Filed with the Securities and Exchange Commission on May 3, 1999
Registration No. 333-34199
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form S-6
POST-EFFECTIVE AMENDMENT NO 5 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, DE 19801
D. Name and address of agent for service:
Kenneth D. Walma, Assistant Secretary and General Counsel
One Alico Plaza
600 King Street
Wilmington, DE 19801
COPIES TO:
Michael Berenson, Esq. and Ernest T. Patrikis, Esq.
Jorden Burt Boros Cicchetti American International Group, Inc.
Berenson & Johnson, LLP 70 Pine Street
Suite 400 East New York, NY 10270
1025 Thomas Jefferson Street, NW
Washington, DC 20007-0805
It is proposed that this filing will become effective:
____ immediately upon filing pursuant to paragraph (b) of Rule 485
X on May 3, 1999 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: Individual and 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>
CROSS REFERENCE TO ITEMS REQUIRED
BY FORM N-8B-2
N-8B-2 Item Caption in Prospectus
1 About Us and the Accounts, The Separate Account
2 About Us and the Accounts
3 Not Applicable
4 Distribution of the Policy
5 The Separate Account
6(a) Not Applicable
6(b) Not Applicable
9 Legal Proceedings
10 Purchasing a Policy
11 The Separate Account, The Investment Options
12 The Separate Account, The Investment Options
13 Expenses of the Policy
14 Purchasing a Policy
15 The Separate Account
16 The Separate Account, The Investment Options
17 Purchasing a Policy, Investing Your
18 Account Value
19 Purchasing a Policy, Investing Your
20 Account Value
19 Not Applicable
20 Not Applicable
21 Cash Benefits During the Insured's Lifetime
22 Not Applicable
23 Not Applicable
24 Not Applicable
25 About Us and the Accounts
26 Not Applicable
27 About Us and the Accounts
28 About Us and the Accounts
29 About Us and the Accounts
30 About Us and the Accounts
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Distribution of the Policy
35 About Us and the Accounts
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 Purchasing a Policy
45 Not Applicable
46 Purchasing a Policy
47 Not Applicable
48 Not Applicable
49 Not Applicable
50 Not Applicable
51 Purchasing a Policy
About Us and the Accounts
52 The Investment Options
53 Federal Income Tax Considerations
54 Financial Statements
55 Not Applicable
<PAGE>
Part I
<PAGE>
AIG Life Insurance Company
Variable Account II
One Alico Plaza
Wilmington, DE 19801
1-800-340-2765
Flexible Premium Variable Universal Life Group Policy
AIG Life Insurance Company is offering life insurance coverage under the policy
described in this prospectus. The policy is a group flexible premium variable
universal life policy. You may be issued a certificate as evidence of your
coverage under a group arrangement. The description of the policy in this
prospectus is fully applicable to your certificate and the word "policy"
includes any such certificate. The policy allows you, as the owner, within
limits, to:
o Select the Face Amount of life insurance. You may within limits change your
initial selection as your insurance needs change.
o Select the amount and timing of premium payments. You may make more premium
payments than scheduled or stop making premium payments.
o Allocate premium payments and your Policy Account Value among the variable
investment options and the Guaranteed Account.
o Receive payments from your policy while the Insured is alive through loans,
partial surrenders or a full surrender.
This document contains information about the policy. You should read this
document carefully before you decide to purchase the policy. You should also
keep this document for future reference.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the policy or determined that this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Prospectus _________, 1999
<PAGE>
Investment Options
Variable Investment Options
The Separate Account is divided into subaccounts. Each subaccount invests in
shares of a specific portfolio of the AIM Variable Insurance Funds, Inc.,
Alliance Variable Products Series Fund, Inc., Dreyfus Variable Investment Fund,
Dreyfus Stock Index Fund, Fidelity Variable Insurance Products Fund, Fidelity
Variable Insurance Products Fund II, and the Van Eck Worldwide Insurance Trust.
The portfolios of the funds which are available under the policy are named
below. The prospectuses for the funds contain information about each portfolio.
You should read the prospectus carefully.
AIM Variable Insurance Funds, Inc.
(managed by A I M Advisors, Inc.)
o V.I. Capital Appreciation Fund
o V.I. International Equity Fund
Alliance Variable Products Series Fund, Inc.
(managed by Alliance Capital Management L.P.)
o Global Bond Portfolio
o Growth Portfolio
o Growth and Income Portfolio
o Premier Growth
o Quasar Portfolio
o Technology Portfolio
Dreyfus Variable Investment Fund
(managed by The Dreyfus Corporation)
o Small Company Stock Portfolio
Dreyfus Stock Index Fund
(managed by The Dreyfus Corporation and Mellon Equity Associates)
Fidelity Variable Insurance Products Fund
(managed by Fidelity Management & Research Company)
o VIP Growth Portfolio
o VIP High Income Portfolio
o VIP Money Market Portfolio
Fidelity Variable Insurance Products Fund II
(managed by Fidelity Management & Research Company)
o VIP II Asset Manager Portfolio
o VIP II Contrafund Portfolio
o VIP II Investment Grade Bond Portfolio
Van Eck Worldwide Insurance Trust
(managed by Van Eck Associates Corporation)
o Worldwide Emerging Markets Portfolio
o Worldwide Hard Assets Portfolio
Guaranteed Investment Option
The Guaranteed Account is part of our general account. We will credit interest
equal to at least 4% per year, compounded annually on that portion of policy
Account Value that you allocate to the Guaranteed Account. We may, in our
discretion, elect to credit a higher rate of interest. This document generally
describes only that portion of the Policy Account Value allocated to the
Variable Account.
<PAGE>
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Table of Contents
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Special Terms
Summary of the Policy
Overview
Applying for a Policy
Premium Payments
Policy Account Value
Death Benefit
Cash Benefits During the Life of the Insured
Expenses of the Policy
Federal Tax Considerations
Purchasing a Policy
Applying for a Policy
Your Right to Cancel the Policy
Premiums
Restrictions on Premiums
Minimum Initial Premium
Planned Periodic Premiums
Additional Premiums
Effect of Premium Payments
Grace Period
Premium Allocations
Crediting Premiums
The Investment Options
Investing Your Policy Account Value
Determining the Policy Account Value
Transfers
Dollar Cost Averaging
Death Benefit
Cash Benefits During the Insured's Life
Payment Options for Benefits
Expenses of the Policy
Supplemental Benefits and Riders
Other Policy Provisions
Performance Information
Federal Income Tax Considerations
Distribution of the Policy
About Us and the Accounts
Our Directors and Executive Officers
Other Information
Financial Statements
Appendices
<PAGE>
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Special Terms
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We have capitalized some special terms we use in this document. We have defined
these terms here.
Accounts. The Separate Account and the Guaranteed Account
Administrative Office. One Alico Plaza, P.O. Box 8718, Wilmington, DE 19801.
Attained Age. The Insured's age as of the Policy Date plus the number of full
years since the Policy Date.
Beneficiary. The person(s) entitled to the death benefit under the policy if the
Insured dies while coverage under the policy is in force.
Cash Surrender Value. The Policy Account Value less any surrender charge that
would be assessed if the policy were surrendered.
Code. The Internal Revenue Code of 1986, as amended.
Face Amount. The amount of insurance specified by the Owner and from which the
amount payable to a beneficiary will be determined.
Grace Period. The period of time that the policy continues to be in force while
the Net Cash Surrender Value is less than the total monthly deductions then due.
It begins on a Monthly Anniversary when the Net Cash Surrender Value is less
than the total monthly deduction then due.
Guaranteed Account. An account within the general account which consists of all
of our assets other than the assets of the Separate Account and any of our other
separate accounts.
Insured. A person whose life is covered under the policy. At the time of
application, the Insured must be 75 years of age or younger.
Issue Date. The date the policy is actually issued and from which we measure
contestability periods. It may be later than the Policy Date.
Loan Account. The portion of the Policy Account Value held in the Guaranteed
Account as collateral for loans.
Monthly Anniversary. The same day as the Policy Date for each succeeding month.
If the day of the monthly anniversary is the 29th, 30th or 31st and a month has
no such day, the Monthly Anniversary is deemed to be the last day of that month.
Net Cash Surrender Value. The Cash Surrender Value less any outstanding Loans.
Net Premium. Any premium paid less any expense charges deducted from the premium
payment.
Owner. The person who purchased the policy as shown in the application, unless
later changed.
Policy Account Value. The total amount in the Accounts credited to your policy.
Policy Date. The date as of which we have received the initial premium and an
application in good order. Coverage begins on the Policy Date which is also the
date used to determine all anniversary dates.
Policy Year. Each period of twelve months commencing with the Policy Date.
Separate Account. Variable Account II, a separate investment account of ours.
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.
<PAGE>
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Summary of the Policy
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Because this is a summary, it does not contain all the information that may be
important to you. You should read this entire document carefully before you
decide to purchase a policy.
Overview
The policy is a flexible premium variable universal life policy. Like
traditional life insurance, the policy provides an initial minimum death benefit
and cash benefits that you can access through loans, partial surrenders or a
full surrender. Unlike traditional life insurance, you may choose how to invest
your policy Account Value.
The policy allows you to make certain choices that will tailor the policy to
your needs. When you apply for the policy, we will ask you to make some of these
choices. You may also change your choices to meet your changing insurance needs.
In addition, we may in the future offer several riders to the policy. These
riders will provide you with the flexibility to design an insurance product that
meets your specific needs.
If you select any variable investment options, your policy benefits will vary
based upon the returns earned by those variable investment options. The returns
may be zero or negative and you bear this risk.
Applying for a Policy
When you apply for a policy, you must select the Face Amount. The Face Amount is
the initial amount of life insurance coverage on the Insured. It must be at
least $50,000 when you apply.
Your policy will become effective after:
o We accept your application.
o We receive an initial premium payment in an amount we determine.
o We have completed our review of your application to our satisfaction.
Your Right to Cancel the Policy
Once you receive your policy, you should read the policy. You have the right to
cancel the policy for any reason within the later of:
o 45 days after you sign Part I of the application.
o 10 days after you receive the policy. If required by the state where you
live, we will extend the time period to the number of days required by law.
Premium Payments
Before your policy is effective, you must pay the minimum initial premium. We
will calculate the initial minimum premium based 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 or riders applied for and whether
premiums will be paid by pre-authorized checking. A table is provided in
Appendix A.
When you apply for a policy you will select the amount of premium payments you
plan to pay during the term of the policy. We will establish a minimum for this
amount. You will also select intervals when you plan to pay this pay this
premium amount. This may be monthly, quarterly, semiannually, or annually.
Pre-authorized checking may be required for monthly payments.
During the term of the policy, you may pay premiums at any time and in any
amount, within limits. Thus, you are not required to pay the planned periodic
premium and you may make payments in addition to the planned periodic premium.
Policy Account Value
We will measure your benefits under the policy by your Policy Account Value.
Your Policy Account Value will reflect:
o the premiums you pay;
o the returns earned by the subaccounts you select;
o the interest earned on the amount allocated to the Guaranteed Account;
o any loans or partial surrenders; and
o the policy charges and expenses we deduct.
Death Benefit
When you apply for a policy, you must select:
o The Face Amount.
o The death benefit option, which determines the manner in which we calculate
the death benefit for your policy.
You may select from two death benefit options. They are:
o Option I: Level Death Benefit Option. The basic death benefit will be the
greater of:
1. The Face Amount; or
2. Policy Account Value on the date of death multiplied by the appropriate
minimum death benefit factor.
o Option II: Increasing Death Benefit Option. The basic death benefit will be
the greater of:
1. The Face Amount plus the Policy Account Value; or
2. Policy Account Value on the date of death multiplied by the appropriate
minimum death benefit factor.
Within limits, you may change the death benefit option and, after the first
Policy Year, may change the Face Amount.
Cash Benefits During the Life of the Insured
During the life of the Insured, your policy has cash benefits that you can
access within limits through loans, partial surrenders or a full surrender.
o Loans -- You may borrow against your Net Cash Surrender Value at any time.
If your policy is a modified endowment contract, the Code may treat the
loan as a taxable distribution of income.
o Partial Surrender -- You may withdraw part of your Policy Account Value
after the first Policy Year. We may deduct an administrative charge. If you
make a partial surrender during the surrender charge period, we will deduct
a surrender charge. A partial surrender may result in a decrease in the
Face Amount of your policy depending upon your death benefit option.
o Full Surrender -- You may surrender your policy for its Net Cash Surrender
Value. If you surrender your policy during the surrender charge period, we
will deduct a surrender charge. A surrender will terminate your policy.
Expenses of the Policy
We deduct expenses related to your policy. These deductions are made:
o from premium, your Policy Account Value and the assets of the subaccounts;
and
o upon certain transactions.
Deduction From Premium -- we will deduct 5% from your premium payments plus a
state specific percent of premium equal to the state and local premium tax rate
applicable to the policy. These deductions are for state premium taxes, federal
taxes, sales and other acquisition related expenses.
Monthly Deductions From Policy Account Value -- we will deduct on each Monthly
Anniversary charges for:
o The administration of your policy.
o The cost of insurance for your policy.
o The costs associated with acquiring and underwriting your policy.
o The cost of any supplemental benefits or riders.
The monthly deduction is deducted from your Accounts on a pro rata basis in the
same proportion as you have Policy Account Value in each Account.
Deductions from Subaccount Net Assets -- we will deduct a daily charge for the
mortality and expense risks we assume at an annual rate not to exceed 0.90% of
your Policy Account Value in the subaccounts.
Deductions Upon Certain Policy Transactions -- If you make a policy transaction,
a charge may apply. They are:
o Transfer Charge -- You may make twelve transfers from your subaccounts each
Policy Year free of charge. Thereafter, we will deduct a fee of $25 per
transfer from the transferred amount.
o Administrative Charge for Partial Surrenders - We currently deduct an
administrative charge of $25 upon a partial surrender. In certain states
the charge may be the lesser of $25 or 2% of the amount surrendered.
o Surrender Charge - A surrender charge for partial surrenders is equal to a
pro rata portion of the surrender charge that would apply to a full
surrender. This applies during the first 14 Policy Years and for the first
14 Policy Years immediately following an increase in Face Amount. If you
request a full surrender during the first 14 Policy Years, we may deduct a
surrender charge based on the initial Face Amount. If you request a
surrender 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.
o Surrender Charge for Face Amount Decreases -- We may also deduct a
surrender charge from the Policy Account Value upon a decrease in Face
Amount. If you request a decrease in Face Amount during the first 14 Policy
Years, we will deduct a surrender charge based on the initial Face Amount.
If you request a decrease within 14 years immediately following an increase
in Face Amount, we will deduct a surrender charge based on the increase in
Face Amount.
In addition, you will indirectly bear the costs of the investment management
fees and expenses paid from the assets of the portfolios you select.
The following tables are designed to help you understand the various fees and
expenses that you will bear directly or indirectly. The first table shows the
policy charges and deductions you will bear directly under the policy. The
second table shows the fees and expenses of the portfolios that you will bear
indirectly when you purchase a policy.
Policy Charges and Deductions
Transaction Charges
Sales and DAC Tax Charge 5% of each premium payment
Premium Tax Charge(1) 0.50% to 5% of each premium payment
Transfer Charge $25 for each transfer in excess of 12 each Policy Year
Surrender Charge During the first 14 Policy Years and the first years
immediately following an increase in Face Amount, there will be a surrender
charge of up to 25% of the first year premium paid up to a surrender charge
premium plus 4% of the first year premium paid in excess of the surrender
charge premium. (3)
Partial Surrender Administrative $25 per partial surrender - In certain
states the charge may Charge the lesser of $25 or 2% of the amount
surrendered.
Account Value Charges (deducted monthly)
Cost of Insurance Charge(2)
Current Guaranteed
Ranges from 0.01609 per Ranges from 0.05667 per
$1,000 of net amount at risk $1,000 of net amount at risk
to 71.15029 per $1,000 of net to 83.33333 per $1,000 of net
amount at risk(4) amount at risk(4)
Monthly Expense Charge Current Guaranteed
If the Face Amount is between $50,000 and $199,000 $ 7.50 $15.00
If the Face Amount is between $200,000 and $499,000 $ 5.00 $10.00
If the Face Amount is between $500,000 and greater $ 4.00 $10.00
First Year Additional Charge $ 20.00 $25.00
First Year Administrative Charge Up to $25 per month during the first
Policy Year and for 12 months following an increase in Face Amount
Annual Separate Account Charges (deducted daily and shown as an annualized
percentage of average net assets)
Mortality and Expense Risk Charge Current Guaranteed
0.90% 0.90%
(1) We deduct a premium tax charge equal to the actual state tax rate from each
premium payment. State and local premium tax rates range from 0.50% to 5%.
(2) The current cost of insurance charge will never exceed the guaranteed cost
of insurance charge shown in the policy. The net amount at risk is the
difference between the death benefit divided by 1.0032737 and the current
Policy Account Value. (See "Expenses of the Policy - Cost of Insurance
Charge.")
(3) A policy's surrender charge premium is based on the issue age, sex and
smoker status of the Insured and the Face Amount. For a 45 year old
non-smoking male purchasing $500,000 Face Amount the surrender charge
premium would be $8,530.00. For a 65 year old non-smoking male purchasing
$200,000 Face Amount, the surrender charge premium would be $10,762.00. The
lowest and highest maximum surrender charge will range from $11.02 to
$34.34 per $1,000 of Face Amount. (See Appendix B for additional examples
of surrender charge premiums.)
(4) Current and guaranteed cost of insurance charges are based on the issue age
(or Attained Age in the case of increase in Face Amount), sex, rate class
of the Insured, and Policy Year.
<PAGE>
Annual Portfolio Expenses
Before Waivers/Reimbursements
As of December 31, 1998
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 before waivers and/or
reimbursements, if applicable, for the year ended December 31, 1998, 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>
Management Other Total
Fees Expenses(1) Expenses
<S> <C> <C> <C>
AIM Variable Insurance Funds
AIM V.I. Capital Appreciation Fund 0.62% 0.05% 0.67%
AIM V.I. International Equity Fund 0.75% 0.16% 0.91%
Alliance Variable Products Series Fund(2)
Global Bond Portfolio 0.65% 0.52% 1.17%
Growth Portfolio 0.75% 0.12% 0.87%
Growth and Income Portfolio 0.63% 0.10% 0.73%
Premier Growth Portfolio 1.00% 0.09% 1.09%
Quasar Portfolio 1.00% 0.30% 1.30%
Technology Portfolio 1.00% 0.20% 1.20%
Dreyfus Variable Investment Fund
Small Company Stock Portfolio 0.75% 0.23% 0.98%
Dreyfus Stock Index Fund 0.25% 0.01% 0.26%
Fidelity Variable Insurance Products Fund(3)
VIP Growth Portfolio 0.59% 0.09% 0.68%
VIP High Income Portfolio 0.58% 0.12% 0.70%
VIP Money Market Portfolio 0.20% 0.10% 0.30%
Fidelity Variable Insurance Products Fund II(4)
VIP II Asset Manager Portfolio 0.59% 0.14% 0.73%
VIP II Contrafund Portfolio 0.59% 0.11% 0.70%
VIP II Investment Grade Bond Portfolio 0.43% 0.14% 0.57%
Van Eck Worldwide Insurance Trust(5)
Worldwide Emerging Markets Fund 1.00% 0.61% 1.61%
Worldwide Hard Assets Fund 1.00% 0.20% 1.20%
</TABLE>
(1) Other expenses are based on the expenses outlined in the prospectuses
for the AIM Variable Insurance Funds, Alliance Variable Products Series
Fund, Dreyfus Variable Investment Fund, Dreyfus Stock Index Fund,
Fidelity Variable Insurance Products Fund, Fidelity Variable Insurance
Products Fund II, and Van Eck Worldwide Insurance Trust.
(2) Expenses for the following portfolios after waivers and reimbursement
by the Alliance Variable Products Series Fund's investment adviser for
the period ended December 31, 1998, were as follows:
Management Other Total
Fees Expenses Expenses
Global Bond Portfolio 0.64% 0.29% 0.93%
Premier Growth Portfolio 0.97% 0.09% 1.06%
Quasar Portfolio 0.73% 0.22% 0.95%
Technology Portfolio 0.81% 0.14% 0.95%
(3) Expenses for the following portfolios after waivers and reimbursement
by the Fidelity Variable Insurance Products Fund's investment adviser
for the period ended December 31, 1998, were as follows:
Management Other Total
Fees Expenses Expenses
VIP Growth Portfolio 0.59% 0.07% 0.66%
(4) Expenses for the following portfolios after waivers and reimbursement
by the Fidelity Variable Insurance Products Fund II's investment
adviser for the period ended December 31, 1998, were as follows:
Management Other Total
Fees Expenses Expenses
VIP II Asset Manager Portfolio 0.54% 0.09% 0.63%
VIP II Contrafund Portfolio 0.59% 0.07% 0.66%
(5) Expenses for the following portfolios after waivers and reimbursement
by the Van Eck Worldwide Insurance Trust's investment adviser for the
period ended December 31, 1998, were as follows:
Management Other Total
Fees Expenses Expenses
Worldwide Emerging Markets 0.89% 0.61% 1.50%
Worldwide Hard Assets Fund 1.00% 0.16% 1.16%
Federal Tax Considerations
Your purchase of, and transactions under, your policy may have tax consequences
that you should consider before purchasing the policy. You may wish to consult a
tax adviser. In general, the death benefit will not be taxable income to the
Beneficiary. You will not be taxed as your Policy Account Value increases. Upon
a distribution from your policy, however, you may be taxed on any increase in
Policy Account Value.
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Purchasing a Policy
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Applying for a Policy
To purchase a policy, you must complete an application and submit it to us. You
must specify certain information in the application, including the Face Amount,
the death benefit option and supplemental benefit riders, if any. We may also
require information to determine if the Insured is an acceptable risk to us. We
may require a medical examination of the Insured and ask for additional
information.
You may apply for a policy to cover a person who is younger than age 76. A
newborn may be an Insured. The minimum Face Amount is $50,000.
We require a minimum initial premium before we will issue the policy. You may
pay the minimum initial premium when you submit the application or at a later
date.
We will not issue a policy until we have accepted the application. We will
accept an application if it meets our underwriting rules. We reserve the right
to reject an application for any reason or "rate" an Insured as a substandard
risk.
Your policy will become effective after:
o We accept your application.
o We receive an initial premium payment in an amount we determine.
o We have completed our review of your application to our satisfaction.
Your Right to Cancel the Policy
Once you receive your policy, you should read the policy. You have the right to
cancel the policy for any reason within the later of:
o 45 days after you sign Part I of the application; or
o 10 days after you received the policy. If required by the state where you
live, we will extend the time period to the number of days required by law.
This is your "period to examine and cancel."
Your right to cancel also applies to the amount of any increase in Face Amount.
You may cancel the policy by returning it to our Administrative Office or to
your agent within the applicable time with a written request for cancellation.
We will refund you the premium paid on the policy. Thus, the amount we return
will not reflect the returns of the subaccounts you selected in your
application.
Premiums
The policy allows you to select the timing and amount of premium payments within
limits. Send premium payments to our Administrative Office.
Restrictions on Premiums. We may not accept any premium payment:
o If it is less than $50.
o If the premium would cause the policy to fail to qualify as a life
insurance contract as defined in Section 7702 of the Code. We will refund
any portion of any premium that causes the policy to fail. In addition, we
will monitor the policy and will attempt to notify you on a timely basis if
your policy is in jeopardy of becoming a modified endowment contract under
the Code.
o If the premium would increase the amount of our risk under your policy by
an amount greater than that premium amount. In such cases, we may require
satisfactory evidence of insurability before accepting that premium.
Minimum Initial Premium. We will calculate the minimum initial premium. The
amount is based on a number of factors, including the age, sex and rating class
of the proposed Insured, the desired Face Amount and any supplemental benefits
or riders applied for and whether premiums will be paid by pre-authorized
checking.
Planned Periodic Premium. When you apply for a policy, you select a plan for
paying level premiums at specified intervals. The intervals may be monthly,
quarterly, semi-annually or annually, for the life of the policy. Pre-authorized
checking may be required for monthly payments. We will establish a minimum
amount that may be used as the planned periodic premium.
You are not required to pay premiums in accordance with this plan. Rather, you
can pay more or less than the planned periodic premium or skip a planned
periodic premium entirely. At any time you can change the amount and frequency
of planned periodic premium by sending a written notice to our Administrative
Office.
Additional Premiums. Additional premiums are premiums other than planned
premiums. Additional premiums may be paid in any amount and at any time subject
to the Code. Depending on the Policy Account Value at the time of an increase in
the Face Amount and the amount of the increase requested, an additional premium
may be needed to prevent your policy from terminating.
Effect of Premium Payments. In general, paying all planned periodic premiums may
not prevent your policy from lapsing. In addition, if you fail to pay any
planned periodic premiums, your policy will not necessarily lapse.
Your policy will lapse only when the Net Cash Surrender Value on a Monthly
Anniversary is less than the amount of that date's monthly deduction. This could
happen if the Net Cash Surrender Value has decreased because:
o of the negative return or insufficient return earned by one or more of the
subaccounts you selected; or
o of any combination of the following -- you have outstanding loans, you have
taken partial surrenders, we have deducted policy expenses, or you have
made insufficient premium payments to offset the monthly deduction.
Grace Period. In order for insurance coverage to remain in force, the Net Cash
Surrender Value on each Monthly Anniversary must be equal to or greater than the
total monthly deductions for that Monthly Anniversary. If it is not, you have a
Grace Period of 61 days during which the policy will continue in force. The
Grace Period begins on the Monthly Anniversary that the Net Cash Surrender Value
is less than the total monthly deductions then due. If we do not receive a
sufficient premium before the end of the Grace Period, the policy will terminate
without value.
We will send you a written notice within 30 days of the beginning of any Grace
Period. The notice will state:
o A Grace Period of 61 days has begun.
o The amount of premium required to prevent your policy from terminating.
This amount is equal to the amount needed to increase the Net Cash
Surrender Value sufficiently to cover total monthly deductions for the next
three (3) Monthly Anniversaries.
If the Insured dies during the Grace Period, we will still pay the death benefit
to the Beneficiary. The amount we pay will reflect a reduction for the unpaid
monthly deductions due on or before the date of the Insured's death.
If your policy lapses with an outstanding loan you may have taxable income.
Premium Allocations. In the application, you specify the percentage of Net
Premiums to be allocated to each subaccount or to the Guaranteed Account.
However, until the period to examine and cancel expires, we invest this amount
in the Money Market Subaccount. On the first business day after the period
expires, we will reallocate your Policy Account Value based on the premium
allocation percentages in your application.
For all subsequent premiums, we will use the allocation percentages you
specified in the application until you change them. You can change the
allocation percentages at any time by sending written notice to our
Administrative Office. The change will apply to all Premiums received with or
after your notice.
Allocation Rules. Your allocation instructions must meet the following
requirements:
o Each allocation percentage must be a whole number; and
o Any allocation to a subaccount must be at least 5%; and the sum of your
allocations must equal 100%.
Crediting Premiums. Your initial Net Premium will be credited to your Policy
Account Value as of the Policy Date. We will credit and invest subsequent Net
Premiums on the date we receive the premium or notice of deposit at our
Administrative Office.
If any premium requires us to accept additional risk, we will allocate this
amount to the Money Market Subaccount until we complete our underwriting. When
accepted, and at the end of the period to examine and cancel the policy, we will
allocate it in accordance with your allocation percentages.
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The Investment Options
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You may allocate your Policy Account Value to:
o the subaccounts which invest in the variable investment options; or
o the Guaranteed Account.
Variable Investment Options
Under the policy, you may currently allocate your Policy Account Value into any
of the available subaccounts. Each subaccount invests in a distinct portfolio of
the AIM Variable Insurance Funds, Inc., Alliance Variable Products Series Fund,
Inc., Dreyfus Variable Investment Fund, Fidelity Investments Variable Insurance
Products Fund, Fidelity Investments Variable Insurance Products Fund II, or Van
Eck Worldwide Insurance Trust. These portfolios operate similarly to a mutual
fund but are only available through the purchase of certain insurance contracts.
The funds may also include other portfolios which are not available under the
policy.
AIM Variable Insurance Funds, Inc.
AIM V.I. Capital Appreciation Fund seeks growth of capital through investment in
common stocks, with emphasis on medium-and smaller-sized growth companies.
AIM V.I. International Equity Fund seeks to provide long-term growth of capital
by investing in a diversified portfolio of international equity securities whose
issuers are considered to have strong earnings momentum.
Alliance Variable Products Series Fund, Inc.
Global Bond Portfolio seeks a high level of return from a combination of current
income and capital appreciation by investing in a globally diversified portfolio
of high quality debt securities denominated in the U.S. dollar and a range of
foreign currencies. The sub-adviser for this portfolio is AIGAM International
Limited, an affiliate of American International Group, Inc.
Growth Portfolio seeks long term growth of capital by investing primarily in
common stocks and other equity securities.
Growth and Income Portfolio seeks to balance the objectives of reasonable
current income and reasonable opportunities for appreciation through investments
primarily in dividend-paying common stocks of good quality.
Premier Growth Portfolio seeks growth of capital rather than current income. In
pursuing its investment objectives, the Premier Growth Portfolio will employ
aggressive investment policies. Since investment will be made based upon their
potential for capital appreciation, current income will be incidental to the
objective of capital growth. The portfolio is not intended for investors whose
principal objective is assured income or preservation of capital.
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.
Technology Portfolio seeks growth of capital through investment in companies
expected to benefit from advances in technology. This portfolio invests
principally in diversified portfolio of securities of companies which use
technology extensively in the development of new or improved products or
processes.
Dreyfus Variable Investment Fund
Small Company Stock Portfolio seeks investment results that are greater than the
total return performance of publicly-traded common stocks in the aggregate, as
represented by Russell 2500 TM Index. The portfolio invests primarily in the
equity securities of the small to medium-sized domestic issuers that are
considered by The Dreyfus Corporation to offer above-average growth potential.
Dreyfus Stock Index Fund seeks to provide investment results that correspond to
the price and yield performance of publicly traded common stocks in the
aggregate, as represented by the Standard & Poor's 500 Composite Stock Price
Index. The fund attempts to be fully invested at all times in the stocks that
comprise the index and stock index futures. The fund is neither sponsored by nor
affiliated with Standard & Poor's Corporation. The Dreyfus Corporation has
engaged its affiliate, Mellon Equity Associates, to serve as the fund's index
fund manager.
Fidelity Variable Insurance Products Fund (VIP)
VIP Growth Portfolio seeks capital appreciation through investments primarily in
common stock.
VIP High Income Portfolio seeks high current income by investing primarily in
income producing debt securities, preferred stocks and convertible securities,
with emphasis on lower-quality debt securities (commonly referred to as "junk
bonds"), while also considering growth of capital. The potential for high yield
is accompanied by higher risk. For a more detailed discussion of the investment
risks associated with such securities, please refer to the attached prospectus.
The sub-advisers for this portfolio is Fidelity Management & Research Far East
Inc. and Fidelity Management & Research (U.K.) Inc.
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 VIP Money Market 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. The
sub-adviser for this portfolio is Fidelity Investments Money Management, Inc., a
wholly owned subsidiary of Fidelity Management & Research Company.
Fidelity Variable Insurance Products Fund II (VIP II)
VIP II Asset Manager Portfolio seeks to provide a high total return with reduced
risk over the long term by allocating its assets among stocks, bonds and
short-term money market instruments. The sub-advisers for this portfolio is
Fidelity Management & Research Far East Inc. and Fidelity Management & Research
(U.K.) Inc.
