<PAGE>
Filed with the Securities and Exchange Commission on July 2, 1998.
Registration No. 333-34199
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-6
POST-EFFECTIVE AMENDMENT NO. 3 TO
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
A. Exact name of trust: Variable Account II
B. Name of depositor: AIG Life Insurance Company
C. Complete address of depositor's principal executive offices:
One Alico Plaza, 600 King Street, Wilmington, Delaware 19801
D. Name and address of agent for service:
Robert Liguori
Senior Vice President and General Counsel
One Alico Plaza
600 King Street
Wilmington, DE 19801
COPIES TO:
Michael Berenson, Esq. Florence Davis, Esq.
Jorden Burt Boros Cicchetti American International Group, Inc.
Berenson & Johnson, LLP 70 Pine Street
Suite 400 East New York, New York 10270
1025 Thomas Jefferson Street, NW
Washington, D.C. 20007-0805
It is proposed that this filing will become effective:
__X__ immediately upon filing pursuant to paragraph (b) of Rule 485
_____ on ____________ pursuant to paragraph (b) of Rule 485 60 days
_____ after filing pursuant to paragraph (a)(1) of Rule 485 on
_____ ____________ pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following box:
_____ this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
E. Title and amount of securities being registered: Group Flexible Premium
Variable Universal Life Insurance Policies.
F. Proposed maximum aggregate offering price to the public of the securities
being registered: N/A
G. Amount of Filing Fee: N/A
<PAGE>
Registrant's post-effective amendment no. 1 to the registration statement on
Form S-6 (File No. 333- 34199) added a new prospectus describing group flexible
premium variable universal life insurance policies to the registration
statement. The purpose of this post-effective amendment no. 3 is to amend that
prospectus. This post-effective amendment no. 3 does not supersede or amend
post-effective amendment no. 2 filed with the Securities and Exchange Commission
on May 4, 1998.
<PAGE>
CROSS REFERENCE TO ITEMS REQUIRED
BY FORM N-8B-2
N-8B-2 Item Caption in Prospectus
1....................................... The Company, The Separate Account
2....................................... The Company
3....................................... Not Applicable
4....................................... Distribution of the Policy
5....................................... The Separate Account
6(a).................................... Not Applicable
6(b).................................... Not Applicable
9....................................... Legal Proceedings
10...................................... The Policy
11...................................... The Separate Account, The Funds and
the Investment Advisers
12...................................... The Separate Account, The Funds and
the Investment Advisers
13...................................... Charges and Deductions
14...................................... The Policy
15...................................... The Separate Account
16...................................... The Separate Account, The Funds and
the Investment Advisers
17...................................... The Policy
18...................................... The Policy
19...................................... Not Applicable
20...................................... Not Applicable
21...................................... Not Applicable
22...................................... Not Applicable
23...................................... Not Applicable
24...................................... Not Applicable
25...................................... The Company
26...................................... Not Applicable
27...................................... The Company
28...................................... The Company
29...................................... The Company
30...................................... The Company
31...................................... Not Applicable
32...................................... Not Applicable
33...................................... Not Applicable
34...................................... Not Applicable
<PAGE>
CROSS REFERENCE TO ITEMS REQUIRED
BY FORM N-8B-2 (CONT'D)
N-8B-2 Item Caption in Prospectus
35.................................... The Company
37.................................... Not Applicable
38.................................... Distribution of the Policy
39.................................... Distribution of the Policy
40.................................... Not Applicable
41(a)................................. Distribution of the Policy
42.................................... Not Applicable
43.................................... Not Applicable
44.................................... The Policy
45.................................... Not Applicable
46.................................... The Policy
47.................................... Not Applicable
48.................................... Not Applicable
49.................................... Not Applicable
50.................................... Not Applicable
51.................................... The Company, The Policy
52.................................... The Funds and the Investment Advisers
53.................................... Tax Considerations
54.................................... Financial Statements
55.................................... Not Applicable
<PAGE>
PART I
<PAGE>
Group Flexible Premium Variable Universal Life Insurance Policy
VARIABLE ACCOUNT II
of AIG LIFE INSURANCE COMPANY
One Alico Plaza
600 King Street
Wilmington, Delaware 19801
1-800-340-2765
This prospectus describes a group flexible premium variable universal
life insurance policy (the "Policy") offered by AIG Life Insurance Company (the
"Company"). The Policy provides insurance protection for individuals within
groups under corporate-owned or sponsored arrangements. Corporate-owned
arrangements include those in which an employer or a trust established by an
employer, for example, purchases life insurance coverage on the lives of its
employees and the employer or trust is the beneficiary under the Policy.
Sponsored arrangements may include, for example, those instances where an
employer, a financial institution, an association, or group otherwise permitted
by state insurance law, allows the Company to sell insurance policies to,
respectively, its employees, depositors, or members. An Owner may be issued a
certificate as evidence of individual insured coverage under a group
arrangement. The description of the Policy in this Prospectus is fully
applicable to any certificate that may be issued under the Policy. As used
herein the word "Policy" includes any such certificate.
The Policy is designed to provide lifetime insurance protection on the
named Insured and at the same time provide flexibility to vary the amount and
timing of Premiums and to change the amount of Life Insurance Proceeds payable.
This flexibility allows You as Owner to provide for changing insurance needs
under a single life insurance product.
You also have the opportunity to allocate Net Premium and 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 Account Value allocated
to the Separate Account. For a brief summary of the Guaranteed Account, see "The
Guaranteed Account," page ___.
The assets of each Subaccount are invested in a corresponding portfolio
as selected by the Owner from the following choices: the Premier Growth
Portfolio, Growth and Income Portfolio, and Quasar Portfolio of ALLIANCE
VARIABLE PRODUCTS SERIES FUND, INC. ("Alliance Fund"); the VIP Money Market
Portfolio of VARIABLE INSURANCE PRODUCTS FUND ("VIP"); the VIP II Index 500
Portfolio and VIP II Contrafund Portfolio of VARIABLE INSURANCE PRODUCTS FUND II
("VIP II") (VIP and VIP II, collectively, "Fidelity Funds"); the Fixed Income
Portfolio, High Yield Portfolio, Global Equity Portfolio, and U.S. Real Estate
Portfolio of MORGAN STANLEY UNIVERSAL FUNDS, INC. ("Morgan Stanley Funds"); the
Partners Portfolio of NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST ("Neuberger &
Berman Trust"); the Developing Markets Fund and International Fund of TEMPLETON
VARIABLE PRODUCTS SERIES FUND ("Templeton Fund"); and the Growth and Income
Fund, CORE U.S. Equity Fund, CORE Large Cap Growth Fund, CORE Small Cap Equity
Fund, Capital Growth Fund, Mid Cap Equity Fund, International Equity Fund, and
Global Income Fund of GOLDMAN SACHS VARIABLE INSURANCE TRUST ("Goldman Sachs
Trust").
<PAGE>
The prospectuses for Alliance Fund, Fidelity Funds, Morgan Stanley
Funds, Neuberger & Berman Trust, Templeton Fund, and Goldman Sachs Trust
(collectively, the "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 Fund prospectuses accompany this Prospectus.
The Policy provides for a Net Cash Surrender Value that can be obtained
by surrender. 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, coverage will lapse without value. The
Policy also provides for 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 issued by the Company 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 __), during which time Net Premium 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.
INVESTMENTS IN THESE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, AND
ARE NOT GUARANTEED OR ENDORSED BY, ANY BANK OR BANK AFFILIATE. INVESTMENTS ARE
NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. ANY INVESTMENT IN THE CONTRACT
INVOLVES CERTAIN INVESTMENT RISKS WHICH MAY INCLUDE THE POSSIBLE LOSS OF
PRINCIPAL.
THIS PROSPECTUS SHOULD BE RETAINED FOR FUTURE REFERENCE.
Date of Prospectus: July 1, 1998
Distributor:
AIG Equity Sales Corp.
Attention: Variable Products
80 Pine Street
New York, New York 10270
1-800-888-7485
2
<PAGE>
TABLE OF CONTENTS
Page
DEFINITIONS OF TERMS................................................
SUMMARY OF THE POLICY...............................................
PORTFOLIO EXPENSES..................................................
PERFORMANCE INFORMATION.............................................
INFORMATION ABOUT THE COMPANY, THE SEPARATE ACCOUNT
AND THE FUNDS....................................................
PREMIUMS AND ALLOCATIONS............................................
GUARANTEED ACCOUNT..................................................
CHARGES AND DEDUCTIONS..............................................
HOW YOUR ACCOUNT VALUE VARIES.......................................
LIFE INSURANCE PROCEEDS AND CHANGES IN FACE AMOUNT..................
CASH BENEFITS.......................................................
ILLUSTRATIONS OF ACCOUNT VALUE, NET CASH SURRENDER VALUE,
LIFE INSURANCE PROCEEDS AND ACCUMULATED PREMIUM..................
OTHER POLICY BENEFITS AND PROVISIONS................................
TAX CONSIDERATIONS..................................................
MANAGEMENT OF THE COMPANY...........................................
DISTRIBUTION OF THE POLICY..........................................
OTHER POLICIES ISSUED BY THE COMPANY................................
STATE REGULATION....................................................
LEGAL PROCEEDINGS...................................................
EXPERTS.............................................................
LEGAL MATTERS.......................................................
PUBLISHED RATINGS...................................................
FINANCIAL STATEMENTS................................................
APPENDIX A..........................................................
3
<PAGE>
DEFINITIONS OF TERMS
Accounts. The Separate Account and the Guaranteed Account of the Company.
Account Value. The total amount in the Accounts credited to a Policy. The
Account Value is described on page ___.
Administrative Office. One Alico Plaza, P.O. Box 8718, Wilmington, DE 19899.
Age. The Insured's age as of his or her last birthday.
Allocation Date. The first business day after the Period to Examine and Cancel
expires. The Period to Examine and Cancel is described on page __.
Attained Age. The Insured's age as of the Policy Date plus the number of
complete Policy Years since the Policy Date.
Beneficiary. The person(s) who is entitled to the Life Insurance Proceeds under
the Policy.
Cash Surrender Value. Account Value less any applicable surrender charge that
would be deducted upon surrender.
Company, We, Our, Us. AIG Life Insurance Company.
Death Benefit Amount. The amount determined based on the Face Amount, Death
Benefit Qualification Option, and the Life Insurance Proceeds Option selected
and from which the Life Insurance Proceeds will be determined.
Face Amount. The amount of insurance specified by the Owner and from which the
Death Benefit Amount will be determined. The initial Face Amount is shown in the
Policy.
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. A person whose life is covered under 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.
Life Insurance Proceeds. The amount payable to a Beneficiary if the Insured dies
while coverage under the Policy is in force.
Loan Account. The portion of the Account Value held in the Guaranteed Account as
collateral for Policy loans. See page __.
4
<PAGE>
Maturity Date. The first Policy Anniversary following the Insured's 100th
birthday.
Monthly Anniversary. The same day as the Policy Date for each succeeding month.
If the Monthly Anniversary falls on the 29th, 30th or 31st of 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 Account Value. The Account Value less any Outstanding Loans.
Net Cash Surrender Value. The Cash Surrender Value less any Outstanding Loans.
Net Premium. Premium less any expense charges deducted from 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 amount of Premium selected by the Owner at the
time of application to be paid in a specified frequency until the Maturity Date.
Policy. The Group Flexible Premium Variable Universal Life Insurance contract
issued by the Company.
Policy Anniversary. An anniversary of the Policy Date.
Policy Date. The date as of which We have received the initial Premium and an
application in good order.
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 the Owner in exchange for Our
obligations under the Policy.
Separate Account. Variable Account II, a separate investment account of the
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 trading.
Valuation Period. A period commencing with the close of trading on the New York
Stock Exchange (currently 4 P.M., Eastern Time) on any Valuation Date and ending
as of the close of the New York Stock Exchange on the next succeeding Valuation
Date.
5
<PAGE>
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 __ 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 Account Value and, if elected
by the Owner and under certain circumstances, its Life Insurance Proceeds 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. The Policy
indicates the initial Face Amount of insurance. The minimum Face Amount is
$50,000, unless the Company agrees otherwise.
Policy Values
An Owner may allocate Net Premium among the various Subaccounts that
comprise the Separate Account and that invest in corresponding portfolios of the
Funds. An Owner may also allocate Net Premium to the Guaranteed Account.
Depending on the investment experience of the selected Subaccounts, the
Account Value may increase or decrease on any day. The Life Insurance Proceeds
may or may not increase or decrease depending upon several factors, including
the Life Insurance Proceeds Option selected by the Owner. There is no guarantee
that the Account Value and Life Insurance Proceeds will increase. The Owner
bears the investment risk on that portion of the Net Premium and Account Value
allocated within the Separate Account.
The Policy will remain in force until the earlier of the death of the
Insured or a full surrender of the Policy, unless, before either of these
events, the Net Cash Surrender Value is insufficient to pay the current monthly
deduction on a Monthly Anniversary and a Grace Period expires without sufficient
additional premium payment or loan repayment by the Owner.
Premium Features
1) Initial Premium
The initial Premium is the total amount paid at the time of
application or at a later date. Policy coverage will not
become effective until the initial Premium is received by Our
Administrative Office.
6
<PAGE>
2) 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.
3) 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
"PREMIUMS AND ALLOCATIONS," page __.)
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.
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 (defined on page ___) under the
Policy.
For information regarding the taxation of the Policy under federal
income tax law, see "TAX CONSIDERATIONS," page ___.
Policy Charges
There are charges and deductions which the Company will deduct from
each Policy. The deductions based on Premium are the sales charges, the deferred
acquisition cost tax ("DAC tax"), and 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 __.) The Company, within its discretion, may
issue the Policy to an employer or trust with no sales charge or a reduced sales
charge. In no event will the sales charge exceed 9% of Premium.
On the Issue Date and each Monthly Anniversary, the following
deductions are made from the Account Value:
(a) administrative charges;
(b) insurance charges; and
(c) supplemental benefit charges, if any.
7
<PAGE>
The monthly deduction is made from the Subaccounts pro rata on the
basis of the portion of Account Value in each Subaccount. The administrative
charge is computed monthly at a maximum rate of $10.00 per Policy Month. There
is an additional monthly administrative charge of up to $25 per month during the
first Policy Year and the 12 months immediately following an increase in Face
Amount. Deductions are also made on a daily basis against the assets of each
Subaccount for mortality and expense risks assumed by the Company. (See "CHARGES
AND DEDUCTIONS," page ___.)
If the Policy is surrendered during the first 14 Policy Years, We will
deduct a surrender charge based on 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 based on 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 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 per Insured. (See "CHARGES AND
DEDUCTIONS," page __.)
Life Insurance Proceeds
The Policy provides for the payment of Life Insurance Proceeds upon the
death of an Insured. The Owner elects in the application to have the Life
Insurance Proceeds determined under one of two Death Benefit Qualification
Options and Life Insurance Proceeds Options. (See "LIFE INSURANCE PROCEEDS AND
CHANGES IN FACE AMOUNT," page ___.)
Under Life Insurance Proceeds Option I, the Face Amount includes the
Account Value and the Death Benefit Amount will be the larger of (1) the Face
Amount on the date of death, or (2) the Account Value on the date of death
multiplied by the appropriate Minimum Death Benefit Factor for the Attained Age,
smoker status, and sex of the Insured at the time of death and the previously
selected Death Benefit Qualification Option. Under Life Insurance Proceeds
Option II, the Face Amount is in addition to the Account Value and the Death
Benefit Amount will be the larger of (1) the Face Amount plus the Account Value
on the date of death, or (2) the Account Value on the date of death multiplied
by the appropriate Minimum Death Benefit Factor for the Attained Age, smoker
status, and sex of the Insured at the time of death and the previously selected
Death Benefit Qualification Option.
8
<PAGE>
PORTFOLIO EXPENSES
As of December 31, 1997
The purpose of this table is to assist the Owner in understanding the
various costs and expenses that will be incurred, directly or indirectly. It is
based on historical expenses as a percentage of net assets after waivers and/or
reimbursements, if applicable, for the year ended December 31, 1997, except as
indicated below. Expenses of the portfolios of the Funds are not fixed or
specified under the terms of the Policy. Actual expenses may vary.
<TABLE>
<CAPTION>
Management Other Total Operating
Portfolio Fees Expenses 12b-1 Fees Expenses
- --------- ---- -------- ---------- --------
<S> <C> <C> <C> <C>
ALLIANCE(1)
Premier Growth 1.00% 0.10% 0.00% 1.10%
Growth and Income 0.63% 0.09% 0.00% 0.72%
Quasar 0.58% 0.37% 0.00% 0.95%
FIDELITY
VIP Money Market 0.21% 0.10% 0.00% 0.31%
VIP II Index 500(2) 0.24% 0.04% 0.00% 0.28%
VIP II Contrafund 0.60% 0.11% 0.00% 0.71%
MORGAN STANLEY(3)
Fixed Income 0.00% 0.70% 0.00% 0.70%
High Yield 0.00% 0.80% 0.00% 0.80%
Global Equity 0.00% 1.15% 0.00% 1.15%
U.S. Real Estate 0.00% 1.10% 0.00% 1.10%
NEUBERGER & BERMAN
Partners 0.80% 0.06% 0.00% 0.86%
TEMPLETON
Developing Markets(4) 1.25% 0.33% 0.25% 1.83%
International(5) 0.69% 0.19% 0.25% 1.13%
GOLDMAN SACHS(6)
Growth and Income Fund 0.75% 0.15% 0.00% 0.90%
Mid Cap Equity Fund 0.80% 0.15% 0.00% 0.95%
Capital Growth Fund 0.75% 0.15% 0.00% 0.90%
International Equity Fund 1.00% 0.25% 0.00% 1.25%
CORE U.S. Equity Fund 0.70% 0.10% 0.00% 0.80%
CORE Large Cap Growth Fund 0.70% 0.10% 0.00% 0.80%
CORE Small Cap Equity Fund 0.75% 0.15% 0.00% 0.90%
Global Income Fund 0.90% 0.15% 0.00% 1.05%
</TABLE>
- ----------------------------
(1) "Total Operating Expenses" before reimbursement by Alliance Capital
Management L.P. for the year ended December 31, 1997, were 1.37% for Quasar
Portfolio. Effective May 1, 1998, Alliance Capital Management L.P.
discontinued expense reimbursement with respect to the Premier Growth
Portfolio. The expenses presented in the table above for Premier Growth
Portfolio are expenses for the year ended December 31, 1997, before
reimbursement. "Management Fees," "Other Expenses" and "Total Operating
Expenses" for Premier Growth Portfolio for 1998 are estimated to be 1.00%,
0.08% and 1.08%, respectively.
9
<PAGE>
(2) Fidelity Management & Research Company agreed to reimburse a portion of
VIP II Index 500 Portfolio's expenses during the period. Without such
reimbursement, "Management Fees," "Other Expenses" and "Total Operating
Expenses" would have been 0.27% 0.13% and 0.40%, respectively.
(3) The investment adviser assigned to a portfolio is entitled to receive
from such portfolio a management fee, payable quarterly, at an annual
rate as a percentage of average daily net assets as set forth in the
prospectus. With respect to the Fixed Income, High Yield, Global Equity
and U.S. Real Estate Portfolios, each portfolio's investment adviser
has voluntarily agreed to waive its investment advisory fees to
reimburse the portfolios if such fees would cause their respective
"Total Operating Expenses" to exceed those set forth in the table
above. Absent such reductions, it is estimated that "Management Fees,"
"Other Expenses" and "Total Operating Expenses" for the portfolios
would have been as follows:
<TABLE>
<CAPTION>
Portfolio Management Fees Other Expenses Total Operating Expenses
--------- --------------- -------------- ------------------------
<S> <C> <C> <C>
Fixed Income 0.40% 1.31% 1.71%
High Yield 0.50% 1.18% 1.68%
Global Equity 0.80% 1.63% 2.43%
U.S. Real Estate 0.80% 1.52% 2.32%
</TABLE>
(4) Class 2 shares of the portfolio have a distribution plan or "Rule 12b-1
Plan" which is described in the Templeton Fund's prospectus. Because
Class 2 shares were not offered until May 1, 1997, figures (other than
"12b-1 Fees") are estimated for 1998 based on historical expenses of
the portfolio's Class 1 shares for the fiscal year ended December 31,
1997.
(5) Class 2 shares of the portfolio have a distribution plan or "Rule 12b-1
plan" which is described in the Templeton Fund's prospectus. Because
Class 2 shares were not offered until May 1, 1997, figures (other than
"12b-1 Fees") are estimated for 1998 based on the historical expenses
of the portfolio's Class 1 shares for the fiscal year ended December
31, 1997. "Management Fees" and "Total Operating Expenses" have also
been revised to reflect the management fee schedule approved by
shareholders and effective May 1, 1997. Actual "Management Fees" and
"Total Operating Expenses" during 1997 were lower. See the Templeton
Fund prospectus for details.
