ 35,611 $ 200,000 $ 78,110 $ 78,110 $ 200,000
25 $ 100,227 $ 14,749 $ 14,749 $ 200,000 $ 44,832 $ 44,832 $ 200,000 $ 131,923 $ 131,923 $ 200,000
30 $ 139,522 $ 6,961 $ 6,961 $ 200,000 $ 51,287 $ 51,287 $ 200,000 $ 219,986 $ 219,986 $ 268,383
</TABLE>
The above illustrations are based on the following:
(1) Assumes no policy loans have been made.
(2) Values reflect guaranteed cost of insurance rates, a state premium tax rate
of 2.00%, a combined administrative charge of $35.00 per month in year 1 and
$10.00 per month thereafter, and a mortality and expense risk charge of
0.90% of assets for all years.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of the policy year. Values
would be different if the premiums are paid with a different frequency or in
different amounts.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
31
<PAGE>
ILLUSTRATION OF POLICY VALUES
AIG LIFE INSURANCE COMPANY
MALE ISSUE AGE 40 NON SMOKER
$3,200 ANNUAL PREMIUM
$250,000 FACE AMOUNT
DEATH BENEFIT OPTION (LEVEL)
<TABLE>
<CAPTION>
USING CURRENT COST OF INSURANCE RATES
-------------------------------------------------------------------------------------------------------
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED --------------------------------- --------------------------------- ---------------------------------
END OF AT 5.00% POLICY NET CASH POLICY NET CASH POLICY NET CASH
POLICY INTEREST PER ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH
YEAR YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- --------- ------------ --------- ----------- --------- --------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 3,360 $ 2,206 $ 1,406 $ 250,000 $ 2,358 $ 1,558 $ 250,000 $ 2,511 $ 1,711 $ 250,000
2 $ 6,888 $ 4,595 $ 3,795 $ 250,000 $ 5,044 $ 4,244 $ 250,000 $ 5,512 $ 4,712 $ 250,000
3 $ 10,592 $ 6,933 $ 6,133 $ 250,000 $ 7,833 $ 7,033 $ 250,000 $ 8,806 $ 8,006 $ 250,000
4 $ 14,482 $ 9,218 $ 8,418 $ 250,000 $ 10,725 $ 9,925 $ 250,000 $ 12,420 $ 11,620 $ 250,000
5 $ 18,566 $ 11,435 $ 10,635 $ 250,000 $ 13,711 $ 12,911 $ 250,000 $ 16,373 $ 15,573 $ 250,000
6 $ 22,854 $ 13,549 $ 12,829 $ 250,000 $ 16,757 $ 16,037 $ 250,000 $ 20,660 $ 19,940 $ 250,000
7 $ 27,357 $ 15,572 $ 14,932 $ 250,000 $ 19,877 $ 19,237 $ 250,000 $ 25,330 $ 24,690 $ 250,000
8 $ 32,085 $ 17,512 $ 16,952 $ 250,000 $ 23,083 $ 22,523 $ 250,000 $ 30,429 $ 29,869 $ 250,000
9 $ 37,049 $ 19,407 $ 18,927 $ 250,000 $ 26,415 $ 25,935 $ 250,000 $ 36,043 $ 35,563 $ 250,000
10 $ 42,262 $ 21,228 $ 20,828 $ 250,000 $ 29,850 $ 29,450 $ 250,000 $ 42,195 $ 41,795 $ 250,000
11 $ 47,735 $ 23,042 $ 22,722 $ 250,000 $ 33,500 $ 33,180 $ 250,000 $ 49,112 $ 48,792 $ 250,000
12 $ 53,482 $ 24,765 $ 24,525 $ 250,000 $ 37,259 $ 37,019 $ 250,000 $ 56,716 $ 56,476 $ 250,000
13 $ 59,516 $ 26,410 $ 26,250 $ 250,000 $ 41,148 $ 40,988 $ 250,000 $ 65,098 $ 64,938 $ 250,000
14 $ 65,851 $ 27,980 $ 27,900 $ 250,000 $ 45,173 $ 45,093 $ 250,000 $ 74,347 $ 74,267 $ 250,000
15 $ 72,504 $ 29,450 $ 29,450 $ 250,000 $ 49,321 $ 49,321 $ 250,000 $ 84,543 $ 84,543 $ 250,000
16 $ 79,489 $ 30,774 $ 30,774 $ 250,000 $ 53,557 $ 53,557 $ 250,000 $ 95,763 $ 95,763 $ 250,000
17 $ 86,824 $ 31,969 $ 31,969 $ 250,000 $ 57,902 $ 57,902 $ 250,000 $ 108,145 $ 108,145 $ 250,000
18 $ 94,525 $ 33,004 $ 33,004 $ 250,000 $ 62,338 $ 62,338 $ 250,000 $ 121,811 $ 121,811 $ 250,000
19 $ 102,611 $ 33,860 $ 33,860 $ 250,000 $ 66,858 $ 66,858 $ 250,000 $ 136,914 $ 136,914 $ 250,000
20 $ 111,102 $ 34,578 $ 34,578 $ 250,000 $ 71,505 $ 71,505 $ 250,000 $ 153,661 $ 153,661 $ 250,000
25 $ 160,363 $ 35,995 $ 35,995 $ 250,000 $ 97,033 $ 97,033 $ 250,000 $ 269,134 $ 269,134 $ 328,343
30 $ 223,235 $ 32,072 $ 32,072 $ 250,000 $ 126,783 $ 126,783 $ 250,000 $ 457,558 $ 457,558 $ 530,767
</TABLE>
The above illustrations are based on the following:
(1) Assumes no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a state premium tax
rate of 2.00%, a combined administrative charge of $25.00 per month in year
1 and $5.00 per month thereafter, and a mortality and expense risk charge of
0.90% of assets for the first 10 policy years and 0.50% for policy years
eleven and later.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of the policy year. Values
would be different if the premiums are paid with a different frequency or in
different amounts.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
32
<PAGE>
ILLUSTRATION OF POLICY VALUES
AIG LIFE INSURANCE COMPANY
MALE ISSUE AGE 40 NON SMOKER
$3,200 ANNUAL PREMIUM
$250,000 FACE AMOUNT
DEATH BENEFIT OPTION (LEVEL)
<TABLE>
<CAPTION>
USING GUARANTEED COST OF INSURANCE RATES
-------------------------------------------------------------------------------------------------------
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED --------------------------------- --------------------------------- ---------------------------------
END OF AT 5.00% POLICY NET CASH POLICY NET CASH POLICY NET CASH
POLICY INTEREST PER ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH
YEAR YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- --------- ------------ --------- ----------- --------- --------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 3,360 $ 1,927 $ 1,127 $ 250,000 $ 2,071 $ 1,271 $ 250,000 $ 2,215 $ 1,415 $ 250,000
2 $ 6,888 $ 4,080 $ 3,280 $ 250,000 $ 4,496 $ 3,696 $ 250,000 $ 4,929 $ 4,129 $ 250,000
3 $ 10,592 $ 6,155 $ 5,355 $ 250,000 $ 6,981 $ 6,181 $ 250,000 $ 7,877 $ 7,077 $ 250,000
4 $ 14,482 $ 8,151 $ 7,351 $ 250,000 $ 9,527 $ 8,727 $ 250,000 $ 11,077 $ 10,277 $ 250,000
5 $ 18,566 $ 10,063 $ 9,263 $ 250,000 $ 12,131 $ 11,331 $ 250,000 $ 14,554 $ 13,754 $ 250,000
6 $ 22,854 $ 11,888 $ 11,168 $ 250,000 $ 14,790 $ 14,070 $ 250,000 $ 18,330 $ 17,610 $ 250,000
7 $ 27,357 $ 13,623 $ 12,983 $ 250,000 $ 17,504 $ 16,864 $ 250,000 $ 22,435 $ 21,795 $ 250,000
8 $ 32,085 $ 15,265 $ 14,705 $ 250,000 $ 20,271 $ 19,711 $ 250,000 $ 26,899 $ 26,339 $ 250,000
9 $ 37,049 $ 16,809 $ 16,329 $ 250,000 $ 23,090 $ 22,610 $ 250,000 $ 31,757 $ 31,277 $ 250,000
10 $ 42,262 $ 18,251 $ 17,851 $ 250,000 $ 25,957 $ 25,557 $ 250,000 $ 37,047 $ 36,647 $ 250,000
11 $ 47,735 $ 19,582 $ 19,262 $ 250,000 $ 28,866 $ 28,546 $ 250,000 $ 42,809 $ 42,489 $ 250,000
12 $ 53,482 $ 20,791 $ 20,551 $ 250,000 $ 31,807 $ 31,567 $ 250,000 $ 49,083 $ 48,843 $ 250,000
13 $ 59,516 $ 21,864 $ 21,704 $ 250,000 $ 34,770 $ 34,610 $ 250,000 $ 55,918 $ 55,758 $ 250,000
14 $ 65,851 $ 22,787 $ 22,707 $ 250,000 $ 37,742 $ 37,662 $ 250,000 $ 63,365 $ 63,285 $ 250,000
15 $ 72,504 $ 23,546 $ 23,546 $ 250,000 $ 40,711 $ 40,711 $ 250,000 $ 71,486 $ 71,486 $ 250,000
16 $ 79,489 $ 24,126 $ 24,126 $ 250,000 $ 43,665 $ 43,665 $ 250,000 $ 80,353 $ 80,353 $ 250,000
17 $ 86,824 $ 24,514 $ 24,514 $ 250,000 $ 46,593 $ 46,593 $ 250,000 $ 90,050 $ 90,050 $ 250,000
18 $ 94,525 $ 24,701 $ 24,701 $ 250,000 $ 49,489 $ 49,489 $ 250,000 $ 100,678 $ 100,678 $ 250,000
19 $ 102,611 $ 24,666 $ 24,666 $ 250,000 $ 52,336 $ 52,336 $ 250,000 $ 112,345 $ 112,345 $ 250,000
20 $ 111,102 $ 24,385 $ 24,385 $ 250,000 $ 55,113 $ 55,113 $ 250,000 $ 125,179 $ 125,179 $ 250,000
25 $ 160,363 $ 18,036 $ 18,036 $ 250,000 $ 66,941 $ 66,941 $ 250,000 $ 212,968 $ 212,968 $ 259,820
30 $ 223,235 $ 0 $ 0 $ 0 $ 71,510 $ 71,510 $ 250,000 $ 354,955 $ 354,955 $ 411,748
</TABLE>
The above illustrations are based on the following:
(1) Assumes no policy loans have been made.
(2) Values reflect guaranteed cost of insurance rates, a state premium tax rate
of 2.00%, a combined administrative charge of $35.00 per month in year 1 and
$10.00 per month thereafter, and a mortality and expense risk charge of
0.90% of assets for all years.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of the policy year. Values
would be different if the premiums are paid with a different frequency or in
different amounts.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
33
<PAGE>
ILLUSTRATION OF POLICY VALUES
AIG LIFE INSURANCE COMPANY
MALE ISSUE AGE 50 NON SMOKER
$8,500 ANNUAL PREMIUM
$400,000 FACE AMOUNT
DEATH BENEFIT OPTION (LEVEL)
<TABLE>
<CAPTION>
USING CURRENT COST OF INSURANCE RATES
--------------------------------------------------------------------------------------------------------
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED --------------------------------- --------------------------------- ----------------------------------
END OF AT 5.00% POLICY NET CASH POLICY NET CASH POLICY NET CASH
POLICY INTEREST PER ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH
YEAR YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- --------- ------------ --------- ----------- --------- --------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 8,925 $ 6,117 $ 3,992 $ 400,000 $ 6,531 $ 4,406 $ 400,000 $ 6,945 $ 4,820 $ 400,000
2 $ 18,296 $ 12,261 $ 10,136 $ 400,000 $ 13,474 $ 11,349 $ 400,000 $ 14,737 $ 12,612 $ 400,000
3 $ 28,136 $ 18,221 $ 16,096 $ 400,000 $ 20,629 $ 18,504 $ 400,000 $ 23,238 $ 21,113 $ 400,000
4 $ 38,468 $ 23,999 $ 21,874 $ 400,000 $ 28,009 $ 25,884 $ 400,000 $ 32,528 $ 30,403 $ 400,000
5 $ 49,316 $ 29,560 $ 27,435 $ 400,000 $ 35,586 $ 33,461 $ 400,000 $ 42,650 $ 40,525 $ 400,000
6 $ 60,707 $ 34,830 $ 32,918 $ 400,000 $ 43,293 $ 41,381 $ 400,000 $ 53,622 $ 51,710 $ 400,000
7 $ 72,667 $ 39,842 $ 38,142 $ 400,000 $ 51,170 $ 49,470 $ 400,000 $ 65,569 $ 63,869 $ 400,000
8 $ 85,226 $ 44,550 $ 43,063 $ 400,000 $ 59,179 $ 57,692 $ 400,000 $ 78,559 $ 77,071 $ 400,000
9 $ 98,412 $ 48,931 $ 47,656 $ 400,000 $ 67,306 $ 66,031 $ 400,000 $ 92,690 $ 91,415 $ 400,000
10 $ 112,258 $ 53,054 $ 51,992 $ 400,000 $ 75,629 $ 74,566 $ 400,000 $ 108,168 $ 107,105 $ 400,000
11 $ 126,796 $ 57,119 $ 56,269 $ 400,000 $ 84,467 $ 83,617 $ 400,000 $ 125,625 $ 124,775 $ 400,000
12 $ 142,060 $ 61,002 $ 60,364 $ 400,000 $ 93,640 $ 93,003 $ 400,000 $ 144,954 $ 144,317 $ 400,000
13 $ 158,088 $ 64,649 $ 64,224 $ 400,000 $ 103,122 $ 102,697 $ 400,000 $ 166,347 $ 165,922 $ 400,000
14 $ 174,918 $ 68,030 $ 67,817 $ 400,000 $ 112,909 $ 112,697 $ 400,000 $ 190,049 $ 189,836 $ 400,000
15 $ 192,589 $ 71,125 $ 71,125 $ 400,000 $ 123,014 $ 123,014 $ 400,000 $ 216,352 $ 216,352 $ 400,000
16 $ 211,143 $ 73,915 $ 73,915 $ 400,000 $ 133,451 $ 133,451 $ 400,000 $ 245,598 $ 245,598 $ 400,000
17 $ 230,625 $ 76,349 $ 76,349 $ 400,000 $ 144,212 $ 144,212 $ 400,000 $ 278,169 $ 278,169 $ 400,000
18 $ 251,082 $ 78,369 $ 78,369 $ 400,000 $ 155,292 $ 155,292 $ 400,000 $ 314,523 $ 314,523 $ 400,000
19 $ 272,561 $ 79,931 $ 79,931 $ 400,000 $ 166,702 $ 166,702 $ 400,000 $ 355,161 $ 355,161 $ 415,539
20 $ 295,114 $ 80,997 $ 80,997 $ 400,000 $ 178,469 $ 178,469 $ 400,000 $ 400,040 $ 400,040 $ 464,047
25 $ 425,964 $ 76,684 $ 76,684 $ 400,000 $ 243,749 $ 243,749 $ 400,000 $ 704,304 $ 704,304 $ 753,605
30 $ 592,967 $ 49,925 $ 49,925 $ 400,000 $ 327,249 $ 327,249 $ 400,000 $1,203,720 $1,203,720 $1,263,906
</TABLE>
The above illustrations are based on the following:
(1) Assumes no policy loans have been made.