VIP II Contrafund Portfolio seeks capital appreciation by investing in
securities of companies whose value the manager believes is not fully recognized
by the public. The sub-advisers for this portfolio is Fidelity Management &
Research Far East Inc. and Fidelity Management & Research (U.K.) Inc.
VIP II Investment Grade Bond Portfolio seeks as high a level of current income
as is consistent with the preservation of capital by investing in U.S.
dollar-denominated investment-grade bonds. The portfolio will maintain a
dollar-weighted average portfolio maturity of ten years or less. The sub-adviser
for this portfolio is Fidelity Investments Money Management, Inc.
Van Eck Worldwide Insurance Trust
Worldwide Emerging Markets Fund seeks long-term capital appreciation by
investing primarily in equity securities in emerging markets around the world.
Worldwide Hard Assets Fund seeks long-term capital appreciation by investing
primarily in "hard asset securities." Income is a secondary consideration. Hard
asset securities are the stocks, bonds, and other securities of companies that
derive at least 50% of gross revenue or profit from exploration, development,
production or distribution of (1) precious metals, (2) natural resources, (3)
real estate and (4) commodities.
Guaranteed Investment Option
Under the policy, you may currently allocate your Policy Account Value to the
Guaranteed Account. In addition, if you request a loan, we will allocate part of
your Policy Account Value to the Loan Account which is part of the Guaranteed
Account.
We treat each allocation and transfer separately for purposes of crediting
interest and making deductions from the Guaranteed Account.
Interest Credited On the Guaranteed Account. All of your Policy Account Value
held in the Guaranteed Account will earn interest at a rate we determine in our
sole discretion. This rate will never be less than 4% per year compounded
annually. You assume the risk that interest credited may not exceed the
guaranteed minimum rate of 4% per year. The Loan Account portion of your Policy
Account Value may earn a different interest rate than the remaining portion of
your Policy Account Value in the Guaranteed Account.
Deductions from the Guaranteed Account. We will deduct any transfers, partial
surrenders or any policy expenses from the Guaranteed Account and your variable
investment options on a pro rata basis, unless you provide other directions. No
portion of the Loan Account may be used for this purpose.
The Loan Account will only increase or decrease in value when policy loans are
taken or repayments are made. If an amount is transferred from the Loan Account
to the remaining portion of the guaranteed Policy 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.
Payments from the Guaranteed Account. If we must pay any part of the proceeds
for a loan, partial surrender or full surrender from the Guaranteed Account, we
may defer the payment for up to six months from the date we receive the written
request. If we defer payment from the Guaranteed Account for 30 days or more, we
will pay interest on the amount we deferred at a rate of 4% per year, compounded
annually, until we make payment.
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Investing Your Policy Account Value
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The policy allows you to choose how to invest your Policy Account Value. Your
Policy Account Value will increase or decrease based on:
o The returns earned by the Subaccounts you select.
o Interest credited on amounts allocated to the Guaranteed Account.
We will determine your policy benefits based upon your Policy Account Value. If
your Policy Account Value is insufficient, your policy may terminate. If the Net
Cash Surrender Value on a monthly anniversary is less than the amount of that
date's monthly deduction, the policy will be in default and a Grace Period will
begin.
Determining the Policy Account Value
On the Policy Date, your Policy Account Value is equal to your initial Net
Premium. If the Policy Date and the Issue Date are the same day, the Policy
Account Value is equal to your initial premium, less the premium expenses and
monthly deduction.
On each Valuation Date thereafter, your Policy Account Value is equal to:
o Your Policy Account Value held in the subaccounts; and
o Your Policy Account Value held in Guaranteed Account.
Your Policy Account Value will reflect:
o the premiums you pay;
o the returns earned by the subaccounts you select;
o the interest credited on amounts allocated to the Guaranteed Account;
o any loans or partial surrenders; and
o the policy expenses we deduct.
Policy Account Value in the Subaccounts. We measure your Policy Account Value in
the subaccounts by the value of the subaccounts' accumulation units we credit to
your policy. When you allocate premiums or transfer part of your Policy Account
Value to a subaccount, we credit your policy with accumulation units in that
subaccount. The number of accumulation units equals the amount allocated to the
subaccount divided by that subaccount's accumulation unit value for the
Valuation Date when the allocation is effected.
The number of subaccount accumulation units we credit to your policy will:
o increase when Net Premium is allocated to the subaccount, amounts are
transferred to the subaccount and loan repayments are credited to the
subaccount.
o decrease when the allocated portion of the monthly deduction is taken from
the subaccount, a 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.
Accumulation Unit Values. A subaccount's accumulation unit value varies to
reflect the return of the portfolio and may increase or decrease from one
Valuation Date to the next. We arbitrarily set the accumulation unit value for
each subaccount at $10 when the subaccount was established. Thereafter, the
accumulation unit value equals the accumulation unit value for the prior
Valuation Period multiplied by the net investment factor for the current
Valuation Period.
Net Investment Factor. The net investment factor is an index we use to measure
the investment return earned by a subaccount during a Valuation Period. It is
based on the change in net asset value of the portfolio shares held by the
subaccount, and reflects any dividend or capital gain distributions on the
portfolio shares and the deduction of the daily mortality and expense risk
charge.
Guaranteed Policy Account Value. On any Valuation Date, the Guaranteed Account
portion of your Policy Account Value equals:
o the total of all Net Premium, allocated to the Guaranteed Account, plus
o any amounts transferred to the Guaranteed Account, plus
o interest credited on the amounts allocated and transferred to the
Guaranteed Account, less
o the amount of any transfers from the Guaranteed Account, less
o the amount of any partial surrenders, including the partial surrender
charges, taken from the Guaranteed Account, and less
o the allocated portion of the monthly deduction deducted from the Guaranteed
Account, plus
o the amount of the Loan Account.
If you take a loan, we transfer the amount of the loan to the Loan Account held
in the Guaranteed Account. The value of your Loan Account includes transfers to
and from the Loan Account as you take and repay loans and interest credited on
the Loan Account.
Net Policy Account Value. The net Policy Account Value on a Valuation Date is
the Policy Account Value less outstanding loans on that date.
Cash Surrender Value. The Cash Surrender Value on a Valuation Date is the Policy
Account Value reduced by any surrender charge that would assessed if the policy
were surrendered on that date.
Net Cash Surrender Value. The Net Cash Surrender Value on a Valuation Date is
the amount you would receive on a surrender of your policy and is equal to:
o the Cash Surrender Value, less
o the outstanding loan on that date.
Transfers
You may transfer Policy Account Value among the subaccounts and to the
Guaranteed Account after the period to examine and cancel. All transfer requests
must satisfy the following requirements:
o Minimum amount of transfer -- You must transfer at least $250 or, the
balance in the subaccount or the Guaranteed Account, if less;
o Form of transfer request - Transfer requests must be in writing;
o Transfers from the Guaranteed Account -- The maximum you may transfer in a
Policy Year is equal to 25% of your guaranteed Policy Account Value that is
not in the Loan Account. Transfers may be made only during the 60-day
period within 30 days before and following the end of each Policy Year. The
amount transferred must be at least $250 or the Policy Account Value held
in the Guaranteed Account.
Date We Process Your Transfer Request. We must receive your transfer request at
our Administrative Office. We process transfers at the price next computed after
we receive your transfer request. We may, however, defer transfers under the
same conditions as described under "Other Policy Provisions - When Proceeds Are
Paid."
Number of Allowable Transfers/Transfer Charge. We do not currently limit the
number of transfers you may make. We will currently assess a $25 transfer
charge, however, for each transfer in excess of 12 during a Policy Year. All
transfers processed on the same business day will count as one transfer for
purposes of determining the number of transfers you have made in a Policy Year.
We reserve the right to increase or decrease the number of free transfers
allowed in any Policy Year.
We will confirm transfer requests received by fax before processing them. You
should review all confirmations to determine if there have been any unauthorized
transfers.
Dollar Cost Averaging
Dollar cost averaging is a systematic method of investing at regular intervals.
By investing at regular intervals, the cost of the securities is averaged over
time and perhaps over various market cycles.
Under this program we will automatically transfer monthly a portion of your
Money Market Subaccount value into other subaccounts or the Guaranteed Account
for a period not in excess of 24 months. We will allocate the transfers based on
your current premium allocation instructions. However, no less than 5% may be
allocated to any one subaccount or to the Guaranteed Account. There is no charge
for this option which can be elected at any time provided there is a minimum
balance of $2000 in the Money Market Subaccount. Transfers in connection with
the dollar cost averaging program will not count against the 12 free transfers
in a Policy Year.
Dollar Cost Averaging From a Subaccount. If you instruct us to make the
transfers from the Money Market Subaccount, you may request that we transfer:
o A specified dollar amount -- we will automatically transfer this amount in
accordance with your most current premium allocation instructions for a
specified period until your Policy Account Value in the transferring Money
Market Subaccount is depleted.
o A specified number of months-- we will automatically transfer over a
specific number of months an amount 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 transfer
will be for 1/10 and so on until the end of the requested period.
We will begin to process your automatic transfers:
o On the first monthly anniversary following the end of the period to examine
and cancel if you requested the automatic transfers when you applied for
your policy.
o On the second Monthly Anniversary following the receipt of your request at
our Administrative Office if you elect the option after you applied for the
policy.
We will stop processing automatic transfers if:
o The funds in the Money Market Subaccount are depleted;
o We receive you written request at our Administrative Office to cancel
future transfers;
o We receive notification of death of the Insured; or
o Your policy goes into the Grace Period.
Dollar cost averaging may lessen the impact of market fluctuations on your
investment. Using dollar cost averaging does not guarantee investment gains or
protect against loss in a declining market.
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Death Benefit
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Death Benefit
During the policy term, we will pay the death benefit to the Beneficiary after
the Insured's death. To make payment, we must receive at our Administrative
Office:
o satisfactory proof of the Insured's death; and
o the policy.
Payment of Death Benefit. We will pay the death benefit generally within seven
days after we receive the information we require. We will pay the death benefit
to the Beneficiary in one lump sum or, if elected, under a payment option.
Payment of the death benefit may also be affected by other provisions of the
policy.
We will pay interest on the death benefit from the date of the Insured's death
to the date of payment as required by applicable state law.
Amount of Death Benefit. We will determine the death benefit as of the date of
the Insured's death. The death benefit will equal:
o the death benefit amount determined according to the death benefit option
selected; plus
o any other benefits then due from riders to the policy; minus
o the outstanding loan, if any, and accrued loan interest; minus
o any overdue monthly deductions if the Insured dies during a Grace Period.
Death Benefit Options
You may select from two death benefit options.
Option I - Level Death Benefit Option. The basic death benefit will be the
greater of:
(1) the Face Amount; or
(2) Policy Account Value at date of death multiplied by the appropriate
minimum death benefit factor.
Option II - Increasing Death Benefits Option. The basic death benefit will be
the greater of:
(1) the Face Amount plus the Policy Account Value; or
(2) Policy Account Value at date of death multiplied by the appropriate
minimum death benefit factor.
Changes in Death Benefit Options
You may change your death benefit option by providing your agent with a written
request or by writing us at our Administrative Office. We may require that you
submit satisfactory evidence of insurability to us.
If you request a change from Option I to Option II, we will decrease the Face
Amount by an amount equal to your Policy Account Value on the date the change
takes effect. However, we reserve the right to decline to make such a change if
it would reduce the Face Amount below the minimum Face Amount.
If you request a change from Option II to Option I, we will increase the Face
Amount by an amount equal to your Policy Account Value on the date the change
takes effect. Such decreases and increases in the Face Amount are made so that
the death benefit remains the same on the date the change takes effect.
Once approved, we will issue new policy information pages and attach a copy of
your application for change. 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 changes that we determine
would cause the policy to fail to qualify as life insurance under our
interpretation of the Code.
The change will take effect on the next Monthly Anniversary that coincides with
or next follows the date we approve your request.
Changes in Face Amount
At any time after the first policy anniversary while the policy is in force you
may request a change in the Face Amount. We will not make a change in Face
Amount that causes your policy to fail to qualify as life insurance under of the
Code.
Increases in Face Amount. Any request for an increase:
o Must be for at least $10,000.
o May not be requested in the same Policy Year as another request for an
increase.
o May not be requested after the Insured is Attained Age 75.
A written application must be submitted to our Administration Office along with
satisfactory evidence of insurability. You must return the policy so we can
amend it to reflect the increase. The increase in Face Amount will become
effective on the Monthly Anniversary on or next following the date the increase
is approved, and the Policy Account Value will be adjusted to the extent
necessary to reflect a monthly deduction as of the effective date based on the
increase in Face Amount.
Decreases in Face Amount. Any request for a decrease:
o Must be at least $5,000.
o Must not cause the Face Amount after the decrease to be less than the
minimum Face Amount at which we would issue a policy.
o During the first 5 Policy Years, the Face Amount may not be decreased
by more than 10% of the initial Face Amount in any one Policy Year.
o No decrease may be made during the first 12 months following an
increase in Face Amount.
o 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.
Consequences of a Change in Face Amount. 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 modified endowment
contract.
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Cash Benefits During the Insured's Life
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During the life of the Insured, your policy has cash benefits which you may
access within limits by taking loans, partial surrenders or a full surrender.
Policy Loans
You may request a loan against your policy at any time after the first Policy
Year or after the first 12 months following an increase in Face Amount while the
policy has a Net Cash Surrender Value. We limit the minimum and maximum amount
of loan you may take.
o Maximum Loan Amount. After First Policy Year -- The maximum loan
amount is:
o 90% of Your Net Cash Surrender Value, less
o Any outstanding loans
o Minimum Loan Amount -- $500
You must submit a written request for a loan to the Administrative Office. Loans
will be processed as of the date we receive the request at our Administrative
Office. Loan proceeds generally will be sent to you within seven days.
Interest. We charge interest daily on any outstanding loan at a declared annual
rate not in excess of 8%. The maximum net cost (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) of a loan is 2% per year. Interest is due and
payable at the end of each Policy Year while a 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 loan.
For Policy Years 11 and later, a portion of the loanable amount may be available
on a preferred loan basis. The amount available on a preferred basis is the
excess, if any, of the Policy Account Value over the sum of the premiums paid.
For a preferred loan, the interest rate charged and credited to the preferred
portion of the loan value will be the same.
Loan Account. You may direct us to take an amount equal to the loan proceeds and
any amount attributed to unpaid interest from any subaccount or from the
Guaranteed Account. Otherwise, we will withdraw this amount from each Account on
a pro rata basis. We transfer this amount to the Loan Account in the Guaranteed
Account.
When a loan is repaid, an amount equal to the repayment will be transferred from
the Loan Account to the subaccounts and Guaranteed Account in accordance with
your allocation percentages in effect at the time of repayment.
Effect of Loan. A loan, whether or not repaid, will have a permanent effect on
the death benefit and Policy 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 Policy Account Value. The longer the
loan is outstanding, the greater this effect is likely to be. Depending on the
investment results of the subaccounts or credited interest rates for the
Guaranteed Account while the loan is outstanding, the effect could be favorable
or unfavorable.
In addition, loans from modified endowment contracts may be treated for tax
purposes as distributions of income.
If the death benefit becomes payable while a loan is outstanding, the
outstanding loan will be deducted in calculating the death benefit.
If the outstanding loan exceeds 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.
Outstanding Loan. The outstanding loan on a Valuation Date equals:
o All loans that have not been repaid (including past due unpaid
interest added to the loan), plus
o accrued interest not yet due.
Loan Repayment. 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.
Partial Surrenders
You may request a partial surrender at any time after the first policy
anniversary. No more than two partial surrenders may be made during a Policy
Year.
We may limit the minimum and maximum amount of partial surrenders.
o Maximum Partial Surrender Amount - 90% of your policy's Net Cash Surrender
Value except that the partial surrender may not cause the Face Amount to be
less than the required minimum Face Amount.
o Minimum Partial Surrender Amount -- $500
In order to make a partial surrender, you must submit a written request to our
Administrative Office. We will reduce your Policy Account Value by the partial
surrender amount plus any applicable charges. When you request a partial
surrender, you may direct us to take the requested amount from any subaccount or
from the Guaranteed Account. If the Guaranteed Account or subaccount value is
insufficient to withdraw the amount requested, we will withdraw the difference
from the remaining Accounts on a pro rata basis unless you have provided
specific instructions to withdraw the amount from one or several Accounts.
We will process partial surrender requests at the price next computed after we
receive your written request at our Administrative Office. We will generally pay
partial surrenders within seven days.
Expenses for Partial Surrenders. We will deduct the applicable surrender charge
on a partial surrender. This charge will be deducted from your Policy Account
Value along with the amount requested to be surrendered and will be considered
part of the partial surrender (together, the "partial surrender amount").
Currently, we assess an administrative charge equal to the lesser of $25 of the
amount surrendered. In certain states the charge may be the lesser of $25 or 2%
of the amount surrendered.
Effect of Partial Surrender on Your Face Amount. The Face Amount of your policy
will also be reduced by the partial surrender amount if you selected Option I as
your death benefit.
We will reduce the Face Amount 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.
No partial surrender may be made that would reduce the Face Amount below the
minimum Face Amount.
Partial surrenders from your policy may have tax consequences.
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. We will process a surrender
request as of the date we receive your written request and all required
documents. Your surrender request generally will be paid within seven days. The
Net Cash Surrender Value may be taken in one sum or it may be applied to a
payment option. Your policy will terminate and cease to be in force if it is
surrendered for one sum. It cannot later be reinstated.
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Payment Options for Benefits
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We offer a wide variety of optional ways of receiving proceeds payable under the
policy, such as on a surrender or death, 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.
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Expenses of the Policy
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Periodically, we will deduct expenses related to your policy. We will deduct
these:
o from premium, Policy Account Value and from subaccount assets; and
o upon certain transactions.
The amount of these expenses are described in your policy as either guaranteed
or current. We will never charge more than the guaranteed amount. We may in our
discretion deduct on a current basis less than the guaranteed amount.
Deduction From Premium
We will deduct 5% plus a state specific percent of premium from each premium
payment. This charge is intended to provide for state premium taxes, DAC taxes
and for other expenses associated with acquiring and servicing a policy.
Monthly Deductions From Policy Account Value
On the Policy Date and each Monthly Anniversary thereafter, we make a deduction
from the Policy Account Value. On the Issue Date the amount deducted 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. We
will deduct charges on each Monthly Anniversary for:
o The administration of your policy.
o The acquisition and underwriting costs of your policy.
o The cost of insurance for your policy.
o The cost of any supplemental benefits or riders.
We will take the monthly deductions from your Policy Account Value and from each
subaccount on a pro rata basis.
Administrative Charge. This charge compensates us for administrative expenses
associated with the policy and the Separate Account. The policy refers to these
expenses as the "monthly expense charge" and the "additional first year
administrative charge."
Monthly Expense Charge. We will make a deduction from your Policy Account Value
for expenses such as premium billing and collection, record keeping, processing
claims, loans, policy changes, reporting and overhead costs, processing
applications and establishing policy records associated with the administration
of your policy. This charge will vary based on the Policy Face Amount. The chart
below reflects the current and guaranteed monthly expense charges:
Current Guaranteed
Monthly Expense Charge Per Policy Charge Charge
If the Face Amount is between $50,000 and $199,999 $ 7.50 $ 15.00
If the Face Amount is between $200,000 and $499,999 $ 5.00 $ 10.00
If the Face Amount is $500,000 or greater $ 4.00 $ 10.00
First Year Additional Charge $ 20.00 $ 25.00
First Year Administrative Charge. There is an additional monthly expense charge
during the first Policy Year and following an increase in Face Amount for our
expenses associated with the acquisition and underwriting of your policy. We
deduct a monthly charge, not to exceed $25, during the first 12 months after the
Policy Date and the 12 months immediately following a Face Amount increase.
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 month to month. 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 described below on that
Monthly Anniversary.
The net amount at risk is calculated as (a) minus (b) where:
(a) is the current death benefit at the beginning of the policy month divided by
1.0032737; and (b) is the current total Policy Account Value.
Rate Classes for Insureds. We currently rate Insureds in one of following basic
rate classifications based on our underwriting:
o non-smoker standard
o smoker
o substandard for those involving a higher mortality risk
We place the Insured in a rate class when we issue the policy based on our
underwriting determination. 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 a lower guaranteed 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 a higher guaranteed 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 Policy Account Value will be applied to the initial Face Amount
first and then to any subsequent increases in Face Amount. If at the time an
increase is requested, the Policy Account Value exceeds the initial Face Amount
(or any subsequently increased Face Amount) divided by 1.0032737, the excess
will then be applied to the subsequent increase in Face Amount in the sequence
of the increases.
In order to maintain the policy in compliance with Section 7702 of the Code,
under certain circumstances an increase in Policy Account Value will cause an
automatic increase in the death benefit. The Attained Age and rate 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).
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
our 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 risk class are generally lower than rates for an Insured of the same
age and sex in a smoker risk class. Cost of insurance rates (whether guaranteed
or current) for an Insured in a nonsmoker or smoker risk class are generally
lower than rates for an Insured of the same age and sex and smoking status in a
substandard risk class.
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.
Deduction From Subaccount Assets
Mortality and Expense Risk Charge. We deduct a daily charge from your Policy
Account Value in the subaccounts for assuming certain mortality and expense
risks under the policy. This charge does not apply to the amounts you allocate
to the Guaranteed Account. The guaranteed and current charge is at an annual
rate of 0.90% of the subaccount assets. Although, the charge may be decreased to
not less than 0.50% in Policy Years 11 and later, it is guaranteed not to exceed
an annual rate of 0.90% of your Policy Account Value in the subaccounts for the
duration of a policy.
The mortality risk we assume is that the Insured under a policy may die sooner
than anticipated, and therefore we will pay an aggregate amount of death benefit
greater than anticipated. The expense risk we assume is that expenses incurred
in issuing and administering all Policies and the Separate Account will exceed
the amounts realized from the administrative charges assessed against all
Policies.
Deductions Upon Policy Transactions
Transfer Charge. We currently impose a $25 transfer charge on any transfer of
Policy Account Value among the subaccounts and the Guaranteed Account in excess
of the 12 free transfers permitted each Policy Year. When we impose the charge,
we deduct it from the amount requested to be transferred before allocation to
the new subaccount(s). We will show the transfer charge in the confirmation of
the transaction.
Surrender Charge. 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 amount by which the Face Amount had been
increased. The surrender charge will be deducted before any surrender proceeds
are paid.
Surrender Charge Calculation. In general, the surrender charge is based on the
premiums you pay. The Surrender Charge will be no greater than the product of
(3) times the sum of (1) and (2) where:
(1) is equal to 25% of the first year paid premium up to the surrender charge
premium (see Appendix B); and (2) is equal to 4% of the first year paid premium
in excess of the surrender charge premium; and (3) is a factor based on the
Policy Year when the surrender occurs as described in the following table:
Policy
Year Factor
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%
Surrender Charge Based On An Increase Or Decrease In Face Amount. If you
increase the Face Amount of the policy, we will impose 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 you reduce the Face Amount of the policy before the end of the 14th
Policy Year or within 14 years immediately following a Face Amount increase, we
may also deduct a pro rata share of any applicable surrender charge from your
Policy Account Value. Reductions will first be applied against the most recent
increase in the Face Amount of the policy. If you have made several increases in
Face Amount, we will apply the surrender charge to prior increases in Face
Amount of the policy in the reverse order in which such increases took place,
before applying the additional surrender charges to the initial Face Amount of
the policy.
Partial Surrender Charge. We may deduct a partial surrender charge:
o upon a partial surrender; and
o if you decrease your Policy's Face Amount.
The amount of the partial surrender charge is equal to a pro rata portion of the
surrender charge that would apply to a full surrender. We deduct the partial
surrender charge, proportionately, from the subaccounts or the Guaranteed
Account affected by your partial surrender.
Partial Surrender Charge Due to Decrease in Face Amount. We will deduct an
amount 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 currently deduct an administrative
charge of $25 upon a partial surrender. In certain states the charge may be the
lesser of $25 or 2% of the amount surrendered.
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 groups of individuals
in a manner that in our opinion results in expense savings. For purchases made
by our officers, directors and employees, those of an affiliate, or any
individual, firm, or a company that has executed the necessary agreements to
sell the policy, and members of the immediate families of such officers,
directors, and employees, we 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.
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Supplemental Benefits and Riders
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We intend to make available certain supplemental benefits and riders which may
in the future be issued with the policy. Any monthly charges for these
supplemental benefits and riders, as listed below, will be deducted from the
Policy Account Value.
Accelerated Benefit Rider (ABR)
Accidental Death Benefit Rider (ADB)
Guaranteed Minimum Death Benefit (GMDB)
Child's Term Rider (CTR)
Other Insured Term Rider (OIR)
Primary Insured Term Rider (PIR)
Waiver of Monthly Deductions (WMD)
Waiver of Specified Premium (WSP)
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Other Policy Provisions
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Right to Exchange or Convert
You may exchange or convert this policy to 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,
we will notify you and give you information on the options available.
When an exchange or conversion is requested, we accomplish the exchange by
transferring all of the Policy Account Value to the Guaranteed Account. There is
no charge for this transfer. Once this option is exercised, the entire Policy
Account Value must remain in the Guaranteed Account for the remaining life of
the new 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 (unless otherwise specified by state law) 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, 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 (unless
otherwise specified by state law) after the effective date of an increase in the
Face Amount, then our liability as to the increase in amount will be limited to
the payment of a single sum equal to the monthly cost of insurance deductions
made for such increase plus the expense charge deducted for the increase.
Changes in the Policy or Benefits
Misstatement of Age or Sex. If an Insured's age or sex has been misstated in the
policy, the death benefit and any benefits provided by riders shall be those
which would be purchased at the then current cost of insurance charge for the
correct age and sex.
Other Changes. At any time we may make such changes in the policy as are
necessary to assure compliance at all times with the definition of life
insurance prescribed by the Code or to make the policy conform with any law or
regulation issued by any government agency to which it is subject.
When Proceeds Are Paid
We will ordinarily pay any death benefit, loan proceeds or partial or full
surrender proceeds within seven days after receipt at our Administrative Office
of all the required documents. Other than the death benefit, which are
determined as of the date of death, the amount will be determined as of the date
we receive the required documents. However, we may delay making a payment or
processing a transfer request if:
(1) the New York Stock Exchange is closed for other than a regular holiday or
weekend, trading is restricted by the Securities and Exchange Commission,
or the Securities and Exchange Commission declares that an emergency
exists; or
(2) the Securities and Exchange Commission by order permits postponement of
payment for your protection.
In addition we may delay making deductions from the Guaranteed Account.
Reports to Owners
You will receive a confirmation within seven days of the transaction of:
o the receipt of any unplanned premium (and any premium received before
the Issue Date);
o any change of allocation of premiums;
o any transfer among subaccounts;
o any loan, interest repayment, or loan repayment;
o any partial surrender;
o any return of premium necessary to comply with applicable maximum
receipt of any premium payment;
o any exercise of your right to cancel;
o an exchange of the policy;
o full surrender of the policy; or
o payment of the death benefit under the policy.
Within 30 days after each policy anniversary we will send you a statement. The
statement will show the death benefit currently payable, and the current Policy
Account Value, Cash Surrender Value, and the outstanding loan. The statement
will also show premiums paid, all charges deducted during the last Policy Year,
and all transactions. We will also send to you reports of the investments within
the Separate Account at least annually.
Assignment
You may assign the policy 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 this
assignment form at our Administrative Office. We assume no responsibility for
the validity or sufficiency of any assignment. Any assignment or pledge of a
modified endowment contract as collateral for a loan may result in a taxable
event.
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 years (unless
otherwise specified by state law) from the end of the Grace Period;
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 months, calculated from the effective date of reinstatement; and
(iii) the premium expense charge and any increase in surrender charges
associated with this payment. We will determine the amount of this
required payment as if no interest or investment performance were
credited to or charged against your Policy Account Value; and
4. Repay or reinstate any loan which existed on the date the policy
ended.
The effective date of the reinstatement of policy benefits will be the next
Monthly Anniversary which coincides with or next follows the date we approve
your request. From the required payment we will deduct the premium expenses. The
Policy Account Value, loan and surrender charges that will apply upon
reinstatement will be those that were in effect on the date the policy lapsed.
We will start to make monthly deductions again as of the effective date of
reinstatement. The monthly expense charge from the beginning of the Grace Period
to the effective date of reinstatement will be deducted from the Policy Account
Value as of the effective date of reinstatement. No other charges will accrue
for this period.
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Performance Information
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From time to time we may advertise the "total return" and the "average annual
total return" of the subaccounts and the portfolios. 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 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 set forth in Appendix C reflects the total of the
income generated by the portfolio net of the total portfolio operating expenses
(i.e., management fees and other portfolio 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. We 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.
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.
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Federal Income Tax Considerations
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The following summarizes the current federal income tax law that applies to life
insurance in general. This summary does not cover all situations. This summary
is based upon our understanding of the current federal income tax laws and
current interpretations by the Internal Revenue Service. We cannot predict
whether the Code will change. You should speak to a competent tax adviser to
discuss how the purchase of a policy and the transactions you make under the
policy will impact your federal tax liability.
Tax Status of the Policy
A policy has certain tax advantages when it is treated as a "life insurance
contract" under the Code. We believe that the policy meets the definition of a
life insurance contract under Section 7702 of the Code. You bear the risk that
the policy may not meet the definition of a life insurance contract. You should
consult your tax adviser to discuss these risks.
The Company
We are taxed as a life insurance company under the Code. For federal tax
purposes, the Separate Account and its operations are considered to be part of
our operations and are not taxed separately.
Diversification and Investor Control
The Code requires that we diversify the investments underlying variable
insurance contracts. If the investments are not properly diversified and any
remedial period has passed, Section 817(h) of the Code provides in general the
contract is immediately disqualified from treatment as a life insurance contract
for federal income tax purposes. Disqualification of the policy as a life
insurance contract would result in taxable income to you at the time that we
allocate any earnings to your policy. You would have taxable income even though
you have not received any payments under the policy. To the extent that any
segregated asset account with respect to a variable life insurance contract
invests exclusively in securities issued by the U.S. Treasury, the
diversification standard is satisfied. A segregated asset account underlying
life insurance contracts such as the policy will also meet the diversification
requirements if, as of the close of each quarter:
o the regulated investment companies in which the segregated asset
account invest satisfy the diversification requirements described
below; and
o 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.
Alternatively, the diversification requirements may be met for each if:
o no more than 55% of the value of the total assets of the portfolio is
represented by any one investment;
o no more than 70% of the value of the total assets of the portfolio is
represented by any two investments;
o no more than 80% of the value of the total assets of the portfolio is
represented by any three investments; and
o no more than 90% of the value of the total assets of the portfolio is
represented by any four investments.
There are several ways for investments to meet the diversification requirements.
Generally, each United States government agency or instrumentality is treated as
a separate issuer under these rules.
All securities of the same issuer are generally treated as a single investment.
We intend that each portfolio in which the subaccounts invest will be managed by
its investment adviser in compliance with these diversification requirements. A
variable life insurance policy could fail to be treated as a life insurance
contract for tax purposes if the owner of the policy has such control over the
investments underlying the policy (e.g., by being able to transfer values among
subaccounts with only limited restrictions) so as to be considered the owner of
the underlying investments. There is some uncertainty on this point because no
guidelines have been issued by the Treasury Department. If and when guidelines
are issued, we may be required to impose limitations on you're rights to control
investment designations under the policy. We do not know whether any such
guidelines will be issued or whether any such guidelines would have retroactive
effect. We, therefore, reserve the right to make changes that we deem necessary
to insure that the policy qualifies as a life insurance contract.