(6) Expenses are estimated because as of December 31, 1997, Goldman Sachs
Trust had not yet commenced operations. Goldman Sachs Asset Management
and Goldman Sachs Asset Management International have respectively
agreed to reduce or limit certain expenses (excluding management fees,
taxes, interest and brokerage fees, and litigation, indemnification and
other extraordinary expenses) of the portfolios of the Goldman Sachs
Trust: the Growth and Income Fund, the CORE U.S. Equity Fund, the CORE
Large Cap Growth Fund, the CORE Small Cap Equity Fund, the Capital
Growth Fund, the Mid Cap Equity Fund, the International Equity Fund and
the Global Income Fund. Without this reimbursement, it is estimated
that "Other Expenses" and "Total Operating Expenses" for each portfolio
would have been 0.76% and 1.51%, 0.76% and 1.46%, 0.50% and 1.20%,
0.30% and 1.05%, 0.27% and 1.02%, 0.53% and 1.33%, 0.37% and 1.37%, and
0.45% and 1.35%, respectively.
10
<PAGE>
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 mortality and expense risk charge. "Average Annual Total
Return" reflects the hypothetical annually compounded return that would have
produced the same cumulative return if a Fund's 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.
The performance information illustrated below 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. The performance results
do not reflect: monthly deductions; cost of insurance; surrender charges; sales
loads; DAC taxes; and any state or local premium taxes. If these charges were
included, the total return figures would be lower.
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 Policy and the
characteristics of and market for such financial instruments.
11
<PAGE>
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
Policy being offered will be calculated as if the Policy had been offered during
that period of time, with all charges assumed to be those applicable to the
Policy. 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 31, 1997
<TABLE>
<CAPTION>
Inception Since
Portfolio Date 1 Year 3 Years 5 Years 10 Years Inception
- --------- ----------- ------ ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
ALLIANCE
Premier Growth 01/14/91 28.80% 29.46% 19.28% N/A 15.30%
Growth and Income 06/26/92 33.86% 33.50% N/A N/A 21.72%
Quasar 10/01/96 18.60% N/A N/A N/A 17.94%
FIDELITY
VIP Money Market 04/01/82 5.51% 5.60% 4.85% 5.87% 6.89%
VIP II Index 500 08/27/92 32.82% 30.76% 19.91% N/A 19.87%
VIP II Contrafund 01/03/95 24.14% N/A N/A N/A 28.16%
MORGAN STANLEY
Fixed Income 01/02/97 9.93% N/A N/A N/A 9.93%
High Yield 01/02/97 13.53% N/A N/A N/A 13.53%
Global Equity 01/02/97 20.04% N/A N/A N/A 20.04%
U.S. Real Estate 03/03/97 N/A N/A N/A N/A 17.99%
NEUBERGER & BERMAN
Partners 03/22/94 31.25% 32.40% N/A N/A 24.18%
TEMPLETON (1)
Developing Markets 05/01/97 N/A N/A N/A N/A -32.79%
International 05/01/97 N/A N/A N/A N/A 9.46%
</TABLE>
- -------------------------
* 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. The data assumes the relevant
Subaccount was in existence on the portfolio's inception date. The
performance results do not reflect: monthly deductions; cost of insurance;
surrender charges; sales loads; DAC taxes; and any state or local premium
taxes. (See "CHARGES AND DEDUCTIONS," page ___). If these charges were
included, the total return figures would be lower. The illustrations
beginning on page ____ reflect the deduction of all charges. Past
performance cannot predict or guarantee future results.
12
<PAGE>
+ No information has been provided for Goldman Sachs Trust because it had not
commenced operations as of December 31, 1997.
(1) Because Class 2 shares of the portfolios were not offered until May 1,
1997, performance shown below for periods prior to that date represents the
historical result of Class 1 shares. Performance shown below for periods
after May 1, 1997, reflect the higher annual fees and expenses resulting
from the Class 2 shares' Rule 12b-1 Plan. Maximum annual plan expenses are
0.25%.
<TABLE>
<CAPTION>
Inception Date 1 Year 3 Years 5 Years Since Inception
-------------- ------ ------- ------- ---------------
<S> <C> <C> <C> <C> <C>
TEMPLETON
Developing Markets 03/01/96 -29.33% N/A N/A -19.85%
International 05/01/92 13.73% 17.76% 18.66% 15.01%
</TABLE>
INFORMATION ABOUT THE COMPANY,
THE SEPARATE ACCOUNT AND THE FUNDS
The Company
AIG Life Insurance Company is a stock life insurance company organized
under the laws of the State of Delaware in 1962. The Company provides a full
range of individual and group life, disability, accidental death and
dismemberment policies and annuities. 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.
The Company is currently evaluating on an ongoing basis its computer
systems and the systems of other companies on which the Company's operations
rely to determine if they will function properly with respect to dates in the
Year 2000 and beyond. These activities are designed to ensure that there is no
adverse effect on the Company's core business operations. While the Company
believes its planning efforts are adequate to address its Year 2000 concerns,
there can be no guarantee that the systems of other companies on which the
Company's operations rely will be converted on a timely basis and will not have
a material effect on the Company.
The Separate Account
We established the Separate Account as a separate investment account on
June 5, 1986. It may be used to support the Policy 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 (the "SEC") 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 Policy invest in
shares of a specific series of the Funds. The Separate Account may include other
Subaccounts which are not available under the Policy and are not otherwise
discussed in this Prospectus.
13
<PAGE>
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 Policy.
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 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 1940 Act. 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
adviser 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 Advisers
The Funds are each registered with the SEC as a diversified open-end
management investment company under the 1940 Act, with the exception of Goldman
Sachs Trust which is registered as a non-diversified open-end management
investment company. Each is a series-type mutual fund made up of different
series, referred to in this Prospectus as portfolios. The investment objectives
of each of the portfolios in which Subaccounts invest are set forth below. Each
of the Funds may include portfolios or funds which are not available under this
Policy.
14
<PAGE>
The shares of the Funds may be sold not only to the Separate Account,
but to other separate accounts of the Company that fund benefits under variable
annuity contracts. The shares of the 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 insurance and variable annuity contract
separate accounts to invest in the same underlying mutual fund. Although neither
We nor the Funds currently perceive or anticipate any such disadvantage, the
Company will monitor events to determine whether any material conflict between
variable life owners and variable annuity owners arises. 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 investments 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
Policy. (See "PREMIUMS AND ALLOCATIONS," page ___.)
ALLIANCE FUND
Premier Growth Portfolio -- seeks growth of capital by employing aggressive
investment policies. Investments will be made based upon their potential for
capital appreciation, with current income incidental to the objective of capital
growth.
Growth and Income Portfolio -- seeks to balance the objectives of reasonable
current income and reasonable opportunities for appreciation through investments
primarily in dividend-paying common stocks of good quality.
Quasar Portfolio -- seeks growth of capital by pursuing aggressive investment
policies. The portfolio invests principally in a diversified portfolio of equity
securities of any company and industry and in any type of security which is
believed to offer possibilities for capital appreciation.
The Alliance Fund is managed by Alliance Capital Management L.P.
FIDELITY FUNDS
VIP Money Market Portfolio -- seeks to obtain as high a level of current income
as is consistent with preserving capital and providing liquidity. The portfolio
will invest only in high quality U.S. dollar-denominated money market securities
of domestic and foreign issuers. An investment in the portfolio is neither
insured nor guaranteed by the U.S. government, and there can be no assurance
that the portfolio will maintain a stable $1.00 share price.
VIP II Index 500 Portfolio -- seeks investment results that correspond to the
total return of common stocks publicly traded in the United States, as
represented by the Standard & Poor's Composite Index of 500 Stocks (commonly
referred to as the "S&P 500"). Normally at least 80% of its assets are invested
in equity securities of companies that compose the S&P 500.
15
<PAGE>
VIP II Contrafund Portfolio -- seeks capital appreciation by investing mainly in
equity securities of companies whose value the adviser believes is not fully
recognized by the public. The portfolio usually invests primarily in common
stock and securities convertible into common stock, but it has the flexibility
to invest in any type of security that may produce capital appreciation.
Fidelity Management & Research Company ("FMR") is the investment
adviser for the Fidelity Funds. Fidelity Investment Money Management Inc., a
subsidiary of FMR, chooses investments for VIP Money Market Portfolio. Bankers
Trust Company, a wholly-owned subsidiary of Bankers Trust of New York
Corporation, currently serves as the sub-adviser to VIP II Index 500 Portfolio.
MORGAN STANLEY FUNDS
Fixed Income Portfolio -- seeks above average total return over a market cycle
of three to five years by investing in a diversified portfolio of U.S.
government and agency securities, corporate bonds, foreign bonds,
mortgage-backed securities of domestic issuers, and other fixed income
securities and derivatives. Under normal circumstances, the portfolio will
invest at least 65% of its total assets in fixed income securities, not more
than 20% of which will be below investment grade (commonly referred to as "high
yield securities" or "junk bonds").
High Yield Portfolio -- seeks above average total return over a market cycle of
three to five years by investing at least 65% of its total assets in high yield
securities of U.S. and foreign issuers including corporate bonds and other fixed
income securities.
Global Equity Portfolio -- seeks long-term capital appreciation by investing
primarily in growth-oriented common and preferred stocks, convertible
securities, rights and warrants to purchase common stocks, depositary receipts
and other equity securities of issuers throughout the world, including issuers
in the U.S. and emerging markets countries.
U.S. Real Estate Portfolio -- seeks above-average current income and long-term
capital appreciation by investing primarily in equity securities of companies in
the U.S. real estate industry, including common stocks, shares or units or
beneficial interest in REITs, limited partnership interests in master limited
partnerships, rights or warrants to purchase common stocks, convertible
securities and preferred stock.
The investment adviser for Global Equity Portfolio and U.S. Real Estate
Portfolio is Morgan Stanley Asset Management Inc., a wholly-owned subsidiary of
Morgan Stanley Dean Witter & Co., which is a publicly owned global financial
services corporation. The investment adviser for Fixed Income Portfolio and High
Yield Portfolio is Miller Anderson & Sherrerd, LLP, which is indirectly
wholly-owned by Morgan Stanley Dean Witter & Co.
NEUBERGER & BERMAN TRUST
Partners Portfolio -- seeks to achieve capital growth by investing principally
in common stocks of medium to large capitalization established companies, using
a value-oriented investment approach designed to increase capital with
reasonable risk.
16
<PAGE>
Each portfolio of Neuberger & Berman Trust invests its assets in a
corresponding series of the Neuberger & Berman Advisers Managers Trust
("Managers Trust"), which is also an open-end management investment company
registered under the 1940 Act and is organized as a New York common law trust.
The investment performance of the Partners Portfolio will directly correspond
with the investment performance of the corresponding series of Managers Trust.
This "Master/Feeder Fund" structure is different from that of many other
investment companies which directly acquire and manage their own portfolios of
securities.
Neuberger & Berman Management Incorporated serves as the investment
manager of each series of Managers Trust and as distributor of the shares of and
administrator of each portfolio of Neuberger & Berman Trust. Neuberger & Berman,
LLC serves as the sub-adviser for each series of Managers Trust.
TEMPLETON FUND
Developing Markets Fund -- seeks long-term capital appreciation by investing
primarily in equity securities of issuers in countries having developing markets
(normally at least 65% of its assets).
International Fund -- seeks long-term capital growth through a flexible policy
of investing in stocks and debt obligations of companies and governments outside
the United States. Any income realized will be incidental. In pursuit of its
investment objective, the International Fund will invest at least 65% of its
assets in securities of issuers in at least three countries outside the United
States.
Templeton Asset Management Ltd. serves as the investment manager to the
Developing Markets Fund and Templeton Investment Counsel, Inc. serves as the
investment manager to the International Fund. Only Class 2 shares of Developing
Markets Fund and International Fund are available under the Policy.
GOLDMAN SACHS TRUST
Growth and Income Fund -- seeks long-term growth of capital and growth of income
through investments in equity securities that are considered to have favorable
prospects for capital appreciation and/or dividend paying ability.
CORE U.S. Equity Fund -- seeks long-term growth of capital and dividend income
through a broadly diversified portfolio of large capitalization and blue chip
equity securities representing all major sectors of the U.S. economy.
CORE Large Cap Growth Fund -- seeks long-term growth of capital through a
broadly diversified portfolio of equity securities of large capitalization U.S.
issuers that are expected to have better prospects for earnings growth than the
growth rate of the general domestic economy. Dividend income is a secondary
consideration.
CORE Small Cap Equity Fund -- seeks long-term growth of capital through a
broadly diversified portfolio of equity securities of U.S. issuers which are
included in the Russell 2000 Index at the time of investment.
Capital Growth Fund -- seeks long-term growth of capital through diversified
investments in equity securities of companies that are considered to have
long-term capital appreciation potential.
17
<PAGE>
Mid Cap Equity Fund -- seeks long-term capital appreciation primarily through
investments in equity securities of companies with public stock market
capitalizations within the range of the market capitalization of companies
constituting the Russell MidCap Index at the time of investment (currently
between $400 million and $16 billion).
International Equity Fund -- seeks long-term capital appreciation through
investments in equity securities of companies that are organized outside the
U.S. or whose securities are principally traded outside the U.S.
Global Income Fund -- seeks high total return, emphasizing current income and,
to a lesser extent, providing opportunities for capital appreciation, by
investing primarily in a portfolio of high quality fixed income securities of
U.S. and foreign issuers and foreign currencies.
Goldman Sachs Asset Management serves as investment adviser to the
Growth and Income, CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap
Equity, Capital Growth, and Mid Cap Equity Funds. Goldman Sachs Asset Management
International serves as investment adviser to the International Equity and
Global Income Funds.
There is no assurance that any of the portfolios will achieve their stated
objective. Owners are advised to read the Fund prospectuses accompanying this
Prospectus for more detailed information regarding management of the portfolios,
investment objectives, investment advisory fees, and other charges assessed by
the Funds.
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 Policy, 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 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.
18
<PAGE>
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 Owner's 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 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
In order to purchase a Policy, the Owner must complete an application
and submit it to the Company with an initial Premium payment at least equal to
the minimum required. (See "PREMIUMS," below.) The initial 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 by Our Administrative
Office.
We require satisfactory evidence of the Insured's 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 "Period to Examine and
Cancel"). The Owner may cancel the Policy before the later of: (a) 45 days after
Part I of the Application for the Policy is signed or (b) 10 days after the
Owner receives the Policy. 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 which 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.
19
<PAGE>
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, and any supplemental benefits.
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 per Insured 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.
In addition, we may refuse to accept Premium that would cause the
Policy to fail to qualify as a life insurance contract as defined in Section
7702 of the Internal Revenue Code, as amended (the "Code"). We will refund any
portion of any Premium that is excess Premium. In addition, We will monitor the
Policy and will attempt to notify the Owner on a timely basis if a Policy is in
jeopardy of becoming a modified endowment contract ("MEC") under the Code. (See
"TAX CONSIDERATIONS," page __.)
Lastly, no Premium will be accepted after the Maturity Date.
Planned Periodic Premiums. 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 Face Amount of the Policy 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" below).
We will send You a reminder notice for Your Planned Periodic Premiums.
Premiums Upon Increase in Specified Face Amount. Depending on the
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 ___.)
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 when due (see page ___).
20
<PAGE>
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. A Policy that lapses with an Outstanding Loan may have tax
consequences. (See "TAX CONSIDERATIONS," page ___.)
Grace Period. In order for insurance coverage to remain in force, the
Net Cash Surrender Value must be sufficient to cover the total monthly
deductions. If the Net Cash Surrender Value at the beginning of a Policy Month
is less than such deductions for that month, the Company will send a written
notice within 30 days stating that a Grace Period of 61 days has begun, starting
with the beginning of that Policy Month. The notice will also state the amount
of Premium required to increase the Net Cash Surrender Value sufficiently to
cover total monthly deductions for three (3) months. If we do not receive the
requested Premium before the end of the Grace Period, the Policy will end
without value. 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 Life Insurance Proceeds 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 Insured's death. (See "LIFE INSURANCE PROCEEDS,"
page ___.)
Net Premium Allocations
In the application, You specify the percentage of 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 Premium received are invested in the Money Market
Subaccount. The first business day after the period expires, the 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 ___.)
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 for a
specified number of months not in excess of twenty-four. This option can be
elected at any time provided there is a minimum balance of $2,000 per Insured 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 the Period to Examine and Cancel; 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.
21
<PAGE>
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; or
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 Dollar Cost
Averaging.
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 Premium will
be credited to the Policy and Net Premium will be invested as of the date the
Premium or notification of deposit is received at Our Administrative Office.
However, any Net Premium 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 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.
Subsequent to the Period to Examine and Cancel, Net Premium 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.
Transfers
You may transfer Account Value among the Subaccounts subject to the
following rules, some of which depend on whether 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 ___). 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 "WHEN PROCEEDS ARE PAID,"
page ___. There is no limit on the number of transfers. However, after twelve
(12) transfers per Insured have been made during a Policy Year, We currently
impose a $25 transfer charge per Insured on each subsequent transfer. (See
"TRANSFER CHARGE," page ___.) The Company reserves the right to increase or
decrease the number of "free" transfers allowed in any Policy Year.
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The minimum amount of Account Value that may be transferred is $250 per
Insured. If less than the full amount of Account Value in a Subaccount is being
transferred from the Subaccount, the amount remaining must be at least $250 per
Insured. If the amount remaining would be less than $250 per Insured, the full
amount of the Account Value will be transferred.
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 day will
count as one transfer per Insured for purposes of determining whether the
transfer is free or may be subject to the $25 charge per Insured.
Guaranteed Account Transfer Rules. 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 per Insured, or the Account Value held
in the Guaranteed Account, whichever is less. If the amount transferred is less
than the Account Value then held in the Guaranteed Account, at least $250 per
Insured 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. For additional rules and limits for
the Guaranteed Account, see "DEDUCTIONS FROM THE GUARANTEED ACCOUNT," page ___.
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
1940 Act. 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
SEC 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 Loan Account is
part of the Guaranteed Account.
Interest Credited on Policy Value in the Guaranteed Account
Net Premium allocated to the Guaranteed Account and Account Value
transferred from the Subaccounts to the Guaranteed Account are credited to the
Guaranteed Account portion of the 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 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.
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.
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<PAGE>
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 Loan Account than to the remaining
portion of 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 __.)
Deductions from the Guaranteed Account
Whenever a charge is deducted from the Account Value in the Guaranteed
Account, or an amount is withdrawn from the 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 ___ for limits and restrictions on transfers of Account Value
from the Guaranteed Account.
If there is any Account Value in the Loan Account, it is not available
for transfers, partial surrenders or Policy loans, nor any charges deducted from
this portion of Account Value. Amounts are transferred to or from the Loan
Account only when Policy loans are taken or repayments made. If an amount is
transferred from the 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 "LOAN ACCOUNT," page ___.)
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 Account Value
and also from each Premium to cover certain expenses relating to the issuance
and administration of 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 Company's discretion, it
may on a current basis charge less than the guaranteed amount.
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<PAGE>
Premium Taxes and DAC Taxes
Premium taxes and DAC taxes are based on Premium. Premium taxes are
charged at an explicit percent of Premium equal to the state and local tax
rates. A typical state premium tax would be in the range of 2% to 2.6% of
Premium. The Company will deduct a specific amount from Premium based on the
place of residence of the Insured. DAC taxes will be deducted from Account Value
at the time Premium is paid at a rate equal to 1.25% of Premium.
In place of the lump sum deductions described above, at the time of
application the Owner may select from any optional methods that may be offered
at the Company's discretion, the terms of which will be agreed upon at that
time.
Sales Charge
The Company may deduct a sales charge from each Premium paid and may
also deduct a sales charge from Account Value, either in place of a deduction
from Premium, or in combination with a deduction from Premium. A sales charge
deducted from Account Value in whole or in part will be deducted according to
the terms negotiated by the Company and the Owner. When a sales charge is
deducted either from Premium or Account Value, or both, the total sales charge
will not exceed 9% of total Premium. An additional sales charge may be deducted
on a partial surrender or surrender of a Policy during the first 14 Policy
Years. (See "SURRENDER CHARGE," page ___.)
The sales charge partially compensates Us for the expenses of selling
and distributing the Policy, including paying sales commissions, printing
prospectuses, preparing sales literature and paying for other promotional
activities. Under certain employer-owned, trust-owned, or sponsored
arrangements, some of these expenses or other administrative expenses may be
assumed by an employer or group sponsor. In such cases and within the sole
discretion of the Company, there may be no sales charge or a reduced sales
charge.
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 current charge is at an annual rate of 0.75% of net assets.
Although the charge may be increased or decreased at the sole discretion of the
Company, it is guaranteed not to exceed 1.00% for the duration of a Policy. If a
Policy is issued with a current charge of less than 1.00%, 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 Insured under a Policy may die
sooner than anticipated and that therefore the Company will pay an aggregate
amount of Life Insurance Proceeds 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.
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<PAGE>
Monthly Deduction
On the Issue Date and each Monthly Anniversary, We deduct the monthly
deduction from the 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 ("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"). The monthly deduction is deducted from the
Accounts pro rata on the basis of the portion of Account Value in each Account.