(2) Current values reflect current cost of insurance rates, a state premium tax
rate of 2.00%, a combined administrative charge of $25.00 per month in year
1 and $5.00 per month thereafter, and a mortality and expense risk charge of
0.90% of assets for the first 10 policy years and 0.50% for policy years
eleven and later.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of the policy year. Values
would be different if the premiums are paid with a different frequency or in
different amounts.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
34
<PAGE>
ILLUSTRATION OF POLICY VALUES
AIG LIFE INSURANCE COMPANY
MALE ISSUE AGE 50 NON SMOKER
$8,500 ANNUAL PREMIUM
$400,000 FACE AMOUNT
DEATH BENEFIT OPTION (LEVEL)
<TABLE>
<CAPTION>
USING GUARANTEED COST OF INSURANCE RATES
-------------------------------------------------------------------------------------------------------
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUMS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
ACCUMULATED --------------------------------- --------------------------------- ---------------------------------
END OF AT 5.00% POLICY NET CASH POLICY NET CASH POLICY NET CASH
POLICY INTEREST PER ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH
YEAR YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- --------- ------------ --------- ----------- --------- --------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 8,925 $ 5,361 $ 3,236 $ 400,000 $ 5,750 $ 3,625 $ 400,000 $ 6,142 $ 4,017 $ 400,000
2 $ 18,296 $ 10,774 $ 8,649 $ 400,000 $ 11,894 $ 9,769 $ 400,000 $ 13,063 $ 10,938 $ 400,000
3 $ 28,136 $ 15,920 $ 13,795 $ 400,000 $ 18,121 $ 15,996 $ 400,000 $ 20,510 $ 18,385 $ 400,000
4 $ 38,468 $ 20,777 $ 18,652 $ 400,000 $ 24,410 $ 22,285 $ 400,000 $ 28,515 $ 26,390 $ 400,000
5 $ 49,316 $ 25,329 $ 23,204 $ 400,000 $ 30,747 $ 28,622 $ 400,000 $ 37,123 $ 34,998 $ 400,000
6 $ 60,707 $ 29,554 $ 27,642 $ 400,000 $ 37,114 $ 35,201 $ 400,000 $ 46,382 $ 44,469 $ 400,000
7 $ 72,667 $ 33,438 $ 31,738 $ 400,000 $ 43,496 $ 41,796 $ 400,000 $ 56,353 $ 54,653 $ 400,000
8 $ 85,226 $ 36,972 $ 35,484 $ 400,000 $ 49,887 $ 48,399 $ 400,000 $ 67,115 $ 65,628 $ 400,000
9 $ 98,412 $ 40,128 $ 38,853 $ 400,000 $ 56,264 $ 54,989 $ 400,000 $ 78,743 $ 77,468 $ 400,000
10 $ 112,258 $ 42,874 $ 41,811 $ 400,000 $ 62,599 $ 61,536 $ 400,000 $ 91,320 $ 90,258 $ 400,000
11 $ 126,796 $ 45,171 $ 44,321 $ 400,000 $ 68,858 $ 68,008 $ 400,000 $ 104,942 $ 104,092 $ 400,000
12 $ 142,060 $ 46,979 $ 46,342 $ 400,000 $ 75,008 $ 74,370 $ 400,000 $ 119,723 $ 119,086 $ 400,000
13 $ 158,088 $ 48,231 $ 47,806 $ 400,000 $ 80,990 $ 80,565 $ 400,000 $ 135,784 $ 135,359 $ 400,000
14 $ 174,918 $ 48,859 $ 48,646 $ 400,000 $ 86,747 $ 86,534 $ 400,000 $ 153,273 $ 153,061 $ 400,000
15 $ 192,589 $ 48,794 $ 48,794 $ 400,000 $ 92,222 $ 92,222 $ 400,000 $ 172,381 $ 172,381 $ 400,000
16 $ 211,143 $ 47,969 $ 47,969 $ 400,000 $ 97,363 $ 97,363 $ 400,000 $ 193,346 $ 193,346 $ 400,000
17 $ 230,625 $ 46,313 $ 46,313 $ 400,000 $ 102,116 $ 102,116 $ 400,000 $ 216,462 $ 216,462 $ 400,000
18 $ 251,082 $ 43,752 $ 43,752 $ 400,000 $ 106,424 $ 106,424 $ 400,000 $ 242,090 $ 242,090 $ 400,000
19 $ 272,561 $ 40,185 $ 40,185 $ 400,000 $ 110,215 $ 110,215 $ 400,000 $ 270,668 $ 270,668 $ 400,000
20 $ 295,114 $ 35,472 $ 35,472 $ 400,000 $ 113,383 $ 113,383 $ 400,000 $ 302,724 $ 302,724 $ 400,000
25 $ 425,964 $ 0 $ 0 $ 0 $ 113,195 $ 113,195 $ 400,000 $ 527,857 $ 527,857 $ 564,807
30 $ 592,967 $ 0 $ 0 $ 0 $ 56,296 $ 56,296 $ 400,000 $ 889,170 $ 889,170 $ 933,629
</TABLE>
The above illustrations are based on the following:
(1) Assumes no policy loans have been made.
(2) Values reflect guaranteed cost of insurance rates, a state premium tax rate
of 2.00%, a combined administrative charge of $35.00 per month in year 1 and
$10.00 per month thereafter, and a mortality and expense risk charge of
0.90% of assets for all years.
(3) Net investment returns are calculated as the hypothetical gross investment
returns less all charges and deductions shown in the prospectus.
(4) Assumes that the premium is paid at the beginning of the policy year. Values
would be different if the premiums are paid with a different frequency or in
different amounts.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% OR 12% OVER A PERIOD
OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUND THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
35
<PAGE>
OTHER POLICY BENEFITS AND PROVISIONS
RIGHT TO CONVERT
The Policy may be converted to a Policy of flexible premium fixed benefit
life insurance on the life of the Insured. This conversion may be made either:
a. within 24 months after the Date of Issue while the Policy is in force;
within 24 months of any increase in Face Amount, or
b. within 60 days of the effective date of a material change in the
investment Policy of a Subaccount, or within 60 days of the notification
of such change, if later. In the event of such a change, the Company will
notify the Owner and give the Owner information on the options available.
When such a conversion is made, no evidence of insurability is required.
When a conversion is requested, the Company accomplishes this by transferring
all of the Policy Account Value to the Guaranteed Account. There is no charge
for this transfer. Once this option is exercised, the entire Policy Account
Value must remain in the Guaranteed Account for the life of the Policy. The Face
Amount in effect at the time of the conversion remains unchanged. The Effective
Date, Date of Issue and Issue Age are unchanged. The Owner and Beneficiary are
the same as were recorded immediately before the conversion.
LIMITS ON OUR RIGHTS TO CONTEST THE POLICY
INCONTESTABILITY. We will not contest the Policy after it has been in force
during the Insured's lifetime for two years from the Issue Date. Any increase in
the Face Amount will be incontestable with respect to statements made in the
evidence of insurability for that increase after the increase has been in force
during the life of the Insured for two years after the effective date of the
increase.
SUICIDE EXCLUSION. If the Insured commits suicide (while sane or insane)
within two years after the Issue Date, Our liability will be limited to the
payment of a single sum. This sum will be equal to the Premiums paid, minus any
loan and accrued loan interest and minus any partial surrender and minus the
cost of any riders attached to the Policy. If the Insured commits suicide (while
sane or insane) within two years after the effective date of an increase in the
Face Amount, then Our liability as to the increase in amount will be limited to
the payment of a single sum equal to the monthly cost of insurance deductions
made for such increase plus the expense charge deducted for the increase.
CHANGES IN THE POLICY OR BENEFITS
MISSTATEMENT OF AGE OR SEX. If an Insured's age or sex has been misstated
in the Policy, the Death Benefit and any benefits provided by Riders to the
Policy shall be those which would be purchased at the then current Cost of
Insurance Charge for the Correct age and sex.
OTHER CHANGES. At any time We may make such changes in the Policy as are
necessary to assure compliance at all times with the definition of life
insurance prescribed by the Internal Revenue Code or to make the Policy conform
with any law or regulation issued by any government agency to which it is
subject. Any such change, however, may be accepted or rejected by the Owner.
WHEN PROCEEDS ARE PAID
We will ordinarily pay any Death Benefit, loan proceeds or partial or full
surrender proceeds within seven days after receipt at Our Administrative Office
of all the documents required for such a payment. Other than the Death Benefit,
which is determined as of the date of death, the amount will be determined as of
the date of receipt of required documents. However, We may delay making a
payment or processing a transfer request if (1) the disposal or valuation of the
Separate Account's assets is not reasonably practicable because the New York
Stock Exchange is closed for other than a regular holiday or weekend, trading is
restricted by the SEC, or the SEC declares that an emergency exists; or (2) the
SEC by order permits postponement of payment to protect the Company's Policy
owners. See also PAYMENTS FROM THE GUARANTEED ACCOUNT, page 18.
36
<PAGE>
REPORTS TO POLICY OWNERS
You will receive a confirmation within seven days of the transaction of: the
receipt of any Premium (except Premiums received before the Date of Issue); any
change of allocation of Premiums; any transfer between Subaccounts; any loan,
interest repayment, or loan repayment; any partial surrender; or any return of
Premium necessary to comply with applicable maximum receipt of any Premium
payment. You will also receive confirmation within seven days of transaction of:
(1) exercise of the Period to Examine and Cancel; (2) an exchange of the Policy;
(3) full Surrender of the Policy; and (4) payment of the Death Benefit under the
Policy.
Within 30 days after each Policy Anniversary an annual statement will be
sent to each Owner. The statement will show the current amount of Death Benefits
payable under the Policy, the current Policy Account Value, the current Cash
Surrender Value and current Outstanding Loans. The statement will also show
Premiums paid, all charges deducted during the Policy Year, and all
transactions. The Company will also send to Owners annual and semi-annual report
of the Separate Account.
ASSIGNMENT
The Policy may be assigned in accordance with its terms on a form provided
by Us. We will not be deemed to know of an assignment unless We receive a copy
of it at Our Administrative Office. We assume no responsibility for the validity
or sufficiency of any assignment.
REINSTATEMENT
If the Policy has ended without value, You may reinstate Policy benefits
while the Insured is alive if You:
1. Ask for reinstatement of Policy benefits within 3 years from the end of
the Grace Period; and
2. Provide evidence of insurability satisfactory to Us; and
3. Make a payment of an amount sufficient to cover (i) the total monthly
administrative charges from the beginning of the Grace Period to the
effective date of reinstatement; (ii) total monthly deductions for 3
months, calculated from the effective date of reinstatement; and (iii)
the charge for applicable taxes, the Premium charge, and any increase in
surrender charges associated with this payment. We will determine the
amount of this required payment as if no interest or investment
performance were credited to or charged against Your Policy Account
Value; and
4. Repay or reinstate any Policy Loan which existed on the date the Policy
ended.
The effective date of the reinstatement of Policy benefits will be the
beginning of the Policy Month which coincides with or next follows the date We
approve Your request.
From the required payment We will deduct the charge for applicable taxes and
the premium charge. The Policy Account Value, Policy Loan and surrender charges
that will apply upon reinstatement will be those that were in effect on the date
the Policy lapsed.
We will start to make monthly deductions again as of the effective date of
reinstatement. The monthly expense charge from the beginning of the Grace Period
to the effective date of reinstatement will be deducted from the Policy Account
Value as of the effective date of reinstatement. No other charges will accrue
for this period.
TAX CONSIDERATIONS
The following description is based upon the Company's understanding of
current federal income tax law applicable to life insurance in general. The
Company cannot predict the probability that any changes in such laws will be
made. Purchasers are cautioned to seek competent tax advice regarding the
possibility of such changes.
37
<PAGE>
Section 7702 of the Internal Revenue Code of 1986, as amended ("Code"),
defines the term "life insurance contract" for purposes of the Code. The Company
believes that the Policies to be issued will qualify as "life insurance
contracts" under Section 7702, but the Company does not guarantee the tax status
of the Policies. Purchasers bear the complete risk that the Policies may not be
treated as "life insurance" under federal income tax laws. Purchasers should
consult their own tax advisers with regard to these risks.