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 has not issued final
regulations 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 contract.
With respect to a policy issued on the basis of a standard rate class, we
believe 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 you pay the
full amount of premiums permitted under the policy.
If subsequent guidance issued under Section 7702 leads us to conclude that a
policy does not (or may not) satisfy Section 7702, we will take appropriate and
necessary steps for the purpose of bringing the policy into compliance, but we
can give no assurance that it will be possible to achieve that result. We
expressly reserve the right to restrict policy transactions if we determine such
action to be necessary to qualify the policy as a life insurance contracts under
Section 7702.
Tax Treatment of Policy Benefits In General
This discussion assumes that each policy will qualify as a life insurance
contract for federal income tax purposes under Section 7702. The death benefit
under the policy should be excluded from the taxable gross income of the
Beneficiary. In addition, the increases in the Policy Account Value should not
be taxed until there has been a distribution from the policy such as a
surrender, partial surrender or lapse with loan.
Pre-Death Distribution
The tax treatment of any distribution you receive before the Insured's death
depends on whether the policy is classified as a modified endowment contract.
Policies Not Classified as Modified Endowment Contracts
o If you surrender the policy or allow it to lapse, you will not be taxed
except to the extent the amount you receive is in excess of the premiums
you paid less the untaxed portion of any prior withdrawals. For this
purpose, you will be treated as receiving any portion of the cash surrender
value policy debt. The tax consequences of a surrender may differ if you
take the proceeds under an income payment settlement option.
o Generally, you will be taxed on a withdrawal to the extent the amount you
receive exceeds the premiums you paid for the policy less the untaxed
portion of any prior withdrawals. However, under some limited
circumstances, in the first 15 Policy Years, all or a portion of a
withdrawal may be taxed if the cash value exceeds the total premiums paid
less the untaxed portions of any prior withdrawals, even if total
withdrawals do not exceed total premiums
o Extra premiums for optional benefits and riders generally do not count in
computing the premiums paid for the policy for the purposes of determining
whether a withdrawal is taxable.
o Loans you take against the policy are ordinarily treated as debt and are
not considered distributions subject to tax.
Modified Endowment Contracts
o The rules change if the policy is classified as a modified endowment
contract ("MEC"). The policy could be classified as a MEC if premiums
substantially in excess of scheduled premiums are paid or a decrease in the
face amount of insurance is made (or a rider removed). The addition of a
rider or an increase in the face amount of insurance may also cause the
policy to be classified as a MEC. The rules on whether a policy will be
treated as a MEC are very complex and cannot be fully described in this
summary. You should consult a qualified tax adviser to determine whether a
policy transaction will cause the policy to be classified as a MEC. We will
monitor your policy and will take steps reasonably necessary to notify you
on a timely basis if your policy is in jeopardy of becoming a MEC.
o If the policy is classified as a MEC, then amounts you receive under the
policy before the Insured's death, including loans and withdrawals, are
included in income to the extent that the cash value before surrender
charges exceeds the premiums paid for the policy increased by the amount of
any loans previously included in income and reduced by any untaxed amounts
previously received other than the amount of any loans excludable from
income. An assignment of a MEC is taxable in the same way. These rules also
apply to pre-death distributions, including loans, made during the two-year
period before the time that the policy became a MEC.
o Any taxable income on pre-death distributions (including full surrenders)
is subject to a penalty of 10% unless the amount is received on or after
age 59 1/2, on account of your becoming disabled or as a life annuity. It
is presently unclear how the penalty tax provisions apply to the Policies
owned by businesses.
o All MECs issued by us to you during the same calendar year are treated as a
single policy for purposes of applying these rules.
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 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 loan, you 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 death benefit option, a loan, a partial surrender,
a surrender, a change in owners 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. We are 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. You are not permitted to
elect out of withholding if you do not provide a social security number or other
taxpayer identification number. Special withholding rules apply to payments made
to non-resident aliens.
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, you should examine the
applicable tax rules relating to such plans and life insurance thereunder in
consultation with a qualified tax adviser.
Possible Charge for the Company's Taxes
At the present time, we do not deduct any charges for any federal state or local
income taxes. However, we do currently deduct charges for state and federal
premium based taxes and the federal DAC tax. We reserve the right in the future
to deduct a charge for any such tax or other economic burden resulting from the
application of the tax laws that we determine to be properly attributable to the
Separate Account or to the policy.
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Distribution of the Policy
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The policy is sold by licensed insurance agents, where the policy may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc.
The policy will be distributed through the principal underwriter for the
Separate Account, AIG Equity Sales Corp. (AIGESC) 70 Pine Street, New York, New
York, an affiliate of ours. AIGESC may also enter into selling agreements with
other broker dealers that will offer the policy.
Commissions may be paid to registered representatives based on premiums paid for
Policies sold. Other expense reimbursements, allowances, and overrides may also
be paid. Registered representatives who meet certain productivity and
profitability standards may be eligible for additional compensation. Additional
payments may be made for administrative or other services not directly related
to the sale of the policy.
Other Policies Issued by the Company
We may offer other policies similar to those offered herein.
- --------------------------------------------------------------------------------
About Us and the Accounts
- --------------------------------------------------------------------------------
AIG Life Insurance Company
We are a stock life insurance company initially organized under the laws of
Pennsylvania and reorganized under the laws of Delaware. We were incorporated in
1962. We provide a full range of individual and group life, disability,
accidental death and dismemberment policies and annuities. We are a subsidiary
of American International Group, Inc., which is a 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.
Year 2000
The Year 2000 issue arises from computer programs being written using two digits
rather than four digits to define the applicable year. This could result in a
failure of the information technology systems (IT systems) and other equipment
containing imbedded technology (non-IT systems) in the year 2000, causing
disruption of our operations and of our lessees, vendors, or business partners.
We have developed a plan to address the Year 2000 issue as it affects our
internal IT and non-IT systems, and to assess Year 2000 issues relating to third
parties with whom we have critical relationships.
Our plan for addressing internal systems includes:
o an assessment of internal IT and non-IT systems and equipment affected by
the Year 2000 issue;
o definition of strategies to address affected systems and equipment;
o remediation of identified affected systems and equipment; and
o internal certification that each internal system is Year 2000 compliant.
We have remediated, tested and returned to production substantially all of our
internal IT systems. We continue to remediate and test internal non-IT systems
and expect to complete our remediation by mid-1999.
We have also initiated formal communications with respect to the Year 2000 issue
to those third parties which have significant interaction with us. Currently, we
are unable to ascertain whether all such third parties will successfully address
the Year 2000 issue, particularly those third parties outside the United States
where it is believed that remediation efforts relating to the Year 2000 issue
may be less advanced. While we expect to have no interruption of operations as a
result of internal IT and non-IT systems, significant uncertainties remain about
the effect on us of third parties who are not Year 2000 compliant. We will
continue to monitor third party Year 2000 issue readiness to determine whether
additional or alternative measures may be necessary. Such measures may include
selecting alternate third parties or other actions designed to mitigate the
effects of a third party's lack of preparedness. There can be no assurance that
unresolved Year 2000 issues of third parties will not have a material adverse
impact on our results of operations, financial condition or liquidity. We are
considering the effects of Year 2000 related failures on our business and, as
the most reasonably likely worst case scenarios become more clearly identified,
we will develop appropriate contingency plans.
The funds, like other third parties, may not have resolved their Year 2000
issues that may have a material adverse impact on your contract values as well
as our operations and we cannot assure that it will. Please refer to Year 2000
discussions in the fund's prospectus.
The Separate Account
We established the Separate Account as a separate investment account on June 5,
1986. It is used to support the policy and other variable life insurance
policies, and may be used for other permitted purposes. The Separate Account is
registered with the Securities and Exchange Commission as a unit investment
trust under the federal securities laws and qualifies as a "separate account"
within the meaning of these laws.
Although you may have allocated your Policy Account Value to the subaccounts,
you do not own these assets. You only own your policy. We own the assets in the
Separate Account. The Separate Account may include other subaccounts which are
not available under the policy.
Income, gains and losses, realized or unrealized, of a subaccount are credited
to or charged against the subaccount without regard to any of our other income,
gains or losses. Assets equal to the reserves and other contract liabilities
with respect to each subaccount are not chargeable with liabilities arising out
of any of our other businesses or separate accounts. 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.
We have reserved certain rights regarding the Separate Account. We will exercise
these rights only in compliance with all applicable regulatory requirements. We
have the right to:
o Change, add or delete designated investment options.
o Add or remove subaccounts.
o Withdraw assets of a class of policies to which the policy belongs from a
subaccount and put them in another subaccount. o Combine any two or more
subaccounts.
o Register other separate accounts or deregister the Separate Account with
the Securities and Exchange Commission.
o Run the Separate Account under the direction of a committee, and discharge
such committee at any time.
o Restrict or eliminate any voting rights of Owners, or other persons who
have voting rights as to the Separate Account.
o Operate the Separate Account or one or more of the subaccounts 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
investments that are legal, as determined by our counsel.
We will not change an investment adviser or any investment of a subaccount of
our Separate Account unless approved by the Commissioner of Insurance of
Delaware or deemed approved in accordance with such law or regulation. Any
approval process is on file with the insurance supervisory official of the
jurisdiction in which this policy is delivered.
If any change we make results in a material change in the underlying investments
of a subaccount, we will notify you of such a change. If you have value in that
subaccount:
o We will transfer it at your written direction from that subaccount (without
charge) to another subaccount or to the Guaranteed Account, and
o You may then change your premium allocation percentages
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 portfolios.
However, as required by law, we will vote shares held in the subaccounts at
regular and special meetings of shareholders of the portfolios in accordance
with instructions we receive from Owners with Policy Account Value in the
subaccounts. If allowed by law or required by law we may vote shares of the
portfolios without obtaining instructions or in disregard to instructions we
have received. If we ever disregard voting instructions, we will advise you of
that action and our reasons for such action in the next semiannual report.
The Guaranteed Account
The Guaranteed Account is an account within the general account of the company.
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.
We have not registered:
o interests in the Guaranteed Account under the Securities Act of 1933, and
o the Guaranteed Account as an investment company.
The staff of the Securities and Exchange Commission has not reviewed our
disclosure on the Guaranteed Account. Our disclosure regarding the Guaranteed
Account must comply with generally applicable provisions of the federal
securities laws relating to the accuracy and completeness of statements made in
a prospectus.
- --------------------------------------------------------------------------------
Our Directors and Executive Officers
- --------------------------------------------------------------------------------
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.
Principal Business Affiliations
and Principal Occupations
Name and Address Office During Past Five Years
- ----------------------- --------- --------------------------------
Michele L. Abruzzo Director, Sr. Exec. Senior Vice President of
80 Pine Street Vice President American International Life
13th Floor Assurance Company of New
New York, NY 10005 York
Paul S. Bell Director, Sr. Vice Sr. Vice President Actuary
One Alico Plaza President Chief of American International
600 King Street Actuary Life Assurance Company of New
Wilmington DE 19801 York
Maurice R. Greenberg Director Director, Chairman and
70 Pine Street Chief Executive Officer of
New York, NY 10270 AIG, Inc.
Howard E. Gunton, Jr. Chief Financial Sr. Vice President and
One Alico Plaza Officer, Senior Comptroller of American
600 King Street Vice President International Life Assurance
Wilmington, DE 19801 Company of New York
Edward Easton Matthews Director, Senior Vice Chairman of Investments and
70 Pine Street Vice President Financial Services of AIG, Inc.
New York, NY 10270
Jerome Thomas Muldowney Director Senior Vice President of
175 Water Street Senior American International Life
New York, NY 10038 Vice Assurance Company of New York,
President Senior Managing Director of
AIG Global Investment Corp.
Michael Mullin Chief Operating Senior Vice President
One Alico Plaza Officer, Senior of American International Life
600 King Street Vice President Assurance Company of New York
Wilmington, DE 19801
Robinson K. Nottingham Director, Chairman Chairman of the Board and
70 Pine Street of the Board Chief Executive Officer of
New York, NY 10270 American International Life
Insurance Company (ALICO)
<PAGE>
Principal Business Affiliations
and Principal Occupations
Name and Address Office During Past Five Years
- ----------------------- --------- --------------------------------
Nicholas A. O'Kulich Director, Vice Vice President, Senior Vice
70 Pine Street Chairman, Treasurer President of AIG, Inc.
New York, NY 10270
Howard Ian Smith Director Director, Executive Vice
70 Pine Street President, Chief Financial
New York, NY 10270 Officer and Comptroller of
AIG, Inc.
Edmund Sze-Wing Tse Director Vice Chairman of AIG, Inc.
AIA Bldg.
70 Pine Street
New York, NY 10270
Elizabeth M. Tuck Secretary Secretary and Assistant
70 Pine Street Secretary of AIG, Inc. and
New York, NY 10270 certain affiliates
Gerald Walter Wyndorf Director, Chief Executive Vice President of
80 Pine Street Executive Officer American International Life
13th Floor and President Assurance Company of New York
New York, NY 10038
- --------------------------------------------------------------------------------
Other Information
- --------------------------------------------------------------------------------
State Regulation
We are subject to the laws of Delaware governing insurance companies and to
regulation by the Delaware Insurance Department. We file an annual statement in
a prescribed form with the Insurance Department each year covering our operation
for the preceding year and our final condition as of the end of such year.
Regulation by the Insurance Department includes periodic examinations to
determine our policy liabilities and reserves so that the Insurance Department
may certify the items are correct. Our 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, we are subject to regulation under the insurance laws
of other jurisdictions in which we may operate.
Legal Proceedings
There are no legal proceedings to which the Separate Account or the principal
underwriter is a party. We are engaged in various kinds of routine litigation
which, in our opinion, are not of material importance in relation to our total
capital and surplus.
Experts
The financial statements which appear in this prospectus have been audited by
PricewaterhouseCoopers LLP, independent certified public accountants, as stated
in its 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.
Published Ratings
We may occasionally publish in advertisements, sales literature and reports the
ratings and other information assigned to us 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 rating organization's opinion of our
financial strength and should not be considered as bearing on the investment
performance of assets held in the Separate Account.
The ratings are not recommendations to purchase our 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 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
- --------------------------------------------------------------------------------
<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, 1998, 1997 AND 1996
<PAGE>
Report of Independent Accountants
To the Stockholders and Board of Directors
AIG Life Insurance Company
In our opinion, the accompanying balance sheets and the related statements of
income, capital funds, cash flows, and comprehensive income present fairly, in
all material respects, the financial position of AIG Life Insurance Company (a
wholly-owned subsidiary of American International Group, Inc.) at December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
February 5, 1999
<PAGE>
AIG LIFE INSURANCE COMPANY
BALANCE SHEETS
(in thousands)
<TABLE>
December31, December 31,
1998 1997
Assets
<S> <C> <C>
Investments and cash:
Fixed maturities:
Bonds available for sale, at market value $ 4,238,045 $ 2,984,255
(cost: 1998 - $4,081,008: 1997 - $2,826,088)
Equity securities:
Common stock
(cost: 1998 - $901: 1997 - $1,381) 2,410 2,775
Preferred stock
(cost: 1998 - $18,250 : 1997 - $250) 19,338 250
Mortgage loans on real estate, net 468,342 350,823
Real estate, net of accumulated
depreciation of $4,351 in 1998; and $4,740 in 1997 13,002 15,940
Policy loans 1,010,969 1,496,837
Other invested assets 81,916 56,219
Short-term investments 163,704 667,912
Cash 4,788 5,132
-------------- -------------
Total investments and cash 6,002,514 5,580,143
Amounts due from related parties 17,330 11,446
Investment income due and accrued 94,029 85,135
Premium and insurance balances receivable-net 56,583 46,937
Reinsurance assets 72,044 60,744
Deferred policy acquisition costs 167,840 118,535
Federal income tax receivable 4,207 -
Separate and variable accounts 1,971,280 1,204,643
Other assets 6,228 4,855
-------------- -------------
Total assets $ 8,392,055 $ 7,112,438
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
December 31, December 31,
1998 1997
Liabilities
<S> <C> <C>
Policyholders' funds on deposit $ 4,472,854 $ 3,745,902
Future policy benefits 1,002,244 749,918
Reserve for unearned premiums 21,468 24,108
Policy and contract claims 200,193 199,069
Reserve for commissions, expenses and taxes 25,702 16,103
Insurance balances payable 56,263 47,372
Amounts due to related parties 4,119 3,945
Federal income tax payable - 1,684
Deferred income taxes 56,519 37,498
Separate and variable accounts 1,971,280 1,204,643
Minority interest 5,987 6,067
Other liabilities 59,189 621,585
------------- ------------
Total liabilities 7,875,818 6,657,894
----------- -----------
Capital funds
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
Retained earnings 236,521 181,887
Accumulated other comprehensive income 121,549 114,490
------------ -------------
Total capital funds 516,237 454,544
------------ ------------
Total liabilities and capital funds $ 8,392,055 $ 7,112,438
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
(in thousands)
<TABLE>
Years ended December 31,
1998 1997 1996
--------- -------------- -------------
<S> <C> <C> <C>
Revenues:
Premiums $ 616,964 $ 437,650 $ 394,480
Net investment income 457,148 381,868 504,661
Realized capital (losses) (334) (3,025) (51)
------------- ------------- -------------
Total revenues 1,073,778 816,493 899,090
--------- ----------- ----------
Benefits and expenses:
Benefits to policyholders 272,368 188,969 189,933
Increase in future policy benefits
and policyholders' funds on deposit 547,100 397,481 495,529
Acquisition and insurance expenses 168,075 163,533 161,841
---------- ----------- ----------
Total benefits and expenses 987,543 749,983 847,303
---------- ----------- ----------
Income before income taxes 86,235 66,510 51,787
----------- ------------ ----------
Income taxes (benefits):
Current 16,218 20,059 25,087
Deferred 15,220 3,964 (5,486)
----------- ------------- -----------
Total income taxes 31,438 24,023 19,601
----------- ----------- ----------
Net income before minority interest 54,797 42,487 32,186
Minority interest income (loss) (163) (128) 154
------------ ------------- ------------
Net income $ 54,634 $ 42,359 $ 32,340
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF CAPITAL FUNDS
(in thousands)
<TABLE>
Years ended December 31,
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Common Stock
Balance at beginning of year $ 4,884 $ 4,884 $ 4,884
------------ ----------- -----------
Balance at end of year 4,884 4,884 4,884
------------ ----------- -----------
Additional paid-in capital
Balance at beginning of year: 153,283 123,283 123,283
Capital contribution - 30,000 -
--------------- ---------- --------------
Balance at end of year 153,283 153,283 123,283
--------- --------- ---------
Retained earnings
Balance at beginning of year 181,887 139,528 107,188
Net income 54,634 42,359 32,340
---------- ---------- -----------
Balance at end of year 236,521 181,887 139,528
--------- --------- ----------
Accumulated other comprehensive income
Balance at beginning of year 114,490 62,814 87,673
Unrealized appreciation (depreciation) of
investments - net of reclassification
adjustments 10,860 79,497 (50,245)
Deferred income tax (expense) benefit on
changes (3,801) (27,821) 25,386
----------- ---------- ----------
Balance at end of year 121,549 114,490 62,814
--------- --------- ----------
Total capital funds $ 516,237 $ 454,544 $ 330,509
========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
Years ended December 31,
1998 1997 1996
----------- ---------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 54,634 $ 42,359 $ 32,340
--------- ----------- ------------
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 250,810 121,325 72,151
Change in premiums and insurance balances
receivable and payable -net (753) (5,346) 11,782
Change in reinsurance assets (11,301) 157,710 (10,627)
Change in deferred policy acquisition costs (49,305) (34,248) (23,662)
Change in investment income due and accrued (8,894) 22,133 135,480
Realized capital losses 334 3,025 51
Change in current and deferred income taxes -net 9,330 2,689 (7,133)
Change in reserves for commissions, expenses and taxes 9,599 13,243 (21,274)
Change in other assets and liabilities - net (61,575) 69,582 12,733
----------- ----------- ------------
Total adjustments 138,245 350,113 169,501
--------- ---------- -----------
Net cash provided by operating activities 192,879 392,472 201,841
--------- ---------- -----------
Cash flows from investing activities:
Cost of fixed maturities at market, sold 282,756 23,816 40,098
Cost of fixed maturities at market, matured or redeemed 340,435 153,963 124,621
Cost of equity securities sold 1,039 3,676 2,607
Cost of real estate sold 2,585 - -
Realized capital gains 1,666 1,975 (51)
Purchase of fixed maturities (1,865,768) (804,262) (524,245)
Purchase of equity securities (18,559) (1,750) (1,678)
Purchase of real estate (341) (413) (881)
Mortgage loans granted (202,484) (87,690) (74,590)
Repayments of mortgage loans 83,035 29,298 16,416
Change in policy loans 485,868 377,124 1,087,765
Change in short-term investments 504,208 (567,876) 102,616
Change in other invested assets (11,706) 6,294 11,002
Other - net (27,908) 11,917 (38)
---------- ----------- --------------
Net cash (used in) provided by investing activities (425,174) (853,928) 783,642
---------- ----------- ----------
Cash flows from financing activities:
Change in policyholders' funds on deposit 231,951 430,808 (980,835)
Proceeds from capital contribution - 30,000 -
--------------- ----------- -----------------
Net cash provided by (used in) financing activities 231,951 460,808 (980,835)
--------- ---------- ------------
Change in cash (344) (648) 4,648
Cash at beginning of year 5,132 5,780 1,132
------------ ------------ -------------
Cash at end of year $ 4,788 $ 5,132 $ 5,780
=========== ============ =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
Years ended December 31,
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Comprehensive income
Net income $ 54,634 $ 42,359 $ 32,340
------------ ------------ -----------
Other comprehensive income
Unrealized appreciation (depreciation) of
investments - net of reclassification
adjustments 10,860 79,497 (50,245)
Changes due to deferred income tax benefit
(expense) on changes and
future policy benefits (3,801) (27,821) 25,386
------------ ------------- -----------
Other comprehensive income 7,059 51,676 (24,859)
------------ ------------ -----------
Comprehensive income $ 61,693 $ 94,035 $ 7,481
=========== =========== ============
</TABLE>
See accompanying notes to financial statements.
<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 their estimated life.
Common and non-redeemable preferred stocks are carried at current
market value. Dividend income is generally recognized when receivable.
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 as a separate
component of comprehensive income, net of deferred income taxes and
future policy benefits in capital funds currently.
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 as a
separate component of comprehensive income, net of deferred income
taxes in capital funds currently.
(c) Income Taxes: The Company joins in a consolidated federal income tax
return with the Parent and its domestic subsidiaries. The Company and
the Parent have a written tax allocation agreement whereby the Parent
agrees not to charge the Company a greater portion of the consolidated
tax liability than would have been paid by the Company if it had filed
a separate return. Additionally, the Parent agrees to reimburse the
Company for any tax benefits arising out of its net losses within
ninety days after the filing of that consolidated tax return for the
year in which these losses are utilized. Deferred federal income taxes
are provided for temporary differences related to the expected future
tax consequences of events that have been recognized in the Company's
financial statements or tax returns.
(d) Premium Recognition and Related Benefits and Expenses: Premiums on
traditional life insurance and life contingent annuity contracts are
recognized when due. Revenues for universal life and investment-type
products consist of policy charges for the cost of insurance,
administration, and surrenders during the period. Premiums on accident
and health insurance are reported as earned over the contract term.
The portion of accident and health premiums which is not earned at the
end of a reporting period is recorded as unearned premiums. Estimates
of premiums due but not yet collected are accrued. Policy benefits and
expenses are associated with earned premiums on long-duration
contracts resulting in a level recognition of profits over the
anticipated life of the contracts.
Policy acquisition costs for traditional life insurance products are
generally deferred and amortized over the premium paying period of the
policy. Deferred policy acquisition costs and policy initiation costs
related to universal life and investment-type products are amortized
in relation to expected gross profits over the life of the policies
(see Note 3).
The liability for future policy benefits and policyholders' contract
deposits is established using assumptions described in Note 4.
(e) Policy and Contract Claims: Policy and contract claims include amounts
representing: (1) the actual in-force amounts for reported life claims
and an estimate of incurred but unreported claims; and (2) an
estimate, based upon prior experience, for accident and health
reported and incurred but unreported losses. The methods of making
such estimates and establishing the resulting reserves are continually
reviewed and updated and any adjustments resulting therefrom are
reflected in income currently.
(f) Separate and Variable Accounts: These accounts represent funds for
which investment income and investment gains and losses accrue
directly to the policyholders. Each account has specific investment
objectives, and the assets are carried at market value. The assets of
each account are legally segregated and are not subject to claims
which arise out of any other business of the Company.
<PAGE>
1. Summary of Significant Accounting Policies - (continued)
(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) Accounting Standards:
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" (FASB 130) and Statement of Financial Accounting
Standards No. 131 "Disclosure about Segments of an Enterprise and
Related Information" (FASB 131).
FASB 130 establishes standards for reporting comprehensive income and
its components in a full set of general purpose financial statements.
FASB 130 was effective for the Company as of January 1, 1998. FASB 130
had no impact on the Company's results of operations, financial
condition or liquidity.
FASB 131 establishes standards for the way companies are required to
disclose information about their operating segments in annual
financial statements and in interim financial statements. FASB 131
establishes, where practicable, standards with respect to geographic
areas, among other things. Certain descriptive information is also
required. FASB 131 has been adopted for the year ended December 31,
1998 by the Parent, whose operations are conducted principally through
three business segments: General Insurance, Life Insurance and
Financial Services. All operations of the Company fall within the Life
Insurance segment.
In February 1998, FASB issued Statement of Financial Accounting
Standards No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (FASB 132). This statement requires revised
disclosures about pension and other postretirement benefit plans and
does not change the measurement or recognition of these plans. Also,
FASB 132 requires additional information on changes in the benefit
obligations and fair values of plan assets. FASB 132 was effective for
the year ended December 31, 1998 and has been adopted by the Parent.
Information regarding the pension and postretirement benefit plans is
not computed on a subsidiary basis, but rather on a consolidated basis
for all subsidiaries of the Parent and, accordingly, is not presented
herein.
In June 1998, FASB issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities"
(FASB 133). This statement requires the Company to recognize all
derivatives in the consolidated balance sheet measuring these
derivatives at fair value. The recognition of the change in the fair
value of a derivative depends on a number of factors, including the
intended use of the derivative. The Company believes that the impact
of FASB 133 on its results of operations, financial condition or
liquidity will not be significant. FASB 133 is effective for the year
commencing January 1, 2000.
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AcSEC) issued
Statement of Position (SOP) 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." This statement
provides guidance for the recording of a liability for
insurance-related assessments. The statement requires that a liability
be recognized in certain defined circumstances. The Company believes
that the impact of this statement on its results of operations,
financial condition or liquidity will not be significant. This
statement is effective for the year commencing January 1, 1999.
<PAGE>
1. Summary of Significant Accounting Policies - (continued)
(h) Accounting Standards - (continued):
In October 1998, AcSEC issued SOP 98-7, "Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk." This statement identifies several methods of
deposit accounting and provides guidance on the application of each
method. This statement classifies insurance and reinsurance contracts
for which the deposit method is appropriate as contracts that (i)
transfer only significant timing risk, (ii) transfer only significant
underwriting risk, (iii) transfer neither significant timing nor
underwriting risk, and (iv) have an indeterminate risk. The Company
believes that the impact of this statement on its results of
operations, financial condition or liquidity will not be significant.
This statement is effective for the year commencing January 1, 2000.
Restatement of previously issued financial statements is not
permitted.
(i) The financial statements for 1997 and 1996 have been reclassified to
conform to the 1998 presentation.
2. Investment Information
(a) Statutory Deposits: Securities with a carrying value of $2,448,000 and
$2,454,000 were deposited by the Company under requirements of
regulatory authorities as of December 31, 1998 and 1997, respectively.
(b) Net Investment Income: An analysis of net investment income is as
follows (in thousands):
<TABLE>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Fixed maturities $284,267 $200,097 $164,548
Equity securities 622 58 219
Mortgage loans 36,464 28,714 22,797
Real estate 2,406 2,254 2,125
Policy loans 120,927 148,555 314,020
Cash and short-term investments 9,346 3,582 2,924
Other invested assets 8,015 2,380 2,549
--------- --------- ---------
Total investment income 462,047 385,640 509,182
Investment expenses 4,899 3,772 4,521
--------- --------- ---------
Net investment income $457,148 $381,868 $504,661
======= ======= =======
</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 1998, 1997 and 1996 are summarized below (in thousands):
<TABLE>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Net realized (losses) gains on investments:
Fixed maturities $ - $ - $ (79)
Equity securities 84 1,975 28
Mortgage loans (2,000) (5,000) -
Real estate 1,561 - -
Other invested assets 21 - -
--------- ----------- ------------
Net realized gains $ (334) $ (3,025) $ (51)
======= ======= ==========
Change in unrealized appreciation (depreciation) of investments:
Fixed maturities $ (1,131) $77,422 $(58,659)
Equity securities 1,203 (626) 1,517
Other invested assets 10,788 2,701 6,897
--------- ------- ---------
Net change in unrealized appreciation
(depreciation) of investments $ 10,860 $79,497 $(50,245)
======== ====== =======
</TABLE>
Proceeds from the sale of investments in fixed maturities during 1998, 1997
and 1996 were $282,756,000, $23,816,000, and $40,098,000, respectively.
During 1998, 1997 and 1996, gross gains of $0, $0, and $176,000,
respectively, and gross losses of $0, $0, and $255,000, respectively, were
realized on dispositions of fixed maturity investments.
During 1998, 1997 and 1996, gross gains of $84,000, $1,975,000, and
$28,000, respectively, were realized on disposition of equity securities.
(d) Market Value of Fixed Maturities and Unrealized Appreciation of
Investments: At December 31, 1998 and 1997, unrealized appreciation of
investments in equity securities (before applicable taxes) included gross
gains of $2,854,000 and $1,530,000 and gross losses of $257,000 and
$136,000, respectively.
The amortized cost and estimated market values of investments in fixed
maturities at December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
Gross Gross
1998 Amortized Unrealized Unrealized Market
---- Cost Gains Losses Value
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government and government
agencies and authorities $ 50,617 $ 19,220 $ 10 $ 69,827
States, municipalities and
political subdivisions 370,790 23,962 4,961 389,791
Foreign governments 30,431 7,201 - 37,632
All other corporate 3,629,170 156,316 44,691 3,740,795
--------- ---------- --------- ---------
Total fixed maturities $4,081,008 $ 206,699 $ 49,662 $4,238,045
========= ========== ========= =========
</TABLE>
<PAGE>
2. Investment Information - (continued)
<TABLE>
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>
The amortized cost and estimated market value of fixed maturities,
available for sale at December 31, 1998, 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>
Estimated
Amortized Market
Cost Value
<S> <C> <C>
Due in one year or less $ 139,701 $ 144,918
Due after one year through five years 1,097,111 1,136,468
Due after five years through ten years 1,538,510 1,586,346
Due after ten years 1,305,686 1,370,313
---------- ---------
$ 4,081,008 $4,238,045
========= =========
</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, 1998 and 1997, the market value of the CMO
portfolio was $522,844,000 and $445,739,000, respectively; the
estimated amortized cost was approximately $504,077,000 in 1998 and
$426,760,000 in 1997. The Company's CMO portfolio is readily
marketable. There were no derivative (high risk) CMO securities
contained in the portfolio at December 31, 1998.