(See "DEDUCTIONS FROM THE GUARANTEED ACCOUNT," page ___.)
Current and Guaranteed Expense Charges. The current Monthly Expense
Charge consists of (1) an administrative charge of $7.50 per Insured and
guaranteed not to exceed $10.00 per Policy Month and (2) an additional monthly
administrative charge during the first Policy Year and the twelve months
immediately following an increase in Face Amount currently at a monthly rate of
$20 per Insured and guaranteed not to exceed $25 per Insured per Policy Month.
These charges compensate Us for administrative expenses associated with
the Policy and the Separate Account. These expenses relate to Premium billing
and collection, recordkeeping, processing 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 on
that Monthly Anniversary.
The Net Amount at Risk is calculated as (a) minus (b) where:
(a) is the current Life Insurance Proceeds at the beginning of the
Policy month divided by 1.0032737; and
(b) is the current total 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.
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<PAGE>
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 Face Amount. For
purposes of calculating the cost of insurance charge after the Face Amount has
been increased, the 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 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.
In order to maintain the Policy in compliance with Section 7702 of the
Code, under certain circumstances an increase in Account Value will cause an
automatic increase in the Life Insurance Proceeds. 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 Company's
discretion, the current charge may be increased in any amount up to the maximum
guaranteed charge shown in the table. 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.
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<PAGE>
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. 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 Policy generally distinguish between males and females.
Thus, Premiums and benefits under the Policy covering males and females of the
same age will generally differ.
We do, however, also offer the Policy based on unisex mortality tables
if required by state law. Employers and employee organizations considering
purchase of a Policy should consult their legal advisers 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 the Policy with unisex mortality tables to such prospective
purchasers.
Transfer Charge
We currently impose a $25 transfer charge on any transfer of Account
Value among the Subaccounts in excess of 12 free transfers per Insured 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.
Surrender Charge
The following discussion of the surrender charge presents the maximum
surrender charge that may be imposed under the Policy. Under certain
employer-owned, trust-owned, and sponsored arrangements where Sales Charges have
been reduced because the Company's sales and administrative expenses were
lessened, the Company in its sole discretion, may also reduce or waive the
surrender charge. Otherwise, the following discussion of the surrender charge
will be applicable.
If the Policy is surrendered or there is a decrease in Face Amount
during the first 14 Policy Years, We will deduct a surrender charge based on the
initial Face Amount. If a Policy is surrendered or there is a decrease in Face
Amount within 14 years after an increase in Face Amount, We will deduct a
surrender charge based on the increase in Face Amount. The surrender charge will
be deducted before any surrender proceeds are paid.
Surrender Charge Based On Initial Face Amount. The surrender charge
based on the initial Face Amount will be no greater than the product of (1)
times (2) times (3) where:
(1) is equal to the Face Amount divided by $1,000;
(2) is equal to a surrender charge factor per $1,000 based on the
Insured's Issue Age, sex and underwriting class; and
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<PAGE>
(3) is equal to the Policy duration factor as described in the
following table:
<TABLE>
<CAPTION>
Policy Policy Duration
Duration 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 factors per $1,000 of Face Amount for
various age, sex, and underwriting classes is shown in Appendix A.
Surrender Charge Based On An Increase Or Decrease In Face Amount. An
increase in Face Amount of the Policy will result in an additional surrender
charge during the 14 Policy Years immediately following the increase. 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
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 Face Amount of the Policy in the reverse order in which such increases took
place, and then to the initial 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 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.
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<PAGE>
A partial surrender charge is also deducted from the 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. The
administrative charge per Insured 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 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 __.)
Each partial surrender will reduce the Account Value by the amount of
partial surrender plus the proportional surrender charge and the partial
surrender administrative charge. If Life Insurance Proceeds Option I is selected
, 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 and other charges under the Policy
may be reduced or eliminated when sales of the Policy 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 Policy, and members of
the immediate families of such officers, directors, and employees, the Company
may reduce or eliminate the surrender charge. Any variation in charges under the
Policy, including the surrender charge, administrative charge or mortality and
expense risk charge, will reflect differences in costs or services and will not
be unfairly discriminatory.
HOW YOUR ACCOUNT VALUE VARIES
There is no minimum guaranteed 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 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 __), the Policy will be in default and a Grace Period will
begin.
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<PAGE>
Determining the Account Value
On the Policy Date the Account Value is equal to the initial Net
Premium. If the Policy Date and the Issue Date are the same day, the 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 Account Value. The
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 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
Subaccount's 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 Premium is 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 Subaccount's 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.
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 Account Value of a Policy is the total of all Net Premium
allocated to the Guaranteed Account, plus any amounts transferred to the
Guaranteed Account, plus interest credited on such Net Premium 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 Loan
Account held in the Guaranteed Account, including transfers to and from the Loan
Account as loans are taken and repayments are made, and interest credited on the
Loan Account.
Net Account Value
The Net Account Value on a Valuation Date is the Account Value less
Outstanding Loans on that date.
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<PAGE>
Cash Surrender Value
The Cash Surrender Value on a Valuation Date is the 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 ___). 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
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.
LIFE INSURANCE PROCEEDS AND CHANGES IN FACE AMOUNT
Life Insurance Proceeds
As long as the Policy remains in force, We will pay the Life Insurance
Proceeds upon receipt at Our Administrative Office of satisfactory proof of the
Insured's death. We will require return of the Policy. The Life Insurance
Proceeds will be paid to the Beneficiary in a lump sum generally within seven
days after We receive due proof of death of the Insured (see "WHEN PROCEEDS ARE
PAID," page ___), or, if elected, under a payment option (see "PAYMENT OPTIONS,"
page ___). Payment of the Life Insurance Proceeds may also be affected by other
provisions of the Policy.
The Life Insurance Proceeds includes the following amounts, which We
will determine as of the date of the Insured's death:
(a) the Death Benefit Amount determined according to the Death
Benefit Qualification Option and Life Insurance Proceeds Option
selected;
(b) plus any other benefits then due from riders to the Policy;
(c) minus any Outstanding Loan and accrued loan interest;
(d) minus any overdue deductions from Account Value if the Insured
dies during a Grace Period.
We will pay interest on the Life Insurance Proceeds for the period from
the date of the Insured's 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 Qualification Options
Section 7702 of the Code defines alternative testing procedures (the
"Death Benefit Qualification Options") for meeting the definition of life
insurance under the Code. (See "TAX TREATMENT OF THE POLICY," page ___.) Each
Policy must qualify under one of the two Death Benefit Qualification Options.
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<PAGE>
The Owner will choose a Death Benefit Qualification Option at the time of
application. Once it has been chosen to test a Policy, the Death Benefit
Qualification Option cannot be changed while the Policy is in force.
Under both Death Benefit Qualification Options, there is a minimum Life
Insurance Proceeds required at all times equal to the Account Value multiplied
by the appropriate Minimum Death Benefit Factor. The Minimum Death Benefit
Factor depends on the Death Benefit Qualification Option and the Attained Age,
sex, and smoker status of the Insured. A table of Minimum Death Benefit Factors
for the selected Death Benefit Qualification Option is located in the Policy.
Cash Value Accumulation Test. Use of the Cash Value Accumulation Test
can be advantageous if an Owner intends to maximize the total amount of Premiums
paid under a Policy. An offsetting consideration, however, is that the higher
Premium permitted under this testing option will generally also require a higher
Life Insurance Proceeds and, thus, a higher total cost of insurance. The Minimum
Death Benefit Factors for the Cash Value Accumulation Test are computed based on
the 1980 Commissioners Standard Ordinary Tables and a 4% effective annual
interest rate.
Guideline Premium/Cash Value Corridor Test. The Guideline Premium/Cash
Value Corridor Test limits the amount of total Premium an Owner may pay under a
Policy. The Minimum Death Benefit Factors for this testing option are those
prescribed by the Code.
Life Insurance Proceeds Options
At the time of application, the Owner will choose one of two Life
Insurance Proceeds Options, regardless of the Death Benefit Qualification Option
selected.
Life Insurance Proceeds Option I. The Face Amount includes the Account
Value and the Death Benefit Amount will be the larger of:
(a) the Face Amount on the date of death; or
(b) the Account Value on the date of death multiplied by the
appropriate Minimum Death Benefit Factor shown in the Policy for the
Attained Age, smoker status, and sex of the Insured at the time of
death and the previously selected Death Benefit Qualification Option.
Life Insurance Proceeds Option II. The Face Amount is in addition to
the Account Value and the Death Benefit Amount will be the larger of:
(a) the Face Amount plus the Account Value on the date of death; or
(b) the Account Value on the date of death multiplied by the
appropriate Minimum Death Benefit Factor shown in the Policy for the
Attained Age, smoker status, and sex of the Insured at the time of
death and the previously selected Death Benefit Qualification Option.
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<PAGE>
If investment performance is favorable, the amount of the Life
Insurance Proceeds may increase. However, under Life Insurance Proceeds Option
I, the Life Insurance Proceeds ordinarily will not change to reflect any
favorable investment performance for several years and may not change at all,
whereas under Life Insurance Proceeds Option II, the Life Insurance Proceeds
will vary directly with the investment performance of the Account Value. To see
how and when investment performance may begin to affect the Life Insurance
Proceeds, please see the illustrations beginning on page ___.
Changes in Life Insurance Proceeds Options
You may change Your Life Insurance Proceeds Option. We may require that
You submit evidence of insurability satisfactory to Us. If You request a change
from Life Insurance Proceeds Option I to Life Insurance Proceeds Option II, We
will decrease the Face Amount by an amount equal to Your 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 below the minimum Face Amount. If
You request a change from Life Insurance Proceeds Option II to Life Insurance
Proceeds Option I, We will increase the Face Amount by an amount equal to Your
Account Value on the date the change takes effect. Such decreases and increases
in the Face Amount are made so that the Life Insurance Proceeds remains the same
on the date the change takes effect. However, if the Life Insurance Proceeds is
determined by a percentage multiple of the Account Value, there may be an
increase in the Life Insurance Proceeds.
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 request a change by completing an Application for Change
available from Our agent or by writing Us at Our Administrative Office. A copy
of Your Application for Change will be attached to the newly issued policy
information pages that We will issue for the Policy 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 certain conditions. No
change will be permitted that would result in the Life Insurance Proceeds being
includable in gross income due to a failure to satisfy the requirements of
Section 7702 of the Code. (See "TAX CONSIDERATIONS," page ___.)
34
<PAGE>
Any increase in the Face Amount must be at least $10,000, however, the
resulting Face Amount may not be in excess of twice the Face Amount on the Issue
Date, unless otherwise permitted by the Company. A written application must be
submitted to Our Administrative Office along with evidence of insurability
satisfactory to Us. The increase in Face Amount will become effective on the
Monthly Anniversary on or next following the date the increase is approved, and
the 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 the Policy so We can amend the Policy to reflect the increase. There
will be an additional monthly administrative charge, currently at a rate of $20
per Insured and guaranteed not to exceed $25 per Insured per Policy Month,
imposed on the contract for the 12 months immediately following the effective
date of such an increase. We will not allow more than one increase per Policy
Year, nor will We allow an increase in Face Amount after an Insured's 65th
birthday.
Any decrease in the Face Amount must be at least $5,000 and the Face
Amount after the decrease must be at least the minimum Face Amount at which we
would then issue the Policy. During the first five (5) Policy Years, the Face
Amount may not be decreased by more than 10 percent of the initial Face Amount
in any one Policy Year. If the Face Amount is decreased during the first 14
Policy Years or within 14 Policy Years of an increase in Face Amount, a
surrender charge may be applicable.
Both increases and decreases in Face Amount may impact the surrender
charge. In addition, an increase or decrease in Face Amount may impact the
status of the Policy as a MEC. (See "TAX CONSIDERATIONS," page ___.)
Selecting and Changing the Beneficiary
The Owner selects a Beneficiary in the application. The Owner 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 Policy Year, or after the first Policy Year following any increase in
Face Amount by submitting a request to the Administrative Office. The loan value
is 90% of Your Net Cash Surrender Value. The Company may impose a minimum loan
amount. Outstanding Loans reduce the amount of the loan value available for new
Policy loans. Policy loans will be processed as of the date the request is
received at our Administrative Office. If a Policy is issued under a
corporate-owned arrangement, a loan will be assessed pro rata over all Insureds
under the Policy. Loan proceeds generally will be sent to the Owner within seven
days. In addition, loans from MECs may be treated for tax purposes as
distributions of income.
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.
35
<PAGE>
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 Life Insurance Proceeds becomes payable
while a Policy loan is outstanding, the Outstanding Loan will be deducted in
calculating the Life Insurance Proceeds. If the Outstanding Loans exceed the Net
Cash Surrender Value on any monthly 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.
Loan Account. When a Policy loan is made, an amount equal to the loan
proceeds is withdrawn from the Account Value in the Subaccounts. This withdrawal
is made pro rata on the basis of the Account Value in each Subaccount unless You
direct a different allocation when requesting the loan. The loan amount
withdrawn is then transferred to the Loan Account in the Guaranteed Account.
Conversely, when a loan is repaid, an amount equal to the repayment will be
transferred from the 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 Account Value, but other Policy
values, such as the Net Account Value and Net Cash Surrender Value, will be
reduced or increased immediately by the amount transferred to or from the 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 on Policy loans and the
amount We credit on the equivalent amount held in the Loan Account). In
addition, We currently intend to credit 6.00% on the amount held in the Loan
Account.
Effect of Policy Loan. A Policy loan, whether or not repaid, will have
a permanent effect on the Life Insurance Proceeds and Account Value 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 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 ___.) 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 ___, and "PAYMENTS
FROM THE GUARANTEED ACCOUNT," page ___.) The Net Cash Surrender Value may be
taken in one sum or it may be applied to a payment option. (See "PAYMENT
OPTIONS," below.) Your Policy will terminate and cease to be in force if it is
surrendered for one sum. It cannot later be reinstated.
If a Policy is issued under a corporate-owned arrangement, the Owner
will not be permitted to surrender the Policy as to selected individual Insureds
only.
36
<PAGE>
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 per Insured after the partial surrender is deducted from the Account Value.
No more than two partial surrenders may be made during a Policy Year and each
partial surrender must be at least $500 per Insured. A partial surrender charge
and an administrative charge will be assessed on a partial surrender. (See
"PARTIAL SURRENDER CHARGE," page __.) This charge will be deducted from Your
Account Value along with the amount requested to be surrendered and will be
considered part of the partial surrender (together, the "partial surrender
amount"). Account Value 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 Account Value in the Accounts. If
You provide no directions, the partial surrender amount will be deducted from
Your Account Value in the Accounts on a pro rata basis. (See "PAYMENTS FROM THE
GUARANTEED ACCOUNT," page __.) If a Policy is issued under a corporate-owned
arrangement, a partial surrender will be applied pro rata over all Insureds
under the Policy.
If Life Insurance Proceeds 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 __, and "PAYMENTS FROM THE GUARANTEED ACCOUNT,"
page __.)
Surrenders of all or part of a Policy may have tax consequences. (See
"TAX CONSIDERATIONS," page __.)
Maturity Date
The Maturity Date as to any Insured will be the Policy Anniversary
immediately following an Insured's 100th birthday. At that time, if the Insured
is still alive and the insurance remains in force, all riders attached to the
Policy will end, no further Premium will be accepted and no cost of insurance
charges will be incurred. After the Maturity Date, the amount of the Life
Insurance Proceeds will equal the Net Account Value.
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.
37
<PAGE>
ILLUSTRATIONS OF ACCOUNT VALUE, NET CASH SURRENDER
VALUE, LIFE INSURANCE PROCEEDS AND ACCUMULATED PREMIUM
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 Account Value, Net Cash Surrender Value and Life
Insurance Proceeds under a Policy covering an Insured of a given age on the
Issue Date, would vary over time if a Periodic Planned Premium was paid annually
and the return on the assets in the selected portfolios of the Funds was a gross
average annual rate of 0%, 6% or 12%. The tables also show Premium accumulated
at 5% interest.
The tables illustrate a Policy insuring a male age 35 in the non-smoker
class with the following features: (i) initial Face Amount of $200,000; (ii)
annual Planned Periodic Premium of $2,000; (iii) Cash Value Accumulation Test;
and (iv) Life Insurance Proceeds Option I.
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 portfolios of the Funds. The tables assume an average annual expense
ratio of 0.91% of the average daily net assets of the portfolios of the Funds
available under the Policy. This average annual expense ratio is based on the
expense ratios of each of the portfolios 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 portfolio of a Fund. For information on Fund expenses,
see the prospectuses for the Funds.
As their headings indicate, one table reflects the deduction of current
contractual charges and the other reflects the deduction of guaranteed
contractual charges. These charges include the monthly cost of insurance charge,
the monthly administrative charge, and the daily charge to the Separate Account
for assuming mortality and expense risks. Both tables assume a state premium tax
rate of 2.00%, 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. After deduction of portfolio 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 current net annual
rates of -1.66%, 4.34% and 10.34% and approximate guaranteed net annual rates of
- -1.91%, 4.09% and 10.09%.
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.
38
<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)
Death Benefit Qualification Option (Cash Value Accumulation Test)
<TABLE>
<CAPTION>
Using Current Cost of Insurance Rates
Premiums 0% Hypothetical 6% Hypothetical 12% Hypothetical
Accumulated Gross Investment Return Gross Investment Return Gross Investment Return
End of at 5.00% Policy Net Cash Policy Net Cash Policy Net Cash
Policy Interest Account Surrender Death Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- ------ ------------ ------- -------- -------- ------- --------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $2,100 $1,328 $948 $200,000 $1,424 $1,044 $200,000 $1,521 $1,141 $200,000
2 $4,305 $2,863 $2,483 $200,000 $3,147 $2,767 $200,000 $3,443 $3,063 $200,000
3 $6,620 $4,360 $3,980 $200,000 $4,932 $4,552 $200,000 $5,551 $5,171 $200,000
4 $9,051 $5,819 $5,439 $200,000 $6,781 $6,401 $200,000 $7,864 $7,484 $200,000
5 $11,604 $7,240 $6,860 $200,000 $8,696 $8,316 $200,000 $10,403 $10,023 $200,000
6 $14,284 $8,620 $8,278 $200,000 $10,678 $10,336 $200,000 $13,187 $12,845 $200,000
7 $17,098 $9,958 $9,654 $200,000 $12,728 $12,424 $200,000 $16,244 $15,940 $200,000
8 $20,053 $11,255 $10,989 $200,000 $14,848 $14,582 $200,000 $19,599 $19,333 $200,000
9 $23,156 $12,509 $12,281 $200,000 $17,041 $16,813 $200,000 $23,284 $23,056 $200,000
10 $26,414 $13,720 $13,530 $200,000 $19,307 $19,117 $200,000 $27,332 $27,142 $200,000
11 $29,834 $14,884 $14,732 $200,000 $21,648 $21,496 $200,000 $31,780 $31,628 $200,000
12 $33,426 $16,000 $15,886 $200,000 $24,065 $23,951 $200,000 $36,668 $36,554 $200,000
13 $37,197 $17,068 $16,992 $200,000 $26,561 $26,485 $200,000 $42,044 $41,968 $200,000
14 $41,157 $18,085 $18,047 $200,000 $29,137 $29,099 $200,000 $47,957 $47,919 $200,000
15 $45,315 $19,050 $19,050 $200,000 $31,794 $31,794 $200,000 $54,465 $54,465 $200,000
16 $49,681 $19,957 $19,957 $200,000 $34,533 $34,533 $200,000 $61,631 $61,631 $200,000
17 $54,265 $20,802 $20,802 $200,000 $37,353 $37,353 $200,000 $69,521 $69,521 $200,000
18 $59,078 $21,579 $21,579 $200,000 $40,251 $40,251 $200,000 $78,214 $78,214 $200,000
19 $64,132 $22,281 $22,281 $200,000 $43,227 $43,227 $200,000 $87,796 $87,796 $200,000
20 $69,439 $22,902 $22,902 $200,000 $46,280 $46,280 $200,000 $98,365 $98,365 $200,000
25 $100,227 $24,565 $24,565 $200,000 $62,683 $62,683 $200,000 $169,866 $169,866 $261,594
30 $139,522 $22,854 $22,854 $200,000 $80,851 $80,851 $200,000 $283,881 $283,881 $397,434
</TABLE>
The above illustrations are based on the following:
(1) Assumes no policy loans or withdrawals have been made.
(2) Current values reflect current cost of insurance rates, a state premium tax
rate of 2.00%, a DAC Tax charge of 1.25%, a sales load of 2.25%, an
administrative charge of $27.50 per month in policy year 1 and $7.50 per
month in all remaining policy years, a fund management expense of 0.91% of
assets and a mortality and expense risk charge of 0.75% of assets for all
policy 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
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.