INTRODUCTION
The discussion contained herein is general in nature and is not intended as
tax advice. Each person concerned should consult a competent tax adviser. No
attempt is made to consider any applicable state or other tax laws. Moreover,
the discussion herein is based upon the Company's understanding of current
federal income tax laws and the current interpretation of those laws. No
representation is made regarding the likelihood of continuation of those current
federal income tax laws or of the current interpretations by the Internal
Revenue Service.
THE COMPANY
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Separate Account is not a separate entity from the
Company and its operations form a part of the Company.
DIVERSIFICATION
Section 817 (h) of the Code and the regulations prescribed under that
Section by the United States Treasury Department ("Treasury Department") impose
certain diversification standards on the investments underlying variable life
insurance contracts. Section 817(h) of the Code provides that if the investment
assets underlying a variable life insurance contract are not properly
diversified in accordance with the Treasury regulations issued under that
Section, then that contract shall be immediately and permanently disqualified
from treatment as a life insurance contract for federal income tax purposes.
Disqualification of the Policy as a life insurance contract would result in
imposition of federal income tax on the Policy Owner with respect to earnings
allocable to the Policy prior to the receipt of payments under the Policy.
Generally, for purposes of determining whether the diversification standards
imposed by Section 817(h) of the Code on the underlying assets of variable
contracts have been met, "each United States government agency or
instrumentality shall be treated as a separate issuer." There is an exception to
that rule, however, permitting all of the amounts held by an insurance company
in connection with variable life insurance contracts to be invested in
securities issued by the U.S. Treasury. The Code also contains a safe harbor
provision which provides that a segregated asset account underlying life
insurance contracts such as the Policies will meet the diversification
requirements of Section 817(h) if, as of the close of each quarter, the
underlying assets of the account meet the diversification requirements
applicable to regulated investment companies and not more than 55 percent of the
value of the assets of the account are securities of other regulated investment
companies.
Treasury Regulation Section 1.817-5 establishes the specific diversification
requirements applicable to the investment portfolios underlying variable life
insurance contracts such as the Policies, and provides alternatives to the safe
harbor provisions described above. Under this Regulation, an investment
portfolio will be deemed adequately diversified if: (i) no more than 55% of the
value of the total assets of the portfolio is represented by any one investment;
(ii) no more than 70% of the value of the total assets of the portfolio is
represented by any two investments; (iii) no more than 80% of the value of the
total assets of the portfolio is represented by any three investments; and (iv)
no more than 90% of the value of the total assets of the portfolio is
represented by any four investments. For purposes of these percentage tests, all
securities of the same issuer are generally treated as a single investment. The
Regulation also provides a remedial procedure pursuant to which some of the
adverse consequences of a violation of the diversification requirements may be
avoided. This procedure requires, among other things, a tax penalty payment by
the issuer of the affected policies.
38
<PAGE>
The Company intends that each Fund underlying the Policies will be managed
by its Investment Manager in such a manner as to comply with these
diversification requirements.
When Regulations under Section 817(h) of the Code were first proposed in
1989, the Treasury Department also indicated that guidelines would be
forthcoming under which a variable life insurance Policy would not be treated as
a life insurance contract for tax purposes if the owner of the Policy had an
excessive degree of control over the investments underlying the Policy (E.G., by
being able to transfer values among Sub-accounts with only limited
restrictions). The issuance of such guidelines could require the Company to
impose limitations on the rights of the Policy Owners to control investment
designations under the Policies. It is not presently known whether any such
guidelines will be issued or whether any such guidelines would have retroactive
effect.
TAX TREATMENT OF THE POLICY
Section 7702 of the Code sets forth a detailed definition of a life
insurance contract for Federal tax purposes. The Treasury Department is
authorized to prescribe regulations implementing Section 7702. While proposed
regulations and other interim guidance have been issued, final regulations have
not been adopted so that the extent of the official guidance as to how Section
7702 is to be applied is quite limited. If a Policy were determined not to be a
life insurance contract for purposes of Section 7702, that Policy would not
qualify for the favorable tax treatment normally provided to a life insurance
Policy.
With respect to a Policy issued on the basis of a standard rate class, the
Company believes (largely in reliance on IRS Notice 88-128 and the proposed
regulations under Section 7702, issued on July 5, 1991) that such a Policy
should meet the Section 7702 definition of a life insurance contract.
With respect to a Policy that is issued on a substandard basis (I.E., a
premium class involving higher than standard mortality risk), there is less
certainty, in particular as to how the mortality and other expense requirements
of Section 7702 are to be applied in determining whether such a Policy meets the
definition of a life insurance contract set forth in section 7702. Thus, it is
not clear that such a Policy would satisfy Section 7702, particularly if the
Owner pays the full amount of premiums permitted under the Policy.
If subsequent guidance issued under Section 7702 leads the Company to
conclude that a Policy does not (or may not) satisfy Section 7702, the Company
will take appropriate and necessary steps for the purpose of causing such Policy
to comply with Section 7702, but the Company can give no assurance that it will
be possible to achieve that result. The Company expressly reserves the right to
restrict Policy transactions if it determines such action to be necessary as
part of an attempt by the Company to qualify the Policies as life insurance
contracts under Section 7702.
The discussion set forth below assumes that each Policy will qualify as a
life insurance contract for Federal income tax purposes under Section 7702.
TAX TREATMENT OF POLICY BENEFITS IN GENERAL. The Company believes that for
Federal income tax purposes both the proceeds and the cash value increases of a
Policy should be treated in a manner consistent with the normal treatment of a
guaranteed-benefit life insurance contract. Thus, the Death Benefit under the
Policy should be excludable from the gross income of the Beneficiary under
Section 101(a)(1) of the Code.
Generally, the Owner will not be deemed to be in constructive receipt of the
Policy Account Value, including increments thereof, until there has been a
distribution from the Policy or a surrender, a lapse, or a payment of benefits
at a Policy's Maturity Date. The tax consequences of distributions from, and
loans taken from or secured by a Policy, will be significantly altered, however,
if the Policy is classified as a "Modified Endowment Contract."
Upon a complete Surrender or lapse of any Policy or upon a payment of
benefits at a Policy's Maturity Date, any excess of the amount received plus the
amount of Outstanding Loan over the total
39
<PAGE>
investment in the Policy, will generally be treated as ordinary income subject
to tax. This treatment of surrenders, lapses, and payments at a Policy's
Maturity Date applies whether the Policy is or is not treated as a Modified
Endowment Contract.
INVESTMENT IN THE POLICY. The term "investment in the Policy" means (i) the
aggregate amount of any Premiums or other consideration paid for a Policy, minus
(ii) the aggregate amount received under the Policy which is excluded from gross
income of the Owner (except that the amount of any loan from, or secured by, a
Policy that is a Modified Endowment Contract, to the extent such amount is
excluded from gross income, will be disregarded), plus (iii) the amount of any
loan from, or secured by, a Policy that is a Modified Endowment Contract to the
extent that such amount is included in the gross income of the Owner.
DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Distributions from a Policy that is not a Modified Endowment
Contract, are generally treated first as a recovery of the Owner's investment in
the Policy and then, but only after the return of all such investment in the
Policy, as a distribution of taxable income. An exception to this general rule
applies in the case of a decrease in the Policy's Death Benefit or any other
change that reduces benefits under the Policy in the first fifteen years after
the Policy is issued and that results in a cash distribution to the Owner, even
where such a distribution must be made in order for the Policy to continue
complying with the definitional limits of Section 7702. Such a cash distribution
will be taxed in whole or in part as ordinary income (to the extent of any gain
in the Policy) under rules prescribed in Section 7702.
Loans from, or secured by, a Policy that is not a Modified Endowment
Contract are not treated as distributions. Instead, any such loan is generally
treated as an Outstanding Loan of the Owner.
MODIFIED ENDOWMENT CONTRACTS. Section 7702A of the Code establishes a class
of life insurance contracts designated as "Modified Endowment Contracts," which
applies to Policies entered into or materially changed after June 20, 1988. Due
to the Policy's flexibility, classification as a Modified Endowment Contract
will depend on the individual circumstances of each Policy.
In general, a Policy will be a Modified Endowment Contract if the
accumulated Premiums paid at any time during the first seven Policy Years exceed
the sum of the net level Premiums which would have been paid on or before such
time if the Policy provided for paid-up future benefits after the payment of
seven level annual Premiums. Whether a Policy will be a Modified Endowment
Contract after a material change generally depends upon the relationship of the
Death Benefit and Policy Account Value at the time of such change and the
additional premiums paid in the seven years following the material change.
The rules relating to whether a Policy will be treated as a Modified
Endowment Contract are extremely complex and cannot be adequately described in
the limited confines of this summary. Therefore, a current or prospective Owner
should consult with a competent advisor to determine whether a Policy
transaction will cause the Policy to be treated as a Modified Endowment
Contract. The Company will, however, monitor Policies and will take all steps
reasonably necessary to notify an Owner on a timely basis if his or her Policy
is in jeopardy of becoming a Modified Endowment Contract.
DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS. Any
Policies that are classified as Modified Endowment Contracts will be subject to
additional adverse tax rules. Loans taken from, or secured by, such a Policy
will be treated as distributions from the Policy and will be taxed accordingly.
(Past due loan interest that is added to the loan amount will also be treated as
a loan for this purpose.) In addition, all distributions, including any loans
and any distributions upon any full or partial surrender, a lapse, or a payment
of benefits at the Maturity Date of such a Policy, will be treated as ordinary
income to the extent of the excess (if any) of the Policy Account Value
immediately before the distribution over the Owner's investment in the Policy
(described above) at such time.
PENALTIES ON EARLY DISTRIBUTIONS POLICIES CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. A ten percent additional income tax may be imposed under Section
72(q) of the Code on the portion of any
40
<PAGE>
distribution (or any loan) from a Policy that is classified as a Modified
Endowment Contract. This additional tax applies to the full amount that is
included in the Owner's taxable income except where the distribution or loan is
made on or after the date that the Owner attains age 59 1/2, is attributable to
the Owner's becoming disabled, or is part of a series of substantially equal
periodic payments for the life (or life expectancy) of the Owner or the joint
lives (or joint life expectancies) of the Owner and the Owner's Beneficiary. If
a Policy is not a Modified Endowment Contract, however, then neither
distributions (including distributions upon surrender) nor loans from, or
secured by, the Policy will be subject to the 10% additional tax.
MULTIPLE POLICIES. Section 72(e)(11) of the Code provides that if two or
more Modified Endowment Contracts are issued within the same calendar year to
the same Owner by one company or its affiliates, then all such contracts must be
treated as one Modified Endowment Contract for purposes of determining the
taxable portion of any loans or distributions. Such treatment may result in
adverse tax consequences including more rapid taxation of the loans or other
amounts distributed from all such contracts. Owners should consult a tax adviser
prior to purchasing more than one Modified Endowment Contract in any calendar
year.
INTEREST ON POLICY LOANS. Except in special circumstances, interest paid on
a loan under a Policy which is owned by an individual is treated as personal
interest under Section 163(h) of the Code and thus will not be tax deductible.
In addition, interest that is otherwise deductible but that is incurred on any
loan under a Policy owned by a taxpayer and covering the life of any individual
who is an officer or employee of or who is financially interested in the
business carried on by that taxpayer will not be tax deductible to the extent
the aggregate amount of such loans with respect to contracts covering such
individual exceeds $50,000. Any deduction for interest on Policy loans that is
otherwise deductible may also be subject to certain other restrictions set forth
in Section 264 of the Code. Before taking a Policy loan, an Owner should consult
a tax adviser as to the tax consequences of such a loan.
POLICY EXCHANGES AND MODIFICATIONS. Depending on the circumstances, the
exchange of a Policy, a change in the Policy's Death Benefit option (I.E., a
change from Level Option to Increasing Option or vice versa), a Policy loan, a
partial surrender, a Surrender, a change in ownership, or an assignment of the
Policy may have Federal income tax consequences. In addition, the Federal, state
and local transfer, and other tax consequences of ownership or receipt of Policy
proceeds will depend on the circumstances of each Owner or Beneficiary.
POSSIBLE CHARGE FOR THE COMPANY'S TAXES
At the present time, the Company makes no charge for any Federal, state or
local taxes (other than state premium taxes) that it incurs that may be
attributable to the Separate and Guaranteed Accounts or to the Policies. The
Company, however, reserves the right in the future to make a charge for any such
tax or other economic burden resulting from the application of the tax laws that
it determines to be properly attributable to the Separate Account or to the
Policies.
41
<PAGE>
SUPPLEMENTAL BENEFITS AND RIDERS
The Company intends to make available certain supplemental benefits and
riders which may be issued with the Policy. Any monthly charges for these
supplemental benefits and riders, as listed below, will be deducted from the
Policy Account Value.
-- Accidental Death Benefit (ADB)
-- Accelerated Benefits Rider
-- Waiver of Monthly Deductions
-- Waiver of Specified Premium
-- Child's Term Rider
-- Primary Insured Term Rider (PIR)
-- Other Insured Term Rider (OIR)
-- Minimum Guaranteed Death Benefit
For a complete description of these supplemental benefits and riders, their
costs, and any rules or limits applicable to their issue, please contact Our
Administrative Office or one of Our authorized agents.
42
<PAGE>
MANAGEMENT OF THE COMPANY
The Directors and Principal Officers of the Company are listed below with
their current principal business affiliation and their principal occupations
during the past five (5) years. All officers have been affiliated with the
Company during the past five (5) years unless otherwise indicated.
<TABLE>
<CAPTION>
CURRENT PRINCIPAL BUSINESS AFFILIATIONS
AND PRINCIPAL OCCUPATIONS DURING PAST
NAME AND ADDRESS OFFICE FIVE YEARS
- --------------------------- ----------------------------------------- -----------------------------------------
<S> <C> <C>
Robert J. O'Connell* President and Director President, AIG Domestic Life Companies.
Formerly, Vice President AIG Domestic
Life Companies. Formerly, Senior Vice
President New York Life.