(f) Fixed Maturities Below Investment Grade: At December 31, 1998 and
1997, the fixed maturities held by the Company that were below
investment grade had an aggregate amortized cost of $344,609,000 and
$242,573,000, respectively, and an aggregate market value of
$327,217,000 and $244,417,000, 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 capital
funds at December 31, 1998 (in thousands):
Other Invested Assets:
Equity Linked Investors II, L.P. $ 60,271
<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).
Years ended December 31,
1998 1997 1996
Balance at beginning of year $118,535 $84,287 $60,625
Acquisition costs deferred 71,430 50,927 43,534
Amortization charged to income (22,125) (16,679) (19,872)
-------- -------- ------
Balance at end of year $167,840 $118,535 $84,287
======= ======= ======
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, 1998 and 1997 follows (in thousands):
<TABLE>
1998 1997
----------- ----------
<S> <C> <C>
Future Policy Benefits:
Long duration contracts $ 987,503 $ 740,969
Short duration contracts 14,741 8,949
----------- ------------
$1,002,244 $ 749,918
========= ==========
Policyholders' funds on deposit:
Annuities $ 1,385,203 $ 1,265,490
Universal life 184,460 149,202
Guaranteed investment contracts (GICs) 669,035 379,049
Corporate owned life insurance 2,229,843 1,948,558
Other investment contracts 4,313 3,603
------------ ------------
$ 4,472,854 $ 3,745,902
============ ============
</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 10.1 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 7.1 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 1 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 1998 was 7.0 percent.
(iv) The universal life funds, exclusive of corporate owned life
insurance business, have credited interest rates of 5.6 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 1998, 1997 and 1996. 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>
Years ended December 31,
-------------------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- ------------------------
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 $ 30,183 35.0% $ 23,279 35.0% $ 18,125 35.0%
Prior year federal
income tax benefit 268 0.3 (6) - (51) (0.1)
State income tax 599 0.7 673 1.0 850 1.6
Other 388 0.5 77 0.1 677 1.3
-------- ------- ---------- ----- --------- -----
Actual income tax expense $31,438 36.5% $ 24,023 36.1% $ 19,601 37.8%
====== ====== ======= ==== ======= ====
</TABLE>
<PAGE>
5. Income Taxes - (continued)
(b) The components of the net deferred tax liability were as follows (in
thousands):
<TABLE>
Years ended December 31,
1998 1997
<S> <C> <C>
Deferred tax assets:
Adjustment to life reserves $ 59,903 $ 51,992
Adjustments to mortgage loans and
investment income due and accrued 4,913 4,250
Adjustment to policy and contract claims 5,456 8,816
Other 2,406 4,292
---------- ---------
72,678 69,350
--------- --------
Deferred tax liabilities:
Deferred policy acquisition costs $ 55,308 $ 37,559
Unrealized appreciation on investments 65,445 61,644
Bond discount 4,911 4,843
Other 3,533 2,802
---------- -----------
129,197 106,848
-------- ---------
Net deferred tax liability $ 56,519 $ 37,498
========= =========
</TABLE>
(c) At December 31, 1998, 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 1998, 1997, and 1996 amounted to $21,184,000,
$20,311,000, and $25,412,000, 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. Contributions totaling
$10,963,000 have been made through December 31, 1998.
During 1998, the Company entered into a partnership agreement with Sankaty
High Yield Asset Partners, L.P. The agreement requires the Company to make
capital contributions totaling $2,500,000. Contributions totaling
$1,868,000 have been made through December 31, 1998.
<PAGE>
7. Fair Value of Financial Instruments
(a) Statement of Financial Accounting Standards No. 107 "Disclosures about
Fair Value of Financial Instruments" (FASB 107) requires disclosure of
fair value information about financial instruments for which it is
practicable to estimate such fair value. These financial instruments
may or may not be recognized in the balance sheet. In the measurement
of the fair value of certain of the financial instruments, quoted
market prices were not available and other valuation techniques were
utilized. These derived fair value estimates are significantly
affected by the assumptions used. FASB 107 excludes certain financial
instruments, including those related to insurance contracts.
The following methods and assumptions were used by the Company in
estimating the fair value of the financial instruments presented:
Cash and short term investments: The carrying amounts reported in the
balance sheet for these instruments approximate fair values.
Fixed maturities: Fair values for fixed maturity securities carried at
market value are generally based upon quoted market prices. For
certain fixed maturities for which market prices were not readily
available, fair values were estimated using values obtained from
independent pricing services.
Equity securities: Fair values for equity securities were based upon
quoted market prices.
Mortgage and policy loans: Where practical, the fair values of loans
on real estate were estimated using discounted cash flow calculations
based upon the Company's current incremental lending rates for similar
type loans. The fair value of the policy loans were not calculated as
the Company believes it would have to expend excessive costs for the
benefits derived. Therefore, the fair value of policy loans was
estimated at carrying value.
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>
1998 Fair Carrying
Value Amount
<S> <C> <C>
Cash and short-term investments $ 168,492 $ 168,492
Fixed maturities 4,238,045 4,238,045
Equity securities 21,748 21,748
Mortgage and policy loans 1,500,447 1,479,311
Policyholders' funds on deposit $ 4,554,644 $ 4,472,854
1997 Fair Carrying
Value Amount
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
</TABLE>
<PAGE>
8. Capital Funds
(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 $35,350,000 during 1998, however, no
dividends were paid during the year.
(b) The Company's capital funds as determined in accordance with statutory
accounting practices was $298,047,000 at December 31, 1998 and
$285,350,000 at December 31, 1997. Statutory net income amounted to
$28,789,000, $35,350,000 and $47,074,000 for 1998, 1997 and 1996,
respectively.
(c) During 1997, the Company received a $30,000,000 surplus contribution
from American International Group Inc., the parent.
(d) Statement of Accounting Standards No. 130 "Comprehensive Income" (FASB
130) was adopted by the Company effective January 1, 1998. FASB 130
establishes standards for reporting comprehensive income and its
components as part of capital funds. The reclassification adjustments
with respect to available for sale securities were $(334,000),
$(3,025,000) and $(51,000) for December 31, 1998, 1997 and 1996,
respectively.
9. Employee Benefits
(a) The Company participates with its affiliates in a qualified,
non-contributory, defined benefit pension plan which is administered
by the Parent. All qualified employees who have attained age 21 and
completed twelve months of continuous service are eligible to
participate in this plan. An employee with 5 or more years of service
is entitled to pension benefits beginning at normal retirement age 65.
Benefits are based upon a percentage of average final compensation
multiplied by years of credited service limited to 44 years of
credited service. 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, 1998, 1997 and 1996 were approximately $272,000,
$373,000, and $400,000, 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, 1998 by
$100,000,000.
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 unfunded.
(b) The Parent also sponsors a voluntary savings plan for domestic
employees (a 401(k) plan), which, during the three years ended
December 31, 1998, 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.
<PAGE>
9. Employee Benefits - (continued)
(c) In addition to the Parent's defined benefit pension plan, the Parent
and its subsidiaries provide a post-retirement benefit program for
medical care and life insurance. Eligibility in the various plans is
generally based upon completion of a specified period of eligible
service and reaching a specified age.
(d) The Parent applies APB Opinion 25 "Accounting for Stock issued to
Employees" and related interpretations in accounting for its stock
based compensation 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, 1998, the
future minimum lease payments under operating leases were as follows
(in thousands):
Year Payment
1999 $ 4,251
2000 2,980
2001 2,530
2002 2,380
2003 1,870
Remaining years after 2003 1,571
-------
Total $ 15,582
Rent expense approximated $4,450,000, $3,881,000, and $4,263,000 for
the years ended December 31, 1998, 1997 and 1996, 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>
Percentage
December 31, 1998 of Amount
Assumed
Gross Ceded Assumed Net to Net
<S> <C> <C> <C> <C> <C>
Life Insurance in Force $53,884,853 $19,921,930 $ 896,285 $34,859,208 2.6%
============= ========== ======== ==========
Premiums:
Life 184,487 54,134 2,022 132,375 1.5%
Accident and Health 155,199 82,614 142,878 215,463 66.3%
Annuity 269,126 - - 269,126 -
------------ ----------------- -------------- ------------
Total Premiums $ 608,812 $ 136,748 $ 144,900 $ 616,964 23.5%
============ =========== ======== ============
Percentage
of Amount
December 31, 1997 Assumed
Gross Ceded Assumed Net to Net
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%
============ ============== ======== ============
</TABLE>
(b) The maximum amount retained on any one life by the Company is
$1,000,000.
(c) Reinsurance recoveries, which reduced death and other benefits,
approximated $111,580,000, $100,029,000, and $54,456,000,
respectively, for each of the years ended December 31, 1998, 1997 and
1996.
The Company's reinsurance arrangements do not relieve the Company from
its direct obligation to its insureds.
<PAGE>
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 1998 amounted to
$1,237,000 and $1,000, respectively. Premium income and commission
ceded for 1997 amounted to $1,251,000 and $1,000, respectively.
Premium income and commission ceded to affiliates amounted to
$1,345,000 and $0 for the year ended December 31, 1996. Premium income
and ceding commission expense assumed from affiliates aggregated
$131,771,000 and $31,584,000, respectively, for 1998, compared to
$110,529,000 and $24,853,000, respectively, for 1997, and $103,885,000
and $27,609,000, respectively for 1996.
(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, 1998, 1997 and 1996, the Company was
charged $40,417,000, $37,846,000 and $28,277,000, respectively, for
expenses attributed to the Company but incurred by affiliates. During
the same period, the Company received reimbursements from affiliates
aggregating $23,132,000, $18,134,000 and $17,598,000, 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 to the Company from Delaware American Life Insurance
Company.
(d) During 1996, the Company purchased 1,500,000 shares of AIG Life
Ireland, LTD., a subsidiary.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of
AIG Life Insurance Company
Variable Account II
In our opinion, the accompanying statements of assets and liabilities of AIG
Life Insurance Company Variable Account II (comprising twenty-seven subaccounts,
hereafter collectively referred to as "Variable Account II") and the related
statements of operations and changes in net assets present fairly, in all
material respects, the financial position of Variable Account II at December 31,
1998, and the results of its operations for the year then ended and the changes
in its net assets for each of the two years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the management of Variable Account II; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
March 12, 1999
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments at Market Value:
Shares Cost Market Value
------------------------------------------------------------------------
------------------------------------------------------------------------
<S> <C> <C> <C>
Aim
Capital Appreciation Portfolio 7,967.361 $ 174,945 $ 200,777
International Equity Portfolio 12,467.656 236,877 244,616
Alliance
Conservative Investors Portfolio 2,351.573 31,263 32,995
Global Bond Portfolio 688.066 8,257 8,547
Global Dollar Government Portfolio 21.880 212 222
Growth Portfolio 103,752.036 2,269,574 2,827,243
Growth & Income Portfolio 114,967.436 2,371,168 2,510,891
Growth Investors Portfolio 11,980.789 170,031 195,648
Money Market Portfolio 20,485.370 20,484 20,484
Premier Growth Portfolio 4,897.459 135,406 151,967
Technology Portfolio 42,154.382 625,961 808,100
Total Return Portfolio 140.114 2,418 2,530
Quasar Portfolio 29,073.531 378,222 323,880
U.S. Government High Grade Portfolio 78.903 967 968
Utility Income Portfolio 53.953 967 1,020
Dreyfus
Small Company Stock Portfolio 16,436.564 244,881 248,028
Stock Index Portfolio 83,498.512 2,317,307 2,715,365
Zero Coupon 2000 Portfolio 1,086.434 13,465 13,579
Fidelity
Asset Manager Portfolio 43,714.023 749,687 793,844
Contrafund Portfolio 12,145.716 259,365 296,842
Growth Portfolio 67,940.819 2,451,577 3,048,504
High Income Portfolio 22,836.942 281,130 263,309
Investment Grade Bond Portfolio 16,104.772 202,456 208,718
Money Market Portfolio 2,748,418.390 2,748,419 2,748,419
Overseas Portfolio 18,964.028 376,478 380,231
Van Eck
Worldwide Emerging Markets Portfolio 4,148.930 26,887 29,539
Worldwide Hard Assets Portfolio 3,756.723 47,156 34,560
Weiss,Peck & Greer
Tomorrow Long Term Portfolio 6,383.661 54,490 58,921
Tomorrow MediumTerm Portfolio 509.549 4,670 4,805
Tomorrow Short Term Portfolio 638.247 6,677 6,727
---------------------- -----------------------
Total Investments $ 16,211,397 18,181,279
Total Assets $ 18,181,279
=======================
Contract Owners' Equity $ 18,181,279
-----------------------
Total Equity $ 18,181,279
=======================
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
STATEMENT OF OPERATIONS
For The Year Ended December 31, 1998
<TABLE>
<CAPTION>
Aim Aim
Capital International
Appreciation Equity
Total Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $733,252 $5,326 $1,878
Expenses:
Mortality & Expense Risk Fees 106,392 694 1,405
--------------- ---------------- ----------------
Net Investment Income (Loss) 626,860 4,632 473
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 519,608 (371) (22,044)
Change in Unrealized Appreciation
(Depreciation) 1,519,964 25,833 7,738
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 2,039,572 25,462 (14,306)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $2,666,432 $30,094 ($13,833)
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Alliance
Alliance Alliance Global
Conservative Global Dollar
Investors Bond Government
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $2,086 $18 $0
Expenses:
Mortality & Expense Risk Fees 263 20 0
--------------- ---------------- ----------------
Net Investment Income (Loss) 1,823 (2) 0
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 1,083 19 2
Change in Unrealized Appreciation
(Depreciation) 691 289 10
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 1,774 308 12
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $3,597 $306 $12
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance
Growth Alliance
Alliance & Growth
Growth Income Investors
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $110,505 $111,284 $14,073
Expenses:
Mortality & Expense Risk Fees 16,449 10,688 1,473
--------------- ---------------- ----------------
Net Investment Income (Loss) 94,056 100,596 12,600
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 36,650 55,743 3,763
Change in Unrealized Appreciation
(Depreciation) 394,461 63,586 17,434
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 431,111 119,329 21,197
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $525,167 $219,925 $33,797
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Alliance Alliance
Alliance Money Premier
International Market Growth
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $0 $2,482 $233
Expenses:
Mortality & Expense Risk Fees 334 482 2,105
--------------- ---------------- ----------------
Net Investment Income (Loss) (334) 2,000 (1,872)
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 54,637 0 30,881
Change in Unrealized Appreciation
(Depreciation) 0 0 16,562
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 54,637 0 47,443
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $54,303 $2,000 $45,571
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance
Alliance Total Alliance
Technology Return Quasar
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $715 $0 $31,614
Expenses:
Mortality & Expense Risk Fees 5,537 1 3,978
--------------- ---------------- ----------------
Net Investment Income (Loss) (4,822) (1) 27,636
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 171,268 0 31,274
Change in Unrealized Appreciation
(Depreciation) 197,601 112 (66,300)
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 368,869 112 (35,026)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $364,047 $111 ($7,390)
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Alliance
U.S. Dreyfus
Government Small
High Alliance Company
Grade Utility Stock
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $0 $0 $1,151
Expenses:
Mortality & Expense Risk Fees 0 0 1,653
--------------- ---------------- ----------------
Net Investment Income (Loss) 0 0 (502)
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 0 0 (2,481)
Change in Unrealized Appreciation
(Depreciation) 0 52 8,859
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 0 52 6,378
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $0 $52 $5,876
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Dreyfus
Dreyfus Zero Fidelity
Stock Coupon Asset
Index 2000 Manager
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $30,188 $705 $60,993
Expenses:
Mortality & Expense Risk Fees 16,095 116 5,125
--------------- ---------------- ----------------
Net Investment Income (Loss) 14,093 589 55,868
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 90,160 117 10,634
Change in Unrealized Appreciation
(Depreciation) 348,632 37 18,503
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 438,792 154 29,137
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $452,885 $743 $85,005
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Fidelity
Fidelity Fidelity High
Contrafund Growth Income
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $1,859 $181,333 $33,968
Expenses:
Mortality & Expense Risk Fees 1,067 17,992 2,593
--------------- ---------------- ----------------
Net Investment Income (Loss) 792 163,341 31,375
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 3,199 52,384 (5,310)
Change in Unrealized Appreciation
(Depreciation) 37,476 484,390 (31,433)
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 40,675 536,774 (36,743)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $41,467 $700,115 ($5,368)
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fidelity
Investment Fidelity
Grade Money Fidelity
Bond Market Overseas
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $9,614 $72,672 $29,556
Expenses:
Mortality & Expense Risk Fees 1,360 12,336 3,291
--------------- ---------------- ----------------
Net Investment Income (Loss) 8,254 60,336 26,265
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity (104) 0 22,548
Change in Unrealized Appreciation
(Depreciation) 2,966 0 1,403
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 2,862 0 23,951
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $11,116 $60,336 $50,216
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
VanEck VanEck
VanEck Worldwide Worldwide
Worldwide Emerging Hard
Balanced Markets Assets
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $24,879 $0 $4,567
Expenses:
Mortality & Expense Risk Fees 466 80 292
--------------- ---------------- ----------------
Net Investment Income (Loss) 24,413 (80) 4,275
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity (10,944) (238) (4,776)
Change in Unrealized Appreciation
(Depreciation) (4,930) 2,653 (11,854)
--------------- ---------------- ----------------
Net Gain (Loss) on Investments (15,874) 2,415 (16,630)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $8,539 $2,335 ($12,355)
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WP&G WP&G WP&G
Tomorrow Tomorrow Tomorrow
Long Medium Short
Term Term Term
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $948 $287 $318
Expenses:
Mortality & Expense Risk Fees 423 41 33
--------------- ---------------- ----------------
Net Investment Income (Loss) 525 246 285
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 1,436 31 47
Change in Unrealized Appreciation
(Depreciation) 4,736 390 67
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 6,172 421 114
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $6,697 $667 $399
=============== ================ ================
</TABLE>
See Accompanying 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, 1998 and December 31, 1997
<TABLE>
<CAPTION>
1998
Aim Aim
Capital International
Appreciation Equity
Total Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $626,860 $4,632 $473
Realized Gain (Loss) on Investment Activity 519,608 (371) (22,044)
Change in Unrealized Appreciation
(Depreciation) of Investments 1,519,964 25,833 7,738
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 2,666,432 30,094 (13,833)
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 10,210,370 185,128 275,137
Cost Of Insurance Charge (1,571,906) (12,343) (20,406)
Policy Loans (212,191) 0 0
Transfers Between Funds 18,740 (1,665) 4,554
Contract Withdrawals (202,369) (437) (836)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 8,242,644 170,683 258,449
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 10,909,076 200,777 244,616
Net Assets, at Beginning of Year 7,272,203 0 0
--------------- ---------------- ----------------
Net Assets, at End of Year $18,181,279 $200,777 $244,616
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance
Alliance Alliance Global
Conservative Global Dollar
Investors Bond Government
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $1,823 ($2) $0
Realized Gain (Loss) on Investment Activity 1,083 19 2
Change in Unrealized Appreciation
(Depreciation) of Investments 691 289 10
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 3,597 306 12
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 9,551 8,736 241
Cost Of Insurance Charge (2,651) (507) (31)
Policy Loans 0 0 0
Transfers Between Funds (834) 12 0
Contract Withdrawals (740) 0 0
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 5,326 8,241 210
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 8,923 8,547 222
Net Assets, at Beginning of Year 24,072 0 0
--------------- ---------------- ----------------
Net Assets, at End of Year $32,995 $8,547 $222
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Alliance
Growth Alliance
Alliance & Growth
Growth Income Investors
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $94,056 $100,596 $12,600
Realized Gain (Loss) on Investment Activity 36,650 55,743 3,763
Change in Unrealized Appreciation
(Depreciation) of Investments 394,461 63,586 17,434
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 525,167 219,925 33,797
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 1,469,752 1,709,454 67,574
Cost Of Insurance Charge (210,721) (152,262) (18,064)
Policy Loans (30,640) (25,729) (2,299)
Transfers Between Funds (4,391) 16,628 97
Contract Withdrawals (44,972) (21,460) (2,915)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 1,179,028 1,526,631 44,393
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 1,704,195 1,746,556 78,190
Net Assets, at Beginning of Year 1,123,048 764,335 117,458
--------------- ---------------- ----------------
Net Assets, at End of Year $2,827,243 $2,510,891 $195,648
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance Alliance
Alliance Money Premier
International Market Growth
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($334) $2,000 ($1,872)
Realized Gain (Loss) on Investment Activity 54,637 0 30,881
Change in Unrealized Appreciation
(Depreciation) of Investments 0 0 16,562
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 54,303 2,000 45,571
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits (48,815) 30,048 122,585
Cost Of Insurance Charge (7,879) (11,766) (19,989)
Policy Loans 0 0 (267)
Transfers Between Funds 2,391 202 4,628
Contract Withdrawals 0 0 (561)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions (54,303) 18,484 106,396
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 0 20,484 151,967
Net Assets, at Beginning of Year 0 0 0
--------------- ---------------- ----------------
Net Assets, at End of Year $0 $20,484 $151,967
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Alliance
Alliance Total Alliance
Technology Return Quasar
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($4,822) ($1) $27,636
Realized Gain (Loss) on Investment Activity 171,268 0 31,274
Change in Unrealized Appreciation
(Depreciation) of Investments 197,601 112 (66,300)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 364,047 111 (7,390)
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 274,264 2,477 152,103
Cost Of Insurance Charge (66,804) (58) (36,287)
Policy Loans (12,128) 0 (10,340)
Transfers Between Funds 6,050 0 (7,597)
Contract Withdrawals (12,390) 0 (8,285)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 188,992 2,419 89,594
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 553,039 2,530 82,204
Net Assets, at Beginning of Year 255,061 0 241,676
--------------- ---------------- ----------------
Net Assets, at End of Year $808,100 $2,530 $323,880
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance
U.S. Dreyfus
Government Small
High Alliance Company
Grade Utility Stock
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $0 $0 ($502)
Realized Gain (Loss) on Investment Activity 0 0 (2,481)
Change in Unrealized Appreciation
(Depreciation) of Investments 0 52 8,859
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 0 52 5,876
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 991 991 139,298
Cost Of Insurance Charge (23) (23) (22,440)
Policy Loans 0 0 (1,455)
Transfers Between Funds 0 0 2,014
Contract Withdrawals 0 0 (2,646)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 968 968 114,771
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 968 1,020 120,647
Net Assets, at Beginning of Year 0 0 127,381
--------------- ---------------- ----------------
Net Assets, at End of Year $968 $1,020 $248,028
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Dreyfus
Dreyfus Zero Fidelity
Stock Coupon Asset
Index 2000 Manager
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $14,093 $589 $55,868
Realized Gain (Loss) on Investment Activity 90,160 117 10,634
Change in Unrealized Appreciation
(Depreciation) of Investments 348,632 37 18,503
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 452,885 743 85,005
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 1,652,138 4,327 384,610
Cost Of Insurance Charge (264,577) (2,247) (60,284)
Policy Loans (35,221) 0 (1,634)
Transfers Between Funds (3,827) (10) 1,319
Contract Withdrawals (30,468) 0 (3,078)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 1,318,045 2,070 320,933
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 1,770,930 2,813 405,938
Net Assets, at Beginning of Year 944,435 10,766 387,906
--------------- ---------------- ----------------
Net Assets, at End of Year $2,715,365 $13,579 $793,844
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fidelity
Fidelity Fidelity High
Contrafund Growth Income
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $792 $163,341 $31,375
Realized Gain (Loss) on Investment Activity 3,199 52,384 (5,310)
Change in Unrealized Appreciation
(Depreciation) of Investments 37,476 484,390 (31,433)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 41,467 700,115 (5,368)
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 274,009 1,511,553 20,065
Cost Of Insurance Charge (18,289) (264,617) (31,215)
Policy Loans 0 (38,305) (541)
Transfers Between Funds (301) 8,334 (1,103)
Contract Withdrawals (44) (32,651) (5,710)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 255,375 1,184,314 (18,504)
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 296,842 1,884,429 (23,872)
Net Assets, at Beginning of Year 0 1,164,075 287,181
--------------- ---------------- ----------------
Net Assets, at End of Year $296,842 $3,048,504 $263,309
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Fidelity
Investment Fidelity
Grade Money Fidelity
Bond Market Overseas
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $8,254 $60,336 $26,265
Realized Gain (Loss) on Investment Activity (104) 0 22,548
Change in Unrealized Appreciation
(Depreciation) of Investments 2,966 0 1,403
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 11,116 60,336 50,216
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 133,257 1,798,436 25,198
Cost Of Insurance Charge (15,077) (262,012) (46,489)
Policy Loans 0 (47,336) (4,988)
Transfers Between Funds 372 (3,849) (3,101)
Contract Withdrawals (446) (23,046) (8,945)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 118,106 1,462,193 (38,325)
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 129,222 1,522,529 11,891
Net Assets, at Beginning of Year 79,496 1,225,890 368,340
--------------- ---------------- ----------------
Net Assets, at End of Year $208,718 $2,748,419 $380,231
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VanEck VanEck
VanEck Worldwide Worldwide
Worldwide Emerging Hard
Balanced Markets Assets
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $24,413 ($80) $4,275
Realized Gain (Loss) on Investment Activity (10,944) (238) (4,776)
Change in Unrealized Appreciation
(Depreciation) of Investments (4,930) 2,653 (11,854)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 8,539 2,335 (12,355)
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits (87,825) 28,761 22,441
Cost Of Insurance Charge (7,250) (1,673) (5,001)
Policy Loans 0 0 0
Transfers Between Funds (1,323) 116 (79)
Contract Withdrawals (456) 0 (666)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions (96,854) 27,204 16,695
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets (88,315) 29,539 4,340
Net Assets, at Beginning of Year 88,315 0 30,220
--------------- ---------------- ----------------
Net Assets, at End of Year $0 $29,539 $34,560
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
WP&G WP&G WP&G
Tomorrow Tomorrow Tomorrow
Long Medium Short
Term Term Term
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $525 $246 $285
Realized Gain (Loss) on Investment Activity 1,436 31 47
Change in Unrealized Appreciation
(Depreciation) of Investments 4,736 390 67
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 6,697 667 399
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 38,701 534 4,650
Cost Of Insurance Charge (9,742) (536) (643)
Policy Loans (1,308) 0 0
Transfers Between Funds 103 0 0
Contract Withdrawals (1,420) 0 (197)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 26,334 (2) 3,810
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 33,031 665 4,209
Net Assets, at Beginning of Year 25,890 4,140 2,518
--------------- ---------------- ----------------
Net Assets, at End of Year $58,921 $4,805 $6,727
=============== ================ ================
</TABLE>
See Accompanying 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, 1998 and December 31, 1997
1997
<TABLE>
<CAPTION>
Aim Aim
Capital International
Appreciation Equity
Total Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $166,746 $0 $0
Realized Gain (Loss) on Investment Activity 206,207 0 0
Change in Unrealized Appreciation
(Depreciation) of Investments 366,321 0 0
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 739,274 0 0
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 5,544,641 0 0
Cost Of Insurance Charge (775,349) 0 0
Policy Loans (94,631) 0 0
Transfers Between Funds 18,850 0 0
Contract Withdrawals (82,467) 0 0
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 4,611,044 0 0
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 5,350,318 0 0
Net Assets, at Beginning of Year 1,921,885 0 0
---------------- ----------------- ---------------
Net Assets, at End of Year $7,272,203 $0 $0
================ ================= ===============
</TABLE>
<TABLE>
<CAPTION>
Alliance
Alliance Alliance Global
Conservative Global Dollar
Investors Bond Government
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $167 $0 $0
Realized Gain (Loss) on Investment Activity 600 0 0
Change in Unrealized Appreciation
(Depreciation) of Investments 586 0 0
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 1,353 0 0
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 15,627 0 0
Cost Of Insurance Charge (2,705) 0 0
Policy Loans 0 0 0
Transfers Between Funds 20 0 0
Contract Withdrawals (239) 0 0
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 12,703 0 0
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 14,056 0 0
Net Assets, at Beginning of Year 10,016 0 0
---------------- ----------------- ---------------
Net Assets, at End of Year $24,072 $0 $0
================ ================= ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance
Growth Alliance
Alliance & Growth
Growth Income Investors
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $21,469 $22,999 $1,477
Realized Gain (Loss) on Investment Activity 37,620 18,395 3,687
Change in Unrealized Appreciation
(Depreciation) of Investments 138,629 68,190 5,513
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 197,718 109,584 10,677
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 814,495 571,454 61,194
Cost Of Insurance Charge (117,612) (74,918) (11,672)
Policy Loans (6,689) (5,180) 0
Transfers Between Funds 1,673 2,565 3,415
Contract Withdrawals (19,879) (5,967) (2,220)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 671,988 487,954 50,717
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 869,706 597,538 61,394
Net Assets, at Beginning of Year 253,342 166,797 56,064
---------------- ----------------- ---------------
Net Assets, at End of Year $1,123,048 $764,335 $117,458
================ ================= ===============
</TABLE>
<TABLE>
<CAPTION>
Alliance Alliance
Alliance Money Premier
International Market Growth
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>
Alliance
Alliance Total Alliance
Technology Return Quasar
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($1,115) $0 ($1,464)
Realized Gain (Loss) on Investment Activity 16,995 0 9,057
Change in Unrealized Appreciation
(Depreciation) of Investments (15,270) 0 11,871
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 610 0 19,464
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 270,239 0 232,934
Cost Of Insurance Charge (19,431) 0 (17,506)
Policy Loans (101) 0 (387)
Transfers Between Funds 4,396 0 3,524
Contract Withdrawals (8,527) 0 (1,093)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 246,576 0 217,472
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 247,186 0 236,936
Net Assets, at Beginning of Year 7,875 0 4,740
---------------- ----------------- ---------------
Net Assets, at End of Year $255,061 $0 $241,676
================ ================= ===============
</TABLE>
<TABLE>
<CAPTION>
Alliance
U.S. Dreyfus
Government Small
High Alliance Company
Grade Utility Stock
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $0 $0 $2,102
Realized Gain (Loss) on Investment Activity 0 0 (107)
Change in Unrealized Appreciation
(Depreciation) of Investments 0 0 (5,712)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 0 0 (3,717)
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 0 0 135,191
Cost Of Insurance Charge 0 0 (2,314)
Policy Loans 0 0 0
Transfers Between Funds 0 0 (1,779)
Contract Withdrawals 0 0 0
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 0 0 131,098
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 0 0 127,381
Net Assets, at Beginning of Year 0 0 0
---------------- ----------------- ---------------
Net Assets, at End of Year $0 $0 $127,381
================ ================= ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Dreyfus
Dreyfus Zero Fidelity
Stock Coupon Asset
Index 2000 Manager
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $26,687 $511 $21,546
Realized Gain (Loss) on Investment Activity 41,444 (71) 8,600
Change in Unrealized Appreciation
(Depreciation) of Investments 41,726 83 19,239
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 109,857 523 49,385
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 778,061 11,713 287,927
Cost Of Insurance Charge (90,065) (4,235) (42,651)
Policy Loans (1,032) 0 (167)
Transfers Between Funds 2,970 25 664
Contract Withdrawals (7,423) (171) (9,859)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 682,511 7,332 235,914
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 792,368 7,855 285,299
Net Assets, at Beginning of Year 152,067 2,911 102,607
---------------- ----------------- ---------------
Net Assets, at End of Year $944,435 $10,766 $387,906
================ ================= ===============
</TABLE>
<TABLE>
<CAPTION>
Fidelity
Fidelity Fidelity High
Contrafund Growth Income
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $0 $21,466 $3,283
Realized Gain (Loss) on Investment Activity 0 55,366 11,481
Change in Unrealized Appreciation
(Depreciation) of Investments 0 90,042 11,697
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 0 166,874 26,461
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 0 492,521 226,949
Cost Of Insurance Charge 0 (148,843) (23,779)
Policy Loans 0 (24,473) 0
Transfers Between Funds 0 3,595 1,695
Contract Withdrawals 0 (19,994) (2,049)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 0 302,806 202,816
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 0 469,680 229,277
Net Assets, at Beginning of Year 0 694,395 57,904
---------------- ----------------- ---------------
Net Assets, at End of Year $0 $1,164,075 $287,181
================ ================= ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fidelity
Investment Fidelity
Grade Money Fidelity
Bond Market Overseas
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $2,521 $32,116 $9,687
Realized Gain (Loss) on Investment Activity 322 0 1,460
Change in Unrealized Appreciation
(Depreciation) of Investments 2,132 0 (3,697)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 4,975 32,116 7,450
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 29,955 1,214,777 281,913
Cost Of Insurance Charge (6,686) (159,431) (34,464)
Policy Loans 0 (52,504) (4,098)
Transfers Between Funds 96 (5,335) 951
Contract Withdrawals (16) (1,225) (3,073)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 23,349 996,282 241,229
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 28,324 1,028,398 248,679
Net Assets, at Beginning of Year 51,172 197,492 119,661
---------------- ----------------- ---------------
Net Assets, at End of Year $79,496 $1,225,890 $368,340
================ ================= ===============
</TABLE>
<TABLE>
<CAPTION>
VanEck VanEck
VanEck Worldwide Worldwide
Worldwide Emerging Hard
Balanced Markets Assets
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $343 $0 $319
Realized Gain (Loss) on Investment Activity 856 0 165
Change in Unrealized Appreciation
(Depreciation) of Investments 3,097 0 (1,231)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 4,296 0 (747)
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 60,650 0 24,911
Cost Of Insurance Charge (10,075) 0 (4,740)
Policy Loans 0 0 0
Transfers Between Funds 186 0 104
Contract Withdrawals (712) 0 (20)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 50,049 0 20,255
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 54,345 0 19,508
Net Assets, at Beginning of Year 33,970 0 10,712
---------------- ----------------- ---------------
Net Assets, at End of Year $88,315 $0 $30,220
================ ================= ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WP&G WP&G WP&G
Tomorrow Tomorrow Tomorrow
Long Medium Short
Term Term Term
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $2,058 $331 $243
Realized Gain (Loss) on Investment Activity 303 2 32
Change in Unrealized Appreciation
(Depreciation) of Investments (304) (254) (16)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 2,057 79 259
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 27,159 4,178 2,793
Cost Of Insurance Charge (3,562) (124) (536)
Policy Loans 0 0 0
Transfers Between Funds 76 7 2
Contract Withdrawals 0 0 0
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 23,673 4,061 2,259
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 25,730 4,140 2,518
Net Assets, at Beginning of Year 160 0 0
---------------- ----------------- ---------------
Net Assets, at End of Year $25,890 $4,140 $2,518
================ ================= ===============
</TABLE>
See Accompanying 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 following products are offered by the Account: Vision and
Gallery Life.