39
<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)
Death Benefit Qualification Option (Cash Value Accumulation Test)
<TABLE>
<CAPTION>
Using Guaranteed Cost of Insurance Rates
Premiums 0% Hypothetical 6% Hypothetical 12% Hypothetical
Accumulated Gross Investment Return Gross Investment Return Gross Investment Return
End of at 5.00% Policy Net Cash Policy Net Cash Policy Net Cash
Policy Interest Account Surrender Death Account Surrender Death Account Surrender Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
- ------ ----------- ------ -------- -------- ------ -------- -------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $2,100 $967 $0 $200,000 $1,047 $0 $200,000 $1,129 $0 $200,000
2 $4,305 $2,196 $0 $200,000 $2,428 $0 $200,000 $2,671 $0 $200,000
3 $6,620 $3,382 $0 $200,000 $3,845 $45 $200,000 $4,347 $547 $200,000
4 $9,051 $4,521 $721 $200,000 $5,296 $1,496 $200,000 $6,170 $2,370 $200,000
5 $11,604 $5,614 $1,814 $200,000 $6,782 $2,982 $200,000 $8,153 $4,353 $200,000
6 $14,284 $6,657 $3,237 $200,000 $8,299 $4,879 $200,000 $10,306 $6,886 $200,000
7 $17,098 $7,648 $4,608 $200,000 $9,847 $6,807 $200,000 $12,647 $9,607 $200,000
8 $20,053 $8,586 $5,926 $200,000 $11,425 $8,765 $200,000 $15,193 $12,533 $200,000
9 $23,156 $9,470 $7,190 $200,000 $13,033 $10,753 $200,000 $17,964 $15,684 $200,000
10 $26,414 $10,296 $8,396 $200,000 $14,668 $12,768 $200,000 $20,980 $19,080 $200,000
11 $29,834 $11,061 $9,541 $200,000 $16,327 $14,807 $200,000 $24,263 $22,743 $200,000
12 $33,426 $11,762 $10,622 $200,000 $18,008 $16,868 $200,000 $27,838 $26,698 $200,000
13 $37,197 $12,397 $11,637 $200,000 $19,708 $18,948 $200,000 $31,736 $30,976 $200,000
14 $41,157 $12,961 $12,581 $200,000 $21,425 $21,045 $200,000 $35,986 $35,606 $200,000
15 $45,315 $13,450 $13,450 $200,000 $23,156 $23,156 $200,000 $40,625 $40,625 $200,000
16 $49,681 $13,858 $13,858 $200,000 $24,892 $24,892 $200,000 $45,688 $45,688 $200,000
17 $54,265 $14,173 $14,173 $200,000 $26,625 $26,625 $200,000 $51,217 $51,217 $200,000
18 $59,078 $14,386 $14,386 $200,000 $28,345 $28,345 $200,000 $57,255 $57,255 $200,000
19 $64,132 $14,482 $14,482 $200,000 $30,038 $30,038 $200,000 $63,852 $63,852 $200,000
20 $69,439 $14,451 $14,451 $200,000 $31,694 $31,694 $200,000 $71,069 $71,069 $200,000
25 $100,227 $11,948 $11,948 $200,000 $38,967 $38,967 $200,000 $119,249 $119,249 $200,000
30 $139,522 $3,553 $3,553 $200,000 $42,613 $42,613 $200,000 $196,522 $196,522 $275,131
</TABLE>
The above illustrations are based on the following:
(1) Assumes no policy loans or withdrawals have been made.
(2) Values reflect guaranteed cost of insurance rates, a state premium tax rate
of 2.00%, a DAC Tax charge of 1.25%, a sales load of 9.00%, an
administrative charge of $35.00 per month in policy year 1 and $10.00 per
month in all remaining policy years, a fund management expense of 0.91% of
assets and a mortality and expense risk charge of 1.00% of assets for all
policy 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
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.
40
<PAGE>
OTHER POLICY BENEFITS AND PROVISIONS
Right to Exchange
The Policy may be exchanged for a flexible premium fixed benefit life
insurance policy on the life of the Insured, without evidence of insurability.
This exchange may be made:
(a) within 24 months after the Issue Date while the Policy is in
force;
(b) within 24 months of any increase in Face Amount of the Policy; or
(c) 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 an exchange is requested, the Company accomplishes the exchange by
transferring all of the Account Value to the Guaranteed Account. There is no
charge for this transfer. Once this option is exercised, the entire Account
Value must remain in the Guaranteed Account for the remaining life of the
Policy. The Face Amount in effect at the time of the exchange will remain
unchanged. The Effective Date, Issue Date and Issue Age of the Insured will
remain unchanged. The Owner and Beneficiary are the same as were recorded
immediately before the exchange.
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 Life Insurance Proceeds 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.
41
<PAGE>
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 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 Life Insurance Proceeds, 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 Life Insurance Proceeds, 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 Owners. (See also "PAYMENTS FROM THE
GUARANTEED ACCOUNT," page ___.)
Reports to Owners
You will receive a confirmation within seven days of the transaction
of: the receipt of any Premium (except Premiums received before the Issue Date);
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. Confirmations will also be sent within seven days 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 Life Insurance Proceeds
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 Life
Insurance Proceeds payable under the Policy, the current 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
reports 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. Any assignment or pledge of a MEC as
collateral for a loan may result in a taxable event. (See "TAX CONSIDERATIONS,"
page ___.)
Reinstatement
If the Policy has ended without value, You may reinstate Policy
benefits while the Insured is alive if You:
1. Request reinstatement of Policy benefits within three (3) years
from the end of the Grace Period;
42
<PAGE>
2. Provide evidence of insurability satisfactory to Us;
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 three (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 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 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 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.
Section 7702 of the Code defines the term "life insurance contract" for
purposes of the Code. The Company believes that the Policy to be issued will
qualify as "life insurance contracts" under Section 7702, but the Company does
not guarantee the tax status of the Policy. Purchasers bear the complete risk
that the Policy 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.
43
<PAGE>
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 disqualified from treatment as
a life insurance contract for federal income tax purposes, subject to a remedial
procedure. Permanent 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." To the extent that any
segregated asset account with respect to a variable life insurance contract is
invested in securities issued by the U.S. Treasury, the investments made by such
accounts shall be treated as adequately diversified. The Code also contains a
safe harbor provision which provides that a segregated asset account underlying
life insurance contracts such as the Policy 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 attributable to cash and cash items
(including receivables), Government securities and 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 Policy, 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.
The Company intends that each Fund underlying the Policy will be
managed by its investment adviser in such a manner as to comply with these
diversification requirements.
44
<PAGE>
When Regulations under Section 817(h) of the Code were first proposed
in 1986, 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 Subaccounts with only limited restrictions).
The issuance of such guidelines could require the Company to impose limitations
on the rights of the Owners to control investment designations under the Policy.
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 Policy 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 the Policy should be treated as a life
insurance contract for federal income tax purposes. Thus, the Life Insurance
Proceeds under the Policy should be excluded from the gross income of the
Beneficiary under Section 101(a)(1) of the Code. In addition, the cash value
increases of a Policy should not be taxed until there has been a distribution
from the Policy such as a surrender, partial surrender, lapse with loan, or a
payment of benefits at a Policy's Maturity Date.
45
<PAGE>
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 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 MEC.
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 MEC, 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 MEC 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 MEC, 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 Life Insurance Proceeds 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 MEC 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 a Policy entered into or a Policy with certain material changes
after June 20, 1988. Due to the Policy's flexibility, classification as a MEC
will depend on the individual circumstances of each Policy.
In general, a Policy will be a MEC 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 MEC after a material change generally
depends upon the relationship of the Life Insurance Proceeds and 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 MEC 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 adviser to determine whether a Policy transaction will cause the
Policy to be treated as a MEC. The Company will, however, monitor the Policy 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 MEC.
46
<PAGE>
Distributions from Policies Classified as Modified Endowment Contracts.
Any Policies that are classified as MECs 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 Account Value immediately
before the distribution over the Owner's investment in the Policy (described
above) at such time. These rules may also apply to a Policy during the two-year
period prior to the Policy's classification as a MEC.
Penalties on Early Distributions from Policies Classified as Modified
Endowment Contracts. A ten percent additional income tax may be imposed under
Section 72(v) of the Code on the portion of any distribution (or any loan) from
a Policy that is classified as a MEC. This additional tax applies to the full
amount that is included in the Owner's taxable income except where the
distribution from the Policy (including distributions upon surrender) or loan is
made from or secured by the Policy 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 (not less frequently than
annually) made 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 MEC, 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 MECs 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 MEC
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 MEC 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, the deduction of interest 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 may also be subject to certain 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. (Also Section
264 of the Code may preclude business Owners from deducting premium payments.)
Policy Exchanges and Modifications. Depending on the circumstances, the
exchange of a Policy, a change in the Policy's Life Insurance Proceeds Option
(e.g., a change from Life Insurance Proceeds Option I to Life Insurance Proceeds
Option II 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.
Withholding. The Company is required to withhold federal income taxes
on the taxable portion of any amounts received under the Policy unless You elect
to not have any withholding or in certain other circumstances. Special
withholding rules apply to payments made to non-resident aliens.
47
<PAGE>
You are liable for payment of federal income taxes on the taxable
portion of any amounts received under the Policy. You may be subject to
penalties under the estimated tax rules if your withholding and estimated tax
payments are not sufficient.
Generation Skipping Transfer Tax. A transfer of the Policy or the
designation of a beneficiary who is either 37 1/2 years younger than the Owner
or a grandchild of the Owner may have Generation Skipping Transfer Tax
consequences.
Contracts Issued in Connection With Tax Qualified Pension Plans. Prior
to purchase of a Policy in connection with a qualified plan, the applicable tax
rules relating to such plans and life insurance thereunder should be examined in
consultation with a qualified tax adviser.
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 Accounts or to the Policy. 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 Policy.
48
<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>
Principal Business Affiliations
and Principal Occupations
Name and Address Office During Past Five Years
<S> <C> <C>
Robert John O'Connell Chief Executive Officer, President and CEO - AIG
80 Pine Street President and Director Life Companies
13th Floor
New York, NY 10005
Nicholas Alexander O'Kulich* Vice President, Senior Vice President, Life
Treasurer and Director Insurance - AIG, Inc.
Maurice Raymond Greenberg* Director Director, Chairman and
Chief Executive Officer -
AIG, Inc.
Edwin A. G. Manton* Director Director - AIG, Inc.
Edward Easton Matthews* Director Vice Chairman Investment and
Financial Services - AIG, Inc.
Jerome Thomas Muldowney Senior Vice President Managing Director - AIG
175 Water Street and Director Investments Corp. Senior Vice
25th Floor President of AIG. Domestic
New York, New York 10005 Life Companies.
Win Jay Neuger Director Senior Vice President -
175 Water Street AIG, Inc. Formerly, Managing
25th Floor Director-Bankers Trust Co.
New York, New York 10005
John Robert Skar Sr. Vice President, Sr. Vice President and Actuary -
One Alico Plaza Actuary and Director AIG Domestic Life Companies
P.O. Box 667
Wilmington DE 19899
Howard Ian Smith* Director Director, Executive Vice
President, Chief Financial
Officer and Comptroller -
AIG, Inc.
Ernest Edward Stempel* Director Senior Advisor - AIG Inc.
49
<PAGE>
Elizabeth Margaret Tuck* Secretary Secretary and Assistant
Secretary of AIG, Inc. and
certain affiliates
Gerald Walter Wyndorf Director and Executive Executive Vice President -
80 Pine Street Vice President AIG Domestic Life Companies
13th Floor
New York, NY 10038
Howard Earl Gunton Sr. Vice President and Sr. Vice President and
One Alico Plaza Comptroller Comptroller - AIG
Wilmington, DE 19899 Domestic Life Companies
* Indicates the business address of the individual, which is 70 Pine Street,
New York, New York 10270.
50
</TABLE>
<PAGE>
DISTRIBUTION OF THE POLICY
Where the Policy may be lawfully sold, the Policy is sold by licensed
insurance agents 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. ("AIGESC"), 80 Pine Street, New
York, New York, an affiliate of the Company. AIGESC will enter into selling
agreements with other broker-dealers who offer the Policy. Commissions may be
paid to registered representatives based on Premiums paid for Policies sold.
Additional payments may be made for administrative or other services not
directly related to the sale of the Policy.
OTHER POLICIES ISSUED BY THE COMPANY
The Company may offer other insurance policies similar to those offered
herein.
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.
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, LLP, 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 MATTERS
Legal matters relating to the federal securities laws are being passed
upon by the firm of Jorden Burt Boros Cicchetti Berenson & Johnson, LLP of
Washington, D.C.
51
<PAGE>
PUBLISHED RATINGS
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 13, 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.
FINANCIAL STATEMENTS
The financial statements of the Company and the Separate Account are
included herein.
52
<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, 1997, 1996 AND 1995
<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, 1997 and 1996, and the related statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AIG Life Insurance Company as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 4, 1998
<PAGE>
AIG LIFE INSURANCE COMPANY
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
----------- -----------
Assets
- ------
<S> <C> <C>
Investments and cash:
Fixed maturities:
Bonds available for sale, at market value $2,984,255 $2,271,326
(cost: 1997 - $2,826,088: 1996 - $2,190,580)
Equity securities:
Common stock
(cost: 1997 - $1,381: 1996 - $3,548) 2,775 5,578
Non - redeemable preferred stock
(cost: 1997 - $250 : 1996 - $0) 250 --
Mortgage loans on real estate, net 350,823 297,363
Real estate, net of accumulated
depreciation of $4,740 in 1997 and $4,099 in 1996 15,940 16,169
Policy loans 1,496,837 1,873,961
Other invested assets 56,219 64,109
Short-term investments 667,912 100,036
Cash 5,132 5,780
---------- ----------
Total investments and cash 5,580,143 4,634,322
Amounts due from related parties 11,446 3,193
Investment income due and accrued 85,135 107,268
Premium and insurance balances receivable-net 46,937 36,357
Reinsurance assets 60,744 218,453
Deferred policy acquisition costs 118,535 84,287
Separate and variable accounts 1,204,643 644,980
Other assets 4,855 5,092
---------- ----------
Total assets $7,112,438 $5,733,952
========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
AIG LIFE INSURANCE COMPANY
BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
Liabilities
- -----------
<S> <C> <C>
Policyholders' funds on deposit $3,745,902 $3,810,095
Future policy benefits 749,918 630,520
Reserve for unearned premiums 24,108 29,911
Policy and contract claims 199,069 191,338
Reserve for commissions, expenses and taxes 16,103 2,860
Insurance balances payable 47,372 42,137
Amounts due to related parties 3,945 5,921
Federal income tax payable 1,684 2,959
Deferred income taxes 37,498 5,713
Separate and variable accounts 1,204,643 644,980
Minority interest 6,067 6,077
Other liabilities 621,585 30,932
---------- ----------
Total liabilities 6,657,894 5,403,443
---------- ----------
</TABLE>
Stockholders' Equity
- --------------------
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
Common stock, $5 par value; 1,000,000 shares
authorized; 976,703 shares issued and
outstanding 4,884 4,884
Additional paid-in capital 153,283 123,283
Unrealized appreciation of investments,
net of future policy benefits and taxes
of $61,644 in 1997 and $33,823 in 1996 114,490 62,814
Retained earnings 181,887 139,528
---------- ----------
Total stockholders' equity 454,544 330,509
---------- ----------
Total liabilities and stockholders' equity $7,112,438 $5,733,952
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
------------ ------------ --------
<S> <C> <C> <C>
Revenues:
Premiums $ 437,650 $ 394,480 $ 364,502
Net investment income 381,868 504,661 435,683
Realized capital (losses) gains (3,025) (51) (417)
--------- --------- ---------
Total revenues 816,493 899,090 799,768
--------- --------- ---------
Benefits and expenses:
Benefits to policyholders 188,969 189,933 202,105
Increase in future policy benefits
and policyholders' funds on deposit 397,481 495,529 392,592
Acquisition and insurance expenses 163,533 161,841 170,343
--------- --------- ---------
Total benefits and expenses 749,983 847,303 765,040
--------- --------- ---------
Income before income taxes 66,510 51,787 34,728
--------- ---------
Income taxes (benefits):
Current 20,059 25,087 18,709
Deferred 3,964 (5,486) (6,339)
--------- --------- ---------
Total income taxes 24,023 19,601 12,370
--------- --------- ---------
Net income before minority interest 42,487 32,186 22,358
Minority interest income (loss) (128) 154 11
--------- --------- ---------
Net income $ 42,359 $ 32,340 $ 22,369
========= ========= =========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
------------ ------------ ---------
Common Stock
<S> <C> <C> <C>
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: 123,283 123,283 123,283
Capital contribution 30,000 - -
--------- --------- ---------
Balance at end of year 153,283 123,283 123,283
--------- --------- ---------
Unrealized appreciation (depreciation)
of investments, net
Balance at beginning of year 62,814 87,673 (15,029)
Change during year 79,497 (50,245) 170,003
Changes due to deferred income tax
(expense) benefit and future policy benefits (27,821) 25,386 (67,301)
----------- ---------- -----------
Balance at end of year 114,490 62,814 87,673
--------- ---------- ----------
Retained earnings
Balance at beginning of year 139,528 107,188 84,819
Net income 42,359 32,340 22,369
---------- ---------- -----------
Balance at end of year 181,887 139,528 107,188
--------- --------- ----------
Total stockholders' equity $ 454,544 $ 330,509 $ 323,028
========= ========= ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
1997 1996 1995
----------- ---------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 42,359 $ 32,340 $ 22,369
--------- ----------- ------------
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 121,325 72,151 133,207
Change in premiums and insurance balances
receivable and payable -net (5,346) 11,782 (4,695)
Change in reinsurance assets 157,710 (10,627) (201)
Change in deferred policy acquisition costs (34,248) (23,662) (6,151)
Change in investment income due and accrued 22,133 135,480 (126,299)
Realized capital gains (losses) 3,025 51 417
Change in current and deferred income taxes -net 2,689 (7,133) (15,112)
Change in reserves for commissions, expenses and taxes 13,243 (21,274) (9,857)
Change in other assets and liabilities - net 69,169 11,852 (7,466)
----------- ----------- -------------
Total adjustments 349,700 168,620 (36,157)
---------- ---------- ------------
Net cash (used in) provided by operating activities 392,059 200,960 (13,788)
---------- ---------- ------------
Cash flows from investing activities:
Cost of fixed maturities at market, sold 23,816 40,098 36,678
Cost of fixed maturities at market, matured or redeemed 153,963 124,621 76,989
Cost of equity securities sold 3,676 2,607 405
Realized capital gains 1,975 (51) 582
Purchase of fixed maturities (804,262) (524,245) (590,864)
Purchase of equity securities (1,750) (1,678) (1,213)
Mortgage loans granted (87,690) (74,590) (75,100)
Repayments of mortgage loans 29,298 16,416 12,406
Change in policy loans 377,124 1,087,765 (1,589,502)
Change in short-term investments (567,876) 102,616 (115,532)
Change in other invested assets 6,294 11,002 (4,296)
Other - net 11,917 (38) (6,042)
----------- ----------- -------------
Net cash used in investing activities (853,515) 784,523 (2,255,489)
----------- ---------- -----------
Cash flows from financing activities:
Change in policyholders' funds on deposit 430,808 (980,835) 2,265,900
Proceeds from capital contribution 30,000 - -
----------- ----------- -----------------
Net cash provided by financing activities 460,808 (980,835) 2,265,900
---------- ---------- ----------
Change in cash (648) 4,648 (3,377)
Cash at beginning of year 5,780 1,132 4,509
------------ ------------ -------------
Cash at end of year $ 5,132 $ 5,780 $ 1,132
============ ============ =============
See accompanying notes to financial statements.
</TABLE>
<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. Interest income with respect to
fixed maturity securities is accrued currently. Included in fixed
maturities available for sale are collateralized mortgage obligations
(CMOs). Premiums and discounts arising from the purchase of CMOs are
treated as yield adjustments over the estimated life. Common and
non-redeemable preferred stocks are carried at market value. Dividend
income is generally recognized when payable. 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. Interest income on such loans is accrued currently.
<PAGE>
1. Summary of Significant Accounting Policies - (continued)
--------------------------------------------------------
(b) Investments: (continued)
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.
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.
<PAGE>
1. Summary of Significant Accounting Policies - (continued)
--------------------------------------------------------
(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.
(h) During 1996, the Company changed its method of accounting for a
subsidiary to reflect the minority interest. The financial statements
for 1995 have been reclassified to conform to this presentation.
2. Investment Information
----------------------
(a) Statutory Deposits: Securities with a carrying value of $2,454,000 and
$2,460,000 were deposited by the Company under requirements of
regulatory authorities as of December 31, 1997 and 1996, respectively.