Nicholas A. O'Kulich* Vice President Vice President, Treasurer American
Treasurer and Director International Companies. Also, Chief
Financial Officer American International
Companies -- Life Division.
Maurice R. Greenberg* Director Chairman of the Board, President and
Chief Executive Officer of American
International Group, Inc.
Edwin A.G. Manton* Director Senior Advisor, American International
Group, Inc.
Edward E. Matthews* Senior Vice President and Director Vice Chairman/Finance and Director of
American International Group, Inc. Also,
Director of AIG Investment Advisers,
Inc., AIG Global Investors, Inc., AIFD
and Chairman and Director, AIG Capital
Corp.
Jerome T. Muldowney* Senior Vice President Vice President-Investments AIG Domestic
Domestic Investments and Director Life Companies. President & Director --
AIG Investment Advisers, Inc.
Win J. Neuger* Director Senior Vice President -- AIG, Inc.
Formerly, Managing Director -- Bankers
Trust Co.
John Skar Vice President Vice President and Chief Actuary AIG
Actuary and Director Domestic Life Companies, and Formerly,
Senior Vice President, Fidelity Mutual
Life Insurance Company.
Howard Smith* Director Senior Vice President -- Comptroller,
American International Group, Inc.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
CURRENT PRINCIPAL BUSINESS AFFILIATIONS
AND PRINCIPAL OCCUPATIONS DURING PAST
NAME AND ADDRESS OFFICE FIVE YEARS
- --------------------------- ----------------------------------------- -----------------------------------------
<S> <C> <C>
Ernest E. Stempel* Director and Chairman of the Board Vice Chairman/Life Insurance and Director
of American International Group, Inc.
Formerly Senior Advisor -- American
International Group, Inc.
Elizabeth M. Tuck* Secretary Secretary and Assistant Secretary of AIG,
Inc. and certain affiliates
Gerald W. Wyndorf Director and Executive Vice President Executive Vice President -- AIG Domestic
Life Companies
Howard Gunton Vice President and Comptroller Vice President and Comptroller of AIG
One Alico Plaza Domestic Life Companies
Wilmington, DE 19899
</TABLE>
- ------------------------
*indicates the business address of the individual, which is 70 Pine Street, New
York, New York 10270
DISTRIBUTION OF POLICY
The Policy is sold by licensed insurance agents, where the Policy may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc.
The Policy will be distributed through the principal underwriter for the
Separate Account, AIG Equity Sales Corp. (AESC) 80 Pine Street, New York, New
York, an affiliate of the Company. The Company pays commissions on behalf of
AESC to selling product dealers and registered representatives.
Commissions may be paid to registered representatives based on Premiums paid
for Policies sold, in amounts up to 50% of first year Premiums, 5% on Premiums
paid during the 2nd through 10th Policy Years, and 2% on Premiums paid after the
first ten Policy Years. Other expense reimbursements, allowances, and overrides
may also be paid. Registered representatives who meet certain productivity and
profitability standards may be eligible for additional compensation. Additional
payments may be made for administrative or other services not directly related
to the sale of the Policies.
STATE REGULATION
The Company is subject to the laws of Delaware governing insurance companies
and to regulation by the Delaware Insurance Department. An annual statement in a
prescribed form is filed with the Insurance Department each year covering the
operation of the Company for the preceding year and its final condition as of
the end of such year. Regulation by the Insurance Department includes periodic
examinations to determine the Company's Policy liabilities and reserves so that
the Insurance Department may certify the items are correct. The Company's books
and accounts are subject to review by the Insurance Department at all times and
a full examination of its operations is conducted periodically by the staff of
the Insurance Department pursuant to the National Association of Insurance
Commissioners. Such regulation does not, however, involve any supervision of
management or investment practices or policies. In addition, the Company is
subject to regulation under the insurance laws of other jurisdictions in which
it may operate.
44
<PAGE>
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account or the
principal underwriter is a party. The Company is engaged in Various kinds of
routine litigation which, in the opinion of the Company, are not of material
importance in relation to the total capital and surplus of the Company.
EXPERTS
The financial statements of the Company which appear in this Prospectus have
been audited by Coopers & Lybrand L.L.P., independent certified public
accountants, as stated in their reports, and have been included in reliance upon
the authority of such firm as experts in accounting and auditing.
LEGAL OPINIONS
Legal matters relating to the policies and state insurance laws described
herein are being passed upon by Kenneth D. Walma, Assistant Secretary and
Associate Counsel of the Company. Jorden Burt Berenson & Johnson LLP of
Washington, D.C. has provided advice on matters relating to federal securities
laws.
FINANCIAL STATEMENTS
The financial statements of the Company that are included herein should be
considered only as bearing upon the ability of the Company to meet its
obligations under the Policy.
45
<PAGE>
AIG LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF
AMERICAN INTERNATIONAL GROUP, INC.)
REPORT ON AUDITS OF FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
AIG Life Insurance Company:
We have audited the accompanying balance sheets of AIG Life Insurance
Company (a wholly-owned subsidiary of American International Group, Inc.) as of
December 31, 1995 and 1994, and the related statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AIG Life Insurance Company
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 1 (h) to the financial statements, the Company changed
in 1993, its method of accounting for investments in certain fixed maturity
securities.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 22, 1996
F-2
<PAGE>
AIG LIFE INSURANCE COMPANY
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
(IN THOUSANDS)
Investments and cash:
Fixed maturities:
Bonds available for sale, at market value (cost: 1995 -- $1,823,860: 1994 --
$1,337,720)................................................................. $ 1,963,265 $ 1,308,564
Equity securities:
Common stock (cost: 1995 -- $1,916: 1994 -- $1,670).......................... 2,437 2,113
Non-redeemable preferred stocks (cost: 1995 -- $2,562:
1994 -- $2,000)............................................................. 2,553 2,000
Mortgage loans on real estate, net............................................... 239,127 177,377
Real estate, net of accumulated depreciation of $1,755 in 1995;
and $1,156 in 1994.............................................................. 10,864 11,441
Policy loans..................................................................... 2,961,726 1,372,224
Other invested assets............................................................ 68,252 62,620
Short-term investments........................................................... 202,652 87,120
Cash............................................................................. 785 4,368
------------- -------------
Total investments and cash................................................. 5,451,661 3,027,827
Amounts due from related parties................................................. 3,899 6,610
Investment income due and accrued................................................ 242,748 116,449
Premium and insurance balances receivable -- net................................. 28,189 20,476
Reinsurance assets............................................................... 207,827 207,626
Deferred policy acquisition cost................................................. 60,625 54,474
Deferred incomes taxes........................................................... -- 24,379
Separate and variable accounts................................................... 190,441 83,718
Other assets..................................................................... 7,509 2,909
------------- -------------
Total assets............................................................... $ 6,192,899 $ 3,544,468
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
AIG LIFE INSURANCE COMPANY
BALANCE SHEETS (CONTINUED)
LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
(IN THOUSANDS, EXCEPT SHARE
AMOUNTS)
Policyholders' funds on deposit.................................................. $ 4,574,995 $ 2,525,030
Future policy benefits........................................................... 566,487 483,211
Reserve for unearned premiums.................................................... 47,590 48,591
Policy and contract claims....................................................... 177,540 114,608
Reserve for commissions, expenses and taxes...................................... 24,134 33,991
Insurance balances payable....................................................... 22,186 19,168
Deferred income taxes............................................................ 24,660 --
Amounts due to related parties................................................... 2,382 12,376
Federal income tax payable....................................................... 4,606 13,349
Separate and variable accounts................................................... 190,441 74,076
Other liabilities................................................................ 234,850 22,111
------------- -------------
Total Liabilities.......................................................... 5,869,871 3,346,511
------------- -------------
Commitments and contingencies (See Note 6)
STOCKHOLDERS' EQUITY
Common stock, $5 par value; 1,000,000 shares authorized; 976,703 shares issued
and outstanding............................................................... 4,884 4,884
Additional paid-in capital..................................................... 123,283 123,283
Unrealized appreciation (depreciation) of investments, net of future policy
benefits and taxes of $47,209 in 1995 and $(8,093) in 1994...................... 87,673 (15,029)
Retained Earnings................................................................ 107,188 84,819
------------- -------------
Total stockholders' equity................................................. 323,028 197,957
------------- -------------
Total liabilities and stockholders' equity....................................... $ 6,192,899 $ 3,544,468
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Revenues:
Premiums................................................................. $ 364,502 $ 265,990 $ 168,547
Net investment income.................................................... 435,697 238,899 137,108
Realized capital (losses) gains.......................................... (417) 1,953 9,280
----------- ----------- -----------
Total revenues......................................................... 799,782 506,842 314,935
----------- ----------- -----------
Benefits and expenses:
Benefits to policyholders................................................ 202,105 196,175 135,309
Increase in future policy benefits and policyholders' funds on deposit... 392,592 158,935 81,908
Acquisition and insurance expenses....................................... 170,343 127,941 87,126
----------- ----------- -----------
Total benefits and expenses............................................ 765,040 483,051 304,343
----------- ----------- -----------
Income before income taxes................................................. 34,742 23,791 10,592
----------- ----------- -----------
Income taxes (benefits):
Current.................................................................. 18,637 27,958 23,425
Deferred................................................................. (6,264) (19,447) (20,991)
----------- ----------- -----------
Total income taxes..................................................... 12,373 8,511 2,434
----------- ----------- -----------
Net income................................................................. $ 22,369 $ 15,280 $ 8,158
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
COMMON STOCK
Balance at beginning of year............................................... $ 4,884 $ 4,884 $ 4,884
----------- ----------- -----------
Balance at end of year..................................................... 4,884 4,884 4,884
----------- ----------- -----------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year............................................... 123,283 123,283 98,283
Capital contribution....................................................... -- -- 25,000
----------- ----------- -----------
Balance at end of year..................................................... 123,283 123,283 123,283
----------- ----------- -----------
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS, NET
Balance at beginning of year............................................... (15,029) 40,159 146
Change during year......................................................... 170,003 (84,904) (60)
Changes due to deferred income tax (expense) benefit and future policy
benefits.................................................................. (67,301) 29,716 19
Cumulative effect of accounting change, net of taxes
of $21,568................................................................ -- -- 40,054
----------- ----------- -----------
Balance at end of year..................................................... 87,673 (15,029) 40,159
----------- ----------- -----------
RETAINED EARNINGS
Balance at beginning of year............................................... 84,819 69,539 61,381
Net income................................................................. 22,369 15,280 8,158
----------- ----------- -----------
Balance at end of year..................................................... 107,188 84,819 69,539
----------- ----------- -----------
Total stockholders' equity............................................. $ 323,028 $ 197,957 $ 237,865
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993
-------------- -------------- ------------
<S> <C> <C> <C>
(IN THOUSANDS)
Cash flows from operating activities:
Net income.......................................................... $ 22,369 $ 15,280 $ 8,158
-------------- -------------- ------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Non-cash revenues, expenses, gains and losses included in income:
Change in insurance reserves.................................... 133,207 88,718 40,597
Change in premiums and insurance balances receivable and payable
-- net......................................................... (4,695) 11,668 (154)
Change in reinsurance assets.................................... (201) 5,553 4,201
Change in deferred policy acquisition costs..................... (6,151) (14,906) (462)
Change in investment income due and accrued..................... (126,299) (82,023) (14,070)
Realized capital gains.......................................... 417 (1,953) (9,280)
Change in current and deferred income taxes -- net.............. (15,005) (16,739) (18,513)
Change in reserves for commissions, expenses and taxes.......... (9,857) 23,055 5,406
Change in other assets and liabilities -- net................... (8,452) (2,479) (1,061)
-------------- -------------- ------------
Total adjustments............................................. (37,036) 10,894 6,664
-------------- -------------- ------------
Net cash (used in) provided by operating activities............. (14,667) 26,174 14,822
-------------- -------------- ------------
Cash flows from investing activities:
Cost of fixed maturities, at market sold.......................... 36,678 19,392 61,551
Cost of fixed maturities, at market matured or redeemed........... 76,989 85,628 154,564
Cost of equity securities sold.................................... 405 -- 2,930
Realized capital gains............................................ 582 3,176 11,925
Purchase of fixed maturities...................................... (590,864) (252,964) (304,771)
Purchase of equity securities..................................... (1,213) -- (2,757)
Mortgage loans granted............................................ (75,100) (53,977) (19,428)
Repayments of mortgage loans...................................... 12,406 16,464 22,623
Change in policy loans............................................ (1,589,502) (1,184,455) (150,953)
Change in short-term investments.................................. (115,532) 18,361 (93,752)
Change in other invested assets................................... (4,296) (6,652) (7,132)
Other -- net...................................................... (5,369) (1,309) (3,079)
-------------- -------------- ------------
Net cash used in investing activities........................... (2,254,816) (1,356,336) (328,279)
-------------- -------------- ------------
Cash flows from financing activities:
Change in policyholders' funds on deposit......................... 2,265,900 1,330,841 290,443
Proceeds from capital contribution................................ -- -- 25,000
-------------- -------------- ------------
Net cash provided by financing activities....................... 2,265,900 1,330,841 315,443
-------------- -------------- ------------
Change in cash...................................................... (3,583) 679 1,986
Cash at beginning of year........................................... 4,368 3,689 1,703
-------------- -------------- ------------
Cash at end of year................................................. $ 785 $ 4,368 $ 3,689
-------------- -------------- ------------
-------------- -------------- ------------
</TABLE>
See accompanying notes to statutory financial statements.
F-7
<PAGE>
AIG LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION: AIG Life Insurance Company (the Company) is a
wholly-owned subsidiary of American International Group, Inc. (the Parent). The
financial statements of the Company have been prepared on the basis of generally
accepted accounting principles (GAAP). The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. The Company is licensed to
sell life and accident and health insurance in the District of Columbia and all
states except for Maine and New York.