The Account invests in shares of AIM Variable Insurance Fund ("AIM Fund"),
Alliance Variable Products Series Fund, Inc. ("Alliance Fund"), Dreyfus Variable
Investment Fund ("Dreyfus Fund"), Fidelity Investments Variable Insurance
Products Fund ("Fidelity Trust"), Fidelity Variable Insurance Products Fund II
("Fidelity Trust II"), Van Eck Investment Trust ("Van Eck Trust") and Weiss,
Peck & Greer ("Tomorrow Funds"). The assets in the policies may be invested in
the following subaccounts:
AIM Fund: Fidelity Trust:
International Equity Portfolio Money Market Portfolio
Capital Appreciation Portfolio High Income Portfolio
Growth Portfolio
Alliance Fund: Overseas Portfolio
Growth & Income Portfolio Contrafund Portfolio
Conservative Investors Portfolio
Growth Portfolio Fidelity Trust II:
Growth Investors Portfolio Investment Grade Bond Portfolio
Quasar Portfolio Asset Manager Portfolio
Technology Portfolio
Global Bond Portfolio Van Eck Trust:
Premier Growth Portfolio Worldwide Hard Assets Portfolio
Money Market Portfolio Worldwide Emerging Markets Portfolio
Worldwide Balanced Portfolio
(Fund closed 06/29/98)
Dreyfus Fund:
Dreyfus Zero Coupon 2000 Portfolio Weiss, Peck & Greer Tomorrow Fund:
Stock Index Portfolio Tomorrow Long Term Portfolio
Small Company Stock Portfolio Tomorrow Medium Term Portfolio
Stock Index Portfolio Tomorrow Short Term 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, 1998, investment activity in the Fund was as
follows:
Cost of Proceeds
Purchases From Sales
Shares of
<S> <C> <C>
Aim
Capital Appreciation Portfolio $ 201,598 $ 26,283
International Equity Portfolio 499,113 240,193
Alliance Funds:
Conservative Investors Portfolio 17,668 10,521
Global Bond Portfolio 9,907 1,670
Global Dollar Government Portfolio 242 31
Growth Portfolio 1,434,835 161,751
Growth & Income Portfolio 7,118,210 5,490,984
Growth Investors Portfolio 83,359 26,366
International Portfolio 7,730,001 7,784,638
Money Market Portfolio 7,530,593 7,510,112
Premier Growth Portfolio 1,721,633 1,617,108
Technology Portfolio 9,312,917 9,128,748
Total Return Portfolio 2,439 21
Quasar Portfolio 9,870,359 9,753,129
U.S. Government High Grade Portfolio 976 8
Utility Income Portfolio 976 8
Dreyfus:
Small Company Portfolio 277,608 163,341
Stock Index Portfolio 1,719,925 387,790
Zero Coupon 2000 Portfolio 7,868 5,215
Fidelity Trust Funds:
Asset Manager Portfolio 637,629 260,827
Contrafund Portfolio 295,002 38,838
Growth Portfolio 1,684,130 336,475
High Income Portfolio 366,333 353,460
Investment Grade Bond Portfolio 252,481 126,121
Money Market Portfolio 3,777,754 2,255,231
Overseas Portfolio 240,411 252,471
Van Eck:
Worldwide Emerging Markets Portfolio 31,817 4,692
Worldwide Hard Assets Portfolio 34,521 13,551
Worldwide Balanced Portfolio 43,581 115,939
Weiss, Peck, & Greer Tomorrow Funds:
Tomorrow Long Term Portfolio 43,881 17,022
Tomorrow Medium Term Portfolio 1,311 1,067
Tomorrow Short Term Portfolio 4,968 873
</TABLE>
For the year ended December 31, 1997, investment activity in the Fund was as
follows: Cost of Proceeds Purchases From Sales
<TABLE>
<S> <C> <C>
Shares of
Alliance Funds:
Conservative Investors Portfolio $ 18,544 $ 5,676
Growth Portfolio 974,204 280,744
Growth & Income Portfolio 674,003 163,065
Growth Investors Portfolio 111,960 63,096
Technology Portfolio 570,493 325,032
Quasar Portfolio 469,753 253,745
Dreyfus:
Small Company Stock Portfolio 134,522 1,321
Stock Index Portfolio 1,010,647 301,445
Zero Coupon 2000 Portfolio 17,381 9,537
Fidelity Trust Funds:
Asset Manager Portfolio 386,303 128,841
Growth Portfolio 1,207,119 882,821
High Income Portfolio 338,288 132,191
Investment Grade Bond Portfolio 36,324 10,571
Money Market Portfolio 2,898,075 1,866,353
Overseas Portfolio 339,597 88,568
Van Eck:
Worldwide Emerging Markets Portfolio 4 4
Worldwide Hard Assets Portfolio 28,081 7,507
Worldwide Balanced Portfolio 58,655 8,264
Weiss, Peck, & Greer Tomorrow Funds:
Tomorrow Long Term Portfolio 28,487 2,754
Tomorrow Medium Term Portfolio 4,465 72
Tomorrow Short Term Portfolio 2,909 406
</TABLE>
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (continued)
5. Net Increase (Decrease) in Accumulation Units
For the year ended December 31, 1998, transactions in accumulation units of the
account were as follows:
<TABLE>
Aim Aim Alliance
Capital International Conservative
Appreciation Equity Investors
Portfolio Portfolio Portfolio
VARIABLE ANNUITY - - -
<S> <C> <C> <C>
Units Purchased 10,966.16 17,130.11 519.94
Units Withdrawn (1,282.07) (1,912.12) (252.21)
Units Transferred Between Funds 7,964.24 5,920.24 151.60
Units Transferred From (To) AI Life 0.00 0.00 0.00
---------- ---------- ---------
Net Increase (Decrease) 17,648.33 21,138.23 419.33
Units, at Beginning of the Year 0.00 0.00 1,986.58
---------- ---------- ---------
Units, at End of the Year 17,648.33 21,138.23 2,405.91
========== ========== =========
Unit Value at December 31, 1998 $ 11.38 $ 11.57 $ 13.71
========== ========== =========
</TABLE>
<TABLE>
Alliance
Alliance Global
Global Dollar Alliance
Bond Government Growth
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 274.70 0.00 48,680.75
Units Withdrawn (47.46) (4.05) (14,982.74)
Units Transferred Between Funds 538.94 33.17 28,539.15
Units Transferred From (To) AI Life 0.00 0.00 0.00
------- ------ -----------
Net Increase (Decrease) 766.18 29.12 62,237.16
Units, at Beginning of the Year 0.00 0.00 63,940.84
------- ------ -----------
Units, at End of the Year 766.18 29.12 126,178.00
======= ====== ===========
Unit Value at December 31, 1998 $ 11.15 $ 7.65 $ 22.41
======= ====== ===========
</TABLE>
<TABLE>
Alliance
Growth Alliance
& Growth Alliance
Income Investors International
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 33,634.28 4,748.04 0.00
Units Withdrawn (10,914.51) (1,602.25) (789.39)
Units Transferred Between Funds 54,953.57 19.95 789.39
Units Transferred From (To) AI Life 0.00 0.00 0.00
----------- ---------- -------
Net Increase (Decrease) 77,673.34 3,165.74 0.00
Units, at Beginning of the Year 44,589.32 8,820.29 0.00
----------- ---------- -------
Units, at End of the Year 122,262.66 11,986.03 0.00
=========== ========== =======
Unit Value at December 31, 1998 $ 20.54 $ 16.32 $ 11.06
=========== ========== =======
</TABLE>
Footnote 1 are all funds except for IVUL 2.
Footnote 2 are the IVUL 2 funds.
<PAGE>
<TABLE>
Alliance Alliance Alliance
Money Premier Premier
Market Growth Growth
Portfolio 1 Portfolio 2 Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 76,950.50 14,340.65 368.47
Units Withdrawn (1,125.28) (1,636.22) (15.78)
Units Transferred Between Funds (73,883.89) (2,993.66) 16.87
Units Transferred From (To) AI Life 0.00 0.00 0.00
---------- ---------- -------
Net Increase (Decrease) 1,941.33 9,710.77 369.56
Units, at Beginning of the Year 0.00 0.00 0.00
---------- ---------- -------
Units, at End of the Year 1,941.33 9,710.77 369.56
========== ========== =======
Unit Value at December 31, 1998 $ 10.55 $ 15.06 $ 15.45
========== ========== =======
</TABLE>
<TABLE>
Alliance
Alliance Total Alliance
Technology Return Quasar
Portfolio Portfolio 1 Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 35,545.90 212.77 16,965.13
Units Withdrawn (7,116.84) (4.98) (4,825.62)
Units Transferred Between Funds (5,978.18) 0.00 (4,170.54)
Units Transferred From (To) AI Life 0.00 0.00 0.00
---------- ------- ----------
Net Increase (Decrease) 22,450.88 207.79 7,968.97
Units, at Beginning of the Year 23,596.78 0.00 20,181.26
---------- ------- ----------
Units, at End of the Year 46,047.66 207.79 28,150.23
========== ======= ==========
Unit Value at December 31, 1998 $ 17.55 $ 12.18 $ 11.34
========== ======= ==========
</TABLE>
<TABLE>
Alliance
U.S.
Government
Alliance High Alliance
Quasar Grade Utility
2 Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 531.58 89.14 72.17
Units Withdrawn (11.11) (2.08) (1.69)
Units Transferred Between Funds 3.26 0.00 0.00
Units Transferred From (To) AI Life 0.00 0.00 0.00
------- ------ ------
Net Increase (Decrease) 523.73 87.06 70.48
Units, at Beginning of the Year 0.00 0.00 0.00
------- ------ ------
Units, at End of the Year 523.73 87.06 70.48
======= ====== ======
Unit Value at December 31, 1998 $ 9.15 $ 11.12 $ 14.47
======= ====== ======
</TABLE>
Footnote 1 are all funds except for IVUL 2.
Footnote 2 are the IVUL 2 funds.
<PAGE>
<TABLE>
Dreyfus Dreyfus
Small Dreyfus Zero
Company Stock Coupon
Stock Index 2000
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 15,130.34 64,100.90 653.34
Units Withdrawn (2,752.76) (17,133.95) (197.62)
Units Transferred Between Funds 1,013.09 21,583.46 (273.54)
Units Transferred From (To) AI Life 0.00 0.00 0.00
---------- ----------- ---------
Net Increase (Decrease) 13,390.67 68,550.41 182.18
Units, at Beginning of the Year 12,290.97 54,287.23 976.29
---------- ----------- ---------
Units, at End of the Year 25,681.64 122,837.64 1,158.47
========== =========== =========
Unit Value at December 31, 1998 $ 9.66 $ 22.11 $ 11.72
========== =========== =========
</TABLE>
<TABLE>
Fidelity
Asset Fidelity Fidelity
Manager Contrafund Growth
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 18,697.45 13,543.93 71,686.34
Units Withdrawn (4,063.22) (1,631.36) (19,446.08)
Units Transferred Between Funds 6,029.71 11,000.06 16,228.87
Units Transferred From (To) AI Life 0.00 0.00 0.00
---------- ---------- -----------
Net Increase (Decrease) 20,663.94 22,912.63 68,469.13
Units, at Beginning of the Year 25,997.34 0.00 76,554.16
---------- ---------- -----------
Units, at End of the Year 46,661.28 22,912.63 145,023.29
========== ========== ===========
Unit Value at December 31, 1998 $ 17.01 $ 12.96 $ 21.02
========== ========== ===========
</TABLE>
<TABLE>
Fidelity
Fidelity Investment Fidelity
High Grade Money
Income Bond Market
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 9,445.60 13,513.40 259,198.27
Units Withdrawn (2,853.91) (1,307.38) (28,981.43)
Units Transferred Between Funds (7,301.62) (2,236.28) (105,109.51)
Units Transferred From (To) AI Life 0.00 0.00 (147.07)
---------- ---------- -----------
Net Increase (Decrease) (709.93) 9,969.74 124,960.26
Units, at Beginning of the Year 21,533.23 6,952.60 109,164.24
---------- ---------- -----------
Units, at End of the Year 20,823.30 16,922.34 234,124.50
========== ========== ===========
Unit Value at December 31, 1998 $ 12.64 $ 12.33 $ 11.74
========== ========== ===========
</TABLE>
Footnote 1 are all funds except for IVUL 2.
Footnote 2 are the IVUL 2 funds.
<PAGE>
<TABLE>
Van Eck
Van Eck Worldwide
Fidelity Worldwide Emerging
Overseas Balanced Markets
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 11,785.44 951.45 1,277.13
Units Withdrawn (4,501.28) (606.33) (278.62)
Units Transferred Between Funds (9,535.93) (7,669.26) 3,870.58
Units Transferred From (To) AI Life 0.00 0.00 0.00
---------- --------- ---------
Net Increase (Decrease) (2,251.77) (7,324.14) 4,869.09
Units, at Beginning of the Year 29,558.72 7,324.14 0.00
---------- --------- ---------
Units, at End of the Year 27,306.95 0.00 4,869.09
========== ========= =========
Unit Value at December 31, 1998 $ 13.92 $ 13.05 $ 6.07
========== ========= =========
</TABLE>
<TABLE>
Van Eck WP&G WP&G
Worldwide Tomorrow Tomorrow
Hard Long Medium
Assets Term Term
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 1,987.17 3,171.98 96.93
Units Withdrawn (614.56) (914.92) (41.35)
Units Transferred Between Funds 411.71 (301.20) (53.41)
Units Transferred From (To) AI Life 0.00 0.00 0.00
--------- -------- -------
Net Increase (Decrease) 1,784.32 1,955.86 2.17
Units, at Beginning of the Year 2,660.66 2,002.12 338.89
--------- --------- -------
Units, at End of the Year 4,444.98 3,957.98 341.06
========= ========= =======
Unit Value at December 31, 1998 $ 7.78 $ 14.89 $ 14.09
========= ========= =======
</TABLE>
<TABLE>
WP&G
Tomorrow
Short
Term
Portfolio
-
<S> <C>
Units Purchased 355.59
Units Withdrawn (66.23)
Units Transferred Between Funds 0.00
Units Transferred From (To) AI Life 0.00
-------
Net Increase (Decrease) 289.36
Units, at Beginning of the Year 207.88
-------
Units, at End of the Year 497.24
=======
Unit Value at December 31, 1998 $ 13.53
=======
</TABLE>
<PAGE>
APPENDIX A
Minimum Premiums
The following table shows for Insureds of varying ages, the current minimum
initial premium for a policy with the Face Amount indicated. This table assumes
that the insured will be placed in a nonsmoker class and that no supplemental
benefits will be added to the base policy.
<TABLE>
Issue Policy Minimum Minimum Planned Periodic Premium
Age of Sex of Face Initial By Premium Payment Mode
Insured Insured Amount Premium Annual Semiannual Quarterly Monthly
<S> <C> <C> <C> <C> <C> <C> <C>
25 Male $75,000 $102.08 $612.50 $306.25 $153.13 $51.04
30 Female $100,000 $107.33 $644.00 $322.00 $161.00 $53.67
35 Male $250,000 $175.42 $1,052.50 $526.25 $263.13 $87.71
40 Female $300,000 $227.83 $1,367.00 $683.50 $341.75 $113.92
45 Male $500,000 $476.67 $2,860.00 $1,430.00 $715.00 $238.33
50 Female $350,000 $427.50 $2,565.00 $1,282.50 $641.25 $213.75
55 Male $300,000 $686.33 $4,118.00 $2,059.00 $1,029.50 $343.17
60 Female $250,000 $620.83 $3,725.00 $1,862.50 $931.25 $310.42
65 Male $200,000 $1,185.67 $7,114.00 $3,557.00 $1,778.50 $592.83
70 Female $100,000 $670.50 $4,023.00 $2,011.50 $1,005.75 $335.25
75 Male $75,000 $1,210.71 $7,264.25 $3,632.13 $1,816.06 $605.35
</TABLE>
A-1
<PAGE>
APPENDIX B
Surrender Charge Premium
The surrender charge premium is an amount used to determine the sales charge
deducted on surrender of the policy. The surrender charge premium is calculated
for each policy based on the issue age, sex, and smoker status of the Insured
and the Face Amount of the policy.
The following table shows for Insureds of varying ages, the surrender charge
premium for a policy with the Face Amount indicated. This table assumes that the
Insured will be placed in a nonsmoker class.
Issue Policy Surrender
Age of Sex of Face Charge
Insured Insured Amount Premium
25 Male $75,000 $483.75
30 Female $100,000 $690.00
35 Male $250,000 $2,562.50
40 Female $300,000 $3,327.00
45 Male $500,000 $8,530.00
50 Female $350,000 $6,373.50
55 Male $300,000 $8,880.00
60 Female $250,000 $7,800.00
65 Male $200,000 $10,762.00
70 Female $100,000 $5,781.00
75 Male $75,000 $7,689.75
B-1
<PAGE>
APPENDIX C
AVERAGE ANNUAL TOTAL RETURNS
As of December 31, 1998
<TABLE>
Inception Date 1 Yr. 3 Yrs. 5 Yrs. 10 Yrs. Since
Inception
<S> <C> <C> <C> <C> <C> <C>
AIM Variable Insurance Funds
Capital Appreciation Fund 4/30/93 18.23% 15.67% 16.10% N/A 17.57%
International Equity Fund 4/30/93 14.45% 12.93% 10.22% N/A 12.22%
Alliance Variable Products Series Fund
Global Bond Portfolio 6/28/91 8.65% -0.84% 0.54% N/A 1.74%
Growth Portfolio 9/15/94 27.57% 27.83% N/A N/A 28.60%
Growth & Income Portfolio 1/14/91 19.81% 23.36% 20.09% N/A 14.96%
Premier Growth Portfolio 6/30/92 42.94% 18.25% 17.75% N/A 17.52%
Quasar Portfolio 8/14/96 -5.34% N/A N/A N/A 7.19%
Technology Portfolio 1/11/96 62.32% N/A N/A N/A 23.54%
Dreyfus Variable Investment Fund
Small Company Stock Portfolio 4/30/96 -6.81% N/A N/A N/A 7.57%
Dreyfus Stock Index Fund 9/29/89 27.06% 26.57% 22.00% N/A 15.84%
Fidelity Variable Insurance Products Fund
VIP Growth Portfolio 10/9/86 38.24% 24.28% 20.63% 18.32% 16.30%
VIP High Income Portfolio 9/19/85 -5.19% 7.69% 7.78% 10.06% 10.08%
VIP Money Market Portfolio 4/1/82 4.52% 4.48% 4.25% 4.67% 5.82%
Fidelity Variable Insurance Products Fund II
VIP II Asset Manager Portfolio 9/6/89 14.02% 15.65% 10.81% N/A 11.97%
VIP II Contrafund Portfolio 12/30/94 28.82% 21.83% N/A N/A 25.81%
VIP II Investment Grade Bond Portfolio 12/5/88 7.87% 6.02% 5.74% 7.38% 7.37%
Van Eck Worldwide Insurance Trust
Worldwide Emerging Markets Fund 12/29/95 -34.72% -10.74% N/A N/A -10.74%
Worldwide Hard Assets Fund 9/1/89 -31.54% -8.22% -4.30% N/A 1.09%
</TABLE>
This portfolio performance information is for illustrative purposes only and is
not intended to indicate or predict future performance.
C-1
<PAGE>
[Back cover]
The Securities and Exchange Commission maintains a Web site (http://www.sec.gov)
that contains additional information about AIG Life Insurance Company, the
policy and the Separate Account which may be of interest to you. The Web site
also contains additional information about the policy's variable investment
options.
<PAGE>
AIG Life Insurance Company
Variable Account II
One Alico Plaza
Wilmington, DE 19801
1-800-340-2765
Flexible Premium Variable Universal Life Group Policy
AIG Life Insurance Company is offering life insurance coverage under the policy
described in this prospectus. The policy is a group flexible premium variable
universal life policy. You may be issued a certificate as evidence of your
coverage under a group arrangement. The description of the policy in this
prospectus is fully applicable to your certificate and the word "policy"
includes any such certificate. The policy allows you, as the owner, within
limits, to:
o Select the Face Amount of life insurance. You may within limits change your
initial selection as your insurance needs change.
o Select the amount and timing of premium payments. You may make more premium
payments than scheduled or stop making premium payments.
o Allocate premium payments and your Policy Account Value among the variable
investment options and the Guaranteed Account.
o Receive payments from your policy while the Insured is alive through loans,
partial surrenders or a full surrender.
This document contains information about the policy. You should read this
document carefully before you decide to purchase the policy. You should also
keep this document for future reference.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the policy or determined that this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Prospectus _________, 1999
<PAGE>
Investment Options
Variable Investment Options
The Separate Account is divided into subaccounts. Each subaccount invests in
shares of a specific portfolio of the Alliance Variable Products Series Fund,
Inc. The portfolios of the fund which are available under the policy are named
below. The prospectus for the fund contains information about each portfolio.
You should read the prospectus carefully.
Alliance Variable Products Series Fund, Inc.
(managed by Alliance Capital Management, L.P.)
Conservative Investors Portfolio Premier Growth Portfolio
Global Bond Portfolio Quasar Portfolio
Global Dollar Government Portfolio Real Estate Investors Portfolio
Growth Portfolio Short-Term Multi-Market Portfolio
Growth and Income Portfolio Technology Portfolio
Growth Investors Portfolio Total Return Portfolio
High-Yield Portfolio U.S. Gov't High Grade Securities Portfolio
International Portfolio Utility Income Portfolio
Money Market Portfolio Worldwide Privatization Portfolio
North American Government Portfolio
Guaranteed Investment Option
The Guaranteed Account is part of our general account. We will credit interest
equal to at least 4% per year, compounded annually on that portion of policy
Account Value that you allocate to the Guaranteed Account. We may, in our
discretion, elect to credit a higher rate of interest. This document generally
describes only that portion of the Policy Account Value allocated to the
Variable Account.
<PAGE>
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
Special Terms
Summary of the Policy
Overview
Applying for a Policy
Premium Payments
Policy Account Value
Death Benefit
Cash Benefits During the Life of the Insured
Expenses of the Policy
Federal Tax Considerations
Purchasing a Policy
Applying for a Policy
Your Right to Cancel the Policy
Premiums
Restrictions on Premiums
Minimum Initial Premium
Planned Periodic Premiums
Additional Premiums
Effect of Premium Payments
Grace Period
Premium Allocations
Crediting Premiums
The Investment Options
Investing Your Policy Account Value
Determining the Policy Account Value
Transfers
Dollar Cost Averaging
Death Benefit
Cash Benefits During the Insured's Life
Payment Options for Benefits
Expenses of the Policy
Supplemental Benefits and Riders
Other Policy Provisions
Performance Information
Federal Income Tax Considerations
Distribution of the Policy
About Us and the Accounts
Our Directors and Executive Officers
Other Information
Financial Statements
Appendices
<PAGE>
- --------------------------------------------------------------------------------
Special Terms
- --------------------------------------------------------------------------------
We have capitalized some special terms we use in this document. We have defined
these terms here.
Accounts. The Separate Account and the Guaranteed Account
Administrative Office. One Alico Plaza, P.O. Box 8718, Wilmington, DE 19801.
Attained Age. The Insured's age as of the Policy Date plus the number of full
years since the Policy Date.
Beneficiary. The person(s) entitled to the death benefit under the policy if the
Insured dies while coverage under the policy is in force.
Cash Surrender Value. The Policy Account Value less any surrender charge that
would be assessed if the policy were surrendered.
Code. The Internal Revenue Code of 1986, as amended.
Face Amount. The amount of insurance specified by the Owner and from which the
amount payable to a beneficiary will be determined.
Grace Period. The period of time that the policy continues to be in force while
the Net Cash Surrender Value is less than the total monthly deductions then due.
It begins on a Monthly Anniversary when the Net Cash Surrender Value is less
than the total monthly deduction then due.
Guaranteed Account. An account within the general account which consists of all
of our assets other than the assets of the Separate Account and any of our other
separate accounts.
Insured. A person whose life is covered under the policy. At the time of
application, the Insured must be 75 years of age or younger.
Issue Date. The date the policy is actually issued and from which we measure
contestability periods. It may be later than the Policy Date.
Loan Account. The portion of the Policy Account Value held in the Guaranteed
Account as collateral for loans.
Monthly Anniversary. The same day as the Policy Date for each succeeding month.
If the day of the monthly anniversary is the 29th, 30th or 31st and a month has
no such day, the Monthly Anniversary is deemed to be the last day of that month.
Net Cash Surrender Value. The Cash Surrender Value less any outstanding Loans.
Net Premium. Any premium paid less any expense charges deducted from the premium
payment.
Owner. The person who purchased the policy as shown in the application, unless
later changed.
Policy Account Value. The total amount in the Accounts credited to your policy.
Policy Date. The date as of which we have received the initial premium and an
application in good order. Coverage begins on the Policy Date which is also the
date used to determine all anniversary dates.
Policy Year. Each period of twelve months commencing with the Policy Date.
Separate Account. Variable Account II, a separate investment account of ours.
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.
<PAGE>
- --------------------------------------------------------------------------------
Summary of the Policy
- --------------------------------------------------------------------------------
Because this is a summary, it does not contain all the information that may be
important to you. You should read this entire document carefully before you
decide to purchase a policy.
Overview
The policy is a flexible premium variable universal life policy. Like
traditional life insurance, the policy provides an initial minimum death benefit
and cash benefits that you can access through loans, partial surrenders or a
full surrender. Unlike traditional life insurance, you may choose how to invest
your policy Account Value.
The policy allows you to make certain choices that will tailor the policy to
your needs. When you apply for the policy, we will ask you to make some of these
choices. You may also change your choices to meet your changing insurance needs.
In addition, we may in the future offer several riders to the policy. These
riders will provide you with the flexibility to design an insurance product that
meets your specific needs.
If you select any variable investment options, your policy benefits will vary
based upon the returns earned by those variable investment options. The returns
may be zero or negative and you bear this risk.
Applying for a Policy
When you apply for a policy, you must select the Face Amount. The Face Amount is
the initial amount of life insurance coverage on the Insured. It must be at
least $50,000 when you apply.
Your policy will become effective after:
o We accept your application.
o We receive an initial premium payment in an amount we determine.
o We have completed our review of your application to our satisfaction.
Your Right to Cancel the Policy
Once you receive your policy, you should read the policy. You have the right to
cancel the policy for any reason within the later of:
o 45 days after you sign Part I of the application.
o 10 days after you receive the policy. If required by the state where you
live, we will extend the time period to the number of days required by law.
Premium Payments
Before your policy is effective, you must pay the minimum initial premium. We
will calculate the initial minimum premium based 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 or riders applied for and whether
premiums will be paid by pre-authorized checking. A table is provided in
Appendix A.
When you apply for a policy you will select the amount of premium payments you
plan to pay during the term of the policy. We will establish a minimum for this
amount. You will also select intervals when you plan to pay this pay this
premium amount. This may be monthly, quarterly, semiannually, or annually.
Pre-authorized checking may be required for monthly payments.
During the term of the policy, you may pay premiums at any time and in any
amount, within limits. Thus, you are not required to pay the planned periodic
premium and you may make payments in addition to the planned periodic premium.
Policy Account Value
We will measure your benefits under the policy by your Policy Account Value.
Your Policy Account Value will reflect:
o the premiums you pay;
o the returns earned by the subaccounts you select;
o the interest earned on the amount allocated to the Guaranteed Account;
o any loans or partial surrenders; and
o the policy charges and expenses we deduct.
Death Benefit
When you apply for a policy, you must select:
o The Face Amount.
o The death benefit option, which determines the manner in which we calculate
the death benefit for your policy.
You may select from two death benefit options. They are:
o Option I: Level Death Benefit Option. The basic death benefit will be the
greater of:
1. The Face Amount; or
2. Policy Account Value on the date of death multiplied by the appropriate
minimum death benefit factor.
o Option II: Increasing Death Benefit Option. The basic death benefit will be
the greater of:
1. The Face Amount plus the Policy Account Value; or
2. Policy Account Value on the date of death multiplied by the appropriate
minimum death benefit factor.