(b) Net Investment Income: An analysis of net investment income is as
follows (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Fixed maturities $200,097 $164,548 $138,341
Equity securities 58 219 225
Mortgage loans 28,714 22,797 19,399
Real estate 2,254 2,125 997
Policy loans 148,555 314,020 268,454
Cash and short-term investments 3,582 2,924 4,348
Other invested assets 2,380 2,549 6,129
-------- -------- --------
Total investment income 385,640 509,182 437,893
Investment expenses 3,772 4,521 2,210
-------- -------- --------
Net investment income $381,868 $504,661 $435,683
======== ======== ========
</TABLE>
<PAGE>
2. Investment Information - (continued)
------------------------------------
(c)Investment Gains and Losses: The net realized capital gains (losses) and
change in unrealized appreciation (depreciation) of investments for
1997, 1996 and 1995 are summarized below (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Net realized (losses) gains on investments:
Fixed maturities $ -- $ (79) $ (166)
Equity securities 1,975 28 712
Mortgage loans (5,000) -- (1,000)
Other invested assets -- -- 37
--------- --------- ---------
Net realized gains $ (3,025) $ (51) $ (417)
========= ========= =========
Change in unrealized appreciation (depreciation) of investments:
Fixed maturities $ 77,422 $ (58,659) $ 168,561
Equity securities (626) 1,517 69
Other invested assets 2,701 6,897 1,373
--------- --------- ---------
Net change in unrealized appreciation
(depreciation) of investments $ 79,497 $ (50,245) $ 170,003
========= ========= =========
</TABLE>
Proceeds from the sale of investments in fixed maturities during 1997, 1996
and 1995 were $23,816,000, $40,098,000, and $36,678,000, respectively.
During 1997, 1996 and 1995, gross gains of $0, $176,000, and $109,000,
respectively, and gross losses of $0, $255,000, and $275,000, respectively,
were realized on dispositions of fixed maturity investments.
During 1997, 1996 and 1995, gross gains of $1,975,000, $28,000, and
$712,000, respectively, were realized on disposition of equity securities.
(d) Market Value of Fixed Maturities and Unrealized Appreciation of
Investments: At December 31, 1997 and 1996, unrealized appreciation of
investments in equity securities (before applicable taxes) included
gross gains of $1,530,000 and $2,265,000 and gross losses of $136,000
and $235,000, respectively.
The amortized cost and estimated market values of investments in fixed
maturities at December 31, 1997 and 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
Gross Gross
1997 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government and government
agencies and authorities $ 42,866 $ 14,667 $ -- $ 57,533
States, municipalities and
political subdivisions 371,477 21,481 252 392,706
Foreign governments 30,168 4,887 -- 35,055
All other corporate 2,381,577 125,382 7,998 2,498,961
---------- ---------- ---------- ---------
Total fixed maturities $2,826,088 $ 166,417 $ 8,250 $2,984,255
========== ========== ========== ==========
</TABLE>
<PAGE>
2. Investment Information - (continued)
------------------------------------
<TABLE>
<CAPTION>
Gross Gross
1996 Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government and government
agencies and authorities $ 47,848 $ 7,814 $ 151 $ 55,511
States, municipalities and
political subdivisions 327,944 15,525 1,934 341,535
Foreign governments 33,340 2,855 113 36,082
All other corporate 1,781,448 71,994 15,244 1,838,198
---------- ---------- ---------- ----------
Total fixed maturities $2,190,580 $ 98,188 $ 17,442 $2,271,326
========== ========== ========== ==========
</TABLE>
The amortized cost and estimated market value of fixed maturities, available for
sale at December 31, 1997, 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>
Estimated
Amortized Market
Cost Value
<S> <C> <C>
Due in one year or less $ 119,207 $ 123,786
Due after one year through five years 765,185 802,683
Due after five years through ten years 1,047,622 1,102,764
Due after ten years 894,074 955,022
---------- ----------
$2,826,088 $2,984,255
========== ==========
</TABLE>
(e) CMOs: CMOs are U.S. Government and Government agency backed and triple
A-rated securities. CMOs are included in other corporate fixed
maturities. At December 31, 1997 and 1996, the market value of the CMO
portfolio was $445,739,000 and $435,313,000, respectively; the estimated
amortized cost was approximately $426,760,000 in 1997 and $419,276,000
in 1996. The Company's CMO portfolio is readily marketable. There were
no derivative (high risk) CMO securities contained in the portfolio at
December 31, 1997.
(f) Fixed Maturities Below Investment Grade: At December 31, 1997 and 1996,
the fixed maturities held by the Company that were below investment
grade had an aggregate amortized cost of $242,573,000 and $136,502,000,
respectively, and an aggregate market value of $244,417,000 and
$135,218,000, 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 company exceeded 10% of the Company's total
stockholders' equity at December 31, 1997 (in thousands):
Other Invested Assets:
Equity Linked Investors II, L.P. $ 49,640
<PAGE>
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, respectively, to recognize
excess loss experienced on credit insurance.
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $ 84,287 $ 60,625 $ 54,474
Acquisition costs deferred 50,927 43,534 35,008
Amortization charged to income (16,679) (19,872) (28,857)
--------- --------- ---------
Balance at end of year $ 118,535 $ 84,287 $ 60,625
========= ========= =========
</TABLE>
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, 1997 and 1996 follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------- -------
<S> <C> <C>
Future Policy Benefits:
Long duration contracts $ 740,969 $ 619,511
Short duration contracts 8,949 11,009
---------- ----------
$ 749,918 $ 630,520
========== ==========
Policyholders' funds on deposit:
Annuities $1,265,490 $1,082,217
Universal life 149,202 130,413
Guaranteed investment contracts (GICs) 379,049 278,680
Corporate owned life insurance 1,948,558 2,314,149
Other investment contracts 3,603 4,636
---------- ----------
$3,745,902 $3,810,095
========== ==========
</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 (exclusive of immediate/terminal funding annuities),
which vary by year of issuance and products, range from 3.0 percent
to 10.0 percent within the first 20 years. 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 surrender 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
17.6 percent.
<PAGE>
4. Future Policy Benefits and Policyholders' Funds on Deposit - (continued)
------------------------------------------------------------------------
(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 3.0 percent to 7.5 percent. Credited
interest rate guarantees are generally for a period of one year.
Withdrawal charges generally range from 3.0 percent to 10.0
percent grading to zero over a period of 5 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 4.7 percent to 8.1 percent and
maturities range from 3 to 20 years.
(iii)Interest rates on corporate-owned life insurance business are
guaranteed at 4.0 percent and the weighted average rate credited
in 1997 was 7.7 percent.
(iv) The universal life funds, exclusive of corporate owned life
insurance business, have credited interest rates of 5.9 percent
to 7.5 percent and guarantees ranging from 3.5 percent to 5.5
percent depending on the year of issue. Additionally, universal
life funds are subject to surrender charges that amount to 11.0
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
1997, 1996 and 1995. 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,
1997 1996 1995
Percent Percent Percent
of of of
pre-tax pre-tax pre-tax
operating operating operating
Amount Income Amount Income Amount Income
<S> <C> <C> <C> <C> <C> <C>
"Expected" income tax expense $ 23,279 35.0% $ 18,125 35.0% $ 12,155 35.0%
Prior year federal income tax benefit (6) -- (51) (0.1) (798) (2.3)
State income tax 673 1.0 850 1.6 894 2.6
Other 77 0.1 677 1.3 119 0.3
-------- ---- -------- ---- -------- ----
Actual income tax expense $ 24,023 36.1% $ 19,601 37.8% $ 12,370 35.6%
======== ==== ======== ==== ======== ====
</TABLE>
<PAGE>
5. Income Taxes - (continued)
--------------------------
(b) The components of the net deferred tax liability were as follows (in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996
<S> <C> <C>
Deferred tax assets:
Adjustment to life reserves $ 51,992 $ 41,522
Adjustments to mortgage loans and
investment income due and accrued 4,250 2,531
Adjustment to policy and contract claims 8,816 10,687
Other 4,292 2,585
-------- --------
69,350 57,325
-------- --------
Deferred tax liabilities:
Deferred policy acquisition costs $ 37,559 $ 23,047
Unrealized appreciation on investments 61,644 33,823
Bond discount 4,843 4,085
Other 2,802 2,083
-------- --------
106,848 63,038
-------- --------
Net deferred tax liability $ 37,498 $ 5,713
======== ========
</TABLE>
(c) At December 31, 1997, 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 1997, 1996, and 1995 amounted to $20,311,000,
$25,412,000, and $26,030,000, respectively.
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.
During 1997, the Company entered into a partnership agreement with
Private Equity Investors III, L.P. The agreement requires the Company to
make capital contributions totaling $50,000,000. The total contribution
for 1997 was $2,900,000.
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.
<PAGE>
7. Fair Value of Financial Instruments - (continued)
-------------------------------------------------
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>
1997 Fair Carrying
Value Amount
<S> <C> <C>
Cash and short-term investments $ 673,044 $ 673,044
Fixed maturities 2,984,255 2,984,255
Equity securities 3,025 3,025
Mortgage and policy loans 1,868,449 1,847,660
Interest rate cap -- 19
Policyholders' funds on deposit $3,777,435 $3,745,902
1996 Fair Carrying
Value Amount
Cash and short-term investments $ 105,816 $ 105,816
Fixed maturities 2,271,326 2,271,326
Equity securities 5,578 5,578
Mortgage and policy loans 2,183,873 2,171,324
Interest rate cap 75 94
Policyholders' funds on deposit $3,832,601 $3,810,095
</TABLE>
<PAGE>
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 $47,100,000 during 1997, however, no
dividends were paid during the year.
(b) The Company's stockholders' equity as determined in accordance with
statutory accounting practices was $285,350,000 at December 31, 1997 and
$221,567,000 at December 31, 1996. Statutory net income amounted to
$35,350,000, $47,074,000 and $39,712,000 for 1997, 1996 and 1995,
respectively.
(c) During 1997, the Company received a $30,000,000 surplus contribution
from American International Group, the parent.
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. 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,
1997, 1996 and 1995 were approximately $373,000, $400,000, and $304,000,
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, 1997 by $65,924,000.
The Parent has adopted a Supplemental Executive Retirement Program
(Supplemental Plan) to provide additional retirement benefits to
designated executives and key employees. Under the Supplemental Plan,
the annual benefit, not to exceed 60 percent of average final
compensation, accrues at a percentage of average final pay multiplied
for each year of credited service reduced by any benefits from the
current and any predecessor retirement plans, Social Security, if any,
and from any qualified pension plan of prior employers. The Supplemental
Plan also provides a benefit equal to the reduction in benefits payable
under the AIG retirement plan as a result of Federal limitations on
benefits payable thereunder. Currently, the Supplemental Plan is not
funded.
(b) The Parent also sponsors a voluntary savings plan for domestic employees
(a 401(k) plan), which, during the two years ended December 31, 1997,
provided for salary reduction contributions by employees and matching
contributions by the Parent of up to 6 percent of annual salary
depending on the employees' 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.
<PAGE>
9. Employee Benefits - (continued)
-------------------------------
(d) The Parent applies APB Opinion 25 "Accounting for Stock issued to
Employees" and related interpretations in accounting for its plans.
Employees of the Company participate in certain stock option and stock
purchase plans of the Parent. In general, under the stock option plan,
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. In general, the stock purchase plan 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. The Parent has not recognized compensation costs for
either plan. The effect of the compensation costs, as determined
consistent with FASB 123, was not computed on a subsidiary basis, but
rather on a consolidated basis for all subsidiaries of the Parent and
therefore are not presented herein.
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, 1997, the
future minimum lease payments under operating leases were as follows (in
thousands):
Year Payment
1998 $ 3,739
1999 3,196
2000 2,265
2001 2,107
2002 1,979
Remaining years after 2002 2,943
------
Total $ 16,229
======
Rent expense approximated $3,881,000, $4,263,000, and $3,764,000 for
the years ended December 31, 1997, 1996 and 1995, 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.
<PAGE>
11. Reinsurance - (continued)
-------------------------
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
December 31, 1997 Assumed
Gross Ceded Assumed Net to Net
<S> <C> <C> <C> <C> <C>
Life Insurance in Force $52,183,971 $18,779,228 $ 935,975 $34,340,718 2.7%
=========== =========== =========== ===========
Premiums:
Life 200,926 67,350 2,389 135,965 1.8%
Accident and Health 118,663 59,550 115,573 174,686 66.2%
Annuity 126,999 -- -- 126,999 --
------- ----------- ----------- -------
Total Premiums $ 446,588 $ 126,900 $ 117,962 $ 437,650 27.0%
======= =========== =========== ===========
Percentage
of Amount
December 31, 1996 Assumed
Gross Ceded Assumed Net to Net
Life Insurance in Force $53,854,456 $17,392,184 $ 605,831 $37,068,103 1.6%
=========== =========== =========== ===========
Premiums:
Life 187,886 49,150 327 139,063 --
Accident and Health 97,971 28,359 107,447 177,059 60.7%
Annuity 78,358 -- -- 78,358 --
----------- ----------- ----------- ----------
Total Premiums $ 364,215 $ 77,509 $ 107,774 $ 394,480 27.3%
=========== =========== =========== ==========
Percentage
of Amount
December 31, 1995 Assumed
Gross Ceded Assumed Net to Net
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%
=========== =========== ========== ===========
(b) The maximum amount retained on any one life by the Company is
$1,000,000.
</TABLE>
<PAGE>
11. Reinsurance - (continued)
-------------------------
(c) Reinsurance recoveries, which reduced death and other benefits,
approximated $100,029,000, $54,456,000, and $51,264,000, respectively,
for each of the years ended December 31, 1997, 1996 and 1995.
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 1997 amounted to
$1,251,000 and $1,000, respectively. Premium income and commission
ceded for 1996 amounted to $1,345,000 and $0, respectively. Premium
income and commission ceded to affiliates amounted to $1,269,000 and
$1,000 for the year ended December 31, 1995. Premium income and ceding
commission expense assumed from affiliates aggregated $110,529,000 and
$24,853,000, respectively, for 1997, compared to $103,885,000 and
$27,609,000, respectively, for 1996, and $90,688,000 and $23,422,000,
respectively for 1995.
(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, 1997, 1996 and 1995, the Company was
charged $37,846,000, $28,277,000 and $23,193,000, respectively, for
expenses attributed to the Company but incurred by affiliates. During
the same period, the Company received reimbursements from affiliates
aggregating $18,134,000, $17,598,000 and $14,496,000, respectively,
for costs incurred by the Company but attributable to affiliates.
(c) During 1997, a reinsurance agreement covering certain annuity policies
was terminated. Upon cancellation, assets totaling $164,895,000 were
transferred from Delaware American Life Insurance Company to the
Company.
(d) During 1996, the Company purchased 1,500,000 shares of AIG Life
Ireland, LTD., a subsidiary.
<PAGE>
AIG LIFE INSURANCE COMPANY
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(unaudited)
<S> <C> <C>
Assets
Investments and cash:
Fixed maturities:
Bonds available for sale, at market value $ 3,722,321 $ 2,984,255
(cost: 1998 - $3,587,707: 1997 - $2,826,088)
Equity securities:
Common stock
(cost: 1998 - $1,381: 1997 - $1,381) 2,906 2,775
Preferred stock
(cost: 1998 - $250 : 1997 - $250) 250 250
Mortgage loans on real estate, net 350,442 350,823
Real estate, net of accumulated
depreciation of $4,907 in 1998; and $4,740 in 1997 15,802 15,940
Policy loans 1,495,250 1,496,837
Other invested assets 61,673 56,219
Short-term investments 110,830 667,912
Cash 6,901 5,132
-------------- -------------
Total investments and cash 5,766,375 5,580,143
Amounts due from related parties 5,065 11,446
Investment income due and accrued 125,399 85,135
Premium and insurance balances receivable-net 56,213 46,937
Reinsurance assets 63,727 60,744
Deferred policy acquisition costs 132,444 118,535
Separate and variable accounts 1,554,665 1,204,643
Other assets 7,759 4,855
-------------- -------------
Total assets $ 7,711,647 $ 7,112,438
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(unaudited)
<S> <C> <C>
Liabilities
Policyholders' funds on deposit $ 4,122,982 $ 3,745,902
Future policy benefits 855,318 749,918
Reserve for unearned premiums 29,457 24,108
Policy and contract claims 200,933 199,069
Reserve for commissions, expenses and taxes 21,343 16,103
Insurance balances payable 48,445 47,372
Deferred income taxes 31,008 37,498
Amounts due to related parties 1,138 3,945
Federal income tax payable 6,684 1,684
Separate and variable accounts 1,554,665 1,204,643
Minority interest 6,127 6,067
Other liabilities 380,095 621,585
------------- ------------
Total liabilities 7,258,195 6,657,894
----------- -----------
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 153,283 153,283
Unrealized appreciation (depreciation) of investments,
net of future policy benefits and taxes
of $53,446 in 1998 and $61,644 in 1997 99,266 114,490
Retained earnings 196,019 181,887
------------ ------------
Total stockholders' equity 453,452 454,544
------------ ------------
Total liabilities and stockholders' equity $ 7,711,647 $ 7,112,438
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
1998 1997
<S> <C> <C>
Revenues:
Premiums $ 155,102 $ 92,488
Net investment income 108,588 94,715
Realized capital gains (losses) - (1,336)
-------------- -----------
Total revenues 263,690 185,867
-------- --------
Benefits and expenses:
Benefits to policyholders 61,317 57,036
Increase in future policy benefits
and policyholders' funds on deposit 138,259 76,601
Acquisition and insurance expenses 41,904 40,753
--------- ---------
Total benefits and expenses 241,480 174,390
-------- --------
Income before income taxes 22,210 11,477
--------- ---------
Income taxes:
Current 6,310 3,039
Deferred 1,708 1,085
--------- ----------
Total income taxes 8,018 4,124
--------- ----------
Net income before minority interest 14,192 7,353
Minority interest income 60 32
----------- ------------
Net income $ 14,132 $ 7,321
======== =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION> March 31, December 31,
1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
Common Stock
Balance at beginning of year $ 4,884 $ 4,884
---------- -----------
Balance at end of year 4,884 4,884
---------- -----------
Additional paid-in capital
Balance at beginning of year: 153,283 123,283
Capital Contribution - 30,000
---------- ----------
Balance at end of year 153,283 153,283
--------- ---------
Unrealized appreciation (depreciation)
of investments, net
Balance at beginning of year 114,490 62,814
Change during year (23,422) 79,497
Changes due to deferred income tax
benefit (expense) and future policy benefits 8,198 (27,821)
----------- ---------
Balance at end of year 99,266 114,490
---------- --------
Retained earnings
Balance at beginning of year 181,887 139,528
Net income 14,132 42,359
---------- ----------
Balance at end of year 196,019 181,887
--------- ---------
Total stockholders' equity $ 453,452 $ 454,544
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION> For three months ended March 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,132 $ 7,321
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 112,613 27,584
Change in premiums and insurance balances
receivable and payable -net (8,201) (3,385)
Change in reinsurance assets (2,983) (2,264)
Change in deferred policy acquisition costs (13,909) (8,828)
Change in investment income due and accrued (40,264) (5,473)
Realized capital gains - 1,336
Change in current and deferred income taxes -net 6,708 1,585
Change in reserves for commissions, expenses and taxes 5,240 (4,275)
Change in other assets and liabilities - net (78,383) (546)
--------- ------------
Total adjustments (19,179) 5,734
----------- -----------
Net cash provided by operating activities (5,047) 13,055
---------- ----------
Cash flows from investing activities:
Cost of fixed maturities, at market sold 14,670 49,316
Cost of fixed maturities, at market matured or redeemed 83,087 22,678
Cost of equity securities sold - 3,667
Realized capital gains - 1,664
Purchase of fixed maturities (857,557) (268,637)
Purchase of equity securities - (1,500)
Mortgage loans granted (11,976) (26,106)
Repayments of mortgage loans 12,375 1,676
Change in policy loans 1,587 216,377
Change in short-term investments 557,082 46,715
Change in other invested assets (4,404) 4,052
Other - net (20,656) 924
---------- -----------
Net cash (used in) provided by investing activities (225,792) 50,826
--------- ---------
Cash flows from financing activities:
Change in policyholders' funds on deposit 232,608 (62,247)
-------- ---------
Net cash (used in) financing activities 232,608 (62,247)
-------- ---------
Change in cash 1,769 1,634
Cash at beginning of year 5,132 5,780
---------- ----------
Cash at end of year $ 6,901 $ 7,414
========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
AIG LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation: The year-end balance sheet data was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of
AIG Life Insurance Company
Variable Separate Account II
We have audited the accompanying statement of assets and liabilities of AIG Life
Insurance Company Variable Separate Account II comprising the Fidelity Money
Market, Asset Manager, Contrafund, Growth, Overseas, Investment Grade Bond, High
Income; the Dreyfus Stock Index, Zero Coupon 2000, Small Company Stock; the
Alliance Growth and Income, Conservative Investors, Growth, Growth Investors,
Technology, Quasar, Global Bond, Premier Growth; the Van Eck Worldwide Hard
Asset, Worldwide Balanced, Worldwide Emerging Markets; the Weiss, Peck and Greer
Tomorrow Short-Term, Tomorrow Medium-Term, Tomorrow Long-Term; and the AIM
International Equity and Capital Appreciation Subaccounts as of December 31,
1997, and the related statement of operations for the year then ended and the
statement of changes in net assets for each of the two years then ended. These
financial statements are the responsibility of the management of the Variable
Separate Account II. 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. Our procedures included
confirmation of investments held at December 31, 1997 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 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
Variable Separate Account II as of December 31, 1997, and the results of its
operations for the year then ended and the changes in its net assets for each of
the two years then ended in conformity with generally accepted accounting
principles.