The Company also files financial statements prepared in accordance with
statutory practices prescribed or permitted by the Insurance Department of the
State of Delaware. Financial statements prepared in accordance with generally
accepted accounting principles differ in certain respects from the practices
prescribed or permitted by regulatory authorities. The significant differences
are: (1) statutory financial statements do not reflect fixed maturities
available for sale at market value; (2) policy acquisition costs, charged
against operations as incurred for regulatory purposes, have been deferred and
are being amortized over the anticipated life of the contracts; (3) individual
life and annuity policy reserves based on statutory requirements have been
adjusted based upon mortality, lapse and interest assumptions applicable to
these coverages, including provisions for reasonable adverse deviations; these
assumptions reflect the Company's experience and industry standards; (4)
deferred income taxes not recognized for regulatory purposes have been provided
for temporary differences between the bases of assets and liabilities for
financial reporting purposes and tax purposes; (5) for regulatory purposes,
future policy benefits, policyholders' funds on deposit, policy and contract
claims and reserve for unearned premiums are presented net of ceded reinsurance;
and (6) an asset valuation reserve and interest maintenance reserve using
National Association of Insurance Commissioners (NAIC) formulas are set up for
regulatory purposes.
(b) INVESTMENTS: Fixed maturities available for sale, where the company
may not have the ability or positive intent to hold these securities until
maturity, are carried at market value. Included in fixed maturities available
for sale are collateralized mortgage obligations (CMOs). Premiums and discounts
arising from the purchase of CMO's are treated as yield adjustments over the
estimated life. Common and non-redeemable preferred stocks are carried at market
value. Short-term investments are carried at cost, which approximates market.
Unrealized gains and losses from investments in equity securities and fixed
maturities available for sale are reflected in stockholders' equity, net of
amounts recorded as future policy benefits and any related deferred income
taxes.
Realized capital gains and losses are determined principally by specific
identification. Where declines in values of securities below cost or amortized
cost are considered to be other than temporary, a charge is reflected in income
for the difference between cost or amortized cost and estimated net realizable
value.
Mortgage loans on real estate are carried at unpaid principal balance less
unamortized loan origination fees and costs less an allowance for uncollectible
loans.
Real estate is carried at depreciated cost and is depreciated on a
straight-line basis over 31.5 years. Expenditures for maintenance and repairs
are charged to income as incurred; expenditures for betterments are capitalized
and depreciated over their estimated lives.
Policy loans are carried at the aggregate unpaid principal balance.
F-8
<PAGE>
AIG LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other invested assets consist primarily of limited partnership interests
which are carried at market value. Unrealized gains and losses from the
revaluation of these investments are reflected in stockholders' equity, net of
any related taxes. Also included in this category is an interest rate cap
agreement, which is carried at its amortized cost. The cost of the cap is being
amortized against investment income on a straight line basis over the life of
the cap.
(c) INCOME TAXES: The Company joins in a consolidated federal income tax
return with the Parent and its domestic subsidiaries. The Company and the Parent
have a written tax allocation agreement whereby the Parent agrees not to charge
the Company a greater portion of the consolidated tax liability than would have
been paid by the Company if it had filed a separate return. Additionally, the
Parent agrees to reimburse the Company for any tax benefits arising out of its
net losses within ninety days after the filing of that consolidated tax return
for the year in which these losses are utilized. Deferred federal income taxes
are provided for temporary differences related to the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns.
(d) PREMIUM RECOGNITION AND RELATED BENEFITS AND EXPENSES: Premiums on
traditional life insurance and life contingent annuity contracts are recognized
when due. Revenues for universal life and investment-type products consist of
policy charges for the cost of insurance, administration, and surrenders during
the period. Premiums on accident and health insurance are reported as earned
over the contract term. The portion of accident and health premiums which is not
earned at the end of a reporting period is recorded as unearned premiums.
Estimates of premiums due but not yet collected are accrued. Policy benefits and
expenses are associated with earned premiums on long-duration contracts
resulting in a level recognition of profits over the anticipated life of the
contracts.
Policy acquisition costs for traditional life insurance products are
generally deferred and amortized over the premium paying period of the policy.
Deferred policy acquisition costs and policy initiation costs related to
universal life and investment-type products are amortized in relation to
expected gross profits over the life of the policies (see Note 3).
The liability for future policy benefits and policyholders' contract
deposits is established using assumptions described in Note 4.
(e) POLICY AND CONTRACT CLAIMS: Policy and contract claims include amounts
representing: (1) the actual in-force amounts for reported life claims and an
estimate of incurred but unreported claims; and (2) an estimate, based upon
prior experience, for accident and health reported and incurred but unreported
losses. The methods of making such estimates and establishing the resulting
reserves are continually reviewed and updated and any adjustments resulting
therefrom are reflected in income currently.
(f) SEPARATE AND VARIABLE ACCOUNTS: These accounts represent funds for
which investment income and investment gains and losses accrue directly to the
policyholders. Each account has specific investment objectives, and the assets
are carried at market value. The assets of each account are legally segregated
and are not subject to claims which arise out of any other business of the
Company.
(g) REINSURANCE ASSETS: Reinsurance assets include the balances due from
both reinsurance and insurance companies under the terms of the Company's
reinsurance arrangements for ceded unearned premiums, future policy benefits for
life and accident and health insurance contracts, policyholders' funds on
deposit and policy and contract claims. It also includes funds held under
reinsurance treaties.
F-9
<PAGE>
AIG LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(h) ACCOUNTING STANDARDS:
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of"
(FASB 121). This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable and an impairment loss must be recognized.
FASB 121 is effective for the Company commencing January 1, 1996. The
Company believes that the adoption of this statement in 1996 will have an
immaterial impact on the results of operations, financial condition and
liquidity.
In December 1995, FASB issued "Special Report, a Guide to the Implementation
of Statement No. 115 on Accounting for Certain Investments in Debt and Equity
Securities". Among other things, this guide provided for a transition provision
permitting a one-time transfer of debt securities from the held to maturity
classification to the available for sale classification. The Company did not
transfer any securities from the held to maturity classification to the
available for sale classification.
In 1994, the American Institute of Certified Public Accountants (AICPA)
issued a Statement of Position (SOP) 94-6 "Disclosure of Certain Significant
Risks and Uncertainties" (SOP 94-6). Pursuant to SOP 94-6, the Company has made
certain disclosures as to the use of estimates in the preparation of its 1995
financial statements. Certain other disclosures were not necessary as the
Company did not meet the required criteria.
In November of 1992, FASB issued Statement of Financial Accounting Standards
No. 112 "Employers' Accounting for Postemployment Benefits" (FASB 112). FASB 112
established accounting standards for employers who provide benefits to former or
inactive employees after employment but before retirement. FASB 112 was adopted
effective January 1, 1994, and had no significant effect on the Company's
results of operations, financial condition or liquidity.
In October 1994, FASB issued Statement of Financial Accounting Standards No.
118 "Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures" (FASB 118). FASB 118 amends FASB 114 to allow a creditor to use
existing methods to recognize interest income on an impaired loan. FASB 118 also
amends certain disclosure requirements of FASB 114. The Company adopted FASB 114
and 118 effective December 31, 1994. The adoption of these statements did not
cause any significant impact on the Company's results of operations, financial
condition or liquidity.
In October 1994, FASB issued Statement of Financial Accounting Standards No.
119 "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments" (FASB 119). FASB 119 requires disclosure about derivative
financial instruments and amends FASB 105 "Disclosure of Information about
Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with
Concentrations of Credit Risk" (FASB 105) and Statement of Financial Accounting
Standards No. 107 "Disclosure about Fair Value of Financial Instruments".
FASB 119 requires disclosure about the amounts, nature and terms of
derivatives that are not subject to FASB 105. Also, FASB 119 requires disclosure
about financial instruments held or issued for trading purposes and purposes
other than trading. This statement was adopted by the Company effective December
31, 1994.
In May 1993, FASB issued Statement of Accounting Standards No. 115
"Accounting for Certain Investments on Debt and Equity Securities" (FASB 115)
and the Company adopted this standard at December 31, 1993. The pretax increase
in carrying value of fixed maturities available for sale as a
F-10
<PAGE>
AIG LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
result of marking to market was $108,623,000. A portion was recorded as a
component of future policy benefits. Thus, the unrealized appreciation of
investments increased $40,054,000, net of taxes of $21,568,000.
2. INVESTMENT INFORMATION
(a) STATUTORY DEPOSITS: Securities with a carrying value of $2,639,000 and
$2,436,000 were deposited by the Company under requirements of regulatory
authorities as of December 31, 1995 and 1994, respectively.
(b) NET INVESTMENT INCOME: An analysis of net investment income is as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Fixed maturities................................................. $ 138,341 $ 109,826 $ 105,333
Equity securities................................................ 225 241 52
Mortgage loans................................................... 19,399 14,655 13,289
Real estate...................................................... 323 765 875
Policy loans..................................................... 268,454 108,453 16,504
Cash and short-term investments.................................. 4,336 1,679 1,112
Other invested assets............................................ 6,129 4,070 3,384
----------- ----------- -----------
Total investment income...................................... 437,207 239,689 140,549
Investment expenses.............................................. 1,510 790 3,441
----------- ----------- -----------
Net investment income........................................ $ 435,697 $ 238,899 $ 137,108
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(c) INVESTMENT GAINS AND LOSSES: The net realized capital gains (losses)
and change in unrealized appreciation (depreciation) of investments for 1995,
1994 and 1993 are summarized below (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
----------- ---------- ---------
<S> <C> <C> <C>
Net realized (losses) gains on investments:
Fixed maturities............................................... $ (166) $ (10) $ 7,842
Equity securities.............................................. 712 442 (2,768)
Mortgage loans................................................. (1,000) (1,223) (2,645)
Other invested assets.......................................... 37 2,744 6,851
----------- ---------- ---------
Net realized gains............................................. $ (417) $ 1,953 $ 9,280
----------- ---------- ---------
----------- ---------- ---------
Change in unrealized appreciation (depreciation) of investments:
Fixed maturities................................................. $ 168,561 $ (90,779) $ --
Equity securities................................................ 69 293 (59)
Other invested assets............................................ 1,373 5,582 (1)
Cumulative effect of accounting change........................... -- -- 61,623
----------- ---------- ---------
Net change in unrealized appreciation (depreciation) of
investments..................................................... $ 170,003 $ (84,904) $ 61,563
----------- ---------- ---------
----------- ---------- ---------
</TABLE>
Proceeds from the sale of investments in fixed maturities during 1995, 1994
and 1993 were $34,679,000, $17,431,000, and $59,251,000, respectively.
F-11
<PAGE>
AIG LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT INFORMATION (CONTINUED)
During 1995, 1994 and 1993, gross gains of $109,000, $394,000, and
$15,363,000, respectively, and gross losses of $275,000, $404,000, and
$7,520,000, respectively, were realized on dispositions of fixed maturity
investments.
During 1995, 1994 and 1993, gross gains of $712,000, $442,000, and $161,000,
respectively, and gross losses of $0, $0 and $2,929,000, respectively, were
realized on disposition of equity securities.
(d) MARKET VALUE OF FIXED MATURITIES AND UNREALIZED APPRECIATION OF
INVESTMENTS: At December 31, 1995 and 1994, unrealized appreciation of
investments in equity securities (before applicable taxes) included gross gains
of $833,000 and $793,000 and gross losses of $320,000 and $349,000,
respectively.
The amortized cost and estimated market values of investments in fixed
maturities at December 31, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
1995 COST GAINS LOSSES MARKET VALUE
- ---------------------------------------------------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government and government agencies and
authorities............................................ $ 45,872 $ 12,144 $ -- $ 58,016
States, municipalities and political subdivisions....... 345,049 22,975 24 368,000
Foreign governments..................................... 30,515 4,158 30 34,643
All other corporate..................................... 1,402,424 106,513 6,331 1,502,606
------------- ----------- ----------- -------------
Total fixed maturities................................ $ 1,823,860 $ 145,790 $ 6,385 $ 1,963,265
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
1994 COST GAINS LOSSES MARKET VALUE
- ---------------------------------------------------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government and government agencies and
authorities............................................ $ 44,107 $ 1,588 $ 1,184 $ 44,511
States, municipalities and political subdivisions....... 341,338 5,799 20,614 326,523
Foreign governments..................................... 15,431 683 956 15,158
All other corporate..................................... 936,844 20,536 35,008 922,372
------------- ----------- ----------- -------------
Total fixed maturities................................ $ 1,337,720 $ 28,606 $ 57,762 $ 1,308,564
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
The amortized cost and estimated market value of fixed maturities, available
for sale at December 31, 1995, by contractual maturity, are shown below (in
thousands). Actual maturities could differ from contractual maturities because
certain borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
------------- -------------
<S> <C> <C>
Due in one year or less.......................................................... $ 77,667 $ 83,553
Due after one year through five years............................................ 470,775 500,396
Due after five years through ten years........................................... 671,788 724,559
Due after ten years.............................................................. 603,630 654,757
------------- -------------
$ 1,823,860 $ 1,963,265
------------- -------------
------------- -------------
</TABLE>
F-12
<PAGE>
AIG LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT INFORMATION (CONTINUED)
(e) CMO'S: CMO's are U.S. Government and Government agency backed and
triple A-rated securities. In the preceding table, CMO's are included in other
corporate fixed maturities. At December 31, 1995 and 1994, the market value of
the CMO portfolio was $457,111,000 and $419,148,000, respectively; the estimated
amortized cost was approximately $433,481,000 in 1995 and $427,409,000 in 1994.
The Company's CMO portfolio is readily marketable. There were no derivative
(high risk) CMO securities contained in the portfolio at December 31, 1995.
(f) FIXED MATURITIES BELOW INVESTMENT GRADE: At December 31, 1995 and
1994, the fixed maturities held by the Company that were below investment grade
had an aggregate amortized cost of $74,622,000 and $65,604,000, respectively,
and an aggregate market value of $73,894,000 and $61,946,000, respectively.