Within limits, you may change the death benefit option and, after the first
Policy Year, may change the Face Amount.
Cash Benefits During the Life of the Insured
During the life of the Insured, your policy has cash benefits that you can
access within limits through loans, partial surrenders or a full surrender.
o Loans -- You may borrow against your Net Cash Surrender Value at any time.
If your policy is a modified endowment contract, the Code may treat the
loan as a taxable distribution of income.
o Partial Surrender -- You may withdraw part of your Policy Account Value
after the first Policy Year. We may deduct an administrative charge. If you
make a partial surrender during the surrender charge period, we will deduct
a surrender charge. A partial surrender may result in a decrease in the
Face Amount of your policy depending upon your death benefit option.
o Full Surrender -- You may surrender your policy for its Net Cash Surrender
Value. If you surrender your policy during the surrender charge period, we
will deduct a surrender charge. A surrender will terminate your policy.
Expenses of the Policy
We deduct expenses related to your policy. These deductions are made:
o from premium, your Policy Account Value and the assets of the subaccounts;
and
o upon certain transactions.
Deduction From Premium -- we will deduct 5% from your premium payments plus a
state specific percent of premium equal to the state and local premium tax rate
applicable to the policy. These deductions are for state premium taxes, federal
taxes, sales and other acquisition related expenses.
Monthly Deductions From Policy Account Value -- we will deduct on each Monthly
Anniversary charges for:
o The administration of your policy.
o The cost of insurance for your policy.
o The costs associated with acquiring and underwriting your policy.
o The cost of any supplemental benefits or riders.
The monthly deduction is deducted from your Accounts on a pro rata basis in the
same proportion as you have Policy Account Value in each Account.
Deductions from Subaccount Net Assets -- we will deduct a daily charge for the
mortality and expense risks we assume at an annual rate not to exceed 0.90% of
your Policy Account Value in the subaccounts.
Deductions Upon Certain Policy Transactions -- If you make a policy transaction,
a charge may apply. They are:
o Transfer Charge -- You may make twelve transfers from your subaccounts each
Policy Year free of charge. Thereafter, we will deduct a fee of $25 per
transfer from the transferred amount.
o Administrative Charge for Partial Surrenders - We currently deduct an
administrative charge of $25 upon a partial surrender. In certain states
the charge may be the lesser of $25 or 2% of the amount surrendered.
o Surrender Charge - A surrender charge for partial surrenders is equal to a
pro rata portion of the surrender charge that would apply to a full
surrender. This applies during the first 14 Policy Years and for the first
14 Policy Years immediately following an increase in Face Amount. If you
request a full surrender during the first 14 Policy Years, we may deduct a
surrender charge based on the initial Face Amount. If you request a
surrender 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.
o Surrender Charge for Face Amount Decreases -- We may also deduct a
surrender charge from the Policy Account Value upon a decrease in Face
Amount. If you request a decrease in Face Amount during the first 14 Policy
Years, we will deduct a surrender charge based on the initial Face Amount.
If you request a decrease within 14 years immediately following an increase
in Face Amount, we will deduct a surrender charge based on the increase in
Face Amount.
In addition, you will indirectly bear the costs of the investment management
fees and expenses paid from the assets of the portfolios you select.
The following tables are designed to help you understand the various fees and
expenses that you will bear directly or indirectly. The first table shows the
policy charges and deductions you will bear directly under the policy. The
second table shows the fees and expenses of the portfolios that you will bear
indirectly when you purchase a policy.
Policy Charges and Deductions
Transaction Charges
Sales and DAC Tax Charge 5% of each premium payment
Premium Tax Charge(1) 0.50% to 5% of each premium payment
Transfer Charge $25 for each transfer in excess of 12 each Policy Year
Surrender Charge During the first 14 Policy Years and the first years
immediately following an increase in Face Amount, there will be a surrender
charge of up to 25% of the first year premium paid up to a surrender charge
premium plus 4% of the first year premium paid in excess of the surrender
charge premium. (3)
Partial Surrender Administrative $25 per partial surrender - In certain
states the charge may Charge the lesser of $25 or 2% of the amount
surrendered.
Account Value Charges (deducted monthly)
Cost of Insurance Charge(2)
Current Guaranteed
Ranges from 0.01609 per Ranges from 0.05667 per
$1,000 of net amount at risk $1,000 of net amount at risk
to 71.15029 per $1,000 of net to 83.33333 per $1,000 of net
amount at risk(4) amount at risk(4)
Monthly Expense Charge Current Guaranteed
If the Face Amount is between $50,000 and $199,000 $ 7.50 $15.00
If the Face Amount is between $200,000 and $499,000 $ 5.00 $10.00
If the Face Amount is between $500,000 and greater $ 4.00 $10.00
First Year Additional Charge $ 20.00 $25.00
First Year Administrative Charge Up to $25 per month during the first
Policy Year and for 12 months following an increase in Face Amount
Annual Separate Account Charges (deducted daily and shown as an annualized
percentage of average net assets)
Mortality and Expense Risk Charge Current Guaranteed
0.90% 0.90%
(1) We deduct a premium tax charge equal to the actual state tax rate from each
premium payment. State and local premium tax rates range from 0.50% to 5%.
(2) The current cost of insurance charge will never exceed the guaranteed cost
of insurance charge shown in the policy. The net amount at risk is the
difference between the death benefit divided by 1.0032737 and the current
Policy Account Value. (See "Expenses of the Policy - Cost of Insurance
Charge.")
(3) A policy's surrender charge premium is based on the issue age, sex and
smoker status of the Insured and the Face Amount. For a 45 year old
non-smoking male purchasing $500,000 Face Amount the surrender charge
premium would be $8,530.00. For a 65 year old non-smoking male purchasing
$200,000 Face Amount, the surrender charge premium would be $10,762.00. The
lowest and highest maximum surrender charge will range from $11.02 to
$34.34 per $1,000 of Face Amount. (See Appendix B for additional examples
of surrender charge premiums.)
(4) Current and guaranteed cost of insurance charges are based on the issue age
(or Attained Age in the case of increase in Face Amount), sex, rate class
of the Insured, and Policy Year.
<PAGE>
Annual Portfolio Expenses
Before Waivers/Reimbursements
As of December 31, 1998
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 before waivers and/or
reimbursements, if applicable, for the year ended December 31, 1998, except as
indicated below. Expenses of the portfolios of the fund are not fixed or
specified under the terms of the policy. Actual expenses may vary.
<TABLE>
Management Other Total
Fees Expenses(1) Expenses
<S> <C> <C> <C>
Alliance Variable Products Series Fund(2)
Conservative Investors Portfolio 0.75% 0.44% 1.19%
Global Bond Portfolio 0.65% 0.52% 1.17%
Global Dollar Government Portfolio 0.75% 1.00% 1.75%
Growth Portfolio 0.75% 0.12% 0.87%
Growth Investors Portfolio 0.75% 0.93% 1.68%
Growth & Income Portfolio 0.63% 0.10% 0.73%
High-Yield Portfolio 0.75% 1.05% 1.80%
International Portfolio 1.00% 0.37% 1.37%
Money Market Portfolio 0.50% 0.18% 0.68%
North American Government Income Portfolio 0.65% 0.52% 1.17%
Premier Growth Portfolio 1.00% 0.09% 1.09%
Quasar Portfolio 1.00% 0.30% 1.30%
Real Estate Investment Portfolio 0.90% 0.87% 1.77%
Short-Term Multi Market Portfolio 0.55% 2.14% 2.69%
Technology Portfolio 1.00% 0.20% 1.20%
Total Return Portfolio 0.63% 0.32% 0.95%
U.S. Government/High Grade Securities Portfolio 0.60% 0.31% 0.91%
Utility Income Portfolio 0.75% 0.60% 1.35%
Worldwide Privatization Portfolio 1.00% 0.70% 1.70%
</TABLE>
(1) Other expenses are based on the expenses outlined in the prospectuses for
the Alliance Variable Products Series Fund.
(2) Expenses for the following portfolios after waivers and reimbursement by
the Alliance Variable Products Series Fund's investment adviser for the
period ended December 31, 1998, were as follows:
Management Other Total
Fees Expenses Expenses
Conservative Investors Portfolio 0.46% 0.44% 0.90%
Global Bond Portfolio 0.64% 0.29% 0.93%
Global Dollar Government Portfolio 0.39% 0.56% 0.95%
Growth Investors Portfolio 0.01% 0.93% 0.94%
High-Yield Portfolio 0.44% 0.51% 0.95%
International Portfolio 0.58% 0.37% 0.95%
North American Government Income Portfolio 0.53% 0.33% 0.86%
Premier Growth Portfolio 0.97% 0.09% 1.06%
Quasar Portfolio 0.73% 0.22% 0.95%
Real Estate Investment Portfolio 0.08% 0.87% 0.95%
Short-Term Multi Market Portfolio 0.00% 0.94% 0.94%
Technology Portfolio 0.81% 0.14% 0.95%
Total Return Portfolio 0.62% 0.26% 0.88%
U.S. Government/High Grade Securities Portfolio 0.60% 0.18% 0.78%
Utility Income Portfolio 0.58% 0.37% 0.95%
Worldwide Privatization Portfolio 0.25% 0.70% 0.95%
Federal Tax Considerations
Your purchase of, and transactions under, your policy may have tax consequences
that you should consider before purchasing the policy. You may wish to consult a
tax adviser. In general, the death benefit will not be taxable income to the
Beneficiary. You will not be taxed as your Policy Account Value increases. Upon
a distribution from your policy, however, you may be taxed on any increase in
Policy Account Value.
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Purchasing a Policy
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Applying for a Policy
To purchase a policy, you must complete an application and submit it to us. You
must specify certain information in the application, including the Face Amount,
the death benefit option and supplemental benefit riders, if any. We may also
require information to determine if the Insured is an acceptable risk to us. We
may require a medical examination of the Insured and ask for additional
information.
You may apply for a policy to cover a person who is younger than age 76. A
newborn may be an Insured. The minimum Face Amount is $50,000.
We require a minimum initial premium before we will issue the policy. You may
pay the minimum initial premium when you submit the application or at a later
date.
We will not issue a policy until we have accepted the application. We will
accept an application if it meets our underwriting rules. We reserve the right
to reject an application for any reason or "rate" an Insured as a substandard
risk.
Your policy will become effective after:
o We accept your application.
o We receive an initial premium payment in an amount we determine.
o We have completed our review of your application to our satisfaction.
Your Right to Cancel the Policy
Once you receive your policy, you should read the policy. You have the right to
cancel the policy for any reason within the later of:
o 45 days after you sign Part I of the application; or
o 10 days after you received the policy. If required by the state where you
live, we will extend the time period to the number of days required by law.
This is your "period to examine and cancel."
Your right to cancel also applies to the amount of any increase in Face Amount.
You may cancel the policy by returning it to our Administrative Office or to
your agent within the applicable time with a written request for cancellation.
We will refund you the premium paid on the policy. Thus, the amount we return
will not reflect the returns of the subaccounts you selected in your
application.
Premiums
The policy allows you to select the timing and amount of premium payments within
limits. Send premium payments to our Administrative Office.
Restrictions on Premiums. We may not accept any premium payment:
o If it is less than $50.
o If the premium would cause the policy to fail to qualify as a life
insurance contract as defined in Section 7702 of the Code. We will refund
any portion of any premium that causes the policy to fail. In addition, we
will monitor the policy and will attempt to notify you on a timely basis if
your policy is in jeopardy of becoming a modified endowment contract under
the Code.
o If the premium would increase the amount of our risk under your policy by
an amount greater than that premium amount. In such cases, we may require
satisfactory evidence of insurability before accepting that premium.
Minimum Initial Premium. We will calculate the minimum initial premium. The
amount is based on a number of factors, including the age, sex and rating class
of the proposed Insured, the desired Face Amount and any supplemental benefits
or riders applied for and whether premiums will be paid by pre-authorized
checking.
Planned Periodic Premium. When you apply for a policy, you select a plan for
paying level premiums at specified intervals. The intervals may be monthly,
quarterly, semi-annually or annually, for the life of the policy. Pre-authorized
checking may be required for monthly payments. We will establish a minimum
amount that may be used as the planned periodic premium.
You are not required to pay premiums in accordance with this plan. Rather, you
can pay more or less than the planned periodic premium or skip a planned
periodic premium entirely. At any time you can change the amount and frequency
of planned periodic premium by sending a written notice to our Administrative
Office.
Additional Premiums. Additional premiums are premiums other than planned
premiums. Additional premiums may be paid in any amount and at any time subject
to the Code. Depending on the Policy Account Value at the time of an increase in
the Face Amount and the amount of the increase requested, an additional premium
may be needed to prevent your policy from terminating.
Effect of Premium Payments. In general, paying all planned periodic premiums may
not prevent your policy from lapsing. In addition, if you fail to pay any
planned periodic premiums, your policy will not necessarily lapse.
Your policy will lapse only when the Net Cash Surrender Value on a Monthly
Anniversary is less than the amount of that date's monthly deduction. This could
happen if the Net Cash Surrender Value has decreased because:
o of the negative return or insufficient return earned by one or more of the
subaccounts you selected; or
o of any combination of the following -- you have outstanding loans, you have
taken partial surrenders, we have deducted policy expenses, or you have
made insufficient premium payments to offset the monthly deduction.
Grace Period. In order for insurance coverage to remain in force, the Net Cash
Surrender Value on each Monthly Anniversary must be equal to or greater than the
total monthly deductions for that Monthly Anniversary. If it is not, you have a
Grace Period of 61 days during which the policy will continue in force. The
Grace Period begins on the Monthly Anniversary that the Net Cash Surrender Value
is less than the total monthly deductions then due. If we do not receive a
sufficient premium before the end of the Grace Period, the policy will terminate
without value.
We will send you a written notice within 30 days of the beginning of any Grace
Period. The notice will state:
o A Grace Period of 61 days has begun.
o The amount of premium required to prevent your policy from terminating.
This amount is equal to the amount needed to increase the Net Cash
Surrender Value sufficiently to cover total monthly deductions for the next
three (3) Monthly Anniversaries.
If the Insured dies during the Grace Period, we will still pay the death benefit
to the Beneficiary. The amount we pay will reflect a reduction for the unpaid
monthly deductions due on or before the date of the Insured's death.
If your policy lapses with an outstanding loan you may have taxable income.
Premium Allocations. In the application, you specify the percentage of Net
Premiums to be allocated to each subaccount or to the Guaranteed Account.
However, until the period to examine and cancel expires, we invest this amount
in the Money Market Subaccount. On the first business day after the period
expires, we will reallocate your Policy Account Value based on the premium
allocation percentages in your application.
For all subsequent premiums, we will use the allocation percentages you
specified in the application until you change them. You can change the
allocation percentages at any time by sending written notice to our
Administrative Office. The change will apply to all Premiums received with or
after your notice.
Allocation Rules. Your allocation instructions must meet the following
requirements:
o Each allocation percentage must be a whole number; and
o Any allocation to a subaccount must be at least 5%; and the sum of your
allocations must equal 100%.
Crediting Premiums. Your initial Net Premium will be credited to your Policy
Account Value as of the Policy Date. We will credit and invest subsequent Net
Premiums on the date we receive the premium or notice of deposit at our
Administrative Office.
If any premium requires us to accept additional risk, we will allocate this
amount to the Money Market Subaccount until we complete our underwriting. When
accepted, and at the end of the period to examine and cancel the policy, we will
allocate it in accordance with your allocation percentages.
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The Investment Options
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You may allocate your Policy Account Value to:
o the subaccounts which invest in the variable investment options; or
o the Guaranteed Account.
Variable Investment Options
Under the policy, you may currently allocate your Policy Account Value into any
of the available subaccounts. Each subaccount invests in a distinct portfolio of
the Alliance Variable Products Series Fund, Inc. These portfolios operate
similarly to a mutual fund but are only available through the purchase of
certain insurance contracts. The fund may also include other portfolios which
are not available under the policy.
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
Conservative Investors Portfolio seeks the highest total return without, in the
view of the Fund's Adviser, undue risk to principal by investing in a
diversified mix of publicly traded equity and fixed-income securities.
Global Bond Portfolio seeks a high level of return from a combination of current
income and capital appreciation by investing in a globally diversified portfolio
of high quality debt securities denominated in the U.S. Dollar and a range of
foreign currencies. The sub-adviser for this portfolio is AIGAM International
Limited, an affiliate of American International Group, Inc.
Global Dollar Government Portfolio seeks a high level of current income through
investing substantially all of its assets in U.S. and non-U.S. fixed income
securities denominated only in U.S. Dollars. As a secondary objective, the
portfolio seeks capital appreciation. Substantially all of the portfolio's
assets will be invested in high yield, high risk securities that are low-rated
(i.e., below investment grade), or of comparable quality and unrated, and that
are considered to be predominately speculative as regards the issuer's capacity
to pay interest and repay principal.
Growth Portfolio seeks long-term growth of capital by investing primarily in
common stocks and other equity securities.
Growth and Income Portfolio seeks to balance the objectives of reasonable
current income and reasonable opportunities for appreciation through investments
primarily in dividend-paying common stocks of good quality.
Growth Investors Portfolio seeks the highest total return consistent with what
the Fund's Adviser considers to be reasonable risk by investing in a diversified
mix of publicly traded equity and fixed-income securities.
High-Yield Portfolio seeks the highest level of current income available without
assuming undue risk by investing principally in high-yielding fixed income
securities. As a secondary objective, this portfolio seeks capital appreciation
where consistent with its primary objective. Many of the high-yielding
securities in which the High Yield Portfolio invests are rated in the lower
rating categories (i.e., below investment grade) by the nationally recognized
rating services. These securities, which are often referred to as "junk bonds,"
are subject to greater risk of loss of principal and interest than higher rated
securities and are considered to be predominately speculative with respect to
the issuer's capacity to pay interest and repay principal.
International Portfolio seeks to obtain a total return on its assets from
long-term growth of capital and from income principally through a broad
portfolio of marketable securities of established non-United States companies
(or United States companies having their principal activities and interests
outside the United States), companies participating in foreign economies with
prospects for growth, and foreign government securities.
Money Market Portfolio seeks safety of principal, maintenance of liquidity and
maximum current income by investing in a broadly diversified portfolio of money
market securities. An investment in the Money Market Portfolio is neither
insured nor guaranteed by the U.S. Government. There can be no assurance that
the Portfolio will be able to maintain a stable net asset value of $1.00 per
share, although it expects to do so.
North American Government Income Portfolio seeks the highest level of current
income, consistent with what the adviser considers to be prudent investment
risk, that is available from a portfolio of debt securities issued or guaranteed
by the governments of the United States, Canada and Mexico, their political
subdivisions (including Canadian Provinces but excluding the States of the
United States), agencies, instrumentalities or authorities. The portfolio seeks
high current yields by investing in government securities denominated in local
currency and U.S. Dollars. Normally, the portfolio expects to maintain at least
25% of its assets in securities denominated in the U.S. Dollar.
Premier Growth Portfolio seeks growth of capital rather than current income. In
pursuing its investment objective, the Premier Growth Portfolio will employ
aggressive investment policies. Since investments will be made based on their
potential for capital appreciation, current income will be incidental to the
objective of capital growth. The portfolio is not intended for investors whose
principal objective is assured income or preservation of capital.
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.
Real Estate Investment Portfolio seeks a total return on its assets from
long-term growth of capital and from income principally through investing in a
portfolio of equity securities of issuers that are primarily engaged in or
related to the real estate industry.
Short-Term Multi Market Portfolio seeks the highest level of current income,
consistent with what the Fund's Adviser considers to be prudent investment risk,
that is available from a portfolio of high-quality debt securities having
remaining maturities of not more than three years.
Technology Portfolio seeks growth of capital through investment in companies
expected to benefit from advances in technology. The Portfolio invests
principally in a diversified portfolio of securities of companies which use
technology extensively in the development of new or improved products or
processes.
Total Return Portfolio seeks to achieve a high return through a combination of
current income and capital appreciation by investing in a diversified portfolio
of common and preferred stocks, senior corporate debt securities, and U.S.
Government and agency obligations, bonds and senior debt securities.
U.S. Government/High Grade Securities Portfolio seeks a high level of current
income consistent with preservation of capital by investing principally in a
portfolio of U.S.
Government Securities and other high grade debt securities.
Utility Income Portfolio seeks current income and capital appreciation by
investing primarily in the equity and fixed-income securities of companies in
the "utilities industry." The portfolio's investment objective and policies are
designed to take advantage of the characteristics and historical performance of
securities of utilities companies. The utilities industry consists of companies
engaged in the manufacture, production, generation, provision, transmission,
sale and distribution of gas, electric energy, and communications equipment and
services, and in the provision of other utility or utility-related goods and
services.
Worldwide Privatization Portfolio seeks long-term capital appreciation by
investing principally in equity securities issued by enterprises that are
undergoing, or have undergone, privatization. The balance of the portfolio's
investment portfolio will include equity securities of companies that are
believed by the Fund's Advisor to be beneficiaries of the privatization process.
Guaranteed Investment Option
Under the policy, you may currently allocate your Policy Account Value to the
Guaranteed Account. In addition, if you request a loan, we will allocate part of
your Policy Account Value to the Loan Account which is part of the Guaranteed
Account.
We treat each allocation and transfer separately for purposes of crediting
interest and making deductions from the Guaranteed Account.
Interest Credited On the Guaranteed Account. All of your Policy Account Value
held in the Guaranteed Account will earn interest at a rate we determine in our
sole discretion. This rate will never be less than 4% per year compounded
annually. You assume the risk that interest credited may not exceed the
guaranteed minimum rate of 4% per year. The Loan Account portion of your Policy
Account Value may earn a different interest rate than the remaining portion of
your Policy Account Value in the Guaranteed Account.
Deductions from the Guaranteed Account. We will deduct any transfers, partial
surrenders or any policy expenses from the Guaranteed Account and your variable
investment options on a pro rata basis, unless you provide other directions. No
portion of the Loan Account may be used for this purpose.
The Loan Account will only increase or decrease in value when policy loans are
taken or repayments are made. If an amount is transferred from the Loan Account
to the remaining portion of the guaranteed Policy 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.
Payments from the Guaranteed Account. If we must pay any part of the proceeds
for a loan, partial surrender or full surrender from the Guaranteed Account, we
may defer the payment for up to six months from the date we receive the written
request. If we defer payment from the Guaranteed Account for 30 days or more, we
will pay interest on the amount we deferred at a rate of 4% per year, compounded
annually, until we make payment.
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Investing Your Policy Account Value
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The policy allows you to choose how to invest your Policy Account Value. Your
Policy Account Value will increase or decrease based on:
o The returns earned by the Subaccounts you select.
o Interest credited on amounts allocated to the Guaranteed Account.
We will determine your policy benefits based upon your Policy Account Value. If
your Policy Account Value is insufficient, your policy may terminate. If the Net
Cash Surrender Value on a monthly anniversary is less than the amount of that
date's monthly deduction, the policy will be in default and a Grace Period will
begin.
Determining the Policy Account Value
On the Policy Date, your Policy Account Value is equal to your initial Net
Premium. If the Policy Date and the Issue Date are the same day, the Policy
Account Value is equal to your initial premium, less the premium expenses and
monthly deduction.
On each Valuation Date thereafter, your Policy Account Value is equal to:
o Your Policy Account Value held in the subaccounts; and
o Your Policy Account Value held in Guaranteed Account.
Your Policy Account Value will reflect:
o the premiums you pay;
o the returns earned by the subaccounts you select;
o the interest credited on amounts allocated to the Guaranteed Account;
o any loans or partial surrenders; and
o the policy expenses we deduct.
Policy Account Value in the Subaccounts. We measure your Policy Account Value in
the subaccounts by the value of the subaccounts' accumulation units we credit to
your policy. When you allocate premiums or transfer part of your Policy Account
Value to a subaccount, we credit your policy with accumulation units in that
subaccount. The number of accumulation units equals the amount allocated to the
subaccount divided by that subaccount's accumulation unit value for the
Valuation Date when the allocation is effected.
The number of subaccount accumulation units we credit to your policy will:
o increase when Net Premium is allocated to the subaccount, amounts are
transferred to the subaccount and loan repayments are credited to the
subaccount.
o decrease when the allocated portion of the monthly deduction is taken from
the subaccount, a 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.
Accumulation Unit Values. A subaccount's accumulation unit value varies to
reflect the return of the portfolio and may increase or decrease from one
Valuation Date to the next. We arbitrarily set the accumulation unit value for
each subaccount at $10 when the subaccount was established. Thereafter, the
accumulation unit value equals the accumulation unit value for the prior
Valuation Period multiplied by the net investment factor for the current
Valuation Period.
Net Investment Factor. The net investment factor is an index we use to measure
the investment return earned by a subaccount during a Valuation Period. It is
based on the change in net asset value of the portfolio shares held by the
subaccount, and reflects any dividend or capital gain distributions on the
portfolio shares and the deduction of the daily mortality and expense risk
charge.
Guaranteed Policy Account Value. On any Valuation Date, the Guaranteed Account
portion of your Policy Account Value equals:
o the total of all Net Premium, allocated to the Guaranteed Account, plus
o any amounts transferred to the Guaranteed Account, plus
o interest credited on the amounts allocated and transferred to the
Guaranteed Account, less
o the amount of any transfers from the Guaranteed Account, less
o the amount of any partial surrenders, including the partial surrender
charges, taken from the Guaranteed Account, and less
o the allocated portion of the monthly deduction deducted from the Guaranteed
Account, plus
o the amount of the Loan Account.
If you take a loan, we transfer the amount of the loan to the Loan Account held
in the Guaranteed Account. The value of your Loan Account includes transfers to
and from the Loan Account as you take and repay loans and interest credited on
the Loan Account.
Net Policy Account Value. The net Policy Account Value on a Valuation Date is
the Policy Account Value less outstanding loans on that date.
Cash Surrender Value. The Cash Surrender Value on a Valuation Date is the Policy
Account Value reduced by any surrender charge that would assessed if the policy
were surrendered on that date.
Net Cash Surrender Value. The Net Cash Surrender Value on a Valuation Date is
the amount you would receive on a surrender of your policy and is equal to:
o the Cash Surrender Value, less
o the outstanding loan on that date.
Transfers
You may transfer Policy Account Value among the subaccounts and to the
Guaranteed Account after the period to examine and cancel. All transfer requests
must satisfy the following requirements:
o Minimum amount of transfer -- You must transfer at least $250 or, the
balance in the subaccount or the Guaranteed Account, if less;
o Form of transfer request - Transfer requests must be in writing;
o Transfers from the Guaranteed Account -- The maximum you may transfer in a
Policy Year is equal to 25% of your guaranteed Policy Account Value that is
not in the Loan Account. Transfers may be made only during the 60-day
period within 30 days before and following the end of each Policy Year. The
amount transferred must be at least $250 or the Policy Account Value held
in the Guaranteed Account.
Date We Process Your Transfer Request. We must receive your transfer request at
our Administrative Office. We process transfers at the price next computed after
we receive your transfer request. We may, however, defer transfers under the
same conditions as described under "Other Policy Provisions - When Proceeds Are
Paid."
Number of Allowable Transfers/Transfer Charge. We do not currently limit the
number of transfers you may make. We will currently assess a $25 transfer
charge, however, for each transfer in excess of 12 during a Policy Year. All
transfers processed on the same business day will count as one transfer for
purposes of determining the number of transfers you have made in a Policy Year.
We reserve the right to increase or decrease the number of free transfers
allowed in any Policy Year.
We will confirm transfer requests received by fax before processing them. You
should review all confirmations to determine if there have been any unauthorized
transfers.
Dollar Cost Averaging
Dollar cost averaging is a systematic method of investing at regular intervals.
By investing at regular intervals, the cost of the securities is averaged over
time and perhaps over various market cycles.
Under this program we will automatically transfer monthly a portion of your
Money Market Subaccount value into other subaccounts or the Guaranteed Account
for a period not in excess of 24 months. We will allocate the transfers based on
your current premium allocation instructions. However, no less than 5% may be
allocated to any one subaccount or to the Guaranteed Account. There is no charge
for this option which can be elected at any time provided there is a minimum
balance of $2000 in the Money Market Subaccount. Transfers in connection with
the dollar cost averaging program will not count against the 12 free transfers
in a Policy Year.
Dollar Cost Averaging From a Subaccount. If you instruct us to make the
transfers from the Money Market Subaccount, you may request that we transfer:
o A specified dollar amount -- we will automatically transfer this amount in
accordance with your most current premium allocation instructions for a
specified period until your Policy Account Value in the transferring Money
Market Subaccount is depleted.
o A specified number of months-- we will automatically transfer over a
specific number of months an amount 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 transfer
will be for 1/10 and so on until the end of the requested period.
We will begin to process your automatic transfers:
o On the first monthly anniversary following the end of the period to examine
and cancel if you requested the automatic transfers when you applied for
your policy.
o On the second Monthly Anniversary following the receipt of your request at
our Administrative Office if you elect the option after you applied for the
policy.
We will stop processing automatic transfers if:
o The funds in the Money Market Subaccount are depleted;
o We receive you written request at our Administrative Office to cancel
future transfers;
o We receive notification of death of the Insured; or
o Your policy goes into the Grace Period.
Dollar cost averaging may lessen the impact of market fluctuations on your
investment. Using dollar cost averaging does not guarantee investment gains or
protect against loss in a declining market.
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Death Benefit
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Death Benefit
During the policy term, we will pay the death benefit to the Beneficiary after
the Insured's death. To make payment, we must receive at our Administrative
Office:
o satisfactory proof of the Insured's death; and
o the policy.
Payment of Death Benefit. We will pay the death benefit generally within seven
days after we receive the information we require. We will pay the death benefit
to the Beneficiary in one lump sum or, if elected, under a payment option.
Payment of the death benefit may also be affected by other provisions of the
policy.
We will pay interest on the death benefit from the date of the Insured's death
to the date of payment as required by applicable state law.
Amount of Death Benefit. We will determine the death benefit as of the date of
the Insured's death. The death benefit will equal:
o the death benefit amount determined according to the death benefit option
selected; plus
o any other benefits then due from riders to the policy; minus
o the outstanding loan, if any, and accrued loan interest; minus
o any overdue monthly deductions if the Insured dies during a Grace Period.
Death Benefit Options
You may select from two death benefit options.
Option I - Level Death Benefit Option. The basic death benefit will be the
greater of:
(1) the Face Amount; or
(2) Policy Account Value at date of death multiplied by the appropriate
minimum death benefit factor.
Option II - Increasing Death Benefits Option. The basic death benefit will be
the greater of:
(1) the Face Amount plus the Policy Account Value; or
(2) Policy Account Value at date of death multiplied by the appropriate
minimum death benefit factor.
Changes in Death Benefit Options
You may change your death benefit option by providing your agent with a written
request or by writing us at our Administrative Office. We may require that you
submit satisfactory evidence of insurability to us.
If you request a change from Option I to Option II, we will decrease the Face
Amount by an amount equal to your Policy Account Value on the date the change
takes effect. However, we reserve the right to decline to make such a change if
it would reduce the Face Amount below the minimum Face Amount.
If you request a change from Option II to Option I, we will increase the Face
Amount by an amount equal to your Policy Account Value on the date the change
takes effect. Such decreases and increases in the Face Amount are made so that
the death benefit remains the same on the date the change takes effect.
Once approved, we will issue new policy information pages and attach a copy of
your application for change. 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 changes that we determine
would cause the policy to fail to qualify as life insurance under our
interpretation of the Code.