/s/Cooper & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 4, 1998
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments at Market Value:
Shares Cost Market Value
----------------------------------------------------------
<S> <C> <C> <C>
Fidelity
Money Market Portfolio 1,225,889.680 $ 1,225,890 $ 1,225,890
Asset Manager Portfolio 21,538.390 362,250 387,906
Growth Portfolio 31,376.682 1,051,538 1,164,075
Overseas Portfolio 19,184.269 365,990 368,340
Investment Grade Bond Portfolio 6,329.266 76,200 79,496
High Income Portfolio 21,147.248 273,567 287,181
Dreyfus
Stock Index Portfolio 36,677.122 895,009 944,435
Zero Coupon 2000 Portfolio 875.283 10,688 10,766
Small Company Stock Portfolio 7,897.168 133,094 127,381
Alliance
Growth & Income Portfolio 38,350.882 688,198 764,335
Conservative Investors Portfolio 1,837.415 23,033 24,072
Growth Portfolio 50,091.336 959,839 1,123,048
Growth Investors Portfolio 8,168.085 109,275 117,458
Technology Portfolio 21,762.871 270,522 255,061
Quasar Portfolio 19,165.402 229,719 241,676
Van Eck
Worldwide Hard Assets Portfolio 1,923.672 30,961 30,220
Worldwide Balanced Portfolio 7,341.490 83,389 88,315
Weiss, Peck & Greer
Tomorrow Short Term Portfolio 256.449 2,534 2,518
Tomorrow Medium Term Portfolio 479.752 4,395 4,140
Tomorrow Long Term Portfolio 3,208.335 26,196 25,890
------------------ ------------------
Total Investments $ 6,822,287 7,272,203
------------------
Total Assets $ 7,272,203
==================
EQUITY:
Contract Owners' Equity $ 7,272,203
------------------
Total Equity $ 7,272,203
==================
</TABLE>
See Notes to Financial Statements
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
STATEMENT OF OPERATIONS
For The Year Ended December 31, 1997
<TABLE>
<CAPTION>
Fidelity Fidelity
Money Asset
Market Manager
Total Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $208,147 $ 38,596 $ 24,048
Expenses:
Mortality & Expense Risk Fees 41,401 6,480 2,502
-------- -------- --------
Net Investment Income (Loss) 166,746 32,116 21,546
-------- -------- --------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 206,207 0 8,600
Change in Unrealized Appreciation
(Depreciation) 366,321 0 19,239
-------- -------- --------
Net Gain (Loss) on Investments 572,528 0 27,839
-------- -------- --------
Increase (Decrease) in Net Assets
Resulting From Operations $739,274 $ 32,116 $ 49,385
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Fidelity
Investment
Fidelity Fidelity Grade
Growth Overseas Bond
Portfolio Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $29,644 $11,804 $3,074
Expenses:
Mortality & Expense Risk Fees 8,178 2,117 553
-------------- --------------- -----------------
Net Investment Income (Loss) 21,466 9,687 2,521
-------------- --------------- -----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 55,366 1,460 322
Change in Unrealized Appreciation
(Depreciation) 90,042 (3,697) 2,132
-------------- --------------- -----------------
Net Gain (Loss) on Investments 145,408 (2,237) 2,454
-------------- --------------- -----------------
Increase (Decrease) in Net Assets
Resulting From Operations $166,874 $7,450 $4,975
============== =============== =================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Dreyfus
Fidelity Dreyfus Zero
High Stock Coupon
Income Index 2000
Portfolio Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $4,849 $30,945 $584
Expenses:
Mortality & Expense Risk Fees 1,566 4,258 73
-------------- --------------- -----------------
Net Investment Income (Loss) 3,283 26,687 511
-------------- --------------- -----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 11,481 41,444 (71)
Change in Unrealized Appreciation
(Depreciation) 11,697 41,726 83
-------------- --------------- -----------------
Net Gain (Loss) on Investments 23,178 83,170 12
-------------- --------------- -----------------
Increase (Decrease) in Net Assets
Resulting From Operations $26,461 $109,857 $523
============== =============== =================
</TABLE>
<TABLE>
<CAPTION>
Dreyfus Alliance
Small Growth Alliance
Company & Conservative
Stock Income Investors
Portfolio Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $2,290 $27,385 $306
Expenses:
Mortality & Expense Risk Fees 188 4,386 139
-------------- --------------- -----------------
Net Investment Income (Loss) 2,102 22,999 167
-------------- --------------- -----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity (107) 18,395 600
Change in Unrealized Appreciation
(Depreciation) (5,712) 68,190 586
-------------- --------------- -----------------
Net Gain (Loss) on Investments (5,819) 86,585 1,186
-------------- --------------- -----------------
Increase (Decrease) in Net Assets
Resulting From Operations ($3,717) $109,584 $1,353
============== =============== =================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance Growth Alliance
Growth Investors Technology
Portfolio Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $27,680 $2,233 $544
Expenses:
Mortality & Expense Risk Fees 6,211 756 1,659
-------------- --------------- -----------------
Net Investment Income (Loss) 21,469 1,477 (1,115)
-------------- --------------- -----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 37,620 3,687 16,995
Change in Unrealized Appreciation
(Depreciation) 138,629 5,513 (15,270)
-------------- --------------- -----------------
Net Gain (Loss) on Investments 176,249 9,200 1,725
-------------- --------------- -----------------
Increase (Decrease) in Net Assets
Resulting From Operations $197,718 $10,677 $610
============== =============== =================
</TABLE>
<TABLE>
<CAPTION>
VanEck
Worldwide VanEck
Alliance Hard Worldwide
Quasar Assets Balanced
Portfolio Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $114 $485 $832
Expenses:
Mortality & Expense Risk Fees 1,578 166 489
-------------- --------------- -----------------
Net Investment Income (Loss) (1,464) 319 343
-------------- --------------- -----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 9,057 165 856
Change in Unrealized Appreciation
(Depreciation) 11,871 (1,231) 3,097
-------------- --------------- -----------------
Net Gain (Loss) on Investments 20,928 (1,066) 3,953
-------------- --------------- -----------------
Increase (Decrease) in Net Assets
Resulting From Operations $19,464 ($747) $4,296
============== =============== =================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WP&G WP&G WP&G
Tomorrow Tomorrow Tomorrow
Short Medium Long
Term Term Term
Portfolio Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $256 $335 $2,143
Expenses:
Mortality & Expense Risk Fees 13 4 85
-------------- --------------- -----------------
Net Investment Income (Loss) 243 331 2,058
-------------- --------------- -----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 32 2 303
Change in Unrealized Appreciation
(Depreciation) (16) (254) (304)
-------------- --------------- -----------------
Net Gain (Loss) on Investments 16 (252) (1)
-------------- --------------- -----------------
Increase (Decrease) in Net Assets
Resulting From Operations $259 $79 $2,057
============== =============== =================
</TABLE>
See Notes to Financial Statements
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
STATEMENT OF CHANGES IN NET ASSETS
For The Years Ended December 31, 1997 and December 31, 1996
<TABLE>
<CAPTION>
1997
Fidelity Fidelity
Money Asset
Market Manager
Total Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $166,746 $32,116 $21,546
Realized Gain (Loss) on Investment Activity 206,207 0 8,600
Change in Unrealized Appreciation
(Depreciation) of Investments 366,321 0 19,239
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Operations 739,274 32,116 49,385
-------------- --------------- -----------------
Capital Transactions:
Contract Deposits 5,544,641 1,214,777 287,927
Cost Of Insurance Charge (775,349) (159,431) (42,651)
Policy Loans (94,631) (52,504) (167)
Transfers Between Funds 18,850 (5,335) 664
Contract Withdrawals (82,467) (1,225) (9,859)
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 4,611,044 996,282 235,914
-------------- --------------- -----------------
Total Increase (Decrease) in Net Assets 5,350,318 1,028,398 285,299
Net Assets, at Beginning of Year 1,921,885 197,492 102,607
-------------- --------------- -----------------
Net Assets, at End of Year $7,272,203 $1,225,890 $387,906
============== =============== =================
</TABLE>
<TABLE>
<CAPTION>
Fidelity
Investment
Fidelity Fidelity Grade
Growth Overseas Bond
Portfolio Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $21,466 $9,687 $2,521
Realized Gain (Loss) on Investment Activity 55,366 1,460 322
Change in Unrealized Appreciation
(Depreciation) of Investments 90,042 (3,697) 2,132
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Operations 166,874 7,450 4,975
-------------- --------------- -----------------
Capital Transactions:
Contract Deposits 492,521 281,913 29,955
Cost Of Insurance Charge (148,843) (34,464) (6,686)
Policy Loans (24,473) (4,098) 0
Transfers Between Funds 3,595 951 96
Contract Withdrawals (19,994) (3,073) (16)
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 302,806 241,229 23,349
-------------- --------------- -----------------
Total Increase (Decrease) in Net Assets 469,680 248,679 28,324
Net Assets, at Beginning of Year 694,395 119,661 51,172
-------------- --------------- -----------------
Net Assets, at End of Year $1,164,075 $368,340 $79,496
============== =============== =================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Dreyfus
Fidelity Dreyfus Zero
High Stock Coupon
Income Index 2000
Portfolio Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $3,283 $26,687 $511
Realized Gain (Loss) on Investment Activity 11,481 41,444 (71)
Change in Unrealized Appreciation
(Depreciation) of Investments 11,697 41,726 83
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Operations 26,461 109,857 523
-------------- --------------- -----------------
Capital Transactions:
Contract Deposits 226,949 778,061 11,713
Cost Of Insurance Charge (23,779) (90,065) (4,235)
Policy Loans 0 (1,032) 0
Transfers Between Funds 1,695 2,970 25
Contract Withdrawals (2,049) (7,423) (171)
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 202,816 682,511 7,332
-------------- --------------- -----------------
Total Increase (Decrease) in Net Assets 229,277 792,368 7,855
Net Assets, at Beginning of Year 57,904 152,067 2,911
-------------- --------------- -----------------
Net Assets, at End of Year $287,181 $944,435 $10,766
============== =============== =================
</TABLE>
<TABLE>
<CAPTION>
Alliance
Dreyfus Growth Alliance
Small & Conservative
Company Income Growth
Stock Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $2,102 $22,999 $167
Realized Gain (Loss) on Investment Activity (107) 18,395 600
Change in Unrealized Appreciation
(Depreciation) of Investments (5,712) 68,190 586
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Operations (3,717) 109,584 1,353
-------------- --------------- -----------------
Capital Transactions:
Contract Deposits 135,191 571,454 15,627
Cost Of Insurance Charge (2,314) (74,918) (2,705)
Policy Loans 0 (5,180) 0
Transfers Between Funds (1,779) 2,565 20
Contract Withdrawals 0 (5,967) (239)
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 131,098 487,954 12,703
-------------- --------------- -----------------
Total Increase (Decrease) in Net Assets 127,381 597,538 14,056
Net Assets, at Beginning of Year 0 166,797 10,016
-------------- --------------- -----------------
Net Assets, at End of Year $127,381 $764,335 $24,072
============== =============== =================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance
Alliance Growth Alliance
Growth Investors Technology
Portfolio Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $21,469 $1,477 ($1,115)
Realized Gain (Loss) on Investment Activity 37,620 3,687 16,995
Change in Unrealized Appreciation
(Depreciation) of Investments 138,629 5,513 (15,270)
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Operations 197,718 10,677 610
-------------- --------------- -----------------
Capital Transactions:
Contract Deposits 814,495 61,194 270,239
Cost Of Insurance Charge (117,612) (11,672) (19,431)
Policy Loans (6,689) 0 (101)
Transfers Between Funds 1,673 3,415 4,396
Contract Withdrawals (19,879) (2,220) (8,527)
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 671,988 50,717 246,576
-------------- --------------- -----------------
Total Increase (Decrease) in Net Assets 869,706 61,394 247,186
Net Assets, at Beginning of Year 253,342 56,064 7,875
-------------- --------------- -----------------
Net Assets, at End of Year $1,123,048 $117,458 $255,061
============== =============== =================
</TABLE>
<TABLE>
<CAPTION>
VanEck
Worldwide VanEck
Alliance Hard Worldwide
Quasar Assets Balanced
Portfolio Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($1,464) $319 $343
Realized Gain (Loss) on Investment Activity 9,057 165 856
Change in Unrealized Appreciation
(Depreciation) of Investments 11,871 (1,231) 3,097
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Operations 19,464 (747) 4,296
-------------- --------------- -----------------
Capital Transactions:
Contract Deposits 232,934 24,911 60,650
Cost Of Insurance Charge (17,506) (4,740) (10,075)
Policy Loans (387) 0 0
Transfers Between Funds 3,524 104 186
Contract Withdrawals (1,093) (20) (712)
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 217,472 20,255 50,049
-------------- --------------- -----------------
Total Increase (Decrease) in Net Assets 236,936 19,508 54,345
Net Assets, at Beginning of Year 4,740 10,712 33,970
-------------- --------------- -----------------
Net Assets, at End of Year $241,676 $30,220 $88,315
============== =============== =================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WP&G WP&G WP&G
Tomorrow Tomorrow Tomorrow
Short Medium Long
Term Term Term
Portfolio Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $243 $331 $2,058
Realized Gain (Loss) on Investment Activity 32 2 303
Change in Unrealized Appreciation
(Depreciation) of Investments (16) (254) (304)
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Operations 259 79 2,057
-------------- --------------- -----------------
Capital Transactions:
Contract Deposits 2,793 4,178 27,159
Cost Of Insurance Charge (536) (124) (3,562)
Policy Loans 0 0 0
Transfers Between Funds 2 7 76
Contract Withdrawals 0 0 0
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 2,259 4,061 23,673
-------------- --------------- -----------------
Total Increase (Decrease) in Net Assets 2,518 4,140 25,730
Net Assets, at Beginning of Year 0 0 160
-------------- --------------- -----------------
Net Assets, at End of Year $2,518 $4,140 $25,890
============== =============== =================
</TABLE>
See Notes to Financial Statements
<PAGE>
1996
<TABLE>
<CAPTION>
Fidelity Fidelity
Money Asset
Market Manager
Total Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $19,784 $5,949 ($86)
Realized Gain (Loss) on Investment Activity 11,950 0 316
Change in Unrealized Appreciation
(Depreciation) of Investments 82,087 0 6,323
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Operations 113,821 5,949 6,553
-------------- --------------- -----------------
Capital Transactions:
Contract Deposits 1,958,603 217,631 102,840
Cost Of Insurance Charge (230,327) (47,650) (9,663)
Policy Loans 0 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals (31,077) (5,236) (110)
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 1,697,199 164,745 93,067
-------------- --------------- -----------------
Total Increase (Decrease) in Net Assets 1,811,020 170,694 99,620
Net Assets, at Beginning of Year 110,865 26,798 2,987
-------------- --------------- -----------------
Net Assets, at End of Year $1,921,885 $197,492 $102,607
============== =============== =================
</TABLE>
<TABLE>
<CAPTION>
Fidelity
Investment
Fidelity Fidelity Grade
Growth Overseas Bond
Portfolio Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($393) ($308) ($93)
Realized Gain (Loss) on Investment Activity 1,315 936 39
Change in Unrealized Appreciation
(Depreciation) of Investments 22,682 5,923 1,154
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Operations 23,604 6,551 1,100
-------------- --------------- -----------------
Capital Transactions:
Contract Deposits 725,685 118,360 52,569
Cost Of Insurance Charge (66,331) (10,379) (3,096)
Policy Loans 0 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals (14,713) (107) (15)
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 644,641 107,874 49,458
-------------- --------------- -----------------
Total Increase (Decrease) in Net Assets 668,245 114,425 50,558
Net Assets, at Beginning of Year 26,150 5,236 614
-------------- --------------- -----------------
Net Assets, at End of Year $694,395 $119,661 $51,172
============== =============== =================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Dreyfus
Fidelity Dreyfus Zero
High Stock Coupon
Income Index 2000
Portfolio Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($12) $2,994 $72
Realized Gain (Loss) on Investment Activity 111 2,229 (14)
Change in Unrealized Appreciation
(Depreciation) of Investments 1,903 7,602 (7)
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Operations 2,002 12,825 51
-------------- --------------- -----------------
Capital Transactions:
Contract Deposits 60,255 151,297 4,192
Cost Of Insurance Charge (5,660) (15,661) (1,635)
Policy Loans 0 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals (15) (50) (15)
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 54,580 135,586 2,542
-------------- --------------- -----------------
Total Increase (Decrease) in Net Assets 56,582 148,411 2,593
Net Assets, at Beginning of Year 1,322 3,656 318
-------------- --------------- -----------------
Net Assets, at End of Year $57,904 $152,067 $2,911
============== =============== =================
</TABLE>
<TABLE>
<CAPTION>
Dreyfus Alliance
Small Growth Alliance
Company & Conservative
Stock Income Investors
Portfolio Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $0 $11,700 $12
Realized Gain (Loss) on Investment Activity 0 (800) 9
Change in Unrealized Appreciation
(Depreciation) of Investments 0 7,238 442
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting 0
From Operations 0 18,138 463
-------------- --------------- -----------------
Capital Transactions:
Contract Deposits 0 154,585 10,554
Cost Of Insurance Charge 0 (18,387) (1,411)
Policy Loans 0 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals 0 (3,803) (64)
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 0 132,395 9,079
-------------- --------------- -----------------
Total Increase (Decrease) in Net Assets 0 150,533 9,542
Net Assets, at Beginning of Year 0 16,264 474
-------------- --------------- -----------------
Net Assets, at End of Year $0 $166,797 $10,016
============== =============== =================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance
Alliance Growth Alliance
Growth Investors Technology
Portfolio Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $251 ($170) ($6)
Realized Gain (Loss) on Investment Activity 7,049 492 0
Change in Unrealized Appreciation
(Depreciation) of Investments 23,960 2,647 (192)
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Operations 31,260 2,969 (198)
-------------- --------------- -----------------
Capital Transactions:
Contract Deposits 240,796 61,331 8,268
Cost Of Insurance Charge (36,923) (8,832) (195)
Policy Loans 0 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals (5,885) (979) 0
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 197,988 51,520 8,073
-------------- --------------- -----------------
Total Increase (Decrease) in Net Assets 229,248 54,489 7,875
Net Assets, at Beginning of Year 24,094 1,575 0
-------------- --------------- -----------------
Net Assets, at End of Year $253,342 $56,064 $7,875
============== =============== =================
</TABLE>
<TABLE>
<CAPTION>
VanEck
Worldwide VanEck
Alliance Hard Worldwide
Quasar Assets Balanced
Portfolio Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($4) ($19) ($104)
Realized Gain (Loss) on Investment Activity 0 44 224
Change in Unrealized Appreciation
(Depreciation) of Investments 86 494 1,832
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Operations 82 519 1,952
-------------- --------------- -----------------
Capital Transactions:
Contract Deposits 4,913 11,121 34,041
Cost Of Insurance Charge (255) (1,173) (3,070)
Policy Loans 0 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals 0 (20) (65)
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 4,658 9,928 30,906
-------------- --------------- -----------------
Total Increase (Decrease) in Net Assets 4,740 10,447 32,858
Net Assets, at Beginning of Year 0 265 1,112
-------------- --------------- -----------------
Net Assets, at End of Year $4,740 $10,712 $33,970
============== =============== =================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WP&G WP&G WP&G
Tomorrow Tomorrow Tomorrow
Short Medium Long
Term Term Term
Portfolio Portfolio Portfolio
-------------- --------------- -----------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $0 $0 $1
Realized Gain (Loss) on Investment Activity 0 0 0
Change in Unrealized Appreciation
(Depreciation) of Investments 0 0 0
-------------- --------------- -----------------
Increase (Decrease) in Net Assets Resulting
From Operations 0 0 1
-------------- --------------- -----------------
Capital Transactions:
Contract Deposits 0 0 165
Cost Of Insurance Charge 0 0 (6)
Policy Loans 0 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals 0 0 0
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 0 0 159
-------------- --------------- -----------------
Total Increase (Decrease) in Net Assets 0 0 160
Net Assets, at Beginning of Year 0 0 0
-------------- --------------- -----------------
Net Assets, at End of Year $0 $0 $160
============== =============== =================
</TABLE>
See Notes to Financial Statements
<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 established
under the provisions of Delaware Insurance Law by AIG Life Insurance Company
(the "Company"), a wholly-owned 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"), AIM Variable Insurance Fund ("AIM Fund") , Dreyfus Variable
Investment Fund ("Dreyfus Fund"), Van Eck Investment Trust ("Van Eck Trust"),
Fidelity Investments Variable Insurance Products Fund ("Fidelity Trust"),
Fidelity Variable Insurance Products Fund II ("Fidelity Trust II") and Weiss,
Peck & Greer ("Tomorrow Funds"). The assets in the policies may be invested in
the following subaccounts:
Alliance Fund: Fidelity Trust:
Growth & Income Portfolio Money Market Portfolio
Conservative Investors Portfolio High Income Portfolio
Growth Portfolio Growth Portfolio
Growth Investors Portfolio Overseas Portfolio
Quasar Portfolio
Technology Portfolio
Global Bond Portfolio
Premier Growth Portfolio
Dreyfus Fund: Fidelity Trust II:
Zero Coupon 2000 Portfolio Investment Grade Bond Portfolio
Stock Index Portfolio Asset Manager Portfolio
Small Company Stock Portfolio Contrafund Portfolio
AIM Fund: Weiss, Peck & Greer Tomorrow Funds:
International Equity Portfolio Tomorrow Long Term Portfolio
Capital Appreciation Portfolio Tomorrow Medium Term Portfolio
Tomorrow Short Term Portfolio
Van Eck Trust:
Worldwide Hard Asset Portfolio (formerly Gold & Natural Resources Portfolio)
Worldwide Balanced Portfolio
Worldwide Emerging Markets Portfolio
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.