(g) NON-INCOME PRODUCING ASSETS: Non-income producing assets were
insignificant.
(h) INVESTMENTS GREATER THAN 10% EQUITY: The market value of investments
in the following companies and institutions exceeded 10% of the Company's total
stockholders' equity at December 31, 1995 (in thousands):
<TABLE>
<S> <C>
Fixed Maturities:
Ford Motor Credit Corporation........................................... $ 38,853
Morgan Stanley Group, Incorporated...................................... $ 35,157
Other Invested Assets:
Equity Linked Investors II, L.P......................................... $ 38,638
</TABLE>
3. DEFERRED POLICY ACQUISITION COSTS
The following reflects the policy acquisition costs deferred (commissions,
direct solicitation and other costs) which will be amortized against future
income and the related current amortization charged to income, excluding certain
amounts deferred and amortized in the same period (in thousands). The 1995
amortization includes $9,455,000 to recognize excess loss experienced on credit
insurance.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
---------- ---------- -----------
<S> <C> <C> <C>
Balance at beginning of year...................................... $ 54,474 $ 39,568 $ 39,106
Acquisition costs deferred........................................ 35,008 29,442 6,465
Amortization charged to income.................................... (28,857) (14,536) (6,003)
---------- ---------- -----------
Balance at end of year........................................ $ 60,625 $ 54,474 $ 39,568
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-13
<PAGE>
AIG LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. FUTURE POLICY BENEFITS AND POLICYHOLDERS' FUNDS ON DEPOSIT
(a) The analysis of the future policy benefits and policyholders' funds on
deposit at December 31, 1995 and 1994 follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Future Policy Benefits:
Long duration contracts.............................................. $ 556,669 $ 476,173
Short duration contracts............................................. 9,818 7,038
------------- -------------
$ 566,487 $ 483,211
------------- -------------
------------- -------------
Policyholders' funds on deposit:
Annuities............................................................ $ 944,629 $ 868,828
Universal life....................................................... 171,564 110,376
Guaranteed investment contracts (GICs)............................... 249,844 57,457
Corporate owned life insurance....................................... 3,204,912 1,483,882
Other investment contracts........................................... 4,046 4,487
------------- -------------
$ 4,574,995 $ 2,525,030
------------- -------------
------------- -------------
</TABLE>
(b) Long duration contract liabilities included in future policy benefits,
as presented in the table above, result from traditional life products. Short
duration contract liabilities are primarily accident and health products. The
liability for future policy benefits has been established based upon the
following assumptions:
(i) Interest rates for traditional life insurance products are 9.5
percent graded to 7.0 percent over 30 years. The liability for future policy
benefits for universal life insurance has been established using FASB 97 and
assumes a 1.0 percent investment margin. Interest rates (exclusive of
immediate/terminal funding annuities), which vary by year of issuance and
products, range from 3.0 percent to 10.0 percent. Interest rates on
immediate/terminal funding annuities are at a maximum of 12.2 percent and
grade to not greater than 7.5 percent.
(ii) Mortality and withdrawal rates are based upon actual experience
modified to allow for variations in policy form. The weighted average lapse
rate, including surrenders, for individual life approximated 2.5 percent.
(c) The liability for policyholders' funds on deposit has been established
based on the following assumptions:
(i) Interest rates credited on deferred annuities vary by year of
issuance and range from 4.0 percent to 8.3 percent. Credited interest rate
guarantees are generally for a period of one year. Withdrawal charges
generally range from 6.0 percent to 10.0 percent grading to zero over a
period of 6 to 10 years.
(ii) GICs have market value withdrawal provisions for any funds
withdrawn other than benefit responsive payments. Interest rates credited
generally range from 5.1 percent to 9.1 percent and maturities range from 2
to 7 years.
(iii) Interest rates on corporate-owned life insurance business are
guaranteed at 4.0 percent and the weighted average rate credited in 1995 was
10.5 percent.
(iv) The universal life funds, exclusive of corporate owned life
insurance business, have credited interest rates of 6.1 percent to 7.0
percent and guarantees ranging from 4.0 percent to 5.5
F-14
<PAGE>
AIG LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. FUTURE POLICY BENEFITS AND POLICYHOLDERS' FUNDS ON DEPOSIT (CONTINUED)
percent depending on the year of issue. Additionally, universal life funds
are subject to surrender charges that amount to 7.5 percent of the fund
balance and grade to zero over a period not longer than 20 years.
5. INCOME TAXES
(a) The Federal income tax rate applicable to ordinary income is 35% for
1995, 1994 and 1993. Actual tax expense on income from operations differs from
the "expected" amount computed by applying the Federal income tax rate because
of the following (in thousands except percentages):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ----------------------
PERCENT OF PRE-TAX PERCENT OF PRE-TAX PERCENT OF PRE-TAX
OPERATING OPERATING OPERATING
---------------------- ---------------------- ----------------------
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
"Expected" income tax expense................. $ 12,160 35.0% $ 8,327 35.0% $ 3,707 35.0%
Prior year federal income tax benefit......... (782) (2.3) -- -- (1,404) (13.2)
State income tax.............................. 876 2.5 149 0.6 -- --
Other......................................... 119 0.3 35 .2 131 1.2
--------- --- --------- --- --------- -----
Actual income tax expense................. $ 12,373 35.5% $ 8,511 35.8% $ 2,434 23.0%
--------- --- --------- --- --------- -----
--------- --- --------- --- --------- -----
</TABLE>
(b) The components of the net deferred tax liability were as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
---------------------
1995 1994
--------- ----------
<S> <C> <C>
Deferred tax assets:
Adjustment to life reserves................................................ $ 24,940 $ 17,703
Adjustments to mortgage loans and investment income........................ 2,546 2,395
Unrealized depreciation on investments..................................... -- 8,093
Adjustment to policy and contract claims................................... 11,725 8,200
Other...................................................................... 1,157 521
--------- ----------
40,368 36,912
--------- ----------
Deferred tax liabilities:
Deferred policy acquisition costs.......................................... $ 13,040 $ 10,275
Unrealized appreciation on investments..................................... 47,209 --
Bond discount.............................................................. 3,458 1,906
Other...................................................................... 1,321 352
--------- ----------
65,028 12,533
--------- ----------
Net deferred tax (asset) liability......................................... $ 24,660 $ (24,379)
--------- ----------
--------- ----------
</TABLE>
(c) At December 31, 1995, accumulated earnings of the Company for Federal
income tax purposes include approximately $2,204,000 of "Policyholders' Surplus"
as defined under the Code. Under provisions of the Code, "Policyholders'
Surplus" has not been currently taxed but would be taxed at current rates if
distributed to the Parent. There is no present intention to make cash
distributions from "Policyholders' Surplus" and accordingly, no provision has
been made for taxes on this amount.
(d) Income taxes paid in 1995, 1994, and 1993 amounted to $26,030,000,
$25,052,000, and $17,669,000, respectively.
F-15
<PAGE>
AIG LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
The Company, in common with the insurance industry in general, is subject to
litigation, including claims for punitive damages, in the normal course of their
business. The Company does not believe that such litigation will have a material
effect on its operating results and financial condition.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
(a) Statement of Financial Accounting Standards No. 107 "Disclosures about
Fair Value of Financial Instruments" (FASB 107) requires disclosure of fair
value information about financial instruments for which it is practicable to
estimate such fair value. These financial instruments may or may not be
recognized in the balance sheet. In the measurement of the fair value of certain
of the financial instruments, quoted market prices were not available and other
valuation techniques were utilized. These derived fair value estimates are
significantly affected by the assumptions used. FASB 107 excludes certain
financial instruments, including those related to insurance contracts.
The following methods and assumptions were used by the Company in estimating
the fair value of the financial instruments presented:
CASH AND SHORT TERM INVESTMENTS: The carrying amounts reported in the
balance sheet for these instruments approximate fair values.
FIXED MATURITIES: Fair values for fixed maturity securities carried at
market value are generally based upon quoted market prices. For certain
fixed maturities for which market prices were not readily available, fair
values were estimated using values obtained from independent pricing
services.
EQUITY SECURITIES: Fair values for equity securities were based upon
quoted market prices.
MORTGAGE AND POLICY LOANS: Where practical, the fair values of loans on
real estate were estimated using discounted cash flow calculations based
upon the Company's current incremental lending rates for similar type loans.
The fair value of the policy loans were not calculated as the Company
believes it would have to expend excessive costs for the benefits derived.
Therefore, the fair value of policy loans was estimated at carrying value.
INTEREST RATE CAP: Fair values for the interest rate cap were estimated
using values obtained from an independent pricing service.
POLICYHOLDERS' FUNDS ON DEPOSIT: Fair value of policyholder contract
deposits were estimated using discounted cash flow calculations based upon
interest rates currently being offered for similar contracts consistent with
those remaining for the contracts being valued.
(b) The fair value and carrying amounts of financial instruments is as
follows (in thousands):
<TABLE>
<CAPTION>
CARRYING
1995 FAIR VALUE AMOUNT
- ----------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Cash and short-term investments........................................ $ 203,437 $ 203,437
Fixed maturities....................................................... 1,963,265 1,963,265
Equity securities...................................................... 4,990 4,990
Mortgage and policy loans.............................................. 3,216,321 3,200,853
Interest rate cap...................................................... 144 170
Policyholders' funds on deposit........................................ $ 4,592,841 $ 4,574,995
</TABLE>
F-16
<PAGE>
AIG LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
CARRYING
1994 FAIR VALUE AMOUNT
- ----------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Cash and short-term investments........................................ $ 91,488 $ 91,488
Fixed maturities....................................................... 1,308,564 1,308,564
Equity securities...................................................... 4,113 4,113
Mortgage and policy loans.............................................. 1,551,831 1,549,601
Interest rate cap...................................................... 522 245
Policyholders' funds on deposit........................................ $ 2,524,273 $ 2,525,030
</TABLE>
8. STOCKHOLDERS' EQUITY
(a) The maximum stockholder dividend which can be paid without prior
regulatory approval is subject to restrictions relating to statutory surplus and
statutory net gain from operations. These restrictions limited payment of
dividends to $44,970,000 during 1995, however, no dividends were paid during the
year.
(b) The Company's stockholders' equity as determined in accordance with
statutory accounting practices was $176,951,000 at December 31, 1995 and
$145,209,000 at December 31, 1994. Statutory net income amounted to $39,712,000,
$47,002,000, and $10,441,000 for 1995, 1994 and 1993, respectively.
9. EMPLOYEE BENEFITS
(a) The Company participates with its affiliates in a qualified,
non-contributory, defined benefit pension plan which is administered by the
Parent. All qualified employees who have attained age 21 and completed twelve
months of continuous service are eligible to participate in this plan. An
employee with 5 or more years of service is entitled to pension benefits
beginning at normal retirement age 65. Benefits are based upon a percentage of
average final compensation multiplied by years of credited service limited to 44
years of credited service. Prior to January 1, 1996, the average final
compensation is subject to certain limitations. Annual funding requirements are
determined based on the "projected unit credit" cost method which attributes a
pro rata portion of the total projected benefit payable at normal retirement to
each year of credited service. Pension expense for current service costs,
retirement and termination benefits for the years ended December 31, 1995, 1994
and 1993 were approximately $304,000, $179,000, and $248,000, respectively. The
Parent's plans do not separately identify projected benefit obligations and plan
assets attributable to employees of participating affiliates. The projected
benefit obligations exceeded the plan assets at December 31, 1995 by
$59,620,000.
(b) The Parent also sponsors a voluntary savings plan for domestic employees
(a 401(k) plan), which, during the two years ended December 31, 1994, provided
for salary reduction contributions by employees and matching contributions by
the Parent of up to 2 percent of annual salary. Commencing January 1, 1995, the
401(k) plan provided for matching contributions by the Parent of up to 6 percent
of annual salary depending on the employee's years of service.
(c) In addition to the Parent's defined benefit pension plan, the Parent and
its subsidiaries provide a post-retirement benefit program for medical care and
life insurance. Eligibility in the various plans is generally based upon
completion of a specified period of eligible service and reaching a specified
age.
(d) Employees of the Company participate in certain stock option and stock
purchase plans of the Parent. In general, under the stock option plans, officers
and other key employees are granted options to purchase AIG common stock at a
price not less than fair market value at the date of grant.
F-17
<PAGE>
AIG LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFITS (CONTINUED)
In general, the stock purchase plans provide for eligible employees to receive
privileges to purchase AIG common stock at a price equal to 85% of the fair
market value on the date of grant of the purchase privilege.
10. LEASES
(a) The Company occupies leased space in many locations under various
long-term leases and has entered into various leases covering the long-term use
of data processing equipment. At December 31, 1995, the future minimum lease
payments under operating leases were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR PAYMENT
- ------------------------------------------------------------------------- ---------
<S> <C>
1996..................................................................... $ 3,735
1997..................................................................... 3,180
1998..................................................................... 2,069
1999..................................................................... 1,443
2000..................................................................... 1,519
Remaining years after 2000............................................... 5,885
---------
Total................................................................ $ 17,831
---------
---------
</TABLE>
Rent expense approximated $3,764,000, $3,542,000, and $2,367,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
(b) Sublease Income -- The Company does not participate in sublease
agreements.
11. REINSURANCE
(a) The Company reinsures portions of its life and accident and health
insurance risks with unaffiliated companies. Life insurance risks are reinsured
primarily under coinsurance and yearly renewable term treaties. Accident and
health insurance risks are reinsured primarily under coinsurance, excess of loss
and quota share treaties. Amounts recoverable from reinsurers are estimated in a
manner consistent with the assumptions used for the underlying policy benefits
and are presented as a component of reinsurance assets. A contingent liability
exists with respect to reinsurance ceded to the extent that any reinsurer is
unable to meet the obligations assumed under the reinsurance agreements.