The change will take effect on the next Monthly Anniversary that coincides with
or next follows the date we approve your request.
Changes in Face Amount
At any time after the first policy anniversary while the policy is in force you
may request a change in the Face Amount. We will not make a change in Face
Amount that causes your policy to fail to qualify as life insurance under of the
Code.
Increases in Face Amount. Any request for an increase:
o Must be for at least $10,000.
o May not be requested in the same Policy Year as another request for an
increase.
o May not be requested after the Insured is Attained Age 75.
A written application must be submitted to our Administration Office along with
satisfactory evidence of insurability. You must return the policy so we can
amend it to reflect the increase. The increase in Face Amount will become
effective on the Monthly Anniversary on or next following the date the increase
is approved, and the Policy Account Value will be adjusted to the extent
necessary to reflect a monthly deduction as of the effective date based on the
increase in Face Amount.
Decreases in Face Amount. Any request for a decrease:
o Must be at least $5,000.
o Must not cause the Face Amount after the decrease to be less than the
minimum Face Amount at which we would issue a policy.
o During the first 5 Policy Years, the Face Amount may not be decreased
by more than 10% of the initial Face Amount in any one Policy Year.
o No decrease may be made during the first 12 months following an
increase in Face Amount.
o 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.
Consequences of a Change in Face Amount. 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 modified endowment
contract.
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Cash Benefits During the Insured's Life
- --------------------------------------------------------------------------------
During the life of the Insured, your policy has cash benefits which you may
access within limits by taking loans, partial surrenders or a full surrender.
Policy Loans
You may request a loan against your policy at any time after the first Policy
Year or after the first 12 months following an increase in Face Amount while the
policy has a Net Cash Surrender Value. We limit the minimum and maximum amount
of loan you may take.
o Maximum Loan Amount. After First Policy Year -- The maximum loan
amount is:
o 90% of Your Net Cash Surrender Value, less
o Any outstanding loans
o Minimum Loan Amount -- $500
You must submit a written request for a loan to the Administrative Office. Loans
will be processed as of the date we receive the request at our Administrative
Office. Loan proceeds generally will be sent to you within seven days.
Interest. We charge interest daily on any outstanding loan at a declared annual
rate not in excess of 8%. The maximum net cost (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) of a loan is 2% per year. Interest is due and
payable at the end of each Policy Year while a 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 loan.
For Policy Years 11 and later, a portion of the loanable amount may be available
on a preferred loan basis. The amount available on a preferred basis is the
excess, if any, of the Policy Account Value over the sum of the premiums paid.
For a preferred loan, the interest rate charged and credited to the preferred
portion of the loan value will be the same.
Loan Account. You may direct us to take an amount equal to the loan proceeds and
any amount attributed to unpaid interest from any subaccount or from the
Guaranteed Account. Otherwise, we will withdraw this amount from each Account on
a pro rata basis. We transfer this amount to the Loan Account in the Guaranteed
Account.
When a loan is repaid, an amount equal to the repayment will be transferred from
the Loan Account to the subaccounts and Guaranteed Account in accordance with
your allocation percentages in effect at the time of repayment.
Effect of Loan. A loan, whether or not repaid, will have a permanent effect on
the death benefit and Policy 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 Policy Account Value. The longer the
loan is outstanding, the greater this effect is likely to be. Depending on the
investment results of the subaccounts or credited interest rates for the
Guaranteed Account while the loan is outstanding, the effect could be favorable
or unfavorable.
In addition, loans from modified endowment contracts may be treated for tax
purposes as distributions of income.
If the death benefit becomes payable while a loan is outstanding, the
outstanding loan will be deducted in calculating the death benefit.
If the outstanding loan exceeds 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.
Outstanding Loan. The outstanding loan on a Valuation Date equals:
o All loans that have not been repaid (including past due unpaid
interest added to the loan), plus
o accrued interest not yet due.
Loan Repayment. 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.
Partial Surrenders
You may request a partial surrender at any time after the first policy
anniversary. No more than two partial surrenders may be made during a Policy
Year.
We may limit the minimum and maximum amount of partial surrenders.
o Maximum Partial Surrender Amount - 90% of your policy's Net Cash Surrender
Value except that the partial surrender may not cause the Face Amount to be
less than the required minimum Face Amount.
o Minimum Partial Surrender Amount -- $500
In order to make a partial surrender, you must submit a written request to our
Administrative Office. We will reduce your Policy Account Value by the partial
surrender amount plus any applicable charges. When you request a partial
surrender, you may direct us to take the requested amount from any subaccount or
from the Guaranteed Account. If the Guaranteed Account or subaccount value is
insufficient to withdraw the amount requested, we will withdraw the difference
from the remaining Accounts on a pro rata basis unless you have provided
specific instructions to withdraw the amount from one or several Accounts.
We will process partial surrender requests at the price next computed after we
receive your written request at our Administrative Office. We will generally pay
partial surrenders within seven days.
Expenses for Partial Surrenders. We will deduct the applicable surrender charge
on a partial surrender. This charge will be deducted from your Policy Account
Value along with the amount requested to be surrendered and will be considered
part of the partial surrender (together, the "partial surrender amount").
Currently, we assess an administrative charge equal to the lesser of $25 of the
amount surrendered. In certain states the charge may be the lesser of $25 or 2%
of the amount surrendered.
Effect of Partial Surrender on Your Face Amount. The Face Amount of your policy
will also be reduced by the partial surrender amount if you selected Option I as
your death benefit.
We will reduce the Face Amount 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.
No partial surrender may be made that would reduce the Face Amount below the
minimum Face Amount.
Partial surrenders from your policy may have tax consequences.
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. We will process a surrender
request as of the date we receive your written request and all required
documents. Your surrender request generally will be paid within seven days. The
Net Cash Surrender Value may be taken in one sum or it may be applied to a
payment option. Your policy will terminate and cease to be in force if it is
surrendered for one sum. It cannot later be reinstated.
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Payment Options for Benefits
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We offer a wide variety of optional ways of receiving proceeds payable under the
policy, such as on a surrender or death, 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.
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Expenses of the Policy
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Periodically, we will deduct expenses related to your policy. We will deduct
these:
o from premium, Policy Account Value and from subaccount assets; and
o upon certain transactions.
The amount of these expenses are described in your policy as either guaranteed
or current. We will never charge more than the guaranteed amount. We may in our
discretion deduct on a current basis less than the guaranteed amount.
Deduction From Premium
We will deduct 5% plus a state specific percent of premium from each premium
payment. This charge is intended to provide for state premium taxes, DAC taxes
and for other expenses associated with acquiring and servicing a policy.
Monthly Deductions From Policy Account Value
On the Policy Date and each Monthly Anniversary thereafter, we make a deduction
from the Policy Account Value. On the Issue Date the amount deducted 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. We
will deduct charges on each Monthly Anniversary for:
o The administration of your policy.
o The acquisition and underwriting costs of your policy.
o The cost of insurance for your policy.
o The cost of any supplemental benefits or riders.
We will take the monthly deductions from your Policy Account Value and from each
subaccount on a pro rata basis.
Administrative Charge. This charge compensates us for administrative expenses
associated with the policy and the Separate Account. The policy refers to these
expenses as the "monthly expense charge" and the "additional first year
administrative charge."
Monthly Expense Charge. We will make a deduction from your Policy Account Value
for expenses such as premium billing and collection, record keeping, processing
claims, loans, policy changes, reporting and overhead costs, processing
applications and establishing policy records associated with the administration
of your policy. This charge will vary based on the Policy Face Amount. The chart
below reflects the current and guaranteed monthly expense charges:
Current Guaranteed
Monthly Expense Charge Per Policy Charge Charge
If the Face Amount is between $50,000 and $199,999 $ 7.50 $ 15.00
If the Face Amount is between $200,000 and $499,999 $ 5.00 $ 10.00
If the Face Amount is $500,000 or greater $ 4.00 $ 10.00
First Year Additional Charge $ 20.00 $ 25.00
First Year Administrative Charge. There is an additional monthly expense charge
during the first Policy Year and following an increase in Face Amount for our
expenses associated with the acquisition and underwriting of your policy. We
deduct a monthly charge, not to exceed $25, during the first 12 months after the
Policy Date and the 12 months immediately following a Face Amount increase.
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 month to month. 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 described below on that
Monthly Anniversary.
The net amount at risk is calculated as (a) minus (b) where:
(a) is the current death benefit at the beginning of the policy month divided by
1.0032737; and (b) is the current total Policy Account Value.
Rate Classes for Insureds. We currently rate Insureds in one of following basic
rate classifications based on our underwriting:
o non-smoker standard
o smoker
o substandard for those involving a higher mortality risk
We place the Insured in a rate class when we issue the policy based on our
underwriting determination. 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 a lower guaranteed 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 a higher guaranteed 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 Policy Account Value will be applied to the initial Face Amount
first and then to any subsequent increases in Face Amount. If at the time an
increase is requested, the Policy Account Value exceeds the initial Face Amount
(or any subsequently increased Face Amount) divided by 1.0032737, the excess
will then be applied to the subsequent increase in Face Amount in the sequence
of the increases.
In order to maintain the policy in compliance with Section 7702 of the Code,
under certain circumstances an increase in Policy Account Value will cause an
automatic increase in the death benefit. The Attained Age and rate 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).
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
our 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 risk class are generally lower than rates for an Insured of the same
age and sex in a smoker risk class. Cost of insurance rates (whether guaranteed
or current) for an Insured in a nonsmoker or smoker risk class are generally
lower than rates for an Insured of the same age and sex and smoking status in a
substandard risk class.
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.
Deduction From Subaccount Assets
Mortality and Expense Risk Charge. We deduct a daily charge from your Policy
Account Value in the subaccounts for assuming certain mortality and expense
risks under the policy. This charge does not apply to the amounts you allocate
to the Guaranteed Account. The guaranteed and current charge is at an annual
rate of 0.90% of the subaccount assets. Although, the charge may be decreased to
not less than 0.50% in Policy Years 11 and later, it is guaranteed not to exceed
an annual rate of 0.90% of your Policy Account Value in the subaccounts for the
duration of a policy.
The mortality risk we assume is that the Insured under a policy may die sooner
than anticipated, and therefore we will pay an aggregate amount of death benefit
greater than anticipated. The expense risk we assume is that expenses incurred
in issuing and administering all Policies and the Separate Account will exceed
the amounts realized from the administrative charges assessed against all
Policies.
Deductions Upon Policy Transactions
Transfer Charge. We currently impose a $25 transfer charge on any transfer of
Policy Account Value among the subaccounts and the Guaranteed Account in excess
of the 12 free transfers permitted each Policy Year. When we impose the charge,
we deduct it from the amount requested to be transferred before allocation to
the new subaccount(s). We will show the transfer charge in the confirmation of
the transaction.
Surrender Charge. 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 amount by which the Face Amount had been
increased. The surrender charge will be deducted before any surrender proceeds
are paid.
Surrender Charge Calculation. In general, the surrender charge is based on the
premiums you pay. The Surrender Charge will be no greater than the product of
(3) times the sum of (1) and (2) where:
(1) is equal to 25% of the first year paid premium up to the surrender charge
premium (see Appendix B); and (2) is equal to 4% of the first year paid premium
in excess of the surrender charge premium; and (3) is a factor based on the
Policy Year when the surrender occurs as described in the following table:
Policy
Year Factor
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%
Surrender Charge Based On An Increase Or Decrease In Face Amount. If you
increase the Face Amount of the policy, we will impose 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 you reduce the Face Amount of the policy before the end of the 14th
Policy Year or within 14 years immediately following a Face Amount increase, we
may also deduct a pro rata share of any applicable surrender charge from your
Policy Account Value. Reductions will first be applied against the most recent
increase in the Face Amount of the policy. If you have made several increases in
Face Amount, we will apply the surrender charge to prior increases in Face
Amount of the policy in the reverse order in which such increases took place,
before applying the additional surrender charges to the initial Face Amount of
the policy.
Partial Surrender Charge. We may deduct a partial surrender charge:
o upon a partial surrender; and
o if you decrease your Policy's Face Amount.
The amount of the partial surrender charge is equal to a pro rata portion of the
surrender charge that would apply to a full surrender. We deduct the partial
surrender charge, proportionately, from the subaccounts or the Guaranteed
Account affected by your partial surrender.
Partial Surrender Charge Due to Decrease in Face Amount. We will deduct an
amount 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 currently deduct an administrative
charge of $25 upon a partial surrender. In certain states the charge may be the
lesser of $25 or 2% of the amount surrendered.
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 groups of individuals
in a manner that in our opinion results in expense savings. For purchases made
by our officers, directors and employees, those of an affiliate, or any
individual, firm, or a company that has executed the necessary agreements to
sell the policy, and members of the immediate families of such officers,
directors, and employees, we 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.
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Supplemental Benefits and Riders
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We intend to make available certain supplemental benefits and riders which may
in the future be issued with the policy. Any monthly charges for these
supplemental benefits and riders, as listed below, will be deducted from the
Policy Account Value.
Accelerated Benefit Rider (ABR)
Accidental Death Benefit Rider (ADB)
Guaranteed Minimum Death Benefit (GMDB)
Child's Term Rider (CTR)
Other Insured Term Rider (OIR)
Primary Insured Term Rider (PIR)
Waiver of Monthly Deductions (WMD)
Waiver of Specified Premium (WSP)
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Other Policy Provisions
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Right to Exchange or Convert
You may exchange or convert this policy to 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,
we will notify you and give you information on the options available.
When an exchange or conversion is requested, we accomplish the exchange by
transferring all of the Policy Account Value to the Guaranteed Account. There is
no charge for this transfer. Once this option is exercised, the entire Policy
Account Value must remain in the Guaranteed Account for the remaining life of
the new 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 (unless otherwise specified by state law) 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, 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 (unless
otherwise specified by state law) after the effective date of an increase in the
Face Amount, then our liability as to the increase in amount will be limited to
the payment of a single sum equal to the monthly cost of insurance deductions
made for such increase plus the expense charge deducted for the increase.
Changes in the Policy or Benefits
Misstatement of Age or Sex. If an Insured's age or sex has been misstated in the
policy, the death benefit and any benefits provided by riders shall be those
which would be purchased at the then current cost of insurance charge for the
correct age and sex.
Other Changes. At any time we may make such changes in the policy as are
necessary to assure compliance at all times with the definition of life
insurance prescribed by the Code or to make the policy conform with any law or
regulation issued by any government agency to which it is subject.
When Proceeds Are Paid
We will ordinarily pay any death benefit, loan proceeds or partial or full
surrender proceeds within seven days after receipt at our Administrative Office
of all the required documents. Other than the death benefit, which are
determined as of the date of death, the amount will be determined as of the date
we receive the required documents. However, we may delay making a payment or
processing a transfer request if:
(1) the New York Stock Exchange is closed for other than a regular holiday or
weekend, trading is restricted by the Securities and Exchange Commission,
or the Securities and Exchange Commission declares that an emergency
exists; or
(2) the Securities and Exchange Commission by order permits postponement of
payment for your protection.
In addition we may delay making deductions from the Guaranteed Account.
Reports to Owners
You will receive a confirmation within seven days of the transaction of:
o the receipt of any unplanned premium (and any premium received before
the Issue Date);
o any change of allocation of premiums;
o any transfer among subaccounts;
o any loan, interest repayment, or loan repayment;
o any partial surrender;
o any return of premium necessary to comply with applicable maximum
receipt of any premium payment;
o any exercise of your right to cancel;
o an exchange of the policy;
o full surrender of the policy; or
o payment of the death benefit under the policy.
Within 30 days after each policy anniversary we will send you a statement. The
statement will show the death benefit currently payable, and the current Policy
Account Value, Cash Surrender Value, and the outstanding loan. The statement
will also show premiums paid, all charges deducted during the last Policy Year,
and all transactions. We will also send to you reports of the investments within
the Separate Account at least annually.
Assignment
You may assign the policy 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 this
assignment form at our Administrative Office. We assume no responsibility for
the validity or sufficiency of any assignment. Any assignment or pledge of a
modified endowment contract as collateral for a loan may result in a taxable
event.
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 years (unless
otherwise specified by state law) from the end of the Grace Period;
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 months, calculated from the effective date of reinstatement; and
(iii) the premium expense charge and any increase in surrender charges
associated with this payment. We will determine the amount of this
required payment as if no interest or investment performance were
credited to or charged against your Policy Account Value; and
4. Repay or reinstate any loan which existed on the date the policy
ended.
The effective date of the reinstatement of policy benefits will be the next
Monthly Anniversary which coincides with or next follows the date we approve
your request. From the required payment we will deduct the premium expenses. The
Policy Account Value, loan and surrender charges that will apply upon
reinstatement will be those that were in effect on the date the policy lapsed.
We will start to make monthly deductions again as of the effective date of
reinstatement. The monthly expense charge from the beginning of the Grace Period
to the effective date of reinstatement will be deducted from the Policy Account
Value as of the effective date of reinstatement. No other charges will accrue
for this period.
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Performance Information
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From time to time we may advertise the "total return" and the "average annual
total return" of the subaccounts and the portfolios. 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 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 set forth in Appendix C reflects the total of the
income generated by the portfolio net of the total portfolio operating expenses
(i.e., management fees and other portfolio 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. We 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.
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.
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Federal Income Tax Considerations
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The following summarizes the current federal income tax law that applies to life
insurance in general. This summary does not cover all situations. This summary
is based upon our understanding of the current federal income tax laws and
current interpretations by the Internal Revenue Service. We cannot predict
whether the Code will change. You should speak to a competent tax adviser to
discuss how the purchase of a policy and the transactions you make under the
policy will impact your federal tax liability.
Tax Status of the Policy
A policy has certain tax advantages when it is treated as a "life insurance
contract" under the Code. We believe that the policy meets the definition of a
life insurance contract under Section 7702 of the Code. You bear the risk that
the policy may not meet the definition of a life insurance contract. You should
consult your tax adviser to discuss these risks.
The Company
We are taxed as a life insurance company under the Code. For federal tax
purposes, the Separate Account and its operations are considered to be part of
our operations and are not taxed separately.
Diversification and Investor Control
The Code requires that we diversify the investments underlying variable
insurance contracts. If the investments are not properly diversified and any
remedial period has passed, Section 817(h) of the Code provides in general the
contract is immediately disqualified from treatment as a life insurance contract
for federal income tax purposes. Disqualification of the policy as a life
insurance contract would result in taxable income to you at the time that we
allocate any earnings to your policy. You would have taxable income even though
you have not received any payments under the policy. To the extent that any
segregated asset account with respect to a variable life insurance contract
invests exclusively in securities issued by the U.S. Treasury, the
diversification standard is satisfied. A segregated asset account underlying
life insurance contracts such as the policy will also meet the diversification
requirements if, as of the close of each quarter:
o the regulated investment companies in which the segregated asset
account invest satisfy the diversification requirements described
below; and
o 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.
Alternatively, the diversification requirements may be met for each if:
o no more than 55% of the value of the total assets of the portfolio is
represented by any one investment;
o no more than 70% of the value of the total assets of the portfolio is
represented by any two investments;
o no more than 80% of the value of the total assets of the portfolio is
represented by any three investments; and
o no more than 90% of the value of the total assets of the portfolio is
represented by any four investments.
There are several ways for investments to meet the diversification requirements.
Generally, each United States government agency or instrumentality is treated as
a separate issuer under these rules.
All securities of the same issuer are generally treated as a single investment.
We intend that each portfolio in which the subaccounts invest will be managed by
its investment adviser in compliance with these diversification requirements. A
variable life insurance policy could fail to be treated as a life insurance
contract for tax purposes if the owner of the policy has such control over the
investments underlying the policy (e.g., by being able to transfer values among
subaccounts with only limited restrictions) so as to be considered the owner of
the underlying investments. There is some uncertainty on this point because no
guidelines have been issued by the Treasury Department. If and when guidelines
are issued, we may be required to impose limitations on you're rights to control
investment designations under the policy. We do not know whether any such
guidelines will be issued or whether any such guidelines would have retroactive
effect. We, therefore, reserve the right to make changes that we deem necessary
to insure that the policy qualifies as a life insurance contract.
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 has not issued final
regulations 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 contract.
With respect to a policy issued on the basis of a standard rate class, we
believe 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 you pay the
full amount of premiums permitted under the policy.
If subsequent guidance issued under Section 7702 leads us to conclude that a
policy does not (or may not) satisfy Section 7702, we will take appropriate and
necessary steps for the purpose of bringing the policy into compliance, but we
can give no assurance that it will be possible to achieve that result. We
expressly reserve the right to restrict policy transactions if we determine such
action to be necessary to qualify the policy as a life insurance contracts under
Section 7702.
Tax Treatment of Policy Benefits In General
This discussion assumes that each policy will qualify as a life insurance
contract for federal income tax purposes under Section 7702. The death benefit
under the policy should be excluded from the taxable gross income of the
Beneficiary. In addition, the increases in the Policy Account Value should not
be taxed until there has been a distribution from the policy such as a
surrender, partial surrender or lapse with loan.
Pre-Death Distribution
The tax treatment of any distribution you receive before the Insured's death
depends on whether the policy is classified as a modified endowment contract.
Policies Not Classified as Modified Endowment Contracts
o If you surrender the policy or allow it to lapse, you will not be taxed
except to the extent the amount you receive is in excess of the premiums
you paid less the untaxed portion of any prior withdrawals. For this
purpose, you will be treated as receiving any portion of the cash surrender
value policy debt. The tax consequences of a surrender may differ if you
take the proceeds under an income payment settlement option.
o Generally, you will be taxed on a withdrawal to the extent the amount you
receive exceeds the premiums you paid for the policy less the untaxed
portion of any prior withdrawals. However, under some limited
circumstances, in the first 15 Policy Years, all or a portion of a
withdrawal may be taxed if the cash value exceeds the total premiums paid
less the untaxed portions of any prior withdrawals, even if total
withdrawals do not exceed total premiums
o Extra premiums for optional benefits and riders generally do not count in
computing the premiums paid for the policy for the purposes of determining
whether a withdrawal is taxable.
o Loans you take against the policy are ordinarily treated as debt and are
not considered distributions subject to tax.
Modified Endowment Contracts
o The rules change if the policy is classified as a modified endowment
contract ("MEC"). The policy could be classified as a MEC if premiums
substantially in excess of scheduled premiums are paid or a decrease in the
face amount of insurance is made (or a rider removed). The addition of a
rider or an increase in the face amount of insurance may also cause the
policy to be classified as a MEC. The rules on whether a policy will be
treated as a MEC are very complex and cannot be fully described in this
summary. You should consult a qualified tax adviser to determine whether a
policy transaction will cause the policy to be classified as a MEC. We will
monitor your policy and will take steps reasonably necessary to notify you
on a timely basis if your policy is in jeopardy of becoming a MEC.
o If the policy is classified as a MEC, then amounts you receive under the
policy before the Insured's death, including loans and withdrawals, are
included in income to the extent that the cash value before surrender
charges exceeds the premiums paid for the policy increased by the amount of
any loans previously included in income and reduced by any untaxed amounts
previously received other than the amount of any loans excludable from
income. An assignment of a MEC is taxable in the same way. These rules also
apply to pre-death distributions, including loans, made during the two-year
period before the time that the policy became a MEC.
o Any taxable income on pre-death distributions (including full surrenders)
is subject to a penalty of 10% unless the amount is received on or after
age 59 1/2, on account of your becoming disabled or as a life annuity. It
is presently unclear how the penalty tax provisions apply to the Policies
owned by businesses.
o All MECs issued by us to you during the same calendar year are treated as a
single policy for purposes of applying these rules.
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 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 loan, you 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 death benefit option, a loan, a partial surrender,
a surrender, a change in owners 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. We are 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. You are not permitted to
elect out of withholding if you do not provide a social security number or other
taxpayer identification number. Special withholding rules apply to payments made
to non-resident aliens.
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, you should examine the
applicable tax rules relating to such plans and life insurance thereunder in
consultation with a qualified tax adviser.
Possible Charge for the Company's Taxes
At the present time, we do not deduct any charges for any federal state or local
income taxes. However, we do currently deduct charges for state and federal
premium based taxes and the federal DAC tax. We reserve the right in the future
to deduct a charge for any such tax or other economic burden resulting from the
application of the tax laws that we determine to be properly attributable to the
Separate Account or to the policy.
- --------------------------------------------------------------------------------
Distribution of the Policy
- --------------------------------------------------------------------------------
The policy is sold by licensed insurance agents, where the policy may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc.
The policy will be distributed through the principal underwriter for the
Separate Account, AIG Equity Sales Corp. (AIGESC) 70 Pine Street, New York, New
York, an affiliate of ours. AIGESC may also enter into selling agreements with
other broker dealers that will offer the policy.
Commissions may be paid to registered representatives based on premiums paid for
Policies sold. Other expense reimbursements, allowances, and overrides may also
be paid. Registered representatives who meet certain productivity and
profitability standards may be eligible for additional compensation. Additional
payments may be made for administrative or other services not directly related
to the sale of the policy.
Other Policies Issued by the Company
We may offer other policies similar to those offered herein.
- --------------------------------------------------------------------------------
About Us and the Accounts
- --------------------------------------------------------------------------------
AIG Life Insurance Company
We are a stock life insurance company initially organized under the laws of
Pennsylvania and reorganized under the laws of Delaware. We were incorporated in
1962. We provide a full range of individual and group life, disability,
accidental death and dismemberment policies and annuities. We are a subsidiary
of American International Group, Inc., which is a 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.
Year 2000
The Year 2000 issue arises from computer programs being written using two digits
rather than four digits to define the applicable year. This could result in a
failure of the information technology systems (IT systems) and other equipment
containing imbedded technology (non-IT systems) in the year 2000, causing
disruption of our operations and of our lessees, vendors, or business partners.
We have developed a plan to address the Year 2000 issue as it affects our
internal IT and non-IT systems, and to assess Year 2000 issues relating to third
parties with whom we have critical relationships.
Our plan for addressing internal systems includes:
o an assessment of internal IT and non-IT systems and equipment affected by
the Year 2000 issue;
o definition of strategies to address affected systems and equipment;
o remediation of identified affected systems and equipment; and
o internal certification that each internal system is Year 2000 compliant.
We have remediated, tested and returned to production substantially all of our
internal IT systems. We continue to remediate and test internal non-IT systems
and expect to complete our remediation by mid-1999.
We have also initiated formal communications with respect to the Year 2000 issue
to those third parties which have significant interaction with us. Currently, we
are unable to ascertain whether all such third parties will successfully address
the Year 2000 issue, particularly those third parties outside the United States
where it is believed that remediation efforts relating to the Year 2000 issue
may be less advanced. While we expect to have no interruption of operations as a
result of internal IT and non-IT systems, significant uncertainties remain about
the effect on us of third parties who are not Year 2000 compliant. We will
continue to monitor third party Year 2000 issue readiness to determine whether
additional or alternative measures may be necessary. Such measures may include
selecting alternate third parties or other actions designed to mitigate the
effects of a third party's lack of preparedness. There can be no assurance that
unresolved Year 2000 issues of third parties will not have a material adverse
impact on our results of operations, financial condition or liquidity. We are
considering the effects of Year 2000 related failures on our business and, as
the most reasonably likely worst case scenarios become more clearly identified,
we will develop appropriate contingency plans.
The fund, like other third parties, may not have resolved their Year 2000
issues that may have a material adverse impact on your contract values as well
as our operations and we cannot assure that it will. Please refer to Year 2000
discussions in the fund's prospectus.
The Separate Account
We established the Separate Account as a separate investment account on June 5,
1986. It is used to support the policy and other variable life insurance
policies, and may be used for other permitted purposes. The Separate Account is
registered with the Securities and Exchange Commission as a unit investment
trust under the federal securities laws and qualifies as a "separate account"
within the meaning of these laws.
Although you may have allocated your Policy Account Value to the subaccounts,
you do not own these assets. You only own your policy. We own the assets in the
Separate Account. The Separate Account may include other subaccounts which are
not available under the policy.
Income, gains and losses, realized or unrealized, of a subaccount are credited
to or charged against the subaccount without regard to any of our other income,
gains or losses. Assets equal to the reserves and other contract liabilities
with respect to each subaccount are not chargeable with liabilities arising out
of any of our other businesses or separate accounts. 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.
We have reserved certain rights regarding the Separate Account. We will exercise
these rights only in compliance with all applicable regulatory requirements. We
have the right to:
o Change, add or delete designated investment options.
o Add or remove subaccounts.
o Withdraw assets of a class of policies to which the policy belongs from a
subaccount and put them in another subaccount. o Combine any two or more
subaccounts.
o Register other separate accounts or deregister the Separate Account with
the Securities and Exchange Commission.
o Run the Separate Account under the direction of a committee, and discharge
such committee at any time.
o Restrict or eliminate any voting rights of Owners, or other persons who
have voting rights as to the Separate Account.
o Operate the Separate Account or one or more of the subaccounts 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
investments that are legal, as determined by our counsel.
We will not change an investment adviser or any investment of a subaccount of
our Separate Account unless approved by the Commissioner of Insurance of
Delaware or deemed approved in accordance with such law or regulation. Any
approval process is on file with the insurance supervisory official of the
jurisdiction in which this policy is delivered.
If any change we make results in a material change in the underlying investments
of a subaccount, we will notify you of such a change. If you have value in that
subaccount:
o We will transfer it at your written direction from that subaccount (without
charge) to another subaccount or to the Guaranteed Account, and
o You may then change your premium allocation percentages
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 portfolios.
However, as required by law, we will vote shares held in the subaccounts at
regular and special meetings of shareholders of the portfolios in accordance
with instructions we receive from Owners with Policy Account Value in the
subaccounts. If allowed by law or required by law we may vote shares of the
portfolios without obtaining instructions or in disregard to instructions we
have received. If we ever disregard voting instructions, we will advise you of
that action and our reasons for such action in the next semiannual report.
The Guaranteed Account
The Guaranteed Account is an account within the general account of the company.
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.
We have not registered:
o interests in the Guaranteed Account under the Securities Act of 1933, and
o the Guaranteed Account as an investment company.
The staff of the Securities and Exchange Commission has not reviewed our
disclosure on the Guaranteed Account. Our disclosure regarding the Guaranteed
Account must comply with generally applicable provisions of the federal
securities laws relating to the accuracy and completeness of statements made in
a prospectus.
- --------------------------------------------------------------------------------
Our Directors and Executive Officers
- --------------------------------------------------------------------------------
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.
Principal Business Affiliations
and Principal Occupations
Name and Address Office During Past Five Years
- ----------------------- --------- --------------------------------
Michele L. Abruzzo Director, Sr. Exec. Senior Vice President of
80 Pine Street Vice President American International Life
13th Floor Assurance Company of New
New York, NY 10005 York
Paul S. Bell Director, Sr. Vice Sr. Vice President Actuary
One Alico Plaza President Chief of American International
600 King Street Actuary Life Assurance Company of New
Wilmington DE 19801 York
Maurice R. Greenberg Director Director, Chairman and
70 Pine Street Chief Executive Officer of
New York, NY 10270 AIG, Inc.
Howard E. Gunton, Jr. Chief Financial Sr. Vice President and
One Alico Plaza Officer, Senior Comptroller of American
600 King Street Vice President International Life Assurance
Wilmington, DE 19801 Company of New York
Edward Easton Matthews Director, Senior Vice Chairman of Investments and
70 Pine Street Vice President Financial Services of AIG, Inc.
New York, NY 10270
Jerome Thomas Muldowney Director Senior Vice President of
175 Water Street Senior American International Life
New York, NY 10038 Vice Assurance Company of New York,
President Senior Managing Director of
AIG Global Investment Corp.