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (continued)
2. Summary of 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.
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 and the reported amounts from operations and policy transactions.
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. <PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
4. Purchases of Investments
For the year ended December 31, 1997, investment activity in the Fund was as
follows:
Cost of Proceeds
Purchases From Sales
<S> <C> <C>
Shares of
Fidelity Trust Funds:
Money Market Portfolio $ 2,898,075 $ 1,866,353
Asset Manager Portfolio 386,303 128,841
Growth Portfolio 1,207,119 882,821
Overseas Portfolio 339,597 88,568
Investment Grade Bond Portfolio 36,324 10,571
High Income Portfolio 338,288 132,191
Dreyfus:
Stock Index Portfolio 1,010,647 301,445
Zero Coupon 2000 Portfolio 17,381 9,537
Small Company Stock Portfolio 134,522 1,321
Alliance Funds:
Growth & Income Portfolio 674,003 163,065
Conservative Investors Portfolio 18,544 5,676
Growth Portfolio 974,204 280,744
Growth Investors Portfolio 111,960 63,096
Technology Portfolio 570,493 325,032
Quasar Portfolio 469,753 253,745
Van Eck:
Worldwide Hard Assets Portfolio 28,081 7,507
Worldwide Balanced Portfolio 58,655 8,264
Worldwide Emerging Markets Portfolio 4 4
Weiss, Peck, & Greer Tomorrow Funds:
Tomorrow Short Term Portfolio 2,909 406
Tomorrow Medium Term Portfolio 4,465 72
Tomorrow Long Term Portfolio 28,487 2,754
For the year ended December 31, 1996, investment activity in the Fund was as
follows:
Cost of Proceeds
Purchases From Sales
Shares of
Fidelity Trust Funds:
Money Market Portfolio $ 1,073,092 $ 905,561
Asset Manager Portfolio 104,160 11,157
Growth Portfolio 834,904 191,222
Overseas Portfolio 128,897 21,393
Investment Grade Bond Portfolio 52,886 3,404
High Income Portfolio 61,293 6,725
Dreyfus:
Stock Index Portfolio 173,308 34,688
Zero Coupon 2000 Portfolio 6,037 3,426
Alliance Funds:
Growth & Income Portfolio 174,195 30,132
Conservative Investors Portfolio 10,787 1,692
Growth Portfolio 256,993 58,688
Growth Investors Portfolio 71,324 16,643
Technology Portfolio 8,088 21
Quasar Portfolio 4,766 112
Van Eck:
Worldwide Hard Assets Portfolio 11,855 1,938
Worldwide Balanced Portfolio 35,032 4,226
Weiss, Peck, & Greer Tomorrow Funds:
Tomorrow Long Term Portfolio 163 4
</TABLE>
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
5. Net Increase (Decrease) in Accumulation Units
For the year ended December 31, 1997, transactions in accumulation units of
the account were as follows:
Fidelity
Fidelity Fidelity Investment
Money Asset Fidelity Fidelity Grade
Market Manager Growth Overseas Bond
Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C>
VARIABLE LIFE
Units Purchased 264,853.17 7,794.04 51,766.40 8,396.86 1,201.48
Units Withdrawn (19,413.06) (3,780.04) (13,689.70)(3,328.02) (611.57)
Units Transferred Between Funds (154,347.26) 13,761.02 (17,404.14)13,883.93 1,514.42
Units Transferred From (To) AIGL - - - - -
-------- ------ ------- ------- ------
Net Increase (Decrease) 91,092.85 17,775.02 20,672.56 18,952.77 2,104.33
Units, at Beginning of the Year 18,071.39 8,222.32 55,881.60 10,605.95 4,848.27
-------- ------ ------- ------- ------
Units, at End of the Year 109,164.24 25,997.34 76,554.16 29,558.72 6,952.60
======== ====== ======= ======= ======
Unit Value at December 31, 1997 $ 11.23 $ 14.92 $ 15.21$ 12.46 $ 11.43
======== ====== ======= ======= ======
</TABLE>
<TABLE>
Dreyfus Dreyfus Alliance
Fidelity Dreyfus Zero Small Growth
High Stock Coupon Company &
Yield Index 2000 Stock Income
Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C>
Units Purchased 8,828.03 29,087.08 1,017.40 1,282.13 17,513.80
Units Withdrawn (2,041.04) (6,148.22) (417.06) (228.06) (5,498.53)
Units Transferred Between Funds 9,683.18 19,831.02 95.86 11,236.90 20,152.99
Units Transferred From (To) AIGL - - - - -
-------- ------ ------- ------- ------
Net Increase (Decrease) 16,470.17 42,769.88 696.20 12,290.97 32,168.26
Units, at Beginning of the Year 5,063.06 11,517.35 280.09 - 12,421.06
-------- ------ ------- ------- ------
Units, at End of the Year 21,533.23 54,287.23 976.29 12,290.97 44,589.32
======== ====== ======= ======= ======
Unit Value at December 31, 1997 $ 13.34 $ 17.40 $ 11.03$ 10.36 $ 17.14
======== ====== ======= ======= ======
</TABLE>
<PAGE>
<TABLE>
Alliance Alliance
Conservative Alliance Growth Alliance Alliance
Investors Growth Investors Technology Quasar
Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C>
Units Purchased 1,267.70 27,141.56 3,466.72 13,094.82 9,134.23
Units Withdrawn (254.29) (9,332.18) (1,094.37) (2,456.36) (1,675.94)
Units Transferred Between Funds 62.06 27,545.73 1,305.72 12,189.72 12,257.70
Units Transferred From (To) AIGL - - - - -
-------- ------ ------- ------- ------
Net Increase (Decrease) 1,075.47 45,355.11 3,678.07 22,828.18 19,715.99
Units, at Beginning of the Year 911.11 18,585.73 5,142.22 768.60 465.27
-------- ------ ------- ------- ------
Units, at End of the Year 1,986.58 63,940.84 8,820.29 23,596.78 20,181.26
======== ====== ======= ======= ======
Unit Value at December 31, 1997 $ 12.12 $ 17.56 $ 13.32$ 10.81 $ 11.98
======== ====== ======= ======= ======
</TABLE>
<TABLE>
VanEck WP&G WP&G WP&G
Worldwide VanEck Tomorrow Tomorrow Tomorrow
Hard Worldwide Short Medium Long
Assets Balanced Term Term Term
Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C>
Units Purchased 1,064.27 3,644.11 25.85 332.53 1,579.30
Units Withdrawn (404.53) (918.50) (45.53) (10.40) (281.04)
Units Transferred Between Funds 1,082.54 1,515.39 227.56 16.76 688.60
Units Transferred From (To) AIGL - - - - -
-------- ------ ------- ------- ------
Net Increase (Decrease) 1,742.28 4,241.00 207.88 338.89 1,986.86
Units, at Beginning of the Year 918.38 3,083.14 - - 15.26
-------- ------ ------- ------- ------
Units, at End of the Year 2,660.66 7,324.14 207.88 338.89 2,002.12
======== ====== ======= ======= ======
Unit Value at December 31, 1997 $ 11.36 $ 12.06 $ 12.11$ 12.22 $ 12.93
======== ====== ======= ======= ======
</TABLE>
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31,1998
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments at Market Value:
Shares Cost Market Value
----------------------------------------------------------
<S> <C> <C> <C>
Fidelity
Money Market Portfolio 1,104,503.140 $ 1,104,503 $ 1,104,503
Asset Manager Portfolio 26,045.542 437,874 443,556
Growth Portfolio 48,015.144 1,638,900 1,741,989
Overseas Portfolio 16,829.687 328,232 341,306
Investment Grade Bond Portfolio 10,125.540 126,527 122,519
High Income Portfolio 26,207.256 337,150 332,308
Contrafund Portfolio 2,554.532 50,935 53,977
Dreyfus
Stock Index Portfolio 47,744.541 1,195,229 1,395,573
Zero Coupon 2000 Portfolio 1,086.660 13,369 13,442
Small Company Stock Portfolio 12,367.294 207,347 214,202
Alliance
Growth & Income Portfolio 46,012.725 850,861 1,033,906
Conservative Investors Portfolio 2,310.418 29,528 31,814
Growth Portfolio 58,938.870 1,170,025 1,520,033
Growth Investors Portfolio 10,365.351 143,038 164,705
Technology Portfolio 35,914.692 460,127 490,236
Quasar Portfolio 28,501.807 363,608 412,991
Global Bond Portfolio 31.610 357 353
Premier Growth Portfolio 8,328.157 207,912 208,454
Van Eck
Worldwide Hard Assets Portfolio 2,373.048 36,329 31,419
Worldwide Balanced Portfolio 8,578.185 98,588 108,171
Worldwide Emerging Markets 105.612 1,117 1,193
Weiss, Peck & Greer
Tomorrow Short Term Portfolio 212.786 2,109 2,209
Tomorrow Medium Term Porfolio 510.405 4,667 4,742
Tomorrow Long Term Portfolio 4,675.736 38,401 41,006
Aim
Capital Appreciation 1,107.529 23,820 26,714
International Equity 897.387 16,160 17,580
------------ -------------------
Total Investments $ 8,886,712 9,858,902
Total Assets $ 9,858,902
==================
EQUITY:
Contract Owners' Equity $ 9,858,902
-------------------
Total Equity $ 9,858,902
===================
</TABLE>
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
STATEMENT OF OPERATIONS
For The Quarter Ended March 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Fidelity Fidelity
Money Asset
Market Manager
Total Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $344,865 $15,606 $60,993
Expenses:
Mortality & Expense Risk Fees 18,768 2,585 1,068
-------------------- -------------------
-------------------
Net Investment Income (Loss) 326,097 13,021 59,925
------------------- -------------------- -------------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 31,572 0 (1,398)
Change in Unrealized Appreciation
(Depreciation) 522,275 0 (19,975)
-------------------- -------------------
-------------------
Net Gain (Loss) on Investments 553,847 0 (21,373)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets
Resulting From Operations $879,944 $13,021 $38,552
=================== ==================== ===================
</TABLE>
<TABLE>
<CAPTION>
Fidelity
Investment
Fidelity Fidelity Grade
Growth Overseas Bond
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $181,333 $29,556 $9,614
Expenses:
Mortality & Expense Risk Fees 3,134 879 367
------------------- -------------------- -------------------
Net Investment Income (Loss) 178,199 28,677 9,247
------------------- -------------------- -------------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 2,499 14,381 (214)
Change in Unrealized Appreciation
(Depreciation) (9,448) 10,726 (7,304)
------------------- -------------------- -------------------
Net Gain (Loss) on Investments (6,949) 25,107 (7,518)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets
Resulting From Operations $171,250 $53,784 $1,729
=================== ==================== ===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fidelity Dreyfus
High Fidelity Stock
Income Contrafund Index
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $33,968 $1,859 $4,287
Expenses:
Mortality & Expense Risk Fees 682 65 2,548
------------------- -------------------- -------------------
Net Investment Income (Loss) 33,286 1,794 1,739
------------------- -------------------- -------------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 38 23 1,234
Change in Unrealized Appreciation
(Depreciation) (18,455) 3,043 150,917
------------------- -------------------- -------------------
Net Gain (Loss) on Investments (18,417) 3,066 152,151
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets
Resulting From Operations $14,869 $4,860 $153,890
=================== ==================== ===================
</TABLE>
<TABLE>
<CAPTION>
Dreyfus Dreyfus Alliance
Zero Small Growth
Coupon Company &
2000 Stock Income
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $119 $580 $0
Expenses:
Mortality & Expense Risk Fees 29 359 1,945
------------------- -------------------- -------------------
Net Investment Income (Loss) 90 221 (1,945)
------------------- -------------------- -------------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 37 (55) 2,744
Change in Unrealized Appreciation
(Depreciation) (5) 12,567 106,910
------------------- -------------------- -------------------
Net Gain (Loss) on Investments 32 12,512 109,654
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets
Resulting From Operations $122 $12,733 $107,709
=================== ==================== ===================
</TABLE>
<TABLE>
<CAPTION>
Alliance Alliance
Conservative Alliance Growth
Investors Growth Investors
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $0 $0 $0
Expenses:
Mortality & Expense Risk Fees 59 2,892 311
------------------- -------------------- -------------------
Net Investment Income (Loss) (59) (2,892) (311)
------------------- -------------------- -------------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 81 4,456 712
Change in Unrealized Appreciation
(Depreciation) 1,249 186,800 13,485
------------------- -------------------- -------------------
Net Gain (Loss) on Investments 1,330 191,256 14,197
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets
Resulting From Operations $1,271 $188,364 $13,886
=================== ==================== ===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance
Alliance Alliance Premier
Technology Quasar Growth
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $0 $0 $0
Expenses:
Mortality & Expense Risk Fees 726 636 46
------------------- -------------------- -------------------
Net Investment Income (Loss) (726) (636) (46)
------------------- -------------------- -------------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 3,338 3,138 232
Change in Unrealized Appreciation
(Depreciation) 45,571 37,426 542
------------------- -------------------- -------------------
Net Gain (Loss) on Investments 48,909 40,564 774
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets
Resulting From Operations $48,183 $39,928 $728
=================== ==================== ===================
</TABLE>
<TABLE>
<CAPTION>
VanEck
Alliance Worldwide VanEck
Global Hard Worldwide
Bond Assets Balanced
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $0 $4,567 $2,383
Expenses:
Mortality & Expense Risk Fees 0 66 219
------------------- -------------------- -------------------
Net Investment Income (Loss) 0 4,501 2,164
------------------- -------------------- -------------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 1 (502) 132
Change in Unrealized Appreciation
(Depreciation) (4) (4,169) 4,654
------------------- -------------------- -------------------
Net Gain (Loss) on Investments (3) (4,671) 4,786
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets
Resulting From Operations ($3) ($170) $6,950
=================== ==================== ===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VanEck
Worldwide Tomorrow Tomorrow
Emerging Short Medium
Markets Term Term
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $0 $0 $0
Expenses:
Mortality & Expense Risk Fees 2 5 10
------------------- -------------------- -------------------
Net Investment Income (Loss) (2) (5) (10)
------------------- -------------------- -------------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 110 16 (1)
Change in Unrealized Appreciation
(Depreciation) 77 116 329
------------------- -------------------- -------------------
Net Gain (Loss) on Investments 187 132 328
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets
Resulting From Operations $185 $127 $318
=================== ==================== ===================
</TABLE>
<TABLE>
<CAPTION>
Tomorrow Aim Aim
Long Capital International
Term Appreciation Equity
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $0 $0 $0
Expenses:
Mortality & Expense Risk Fees 76 39 20
------------------- -------------------- -------------------
Net Investment Income (Loss) (76) (39) (20)
------------------- -------------------- -------------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 209 158 203
Change in Unrealized Appreciation
(Depreciation) 2,910 2,893 1,420
------------------- -------------------- -------------------
Net Gain (Loss) on Investments 3,119 3,051 1,623
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets
Resulting From Operations $3,043 $3,012 $1,603
=================== ==================== ===================
</TABLE>
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
STATEMENT OF CHANGES IN NET ASSETS
For The Quarters Ended March 31, 1998 and March 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998
Fidelity Fidelity
Money Asset
Market Manager
Total Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $326,097 $13,021 $59,925
Realized Gain (Loss) on Investment Activity 31,572 0 (1,398)
Change in Unrealized Appreciation
(Depreciation) of Investments 522,275 0 (19,975)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Operations 879,944 13,021 38,552
------------------- -------------------- -------------------
Capital Transactions:
Contract Deposits 2,102,195 (53,243) 31,812
Cost Of Insurance Charge (311,005) (44,696) (13,727)
Policy Loans (43,605) (36,324) 0
Transfers Between Funds 0 0 0
Contract Withdrawals (40,830) (146) (988)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 1,706,755 (134,409) 17,097
------------------- -------------------- -------------------
Total Increase (Decrease) in Net Assets 2,586,699 (121,388) 55,649
Net Assets, at Beginning of Year 7,272,203 1,225,890 387,906
=================== ==================== ===================
Net Assets, at End of Year $9,858,902 $1,104,502 $443,555
=================== ==================== ===================
</TABLE>
<TABLE>
<CAPTION>
Fidelity
Investment
Fidelity Fidelity Grade
Growth Overseas Bond
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $178,199 $28,677 $9,247
Realized Gain (Loss) on Investment Activity 2,499 14,381 (214)
Change in Unrealized Appreciation
(Depreciation) of Investments (9,448) 10,726 (7,304)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Operations 171,250 53,784 1,729
------------------- -------------------- -------------------
Capital Transactions:
Contract Deposits 475,461 (62,793) 45,541
Cost Of Insurance Charge (59,370) (14,507) (4,160)
Policy Loans (2,229) 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals (7,198) (3,515) (87)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 406,664 (80,815) 41,294
------------------- -------------------- -------------------
Total Increase (Decrease) in Net Assets 577,914 (27,031) 43,023
Net Assets, at Beginning of Year 1,164,075 368,340 79,496
=================== ==================== ===================
Net Assets, at End of Year $1,741,989 $341,309 $122,519
=================== ==================== ===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fidelity Dreyfus
High Fidelity Stock
Income Contrafund Index
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $33,286 $1,794 $1,739
Realized Gain (Loss) on Investment Activity 38 23 1,234
Change in Unrealized Appreciation
(Depreciation) of Investments (18,455) 3,043 150,917
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Operations 14,869 4,860 153,890
------------------- -------------------- -------------------
Capital Transactions:
Contract Deposits 38,790 49,595 348,779
Cost Of Insurance Charge (8,457) (477) (47,916)
Policy Loans 0 0 (298)
Transfers Between Funds 0 0 0
Contract Withdrawals (74) 0 (3,318)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 30,259 49,118 297,247
------------------- -------------------- -------------------
Total Increase (Decrease) in Net Assets 45,128 53,978 451,137
Net Assets, at Beginning of Year 287,181 0 944,435
=================== ==================== ===================
Net Assets, at End of Year $332,309 $53,978 $1,395,572
=================== ==================== ===================
</TABLE>
<TABLE>
<CAPTION>
Dreyfus Dreyfus Alliance
Zero Small Growth
Coupon Company &
2000 Stock Income
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $90 $221 ($1,945)
Realized Gain (Loss) on Investment Activity 37 (55) 2,744
Change in Unrealized Appreciation
(Depreciation) of Investments (5) 12,567 106,910
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Operations 122 12,733 107,709
------------------- -------------------- -------------------
Capital Transactions:
Contract Deposits 3,214 78,589 195,471
Cost Of Insurance Charge (660) (4,502) (32,578)
Policy Loans 0 0 (834)
Transfers Between Funds 0 0 0
Contract Withdrawals 0 0 (290)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 2,554 74,087 161,769
------------------- -------------------- -------------------
Total Increase (Decrease) in Net Assets 2,676 86,820 269,478
Net Assets, at Beginning of Year 10,766 127,381 764,335
=================== ==================== ===================
Net Assets, at End of Year $13,442 $214,201 $1,033,813
=================== ==================== ===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance Alliance
Conservative Alliance Growth
Investors Growth Investors
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($59) ($2,892) ($311)
Realized Gain (Loss) on Investment Activity 81 4,456 712
Change in Unrealized Appreciation
(Depreciation) of Investments 1,249 186,800 13,485
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Operations 1,271 188,364 13,886
------------------- -------------------- -------------------
Capital Transactions:
Contract Deposits 7,407 270,214 38,988
Cost Of Insurance Charge (933) (44,096) (5,466)
Policy Loans 0 (1,205) 0
Transfers Between Funds 0 0 0
Contract Withdrawals 0 (16,291) (161)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 6,474 208,622 33,361
------------------- -------------------- -------------------
Total Increase (Decrease) in Net Assets 7,745 396,986 47,247
Net Assets, at Beginning of Year 24,072 1,123,048 117,458
=================== ==================== ===================
Net Assets, at End of Year $31,817 $1,520,034 $164,705
=================== ==================== ===================
</TABLE>
<TABLE>
<CAPTION>
Alliance
Alliance Alliance Premier
Technology Quasar Growth
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($726) ($636) ($46)
Realized Gain (Loss) on Investment Activity 3,338 3,138 232
Change in Unrealized Appreciation
(Depreciation) of Investments 45,571 37,426 542
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Operations 48,183 39,928 728
------------------- -------------------- -------------------
Capital Transactions:
Contract Deposits 203,851 144,947 208,140
Cost Of Insurance Charge (10,934) (8,858) (291)
Policy Loans (2,099) (492) (124)
Transfers Between Funds 0 0 0
Contract Withdrawals (3,826) (4,209) 0
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 186,992 131,388 207,725
------------------- -------------------- -------------------
Total Increase (Decrease) in Net Assets 235,175 171,316 208,453
Net Assets, at Beginning of Year 255,061 241,676 0
-------------------
=================== ==================== ===================
Net Assets, at End of Year $490,236 $412,992 $208,453
=================== ==================== ===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VanEck
Alliance Worldwide VanEck
Global Hard Worldwide
Bond Assets Balanced
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $0 $4,501 $2,164
Realized Gain (Loss) on Investment Activity 1 (502) 132
Change in Unrealized Appreciation
(Depreciation) of Investments (4) (4,169) 4,654