The Company also reinsures portions of its life and accident and health
insurance risks with affiliated companies (see Note 12). The effect of all
reinsurance contracts, including reinsurance assumed, is as follows (in
thousands, except percentages):
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT ASSUMED
DECEMBER 31, 1995 GROSS CEDED ASSUMED NET TO NET
- -------------------------------------- -------------- -------------- --------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Life Insurance in Force............... $ 48,644,007 $ 16,635,298 $ 58,966 $ 32,067,675 0.2%
-------------- -------------- --------- --------------
-------------- -------------- --------- --------------
Premiums:
Life.............................. 184,981 33,768 1,670 152,883 1.1%
Accident and Health............... 72,473 16,800 93,060 148,733 62.6%
Annuity........................... 62,886 -- -- 62,886 --
-------------- -------------- --------- --------------
Total Premiums.................. $ 320,340 $ 50,568 $ 94,730 $ 364,502 26.0%
-------------- -------------- --------- --------------
-------------- -------------- --------- --------------
</TABLE>
F-18
<PAGE>
AIG LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. REINSURANCE (CONTINUED)
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT ASSUMED
DECEMBER 31, 1994 GROSS CEDED ASSUMED NET TO NET
- -------------------------------------- -------------- -------------- --------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Life Insurance in Force............... $ 38,375,181 $ 16,500,870 $ 19,298 $ 21,893,609 0.1%
-------------- -------------- --------- --------------
-------------- -------------- --------- --------------
Premiums:
Life.............................. 130,716 7,233 (10) 123,473 --
Accident and Health............... 66,026 13,949 79,810 131,887 60.5%
Annuity........................... 10,630 -- -- 10,630 --
-------------- -------------- --------- --------------
Total Premiums.................. $ 207,372 $ 21,182 $ 79,800 $ 265,990 30.0%
-------------- -------------- --------- --------------
-------------- -------------- --------- --------------
<CAPTION>
PERCENTAGE OF
AMOUNT ASSUMED
DECEMBER 31, 1993 GROSS CEDED ASSUMED NET TO NET
- -------------------------------------- -------------- -------------- --------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Life Insurance in Force............... $ 12,101,258 $ 1,824,238 $ 57,697 $ 10,334,717 0.6%
-------------- -------------- --------- --------------
-------------- -------------- --------- --------------
Premiums:
Life.............................. 54,475 6,115 604 48,964 1.2%
Accident and Health............... 59,363 14,777 69,388 113,974 60.9%
Annuity........................... 4,985 48 672 5,609 12.0%
-------------- -------------- --------- --------------
Total Premiums.................. $ 118,823 $ 20,940 $ 70,664 $ 168,547 41.9%
-------------- -------------- --------- --------------
-------------- -------------- --------- --------------
</TABLE>
(b) The maximum amount retained on any one life by the Company is $500,000.
(c) Reinsurance recoveries, which reduced death and other benefits,
approximated $51,264,000, $34,252,000, and $15,182,000, respectively, for each
of the years ended December 31, 1995, 1994 and 1993.
The Company's reinsurance arrangements do not relieve the Company from its
direct obligation to its insureds.
12. TRANSACTIONS WITH RELATED PARTIES
(a) The Company is party to several reinsurance agreements with its
affiliates covering certain life and accident and health insurance risks.
Premium income and commission ceded for 1995 amounted to $1,269,000 and $1,000,
respectively. Premium income and commission ceded for 1994 amounted to
$1,267,000 and $2,000, respectively. Premium income ceded to affiliates amounted
to $322,000 for the year ended December 31, 1993. There were no commissions
ceded to affiliates in 1993. Premium income and ceding commission expense
assumed from affiliates aggregated $90,688,000 and $23,422,000, respectively,
for 1995, compared to $75,005,000 and $20,374,000, respectively, for 1994, and
$69,076,000 and $19,469,000, respectively for 1993.
(b) The Company is party to several cost sharing agreements with its
affiliates. Generally, these agreements provide for the allocation of costs upon
either the specific identification basis or a proportional cost allocation basis
which management believes to be reasonable. For the years ended December 31,
1995, 1994 and 1993, the Company was charged $23,193,000, $21,392,000, and
$19,961,000, respectively, for expenses attributed to the Company but incurred
by affiliates. During the same period, the Company received reimbursements from
affiliates aggregating $14,496,000, $13,383,000, and $12,210,000, respectively,
for costs incurred by the Company but attributable to affiliates.
F-19
<PAGE>
AIG LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
(c) During 1993, the Company received cash surplus contributions of
$25,000,000 from AIG, Inc., the Parent and Commerce & Industry Insurance
Company.
(d) During 1993, the Company sold a mortgage loan to Atlanta 17th Street,
Inc., for the aggregate unpaid principal balance of $17,500,000.
(e) During 1993, the Company entered into a loan agreement with AIG
Investment Company (AIGIC), an affiliated company. The purpose of the loan was
to fund the Company's investment in the separate account pension product. At
December 31, 1995 and 1994, amounts due to related parties include $2,000 and
$9,566,000, respectively, reflecting the loan balance under this agreement.
F-20
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE LIFE SEPARATE ACCOUNT II
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of
AIG Life Insurance Company
Variable Life Separate Account II
We have audited the accompanying statements of assets and liabilities of AIG
Life Insurance Company Variable Life Separate Account II comprising the Alliance
Growth and Income, Conservative Investors, Growth, Growth Investors; the
Fidelity Money Market, Asset Manager, Growth, Overseas, Investment Grade Bond,
High Income; the Van Eck Gold and Natural Resources, Worldwide Balanced; and the
Dreyfus Stock Index and Zero Coupon 2000 Portfolios as of December 31, 1995, and
the related statements of operations and changes in net assets for the period
May 4, 1995 (Date of Inception) to December 31, 1995. These financial statements
are the responsibility of the management of the Variable Life Separate Account
II. Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit 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. Our procedures included
confirmation of investments held at December 31, 1995 by correspondence with the
transfer agents. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AIG Life Insurance Company
Variable Life Separate Account II as of December 31, 1995, and the results of
its operations and the changes in its net assets for the period May 4, 1995
(Date of Inception) to December 31, 1995 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 19, 1996
F-21
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
SHARES COST
------------- -----------
<S> <C> <C> <C>
ASSETS:
Investments at Market Value:
Alliance
Growth and Income Portfolio........................................ 1,032.846 $ 15,602 $ 16,309
Conservative Investors Portfolio................................... 39.957 461 470
Growth Portfolio................................................... 1,688.198 23,404 24,024
Growth Investors Portfolio......................................... 132.604 1,552 1,574
Fidelity
Money Market Portfolio............................................. 26,636.060 26,636 26,636
Asset Manager Portfolio............................................ 187.629 2,869 2,963
Growth Portfolio................................................... 914.032 26,877 26,690
Overseas Portfolio................................................. 303.948 5,061 5,183
Investment Grade Bond Portfolio.................................... 49.210 604 614
High Income Portfolio.............................................. 109.772 1,310 1,323
Van Eck
Gold and Natural Resources Portfolio............................... 17.803 259 257
Worldwide Balanced Portfolio....................................... 111.361 1,110 1,111
Dreyfus
Stock Index Portfolio.............................................. 210.062 3,514 3,613
Zero Coupon 2000 Portfolio......................................... 25.067 317 320
----------- -----------
Total Investments................................................ $ 109,576 111,087
Total Assets..................................................... $ 111,087
-----------
-----------
LIABILITIES:
Payable to AIG Life Insurance Company.................................. $ 222
-----------
EQUITY:
Contract Owners' Equity................................................ 110,865
-----------
Total Liabilities and Equity..................................... $ 111,087
-----------
-----------
</TABLE>
See Notes to Financial Statements
F-22
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ALLIANCE ALLIANCE ALLIANCE
GROWTH AND CONSERVATIVE ALLIANCE GROWTH
INCOME INVESTORS GROWTH INVESTORS
TOTAL PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Investment Income:
Dividends............................................ $ 348 $ -- $ -- $ -- $ --
Expenses:
Mortality & Expense Risk Fees........................ (188) (30) (1) (43) (2)
--------- ----------- ------ ----------- -----------
Total Expenses..................................... (188) (30) (1) (43) (2)
--------- ----------- ------ ----------- -----------
Net Investment Income (Loss)......................... 160 (30) (1) (43) (2)
--------- ----------- ------ ----------- -----------
Realized and Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment Activity.......... (55) 79 6 80 15
Change in Unrealized Appreciation (Depreciation)..... 1,511 707 9 620 22
--------- ----------- ------ ----------- -----------
Net Gain (Loss) on Investments..................... 1,456 786 15 700 37
Increase (Decrease) in Net Assets Resulting From
Operations............................................ $ 1,616 $ 756 $ 14 $ 657 $ 35
--------- ----------- ------ ----------- -----------
--------- ----------- ------ ----------- -----------
</TABLE>
See Notes to Financial Statements
F-23
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
FIDELITY FIDELITY FIDELITY
MONEY ASSET FIDELITY FIDELITY INVESTMENT
MARKET MANAGER GROWTH OVERSEAS GRADE BOND
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Investment Income:
Dividends............................................... $ 289 $ -- $ -- $ -- $ --
Expenses:
Mortality & Expense Risk Fees........................... (45) (5) (41) (9) (1)
----------- ----------- ----------- ----------- -----------
Total Expenses........................................ (45) (5) (41) (9) (1)
----------- ----------- ----------- ----------- -----------
Net Investment Income (Loss)............................ 244 (5) (41) (9) (1)
----------- ----------- ----------- ----------- -----------
Realized and Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment Activity............. -- 18 (291) (14) 6
Change in Unrealized Appreciation (Depreciation)........ -- 94 (187) 122 10
----------- ----------- ----------- ----------- -----------
Net Gain (Loss) on Investments........................ -- 112 (478) 108 16
Increase (Decrease) in Net Assets Resulting From
Operations............................................... $ 244 $ 107 $ (519) $ 99 $ 15
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See Notes to Financial Statements
F-24
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
VAN ECK VAN ECK DREYFUS
FIDELITY GOLD AND WORLDWIDE DREYFUS ZERO COUPON
HIGH INCOME NATURAL RESOURCES BALANCED STOCK INDEX 2000
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Investment Income:
Dividends..................................... $ -- $ 1 $ -- $ 56 $ 2
Expenses:
Mortality & Expense Risk Fees................. (1) (1) (1) (8) --
----------- ------ ----------- ----------- ------
Total Expenses.............................. (1) (1) (1) (8) --
----------- ------ ----------- ----------- ------
Net Investment Income (Loss).................. (1) -- (1) 48 2
----------- ------ ----------- ----------- ------
Realized and Unrealized Gain (Loss) on
Investments:
Realized Gain (Loss) on Investment Activity... -- (2) -- 49 (1)
Change in Unrealized Appreciation
(Depreciation)............................... 13 (2) 1 99 3
----------- ------ ----------- ----------- ------
Net Gain (Loss) on Investments.............. 13 (4) 1 148 2
Increase (Decrease) in Net Assets Resulting From
Operations..................................... $ 12 $ (4) $ -- $ 196 $ 4
----------- ------ ----------- ----------- ------
----------- ------ ----------- ----------- ------
</TABLE>
See Notes to Financial Statements
F-25
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 1995.
<TABLE>
<CAPTION>
ALLIANCE ALLIANCE ALLIANCE
GROWTH AND CONSERVATIVE ALLIANCE GROWTH
INCOME INVESTOR GROWTH INVESTORS
TOTAL PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Increase in Net Assets
Operations:
Net Investment Income (Loss)..................... $ 160 $ (30) $ (1) $ (43) $ (2)
Realized Gain on Investment Activity............. (55) 79 6 80 15
Change in Unrealized Appreciation
(Depreciation).................................. 1,511 707 9 620 22
----------- ----------- ------ --------- -----------
Increase in Net Assets Resulting from Operations... 1,616 756 14 657 35
----------- ----------- ------ --------- -----------
Capital Transactions:
Contract Deposits................................ 133,550 11,299 460 15,441 1,326
Transfers Between Funds.......................... -- 6,137 211 11,912 916
Transfers From (To) AIG Life..................... (872) -- -- -- --
Transfers to the Company for monthly
deductions...................................... (23,429) (1,928) (211) (3,916) (702)
----------- ----------- ------ --------- -----------
Increase (Decrease) in Net Assets Resulting from
Capital Transactions.............................. 109,249 15,508 460 23,437 1,540
----------- ----------- ------ --------- -----------
Total Increase (Decrease) in Net Assets............ 110,865 16,264 474 24,094 1,575
Net Assets, at Beginning of Period................. -- -- -- -- --
----------- ----------- ------ --------- -----------
Net Assets, at End of Period....................... $ 110,865 $ 16,264 $ 474 $ 24,094 $ 1,575
----------- ----------- ------ --------- -----------
----------- ----------- ------ --------- -----------
</TABLE>
See Notes to Financial Statements
F-26
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 1995.
<TABLE>
<CAPTION>
FIDELITY FIDELITY FIDELITY
MONEY ASSET FIDELITY FIDELITY INVESTMENT
MARKET MANAGER GROWTH OVERSEAS GRADE BOND
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Increase in Net Assets
Operations:
Net Investment Income (Loss)..................... $ 244 $ (5) $ (41) $ (9) $ (1)
Realized Gain on Investment Activity............. -- 18 (291) (14) 6
Change in Unrealized Appreciation
(Depreciation).................................. -- 94 (187) 122 10
---------- ----------- ------------ ----------- -----------
Increase in Net Assets Resulting from Operations... 244 107 (519) 99 15
---------- ----------- ------------ ----------- -----------
Capital Transactions:
Contract Deposits................................ 80,546 1,541 18,203 1,799 356
Transfers Between Funds.......................... (44,242) 2,186 12,969 4,158 393
Transfers From (To) AIG Life..................... (872) -- -- -- --
Transfers to the Company for monthly
deductions...................................... (8,878) (847) (4,503) (820) (150)
---------- ----------- ------------ ----------- -----------
Increase (Decrease) in Net Assets Resulting from
Capital Transactions............................ 26,554 2,880 26,669 5,137 599
---------- ----------- ------------ ----------- -----------
Total Increase (Decrease) in Net Assets............ 26,798 2,987 26,150 5,236 614
Net Assets, at Beginning of Period................. -- -- -- -- --
---------- ----------- ------------ ----------- -----------
Net Assets, at End of Period....................... $ 26,798 $ 2,987 $ 26,150 $ 5,236 $ 614
---------- ----------- ------------ ----------- -----------
---------- ----------- ------------ ----------- -----------
</TABLE>
See Notes to Financial Statements
F-27
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 1995.