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Operations (3) (170) 6,950
------------------- -------------------- -------------------
Capital Transactions:
Contract Deposits 400 2,990 17,534
Cost Of Insurance Charge (43) (1,579) (4,194)
Policy Loans 0 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals 0 (42) (438)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 357 1,369 12,902
------------------- -------------------- -------------------
Total Increase (Decrease) in Net Assets 354 1,199 19,852
Net Assets, at Beginning of Year 0 30,220 88,315
=================== ==================== ===================
Net Assets, at End of Year $354 $31,419 $108,167
=================== ==================== ===================
</TABLE>
<TABLE>
<CAPTION>
VanEck
Worldwide Tomorrow Tomorrow
Emerging Short Medium
Markets Term Term
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($2) ($5) ($10)
Realized Gain (Loss) on Investment Activity 110 16 (1)
Change in Unrealized Appreciation
(Depreciation) of Investments 77 116 329
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Operations 185 127 318
------------------- -------------------- -------------------
Capital Transactions:
Contract Deposits 1,074 0 424
Cost Of Insurance Charge (66) (239) (142)
Policy Loans 0 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals 0 (197) 0
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 1,008 (436) 282
------------------- -------------------- -------------------
Total Increase (Decrease) in Net Assets 1,193 (309) 600
Net Assets, at Beginning of Year 0 2,518 4,140
=================== ==================== ===================
Net Assets, at End of Year $1,193 $2,209 $4,740
=================== ==================== ===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Tomorrow Aim Aim
Long Capital International
Term Appreciation Equity
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($76) ($39) ($20)
Realized Gain (Loss) on Investment Activity 209 158 203
Change in Unrealized Appreciation
(Depreciation) of Investments 2,910 2,893 1,420
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Operations 3,043 3,012 1,603
------------------- -------------------- -------------------
Capital Transactions:
Contract Deposits 14,520 24,014 16,476
Cost Of Insurance Charge (2,396) (313) (405)
Policy Loans 0 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals (50) 0 0
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 12,074 23,701 16,071
------------------- -------------------- -------------------
Total Increase (Decrease) in Net Assets 15,117 26,713 17,674
Net Assets, at Beginning of Year 25,890 0 0
=================== ==================== ===================
Net Assets, at End of Year $41,007 $26,713 $17,674
=================== ==================== ===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997
Fidelity Fidelity
Money Asset
Market Manager
Total Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $76,249 $5,615 $23,681
Realized Gain (Loss) on Investment Activity 91,520 0 8,395
Change in Unrealized Appreciation
(Depreciation) of Investments (264,553) (34,275)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Operations (96,784) 5,615 (2,199)
------------------- -------------------- -------------------
Capital Transactions:
Contract Deposits 1,708,182 468,017 115,637
Cost Of Insurance Charge (143,668) (30,930) (7,000)
Policy Loans 0 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals (4,008) 0 (601)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 1,560,506 437,087 108,036
------------------- -------------------- -------------------
Total Increase (Decrease) in Net Assets 1,463,722 442,702 105,837
Net Assets, at Beginning of Year 1,921,885 197,492 102,607
=================== ==================== ===================
Net Assets, at End of Year $3,385,607 $640,194 $208,444
=================== ==================== ===================
</TABLE>
<TABLE>
<CAPTION>
Fidelity
Investment
Fidelity Fidelity Grade
Growth Overseas Bond
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $27,884 $11,510 $2,965
Realized Gain (Loss) on Investment Activity 35,564 (359) 9
Change in Unrealized Appreciation
(Depreciation) of Investments (91,753) (6,963) (3,429)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Operations (28,305) 4,188 (455)
------------------- -------------------- -------------------
Capital Transactions:
Contract Deposits 148,855 36,871 1,906
Cost Of Insurance Charge (36,022) (5,958) (1,409)
Policy Loans 0 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals (657) (364) 0
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 112,176 30,549 497
------------------- -------------------- -------------------
Total Increase (Decrease) in Net Assets 83,871 34,737 42
Net Assets, at Beginning of Year 694,395 119,661 51,172
=================== ==================== ===================
Net Assets, at End of Year $778,266 $154,398 $51,214
=================== ==================== ===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fidelity Dreyfus
High Fidelity Stock
Income Contrafund Index
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $4,715 $0 $583
Realized Gain (Loss) on Investment Activity 135 0 11,208
Change in Unrealized Appreciation
(Depreciation) of Investments (5,229) 0 (11,410)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Operations (379) 0 381
------------------- -------------------- -------------------
Capital Transactions:
Contract Deposits 14,542 0 111,057
Cost Of Insurance Charge (3,249) 0 (12,618)
Policy Loans 0 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals 0 0 (464)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 11,293 0 97,975
------------------- -------------------- -------------------
Total Increase (Decrease) in Net Assets 10,914 0 98,356
Net Assets, at Beginning of Year 57,904 0 152,067
=================== ==================== ===================
Net Assets, at End of Year $68,818 $0 $250,423
=================== ==================== ===================
</TABLE>
<TABLE>
<CAPTION>
Dreyfus Dreyfus Alliance
Zero Small Growth
Coupon Company &
2000 Stock Income
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $36 $0 ($585)
Realized Gain (Loss) on Investment Activity (64) 0 13,616
Change in Unrealized Appreciation
(Depreciation) of Investments (46) 0 (16,165)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Operations (74) 0 (3,134)
------------------- -------------------- -------------------
Capital Transactions:
Contract Deposits 5,287 0 171,673
Cost Of Insurance Charge (1,233) 0 (11,725)
Policy Loans 0 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals (119) 0 (666)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 3,935 0 159,282
------------------- -------------------- -------------------
Total Increase (Decrease) in Net Assets 3,861 0 156,148
Net Assets, at Beginning of Year 2,911 0 166,797
=================== ==================== ===================
Net Assets, at End of Year $6,772 $0 $322,945
=================== ==================== ===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance Alliance
Conservative Alliance Growth
Investors Growth Investors
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($22) ($719) ($128)
Realized Gain (Loss) on Investment Activity 37 21,576 3,447
Change in Unrealized Appreciation
(Depreciation) of Investments (142) (52,309) (4,258)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Operations (127) (31,452) (939)
------------------- -------------------- -------------------
Capital Transactions:
Contract Deposits 2,138 248,626 8,204
Cost Of Insurance Charge (665) (22,099) (2,749)
Policy Loans 0 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals 0 (869) 0
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 1,473 225,658 5,455
------------------- -------------------- -------------------
Total Increase (Decrease) in Net Assets 1,346 194,206 4,516
Net Assets, at Beginning of Year 10,016 253,342 56,064
=================== ==================== ===================
Net Assets, at End of Year $11,362 $447,548 $60,580
=================== ==================== ===================
</TABLE>
<TABLE>
<CAPTION>
Alliance
Alliance Alliance Premier
Technology Quasar Growth
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($263) ($235) $0
Realized Gain (Loss) on Investment Activity (1,866) (425) 0
Change in Unrealized Appreciation
(Depreciation) of Investments (25,535) (10,826) 0
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Operations (27,664) (11,486) 0
------------------- -------------------- -------------------
Capital Transactions:
Contract Deposits 189,296 169,876 0
Cost Of Insurance Charge (2,251) (2,331) 0
Policy Loans 0 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals 0 0 0
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 187,045 167,545 0
------------------- -------------------- -------------------
Total Increase (Decrease) in Net Assets 159,381 156,059 0
Net Assets, at Beginning of Year 7,875 4,740 0
=================== ==================== ===================
Net Assets, at End of Year $167,256 $160,799 $0
=================== ==================== ===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VanEck
Alliance Worldwide VanEck
Global Hard Worldwide
Bond Assets Balanced
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $0 $461 $752
Realized Gain (Loss) on Investment Activity 0 12 234
Change in Unrealized Appreciation
(Depreciation) of Investments 0 (1,005) (1,145)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Operations 0 (532) (159)
------------------- -------------------- -------------------
Capital Transactions:
Contract Deposits 0 2,965 8,590
Cost Of Insurance Charge 0 (1,023) (2,315)
Policy Loans 0 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals 0 0 (268)
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 0 1,942 6,007
------------------- -------------------- -------------------
Total Increase (Decrease) in Net Assets 0 1,410 5,848
Net Assets, at Beginning of Year 0 10,712 33,970
=================== ==================== ===================
Net Assets, at End of Year $0 $12,122 $39,818
=================== ==================== ===================
</TABLE>
<TABLE>
<CAPTION>
VanEck
Worldwide Tomorrow Tomorrow
Emerging Short Medium
Markets Term Term
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $0 $0 $0
Realized Gain (Loss) on Investment Activity 0 0 0
Change in Unrealized Appreciation
(Depreciation) of Investments 0 0 0
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Operations 0 0 0
------------------- -------------------- -------------------
Capital Transactions:
Contract Deposits 0 0 0
Cost Of Insurance Charge 0 0 0
Policy Loans 0 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals 0 0 0
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 0 0 0
------------------- -------------------- -------------------
Total Increase (Decrease) in Net Assets 0 0 0
Net Assets, at Beginning of Year 0 0 0
=================== ==================== ===================
Net Assets, at End of Year $0 $0 $0
=================== ==================== ===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Tomorrow Aim Aim
Long Capital International
Term Appreciation Equity
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($1) $0 $0
Realized Gain (Loss) on Investment Activity 1 0 0
Change in Unrealized Appreciation
(Depreciation) of Investments (63) 0 0
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Operations (63) 0 0
------------------- -------------------- -------------------
Capital Transactions:
Contract Deposits 4,642 0 0
Cost Of Insurance Charge (91) 0 0
Policy Loans 0 0 0
Transfers Between Funds 0 0 0
Contract Withdrawals 0 0 0
------------------- -------------------- -------------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 4,551 0 0
------------------- -------------------- -------------------
Total Increase (Decrease) in Net Assets 4,488 0 0
Net Assets, at Beginning of Year 160 0 0
=================== ==================== ===================
Net Assets, at End of Year $4,648 $0 $0
=================== ==================== ===================
</TABLE>
<PAGE>
Appendix A
Maximum Initial Surrender Charge Per $1,000
of Initial Specified Face Amount
<TABLE>
<CAPTION>
Issue Age Sex Smoker Status Surrender Charge
--------- --- ------------- ----------------
<S> <C> <C> <C>
25 Male Nonsmoker $16.00
35 Male Nonsmoker 19.00
45 Male Nonsmoker 26.00
55 Male Nonsmoker 38.00
65 Male Nonsmoker 46.00
75 Male Nonsmoker 46.00
25 Male Smoker 18.00
35 Male Smoker 23.00
45 Male Smoker 32.00
55 Male Smoker 48.00
65 Male Smoker 48.00
75 Male Smoker 48.00
25 Female Nonsmoker 15.00
35 Female Nonsmoker 18.00
45 Female Nonsmoker 23.00
55 Female Nonsmoker 33.00
65 Female Nonsmoker 45.00
75 Female Nonsmoker 45.00
25 Female Smoker 16.00
35 Female Smoker 20.00
45 Female Smoker 26.00
55 Female Smoker 37.00
65 Female Smoker 46.00
75 Female Smoker 46.00
</TABLE>
A-1
<PAGE>
PART II - OTHER INFORMATION
<PAGE>
PART II - OTHER INFORMATION
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission theretofore or hereafter duly adopted pursuant to
authority conferred in that section.
REPRESENTATION
AIG Life Insurance Company represents that the fees and charges
deducted under the Policy covered by this registration statement, in the
aggregate are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the Company.
INDEMNIFICATION
Under its Bylaws, the Company, to the full extent permitted by Delaware
law shall indemnify any person who was or is a party to any proceeding (whether
brought by or in the right of the Company or otherwise) by reason of the fact
that he or she is or was a Director of the Company, or while a Director of the
Company, is or was serving at the request of the Company as a Director, Officer,
Partner, Trustee, Employee, or Agent of another foreign or domestic corporation,
partnership, joint venture, trust, other enterprise or employee benefit plan,
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by him or her in connection with such proceeding.
The Company shall extend such indemnification, as is provided to
directors above, to any person, not a director of the Company, who is or was an
officer of the Company or is or was serving at the request of the Company as a
director, officer, partner, trustee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan. In addition, the Board of Directors of the Company may, by
resolution, extend such further indemnification to an officer or such other
person as may to it seem fair and reasonable in view of all relevant
circumstances.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to such provisions of the bylaws or statutes or otherwise,
the Company has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any such action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the Policies issued by Variable Account II, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in said Act and
will be governed by the final adjudication of such issue.
1
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and
documents:
The facing sheet.
The Prospectus consisting of 116 pages.
The undertaking to file reports.
Representation.
The signatures.
Written consents of the following persons:
Kenneth D. Walma
A. Hasan Qureshi
Coopers & Lybrand L.L.P.
Jorden Burt Boros Cicchetti Berenson & Johnson LLP
The following exhibits:
A. Copies of all exhibits required by paragraph A of instructions for
Exhibits in Form N-8B-2, unless indicated otherwise.
1. Resolution of the Board of Directors of the Company*
2. Not Applicable
3. a. Principal Underwriter's Agreement***
b. Registered Representative's Agreement***
4. Not Applicable
5. a. Form of Group Flexible Premium Variable Life Insurance
Policy*****
b. Form of Group Flexible Premium Variable Life Insurance
Certificate*****
6. a. Articles of Incorporation of the Company**
b. By-Laws of the Company**
7. Not Applicable
8. Not Applicable
9. Not Applicable
10. Form of Life Insurance Application*****
2
<PAGE>
11. Powers of Attorney****
B. Opinion and Consent of Counsel
C. Opinion and Consent of Actuary
D. Consent of Independent Certified Public Accountants
E. Consent of Jorden Burt Boros Cicchetti Berenson & Johnson LLP
F. Memorandum Regarding Administrative Procedures***
- --------------------
* Incorporated by reference to Registrant's Form N-8B-2.
** Incorporated by reference to Registrant's Pre-Effective Amendment No. 1 to
Form N-8B-2.
*** Incorporated by reference to Registrant's filing on Form S-6, March 28,
1995 (File No. 33-90684).
**** Incorporated by reference to Registrant's Post-Effective Amendment No. 2
filed on Form S-6, May 1, 1997 (File No. 33-90684).
*****Incorporated by reference to Registrant's Post-Effective Amendment No. 1
filed on Form S-6, March 13, 1998 (File No. 333-34199).
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it meets all of the requirements for effectiveness of
this Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Registration Statement to be signed on its behalf
by the undersigned thereunto duly authorized, and its seal to be hereunto
affixed and attested, all in the City of Wilmington, and State of Delaware, on
the 1st day of July, 1998.
VARIABLE ACCOUNT II
(Registrant)
By: AIG LIFE INSURANCE COMPANY
(Sponsor)
By:/s/ Kenneth D. Walma
Kenneth D. Walma, Assistant Secretary
ATTEST:
/s/ Robert Liguori
Robert Liguori, Vice President and General Counsel
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/Howard E. Gunton, Jr.* Chief Accounting Officer July 1, 1998
Howard E. Gunton, Jr.
/s/Nicholas A. O'Kulich* Director July 1, 1998
Nicholas A. O'Kulich
/s/Maurice R. Greenberg* Director July 1, 1998
Maurice R. Greenberg
/s/Edwin A. G. Manton* Director July 1, 1998
Edwin A. G. Manton
/s/Edward E. Matthews* Director July 1, 1998
Edward E. Matthews
/s/Jerome T. Muldowney* Director July 1, 1998
Jerome T. Muldowney
/s/Win J. Neuger* Director July 1, 1998
Win J. Neuger
/s/John R. Skar* Director July 1, 1998
John R. Skar
/s/Howard I. Smith* Director July 1, 1998
Howard I. Smith
/s/Ernest E. Stempel* Director July 1, 1998
Ernest E. Stempel
/s/Gerald W. Wyndorf* Director July 1, 1998
Gerald W. Wyndorf
/s/Robert J. O'Connell* Director July 1, 1998
Robert J. O'Connell
*By:/s/Kenneth D. Walma
Kenneth D. Walma
Attorney in Fact
</TABLE>
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
A. Opinion and Consent of Counsel
B. Opinion and Consent of Actuary
C. Consent of Independent Certified Public Accountants
D. Consent of Jorden Burt Boros Cicchetti Berenson & Johnson LLP
<PAGE>
EXHIBIT A
OPINION AND CONSENT OF COUNSEL
Gentlemen:
I have made such examination of the law and have examined such Company
records and documents as in my judgment are necessary or appropriate to enable
me to render the opinion:
1. AIG Life Insurance Company is a valid and existing stock life
insurance company of the State of Delaware.
2. Variable Account II is a separate investment account of AIG
Life insurance Company created and validly existing pursuant
to the Delaware Insurance Laws and the Regulations thereunder.
3. All of the prescribed corporate procedures for the issuance of
the Policies have been followed, and, when such Policies are
issued in accordance with the Prospectus contained in the
Registration Statement, all state requirements relating to
such Policies will have been complied with.
4. Upon the acceptance of Premiums made by Owners pursuant to a
Policy issued in accordance with the Prospectus contained in
the Registration Statement and upon compliance with the
applicable law, such Owner will have a legally issued, fully
paid, non-assessable contractual interest in such Policy.
This opinion, or a copy hereof, may be used as an exhibit to or in
connection with the filing with the Securities and Exchange Commission of the
Registration Statement on Form S-6 for the Policies to be issued by AIG Life
Insurance Company and its separate account, Variable Account II.
/s/ Kenneth D. Walma
Kenneth D. Walma
Assistant Secretary and Associate Counsel
Dated: July 1, 1998
<PAGE>
EXHIBIT B
OPINION AND CONSENT OF ACTUARY
On behalf of AIG Life Insurance Company, I hereby consent to the
inclusion of the section entitled "Illustrations of Account Value, Net Cash
Surrender Value, Life Insurance Proceeds, and Accumulated Premium" and of the
table in Appendix A entitled "Maximum Initial Surrender Charge Per $1,000 of
Initial Specified Face Amount" in the registration statement on Form S-6
registering Group Flexible Premium Variable Universal Life Insurance Policies.
The illustrations have been prepared in accordance with standard actuarial
principles and reflect the operation of the Policy by taking into account all
charges under the Policy and the underlying funds.
/s/ A. Hasan Qureshi
A. Hasan Qureshi, FIA, MAAA
Vice President and Actuary
Dated: July 1, 1998
<PAGE>
EXHIBIT C
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the following with respect to Post-Effective
Amendment No. 3 to the Registration Statement (No. 333-34199) on Form S-6 under
the Securities Act of 1933 of Variable Account II of AIG Life Insurance Company.
1. The inclusion in the Prospectus of Variable Account II of AIG
Life Insurance Company of our report dated February 4, 1998
relating to our audit of the financial statements of AIG Life
Insurance Company.
2. The inclusion in the Prospectus of Variable Account II of AIG
Life Insurance Company of our report dated February 4, 1998
relating to our audit of the financial statements of AIG Life
Insurance Company.
3. The reference to our firm under the heading "Experts."
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
June 17, 1998
<PAGE>
EXHIBIT D
July 1, 1998
AIG Life Insurance Company
One Alico Plaza
600 King Street
Wilmington, Delaware 19899
Ladies and Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the Prospectus contained in Post-Effective Amendment No. 3 to the
Registration Statement on Form S-6 (File No. 333- 34199) filed on or around July
2, 1998, by AIG Life Insurance Company and Variable Account II with the
Securities and Exchange Commission under the Securities Act of 1933 and the
Investment Company Act of 1940.
Very truly yours,
/s/ Jorden Burt Boros Cicchetti Berenson & Johnson LLP
Jorden Burt Boros Cicchetti Berenson & Johnson LLP