<TABLE>
<CAPTION>
VAN ECK
GOLD AND VAN ECK DREYFUS
FIDELITY NATURAL WORLDWIDE DREYFUS ZERO COUPON
HIGH INCOME RESOURCES BALANCED STOCK INDEX 2000
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Increase in Net Assets
Operations:
Net Investment Income (Loss)............................. $ (1) $ -- $ (1) $ 48 $ 2
Realized Gain on Investment Activity..................... -- (2) -- 49 (1)
Change in Unrealized Appreciation (Depreciation)......... 13 (2) 1 99 3
----------- ----------- ----------- ----------- -----------
Increase in Net Assets Resulting from Operations........... 12 (4) 0 196 4
----------- ----------- ----------- ----------- -----------
Capital Transactions:
Contract Deposits........................................ 89 256 385 1,751 98
Transfers Between Funds.................................. 1,343 113 929 2,651 324
Transfers From (To) AIG Life............................. -- -- -- -- --
Transfers to the Company for monthly deductions.......... (122) (100) (202) (942) (108)
----------- ----------- ----------- ----------- -----------
Increase (Decrease) in Net Assets Resulting from Capital
Transactions............................................ 1,310 269 1,112 3,460 314
----------- ----------- ----------- ----------- -----------
Total Increase (Decrease) in Net Assets.................... 1,322 265 1,112 3,656 318
Net Assets, at Beginning of Period......................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net Assets, at End of Period............................... $ 1,322 $ 265 $ 1,112 $ 3,656 $ 318
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See Notes to Financial Statements
F-28
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS
1. HISTORY
Variable Account II (the "Account") is a separate investment account
maintained under the provisions of Delaware Insurance Law by AIG Life Insurance
Company (the "Company"), a subsidiary of American International Group, Inc. The
Account operates as a unit investment trust registered under the Investment
Company Act of 1940, as amended, and supports the operations of the Company's
individual flexible premium variable universal life insurance policies (the
"policies").
The Account invests in shares of Alliance Variable Products Series Fund,
Inc. ("Alliance Fund"), Dreyfus Variable Investment Fund ("Dreyfus Fund"),
Dreyfus Stock Index Fund, Fidelity Investments Variable Insurance Products Fund
("Fidelity Trust"), Fidelity Variable Insurance Products Fund II ("Fidelity
Trust II") and Van Eck Investment Trust ("Van Eck Trust"). The assets in the
policies may be invested in the following subaccounts:
<TABLE>
<S> <C>
Alliance Fund: Fidelity Trust:
Growth and Income Portfolio Money Market Portfolio
Conservative Investors Portfolio High Income Portfolio
Growth Portfolio Growth Portfolio
Growth Investors Portfolio Overseas Portfolio
Dreyfus Fund: Fidelity Trust II:
Zero Coupon 2000 Portfolio Investment Grade Bond Portfolio
The Dreyfus Stock Index Fund Asset Manager Portfolio
Van Eck Trust:
Gold and Natural Resources Fund
Worldwide Balanced Fund
</TABLE>
The Account commenced operations on May 4, 1995.
The assets of the Account are the property of the Company. The portion of
the Account's assets applicable to the policies are not chargeable with the
liabilities arising out of any other business conducted by the Company.
In addition to the Account, policy owners may also allocate assets of the
policies to the Guaranteed Account, which is part of the Company's general
account. Amounts allocated to the Guaranteed Account are credited with a
guaranteed rate of interest. Because of exemptive and exclusionary provisions,
interests in the Guaranteed Account have not been registered under the
Securities Act of 1933 and the Guaranteed Account has not been registered as an
investment company under the Investment Company Act of 1940.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Account in preparation of the financial statements in conformity with
generally accepted accounting principles.
A. Investment Valuation -- The investments in the Funds are stated at
market value which is the net asset value of each of the respective
series as determined at the close of business on the last business day of
the period by the Fund.
B. Accounting for Investments -- Investment transactions are accounted for
on the date the investments are purchased or sold. Dividend income is
recorded on the ex-dividend date.
F-29
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. Federal Income Taxes -- The Company is taxed under federal law as a life
insurance company. The Account is part of the Company's total operations
and is not taxed separately. Under existing federal law, no taxes are
payable on investment income and realized capital gains of the Account.
D. The preparation of the accompanying financial statements required
management to make estimates and assumptions that affect the reported
values of assets and liabilities as of December 31, 1995 and the reported
amounts from operations and policy transactions during 1995. Actual
results could differ from those estimates.
3. CONTRACT CHARGES
There are charges and deductions which the Company will deduct from each
policy. The deductions from premium are a sales charge of 5% plus the state
specific premium taxes.
Daily charges for mortality and expense risks assumed by the Company are
assessed through the daily unit value calculation and are equivalent on an
annual basis to .90% of the account value of the policies. This charge may be
decreased to not less than .50% in policy years eleven and greater.
On the policies' issue date and each monthly anniversary, the following
deductions are made from the policies' account value:
(a) administrative charges
(b) insurance charges
(c) supplemental benefit charges.
If the policy is surrendered during the first fourteen policy years, the
Company will deduct a surrender charge based on a percentage of first year
premium. A pro rata surrender charge will be deducted for any partial surrender.
An administrative charge upon partial surrender will be equal to the lessor of
$25.00 or 2% of the amount surrendered.
F-30
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PURCHASES OF INVESTMENTS
For the period ended December 31, 1995, investment activity in the Fund was
as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
SHARES OF PURCHASES FROM SALES
- -------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Alliance Funds:
Growth and Income Portfolio................................................... $ 17,402 $ 1,878
Conservative Investors Portfolio.............................................. 672 217
Growth Portfolio.............................................................. 26,173 2,850
Growth Investors Portfolio.................................................... 2,011 474
Fidelity Trust Funds:
Money Market Portfolio........................................................ 79,323 52,686
Asset Manager Portfolio....................................................... 3,611 760
Growth Portfolio.............................................................. 44,248 16,780
Overseas Portfolio............................................................ 5,767 692
Investment Grade Bond Portfolio............................................... 889 291
High Income Portfolio......................................................... 1,361 52
Van Eck:
Gold and Natural Resources Portfolio.......................................... 361 102
Worldwide Balance Portfolio................................................... 1,440 331
Dreyfus:
Stock Index Portfolio......................................................... 4,255 790
Zero Coupon 2000 Portfolio.................................................... 421 105
</TABLE>
5. NET INCREASE IN ACCUMULATION UNITS
For the period ended December 31, 1995 transactions in accumulation units of
the account were as follows:
<TABLE>
<CAPTION>
ALLIANCE ALLIANCE ALLIANCE
GROWTH & CONSERVATIVE ALLIANCE GROWTH FIDELITY
INCOME INVESTORS GROWTH INVESTORS MONEY MARKET
VARIABLE LIFE PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Units Purchased................................ 1,098.54 44.57 1,489.21 125.18 7,921.95
Units Withdrawn................................ (193.09) (21.19) (385.06) (67.32) (874.63)
Units Transferred Between Funds................ 584.00 20.92 1,141.63 88.29 (4,348.85)
Net Units Transferred From (To) AIG Life....... -- -- -- -- (85.27)
----------- ------------ ----------- ----------- ------------
Net Increase (Decrease)........................ 1,489.45 44.30 2,245.78 146.15 2,613.20
Units, at Beginning of the Period.............. -- -- -- -- --
----------- ------------ ----------- ----------- ------------
Units, at End of the Period.................... 1,489.45 44.30 2,245.78 146.15 2,613.20
----------- ------------ ----------- ----------- ------------
----------- ------------ ----------- ----------- ------------
Unit Value at December 31, 1995................ $ 10.92 $ 10.69 $ 10.73 $ 10.77 $ 10.25
----------- ------------ ----------- ----------- ------------
----------- ------------ ----------- ----------- ------------
</TABLE>
F-31
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. NET INCREASE IN ACCUMULATION UNITS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY FIDELITY
ASSET FIDELITY FIDELITY INVESTMENT FIDELITY
MANAGER GROWTH OVERSEAS GRADE BOND HIGH YIELD
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Units Purchased..................... 148.02 1,682.23 186.04 35.00 8.90
Units Withdrawn..................... (83.59) (413.68) (87.35) (14.67) (11.93)
Units Transferred Between Funds..... 208.66 1,188.86 422.12 39.01 133.69
Net Units Transferred From (To) AIG
Life............................... -- -- -- -- --
--------- --------- --------- ----------- ----------
Net Increase (Decrease)............. 273.09 2,457.41 520.81 59.34 130.66
Units, at Beginning of the Period... -- -- -- -- --
--------- --------- --------- ----------- ----------
Units, at End of the Period......... 273.09 2,457.41 520.81 59.34 130.66
--------- --------- --------- ----------- ----------
--------- --------- --------- ----------- ----------
Unit Value at December 31, 1995..... $ 10.94 $ 10.64 $ 10.05 $ 10.35 $ 10.12
--------- --------- --------- ----------- ----------
--------- --------- --------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
VAN ECK VAN ECK DREYFUS
GOLD & NAT WORLDWIDE DREYFUS ZERO COUPON
RESOURCES BALANCED STOCK INDEX 2000
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Units Purchased............................................... 27.28 38.70 167.30 9.57
Units Withdrawn............................................... (12.24) (20.41) (85.55) (10.57)
Units Transferred Between Funds............................... 11.30 93.66 255.39 31.83
Net Units Transferred From (To) AIG Life...................... -- -- -- --
----------- ----------- ----------- -----------
Net Increase (Decrease)....................................... 26.34 111.95 337.14 30.83
Units, at Beginning of the Period............................. -- -- -- --
----------- ----------- ----------- -----------
Units, at End of the Period................................... 26.34 111.95 337.14 30.83
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Unit Value at December 31, 1995............................... $ 10.06 $ 9.94 $ 10.84 $ 10.32
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
F-32
<PAGE>
APPENDIX A
MINIMUM PREMIUMS
The following table shows for Insureds of varying ages, the current minimum
initial Premium for a Policy with the Face Amount indicated. This table assumes
that the insured will be placed in a nonsmoker class and that no supplemental
benefits will be added to the base policy.
<TABLE>
<CAPTION>
MINIMUM PLANNED PERIODIC PREMIUM
MINIMUM BY PREMIUM PAYMENT MODE
ISSUE AGE OF SEX OF POLICY FACE INITIAL ------------------------------------------------
INSURED INSURED AMOUNT PREMIUM ANNUAL SEMIANNUAL QUARTERLY MONTHLY
- ------------- --------- ----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
25 Male $ 75,000 $ 102.08 $ 612.50 $ 306.25 $ 153.13 $ 51.04
30 Female $ 100,000 $ 107.33 $ 644.00 $ 322.00 $ 161.00 $ 53.67
35 Male $ 250,000 $ 175.42 $ 1,052.50 $ 526.25 $ 263.13 $ 87.71
40 Female $ 300,000 $ 227.83 $ 1,367.00 $ 683.50 $ 341.75 $ 113.92
45 Male $ 500,000 $ 476.67 $ 2,860.00 $ 1,430.00 $ 715.00 $ 238.33
50 Female $ 350,000 $ 427.50 $ 2,565.00 $ 1,282.50 $ 641.25 $ 213.75
55 Male $ 300,000 $ 686.33 $ 4,118.00 $ 2,059.00 $ 1,029.50 $ 343.17
60 Female $ 250,000 $ 620.83 $ 3,725.00 $ 1,862.50 $ 931.25 $ 310.42
65 Male $ 200,000 $ 1,185.67 $ 7,114.00 $ 3,557.00 $ 1,778.50 $ 592.83
70 Female $ 100,000 $ 670.50 $ 4,023.00 $ 2,011.50 $ 1,005.75 $ 335.25
75 Male $ 75,000 $ 1,210.71 $ 7,264.25 $ 3,632.13 $ 1,816.06 $ 605.35
</TABLE>
A-1
<PAGE>
APPENDIX B
SURRENDER CHARGE PREMIUM
The surrender charge premium is an amount used to determine the sales charge
deducted on surrender of the policy. The surrender charge premium is calculated
for each Policy based on the issue age, sex, and smoker status of the Insured
and the Face Amount of the Policy.
The following table shows for Insureds of varying ages, the surrender charge
premium for a policy with the Face Amount indicated. This table assumes that the
Insured will be placed in a nonsmoker class.
<TABLE>
<CAPTION>
SURRENDER
ISSUE AGE OF SEX OF POLICY FACE CHARGE
INSURED INSURED AMOUNT PREMIUM
- ------------- --------- ----------- -------------
<S> <C> <C> <C>
25 Male $ 75,000 $ 483.75
30 Female $ 100,000 $ 690.00
35 Male $ 250,000 $ 2,562.50
40 Female $ 300,000 $ 3,327.00
45 Male $ 500,000 $ 8,530.00
50 Female $ 350,000 $ 6,373.50
55 Male $ 300,000 $ 8,880.00
60 Female $ 250,000 $ 7,800.00
65 Male $ 200,000 $ 10,762.00
70 Female $ 100,000 $ 5,781.00
75 Male $ 75,000 $ 7,689.75
</TABLE>
B-1