Michael Mullin Chief Operating Senior Vice President
One Alico Plaza Officer, Senior of American International Life
600 King Street Vice President Assurance Company of New York
Wilmington, DE 19801
Robinson K. Nottingham Director, Chairman Chairman of the Board and
70 Pine Street of the Board Chief Executive Officer of
New York, NY 10270 American International Life
Insurance Company (ALICO)
<PAGE>
Principal Business Affiliations
and Principal Occupations
Name and Address Office During Past Five Years
- ----------------------- --------- --------------------------------
Nicholas A. O'Kulich Director, Vice Vice President, Senior Vice
70 Pine Street Chairman, Treasurer President of AIG, Inc.
New York, NY 10270
Howard Ian Smith Director Director, Executive Vice
70 Pine Street President, Chief Financial
New York, NY 10270 Officer and Comptroller of
AIG, Inc.
Edmund Sze-Wing Tse Director Vice Chairman of AIG, Inc.
AIA Bldg.
70 Pine Street
New York, NY 10270
Elizabeth M. Tuck Secretary Secretary and Assistant
70 Pine Street Secretary of AIG, Inc. and
New York, NY 10270 certain affiliates
Gerald Walter Wyndorf Director, Chief Executive Vice President of
80 Pine Street Executive Officer American International Life
13th Floor and President Assurance Company of New York
New York, NY 10038
- --------------------------------------------------------------------------------
Other Information
- --------------------------------------------------------------------------------
State Regulation
We are subject to the laws of Delaware governing insurance companies and to
regulation by the Delaware Insurance Department. We file an annual statement in
a prescribed form with the Insurance Department each year covering our operation
for the preceding year and our final condition as of the end of such year.
Regulation by the Insurance Department includes periodic examinations to
determine our policy liabilities and reserves so that the Insurance Department
may certify the items are correct. Our 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, we are subject to regulation under the insurance laws
of other jurisdictions in which we may operate.
Legal Proceedings
There are no legal proceedings to which the Separate Account or the principal
underwriter is a party. We are engaged in various kinds of routine litigation
which, in our opinion, are not of material importance in relation to our total
capital and surplus.
Experts
The financial statements which appear in this prospectus have been audited by
PricewaterhouseCoopers LLP, independent certified public accountants, as stated
in its 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.
Published Ratings
We may occasionally publish in advertisements, sales literature and reports the
ratings and other information assigned to us 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 rating organization's opinion of our
financial strength and should not be considered as bearing on the investment
performance of assets held in the Separate Account.
The ratings are not recommendations to purchase our 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 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
- --------------------------------------------------------------------------------
<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, 1998, 1997 AND 1996
<PAGE>
Report of Independent Accountants
To the Stockholders and Board of Directors
AIG Life Insurance Company
In our opinion, the accompanying balance sheets and the related statements of
income, capital funds, cash flows, and comprehensive income present fairly, in
all material respects, the financial position of AIG Life Insurance Company (a
wholly-owned subsidiary of American International Group, Inc.) at December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
February 5, 1999
<PAGE>
AIG LIFE INSURANCE COMPANY
BALANCE SHEETS
(in thousands)
<TABLE>
December31, December 31,
1998 1997
Assets
<S> <C> <C>
Investments and cash:
Fixed maturities:
Bonds available for sale, at market value $ 4,238,045 $ 2,984,255
(cost: 1998 - $4,081,008: 1997 - $2,826,088)
Equity securities:
Common stock
(cost: 1998 - $901: 1997 - $1,381) 2,410 2,775
Preferred stock
(cost: 1998 - $18,250 : 1997 - $250) 19,338 250
Mortgage loans on real estate, net 468,342 350,823
Real estate, net of accumulated
depreciation of $4,351 in 1998; and $4,740 in 1997 13,002 15,940
Policy loans 1,010,969 1,496,837
Other invested assets 81,916 56,219
Short-term investments 163,704 667,912
Cash 4,788 5,132
-------------- -------------
Total investments and cash 6,002,514 5,580,143
Amounts due from related parties 17,330 11,446
Investment income due and accrued 94,029 85,135
Premium and insurance balances receivable-net 56,583 46,937
Reinsurance assets 72,044 60,744
Deferred policy acquisition costs 167,840 118,535
Federal income tax receivable 4,207 -
Separate and variable accounts 1,971,280 1,204,643
Other assets 6,228 4,855
-------------- -------------
Total assets $ 8,392,055 $ 7,112,438
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
December 31, December 31,
1998 1997
Liabilities
<S> <C> <C>
Policyholders' funds on deposit $ 4,472,854 $ 3,745,902
Future policy benefits 1,002,244 749,918
Reserve for unearned premiums 21,468 24,108
Policy and contract claims 200,193 199,069
Reserve for commissions, expenses and taxes 25,702 16,103
Insurance balances payable 56,263 47,372
Amounts due to related parties 4,119 3,945
Federal income tax payable - 1,684
Deferred income taxes 56,519 37,498
Separate and variable accounts 1,971,280 1,204,643
Minority interest 5,987 6,067
Other liabilities 59,189 621,585
------------- ------------
Total liabilities 7,875,818 6,657,894
----------- -----------
Capital funds
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
Retained earnings 236,521 181,887
Accumulated other comprehensive income 121,549 114,490
------------ -------------
Total capital funds 516,237 454,544
------------ ------------
Total liabilities and capital funds $ 8,392,055 $ 7,112,438
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
(in thousands)
<TABLE>
Years ended December 31,
1998 1997 1996
--------- -------------- -------------
<S> <C> <C> <C>
Revenues:
Premiums $ 616,964 $ 437,650 $ 394,480
Net investment income 457,148 381,868 504,661
Realized capital (losses) (334) (3,025) (51)
------------- ------------- -------------
Total revenues 1,073,778 816,493 899,090
--------- ----------- ----------
Benefits and expenses:
Benefits to policyholders 272,368 188,969 189,933
Increase in future policy benefits
and policyholders' funds on deposit 547,100 397,481 495,529
Acquisition and insurance expenses 168,075 163,533 161,841
---------- ----------- ----------
Total benefits and expenses 987,543 749,983 847,303
---------- ----------- ----------
Income before income taxes 86,235 66,510 51,787
----------- ------------ ----------
Income taxes (benefits):
Current 16,218 20,059 25,087
Deferred 15,220 3,964 (5,486)
----------- ------------- -----------
Total income taxes 31,438 24,023 19,601
----------- ----------- ----------
Net income before minority interest 54,797 42,487 32,186
Minority interest income (loss) (163) (128) 154
------------ ------------- ------------
Net income $ 54,634 $ 42,359 $ 32,340
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF CAPITAL FUNDS
(in thousands)
<TABLE>
Years ended December 31,
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Common Stock
Balance at beginning of year $ 4,884 $ 4,884 $ 4,884
------------ ----------- -----------
Balance at end of year 4,884 4,884 4,884
------------ ----------- -----------
Additional paid-in capital
Balance at beginning of year: 153,283 123,283 123,283
Capital contribution - 30,000 -
--------------- ---------- --------------
Balance at end of year 153,283 153,283 123,283
--------- --------- ---------
Retained earnings
Balance at beginning of year 181,887 139,528 107,188
Net income 54,634 42,359 32,340
---------- ---------- -----------
Balance at end of year 236,521 181,887 139,528
--------- --------- ----------
Accumulated other comprehensive income
Balance at beginning of year 114,490 62,814 87,673
Unrealized appreciation (depreciation) of
investments - net of reclassification
adjustments 10,860 79,497 (50,245)
Deferred income tax (expense) benefit on
changes (3,801) (27,821) 25,386
----------- ---------- ----------
Balance at end of year 121,549 114,490 62,814
--------- --------- ----------
Total capital funds $ 516,237 $ 454,544 $ 330,509
========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
Years ended December 31,
1998 1997 1996
----------- ---------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 54,634 $ 42,359 $ 32,340
--------- ----------- ------------
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 250,810 121,325 72,151
Change in premiums and insurance balances
receivable and payable -net (753) (5,346) 11,782
Change in reinsurance assets (11,301) 157,710 (10,627)
Change in deferred policy acquisition costs (49,305) (34,248) (23,662)
Change in investment income due and accrued (8,894) 22,133 135,480
Realized capital losses 334 3,025 51
Change in current and deferred income taxes -net 9,330 2,689 (7,133)
Change in reserves for commissions, expenses and taxes 9,599 13,243 (21,274)
Change in other assets and liabilities - net (61,575) 69,582 12,733
----------- ----------- ------------
Total adjustments 138,245 350,113 169,501
--------- ---------- -----------
Net cash provided by operating activities 192,879 392,472 201,841
--------- ---------- -----------
Cash flows from investing activities:
Cost of fixed maturities at market, sold 282,756 23,816 40,098
Cost of fixed maturities at market, matured or redeemed 340,435 153,963 124,621
Cost of equity securities sold 1,039 3,676 2,607
Cost of real estate sold 2,585 - -
Realized capital gains 1,666 1,975 (51)
Purchase of fixed maturities (1,865,768) (804,262) (524,245)
Purchase of equity securities (18,559) (1,750) (1,678)
Purchase of real estate (341) (413) (881)
Mortgage loans granted (202,484) (87,690) (74,590)
Repayments of mortgage loans 83,035 29,298 16,416
Change in policy loans 485,868 377,124 1,087,765
Change in short-term investments 504,208 (567,876) 102,616
Change in other invested assets (11,706) 6,294 11,002
Other - net (27,908) 11,917 (38)
---------- ----------- --------------
Net cash (used in) provided by investing activities (425,174) (853,928) 783,642
---------- ----------- ----------
Cash flows from financing activities:
Change in policyholders' funds on deposit 231,951 430,808 (980,835)
Proceeds from capital contribution - 30,000 -
--------------- ----------- -----------------
Net cash provided by (used in) financing activities 231,951 460,808 (980,835)
--------- ---------- ------------
Change in cash (344) (648) 4,648
Cash at beginning of year 5,132 5,780 1,132
------------ ------------ -------------
Cash at end of year $ 4,788 $ 5,132 $ 5,780
=========== ============ =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
Years ended December 31,
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Comprehensive income
Net income $ 54,634 $ 42,359 $ 32,340
------------ ------------ -----------
Other comprehensive income
Unrealized appreciation (depreciation) of
investments - net of reclassification
adjustments 10,860 79,497 (50,245)
Changes due to deferred income tax benefit
(expense) on changes and
future policy benefits (3,801) (27,821) 25,386
------------ ------------- -----------
Other comprehensive income 7,059 51,676 (24,859)
------------ ------------ -----------
Comprehensive income $ 61,693 $ 94,035 $ 7,481
=========== =========== ============
</TABLE>
See accompanying notes to financial statements.
<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 their estimated life.
Common and non-redeemable preferred stocks are carried at current
market value. Dividend income is generally recognized when receivable.
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 as a separate
component of comprehensive income, net of deferred income taxes and
future policy benefits in capital funds currently.
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 as a
separate component of comprehensive income, net of deferred income
taxes in capital funds currently.
(c) Income Taxes: The Company joins in a consolidated federal income tax
return with the Parent and its domestic subsidiaries. The Company and
the Parent have a written tax allocation agreement whereby the Parent
agrees not to charge the Company a greater portion of the consolidated
tax liability than would have been paid by the Company if it had filed
a separate return. Additionally, the Parent agrees to reimburse the
Company for any tax benefits arising out of its net losses within
ninety days after the filing of that consolidated tax return for the
year in which these losses are utilized. Deferred federal income taxes
are provided for temporary differences related to the expected future
tax consequences of events that have been recognized in the Company's
financial statements or tax returns.
(d) Premium Recognition and Related Benefits and Expenses: Premiums on
traditional life insurance and life contingent annuity contracts are
recognized when due. Revenues for universal life and investment-type
products consist of policy charges for the cost of insurance,
administration, and surrenders during the period. Premiums on accident
and health insurance are reported as earned over the contract term.
The portion of accident and health premiums which is not earned at the
end of a reporting period is recorded as unearned premiums. Estimates
of premiums due but not yet collected are accrued. Policy benefits and
expenses are associated with earned premiums on long-duration
contracts resulting in a level recognition of profits over the
anticipated life of the contracts.
Policy acquisition costs for traditional life insurance products are
generally deferred and amortized over the premium paying period of the
policy. Deferred policy acquisition costs and policy initiation costs
related to universal life and investment-type products are amortized
in relation to expected gross profits over the life of the policies
(see Note 3).
The liability for future policy benefits and policyholders' contract
deposits is established using assumptions described in Note 4.
(e) Policy and Contract Claims: Policy and contract claims include amounts
representing: (1) the actual in-force amounts for reported life claims
and an estimate of incurred but unreported claims; and (2) an
estimate, based upon prior experience, for accident and health
reported and incurred but unreported losses. The methods of making
such estimates and establishing the resulting reserves are continually
reviewed and updated and any adjustments resulting therefrom are
reflected in income currently.
(f) Separate and Variable Accounts: These accounts represent funds for
which investment income and investment gains and losses accrue
directly to the policyholders. Each account has specific investment
objectives, and the assets are carried at market value. The assets of
each account are legally segregated and are not subject to claims
which arise out of any other business of the Company.
<PAGE>
1. Summary of Significant Accounting Policies - (continued)
(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) Accounting Standards:
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" (FASB 130) and Statement of Financial Accounting
Standards No. 131 "Disclosure about Segments of an Enterprise and
Related Information" (FASB 131).
FASB 130 establishes standards for reporting comprehensive income and
its components in a full set of general purpose financial statements.
FASB 130 was effective for the Company as of January 1, 1998. FASB 130
had no impact on the Company's results of operations, financial
condition or liquidity.
FASB 131 establishes standards for the way companies are required to
disclose information about their operating segments in annual
financial statements and in interim financial statements. FASB 131
establishes, where practicable, standards with respect to geographic
areas, among other things. Certain descriptive information is also
required. FASB 131 has been adopted for the year ended December 31,
1998 by the Parent, whose operations are conducted principally through
three business segments: General Insurance, Life Insurance and
Financial Services. All operations of the Company fall within the Life
Insurance segment.
In February 1998, FASB issued Statement of Financial Accounting
Standards No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (FASB 132). This statement requires revised
disclosures about pension and other postretirement benefit plans and
does not change the measurement or recognition of these plans. Also,
FASB 132 requires additional information on changes in the benefit
obligations and fair values of plan assets. FASB 132 was effective for
the year ended December 31, 1998 and has been adopted by the Parent.
Information regarding the pension and postretirement benefit plans is
not computed on a subsidiary basis, but rather on a consolidated basis
for all subsidiaries of the Parent and, accordingly, is not presented
herein.
In June 1998, FASB issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities"
(FASB 133). This statement requires the Company to recognize all
derivatives in the consolidated balance sheet measuring these
derivatives at fair value. The recognition of the change in the fair
value of a derivative depends on a number of factors, including the
intended use of the derivative. The Company believes that the impact
of FASB 133 on its results of operations, financial condition or
liquidity will not be significant. FASB 133 is effective for the year
commencing January 1, 2000.
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AcSEC) issued
Statement of Position (SOP) 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." This statement
provides guidance for the recording of a liability for
insurance-related assessments. The statement requires that a liability
be recognized in certain defined circumstances. The Company believes
that the impact of this statement on its results of operations,
financial condition or liquidity will not be significant. This
statement is effective for the year commencing January 1, 1999.
<PAGE>
1. Summary of Significant Accounting Policies - (continued)
(h) Accounting Standards - (continued):
In October 1998, AcSEC issued SOP 98-7, "Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk." This statement identifies several methods of
deposit accounting and provides guidance on the application of each
method. This statement classifies insurance and reinsurance contracts
for which the deposit method is appropriate as contracts that (i)
transfer only significant timing risk, (ii) transfer only significant
underwriting risk, (iii) transfer neither significant timing nor
underwriting risk, and (iv) have an indeterminate risk. The Company
believes that the impact of this statement on its results of
operations, financial condition or liquidity will not be significant.
This statement is effective for the year commencing January 1, 2000.
Restatement of previously issued financial statements is not
permitted.
(i) The financial statements for 1997 and 1996 have been reclassified to
conform to the 1998 presentation.
2. Investment Information
(a) Statutory Deposits: Securities with a carrying value of $2,448,000 and
$2,454,000 were deposited by the Company under requirements of
regulatory authorities as of December 31, 1998 and 1997, respectively.
(b) Net Investment Income: An analysis of net investment income is as
follows (in thousands):
<TABLE>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Fixed maturities $284,267 $200,097 $164,548
Equity securities 622 58 219
Mortgage loans 36,464 28,714 22,797
Real estate 2,406 2,254 2,125
Policy loans 120,927 148,555 314,020
Cash and short-term investments 9,346 3,582 2,924
Other invested assets 8,015 2,380 2,549
--------- --------- ---------
Total investment income 462,047 385,640 509,182
Investment expenses 4,899 3,772 4,521
--------- --------- ---------
Net investment income $457,148 $381,868 $504,661
======= ======= =======
</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 1998, 1997 and 1996 are summarized below (in thousands):
<TABLE>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Net realized (losses) gains on investments:
Fixed maturities $ - $ - $ (79)
Equity securities 84 1,975 28
Mortgage loans (2,000) (5,000) -
Real estate 1,561 - -
Other invested assets 21 - -
--------- ----------- ------------
Net realized gains $ (334) $ (3,025) $ (51)
======= ======= ==========
Change in unrealized appreciation (depreciation) of investments:
Fixed maturities $ (1,131) $77,422 $(58,659)
Equity securities 1,203 (626) 1,517
Other invested assets 10,788 2,701 6,897
--------- ------- ---------
Net change in unrealized appreciation
(depreciation) of investments $ 10,860 $79,497 $(50,245)
======== ====== =======
</TABLE>
Proceeds from the sale of investments in fixed maturities during 1998, 1997
and 1996 were $282,756,000, $23,816,000, and $40,098,000, respectively.
During 1998, 1997 and 1996, gross gains of $0, $0, and $176,000,
respectively, and gross losses of $0, $0, and $255,000, respectively, were
realized on dispositions of fixed maturity investments.
During 1998, 1997 and 1996, gross gains of $84,000, $1,975,000, and
$28,000, respectively, were realized on disposition of equity securities.
(d) Market Value of Fixed Maturities and Unrealized Appreciation of
Investments: At December 31, 1998 and 1997, unrealized appreciation of
investments in equity securities (before applicable taxes) included gross
gains of $2,854,000 and $1,530,000 and gross losses of $257,000 and
$136,000, respectively.
The amortized cost and estimated market values of investments in fixed
maturities at December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
Gross Gross
1998 Amortized Unrealized Unrealized Market
---- Cost Gains Losses Value
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government and government
agencies and authorities $ 50,617 $ 19,220 $ 10 $ 69,827
States, municipalities and
political subdivisions 370,790 23,962 4,961 389,791
Foreign governments 30,431 7,201 - 37,632
All other corporate 3,629,170 156,316 44,691 3,740,795
--------- ---------- --------- ---------
Total fixed maturities $4,081,008 $ 206,699 $ 49,662 $4,238,045
========= ========== ========= =========
</TABLE>
<PAGE>
2. Investment Information - (continued)
<TABLE>
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>
The amortized cost and estimated market value of fixed maturities,
available for sale at December 31, 1998, 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>
Estimated
Amortized Market
Cost Value
<S> <C> <C>
Due in one year or less $ 139,701 $ 144,918
Due after one year through five years 1,097,111 1,136,468
Due after five years through ten years 1,538,510 1,586,346
Due after ten years 1,305,686 1,370,313
---------- ---------
$ 4,081,008 $4,238,045
========= =========
</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, 1998 and 1997, the market value of the CMO
portfolio was $522,844,000 and $445,739,000, respectively; the
estimated amortized cost was approximately $504,077,000 in 1998 and
$426,760,000 in 1997. The Company's CMO portfolio is readily
marketable. There were no derivative (high risk) CMO securities
contained in the portfolio at December 31, 1998.
(f) Fixed Maturities Below Investment Grade: At December 31, 1998 and
1997, the fixed maturities held by the Company that were below
investment grade had an aggregate amortized cost of $344,609,000 and
$242,573,000, respectively, and an aggregate market value of
$327,217,000 and $244,417,000, 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 capital
funds at December 31, 1998 (in thousands):
Other Invested Assets:
Equity Linked Investors II, L.P. $ 60,271
<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).
Years ended December 31,
1998 1997 1996
Balance at beginning of year $118,535 $84,287 $60,625
Acquisition costs deferred 71,430 50,927 43,534
Amortization charged to income (22,125) (16,679) (19,872)
-------- -------- ------
Balance at end of year $167,840 $118,535 $84,287
======= ======= ======
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, 1998 and 1997 follows (in thousands):
<TABLE>
1998 1997
----------- ----------
<S> <C> <C>
Future Policy Benefits:
Long duration contracts $ 987,503 $ 740,969
Short duration contracts 14,741 8,949
----------- ------------
$1,002,244 $ 749,918
========= ==========
Policyholders' funds on deposit:
Annuities $ 1,385,203 $ 1,265,490
Universal life 184,460 149,202
Guaranteed investment contracts (GICs) 669,035 379,049
Corporate owned life insurance 2,229,843 1,948,558
Other investment contracts 4,313 3,603
------------ ------------
$ 4,472,854 $ 3,745,902
============ ============
</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 10.1 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 7.1 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 1 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 1998 was 7.0 percent.
(iv) The universal life funds, exclusive of corporate owned life
insurance business, have credited interest rates of 5.6 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 1998, 1997 and 1996. 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>
Years ended December 31,
-------------------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- ------------------------
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 $ 30,183 35.0% $ 23,279 35.0% $ 18,125 35.0%
Prior year federal
income tax benefit 268 0.3 (6) - (51) (0.1)
State income tax 599 0.7 673 1.0 850 1.6
Other 388 0.5 77 0.1 677 1.3
-------- ------- ---------- ----- --------- -----
Actual income tax expense $31,438 36.5% $ 24,023 36.1% $ 19,601 37.8%
====== ====== ======= ==== ======= ====
</TABLE>
<PAGE>
5. Income Taxes - (continued)
(b) The components of the net deferred tax liability were as follows (in
thousands):
<TABLE>
Years ended December 31,
1998 1997
<S> <C> <C>
Deferred tax assets:
Adjustment to life reserves $ 59,903 $ 51,992
Adjustments to mortgage loans and
investment income due and accrued 4,913 4,250
Adjustment to policy and contract claims 5,456 8,816
Other 2,406 4,292
---------- ---------
72,678 69,350
--------- --------
Deferred tax liabilities:
Deferred policy acquisition costs $ 55,308 $ 37,559
Unrealized appreciation on investments 65,445 61,644
Bond discount 4,911 4,843
Other 3,533 2,802
---------- -----------
129,197 106,848
-------- ---------
Net deferred tax liability $ 56,519 $ 37,498
========= =========
</TABLE>
(c) At December 31, 1998, 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 1998, 1997, and 1996 amounted to $21,184,000,
$20,311,000, and $25,412,000, 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. Contributions totaling
$10,963,000 have been made through December 31, 1998.
During 1998, the Company entered into a partnership agreement with Sankaty
High Yield Asset Partners, L.P. The agreement requires the Company to make
capital contributions totaling $2,500,000. Contributions totaling
$1,868,000 have been made through December 31, 1998.
<PAGE>
7. Fair Value of Financial Instruments
(a) Statement of Financial Accounting Standards No. 107 "Disclosures about
Fair Value of Financial Instruments" (FASB 107) requires disclosure of
fair value information about financial instruments for which it is
practicable to estimate such fair value. These financial instruments
may or may not be recognized in the balance sheet. In the measurement
of the fair value of certain of the financial instruments, quoted
market prices were not available and other valuation techniques were
utilized. These derived fair value estimates are significantly
affected by the assumptions used. FASB 107 excludes certain financial
instruments, including those related to insurance contracts.
The following methods and assumptions were used by the Company in
estimating the fair value of the financial instruments presented:
Cash and short term investments: The carrying amounts reported in the
balance sheet for these instruments approximate fair values.
Fixed maturities: Fair values for fixed maturity securities carried at
market value are generally based upon quoted market prices. For
certain fixed maturities for which market prices were not readily
available, fair values were estimated using values obtained from
independent pricing services.
Equity securities: Fair values for equity securities were based upon
quoted market prices.
Mortgage and policy loans: Where practical, the fair values of loans
on real estate were estimated using discounted cash flow calculations
based upon the Company's current incremental lending rates for similar
type loans. The fair value of the policy loans were not calculated as
the Company believes it would have to expend excessive costs for the
benefits derived. Therefore, the fair value of policy loans was
estimated at carrying value.
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>
1998 Fair Carrying
Value Amount
<S> <C> <C>
Cash and short-term investments $ 168,492 $ 168,492
Fixed maturities 4,238,045 4,238,045
Equity securities 21,748 21,748
Mortgage and policy loans 1,500,447 1,479,311
Policyholders' funds on deposit $ 4,554,644 $ 4,472,854
1997 Fair Carrying
Value Amount
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
</TABLE>
<PAGE>
8. Capital Funds
(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 $35,350,000 during 1998, however, no
dividends were paid during the year.
(b) The Company's capital funds as determined in accordance with statutory
accounting practices was $298,047,000 at December 31, 1998 and
$285,350,000 at December 31, 1997. Statutory net income amounted to
$28,789,000, $35,350,000 and $47,074,000 for 1998, 1997 and 1996,
respectively.
(c) During 1997, the Company received a $30,000,000 surplus contribution
from American International Group Inc., the parent.
(d) Statement of Accounting Standards No. 130 "Comprehensive Income" (FASB
130) was adopted by the Company effective January 1, 1998. FASB 130
establishes standards for reporting comprehensive income and its
components as part of capital funds. The reclassification adjustments
with respect to available for sale securities were $(334,000),
$(3,025,000) and $(51,000) for December 31, 1998, 1997 and 1996,
respectively.
9. Employee Benefits
(a) The Company participates with its affiliates in a qualified,
non-contributory, defined benefit pension plan which is administered
by the Parent. All qualified employees who have attained age 21 and
completed twelve months of continuous service are eligible to
participate in this plan. An employee with 5 or more years of service
is entitled to pension benefits beginning at normal retirement age 65.
Benefits are based upon a percentage of average final compensation
multiplied by years of credited service limited to 44 years of
credited service. 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, 1998, 1997 and 1996 were approximately $272,000,
$373,000, and $400,000, 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, 1998 by
$100,000,000.
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 unfunded.
(b) The Parent also sponsors a voluntary savings plan for domestic
employees (a 401(k) plan), which, during the three years ended
December 31, 1998, 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.
<PAGE>
9. Employee Benefits - (continued)
(c) In addition to the Parent's defined benefit pension plan, the Parent
and its subsidiaries provide a post-retirement benefit program for
medical care and life insurance. Eligibility in the various plans is
generally based upon completion of a specified period of eligible
service and reaching a specified age.
(d) The Parent applies APB Opinion 25 "Accounting for Stock issued to
Employees" and related interpretations in accounting for its stock
based compensation 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, 1998, the
future minimum lease payments under operating leases were as follows
(in thousands):
Year Payment
1999 $ 4,251
2000 2,980
2001 2,530
2002 2,380
2003 1,870
Remaining years after 2003 1,571
-------
Total $ 15,582
Rent expense approximated $4,450,000, $3,881,000, and $4,263,000 for
the years ended December 31, 1998, 1997 and 1996, 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>
Percentage
December 31, 1998 of Amount
Assumed
Gross Ceded Assumed Net to Net
<S> <C> <C> <C> <C> <C>
Life Insurance in Force $53,884,853 $19,921,930 $ 896,285 $34,859,208 2.6%
============= ========== ======== ==========
Premiums:
Life 184,487 54,134 2,022 132,375 1.5%
Accident and Health 155,199 82,614 142,878 215,463 66.3%
Annuity 269,126 - - 269,126 -
------------ ----------------- -------------- ------------
Total Premiums $ 608,812 $ 136,748 $ 144,900 $ 616,964 23.5%
============ =========== ======== ============
Percentage
of Amount
December 31, 1997 Assumed
Gross Ceded Assumed Net to Net
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%
============ ============== ======== ============
</TABLE>
(b) The maximum amount retained on any one life by the Company is
$1,000,000.
(c) Reinsurance recoveries, which reduced death and other benefits,
approximated $111,580,000, $100,029,000, and $54,456,000,
respectively, for each of the years ended December 31, 1998, 1997 and
1996.
The Company's reinsurance arrangements do not relieve the Company from
its direct obligation to its insureds.
<PAGE>
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 1998 amounted to
$1,237,000 and $1,000, respectively. Premium income and commission
ceded for 1997 amounted to $1,251,000 and $1,000, respectively.
Premium income and commission ceded to affiliates amounted to
$1,345,000 and $0 for the year ended December 31, 1996. Premium income
and ceding commission expense assumed from affiliates aggregated
$131,771,000 and $31,584,000, respectively, for 1998, compared to
$110,529,000 and $24,853,000, respectively, for 1997, and $103,885,000
and $27,609,000, respectively for 1996.
(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, 1998, 1997 and 1996, the Company was
charged $40,417,000, $37,846,000 and $28,277,000, respectively, for
expenses attributed to the Company but incurred by affiliates. During
the same period, the Company received reimbursements from affiliates
aggregating $23,132,000, $18,134,000 and $17,598,000, 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 to the Company from Delaware American Life Insurance
Company.
(d) During 1996, the Company purchased 1,500,000 shares of AIG Life
Ireland, LTD., a subsidiary.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of
AIG Life Insurance Company
Variable Account II
In our opinion, the accompanying statements of assets and liabilities of AIG
Life Insurance Company Variable Account II (comprising twenty-seven subaccounts,
hereafter collectively referred to as "Variable Account II") and the related
statements of operations and changes in net assets present fairly, in all
material respects, the financial position of Variable Account II at December 31,
1998, and the results of its operations for the year then ended and the changes
in its net assets for each of the two years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the management of Variable Account II; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
March 12, 1999
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments at Market Value:
Shares Cost Market Value
------------------------------------------------------------------------
------------------------------------------------------------------------
<S> <C> <C> <C>
Aim
Capital Appreciation Portfolio 7,967.361 $ 174,945 $ 200,777
International Equity Portfolio 12,467.656 236,877 244,616
Alliance
Conservative Investors Portfolio 2,351.573 31,263 32,995
Global Bond Portfolio 688.066 8,257 8,547
Global Dollar Government Portfolio 21.880 212 222
Growth Portfolio 103,752.036 2,269,574 2,827,243
Growth & Income Portfolio 114,967.436 2,371,168 2,510,891
Growth Investors Portfolio 11,980.789 170,031 195,648
Money Market Portfolio 20,485.370 20,484 20,484
Premier Growth Portfolio 4,897.459 135,406 151,967
Technology Portfolio 42,154.382 625,961 808,100
Total Return Portfolio 140.114 2,418 2,530
Quasar Portfolio 29,073.531 378,222 323,880
U.S. Government High Grade Portfolio 78.903 967 968
Utility Income Portfolio 53.953 967 1,020
Dreyfus
Small Company Stock Portfolio 16,436.564 244,881 248,028
Stock Index Portfolio 83,498.512 2,317,307 2,715,365
Zero Coupon 2000 Portfolio 1,086.434 13,465 13,579
Fidelity
Asset Manager Portfolio 43,714.023 749,687 793,844
Contrafund Portfolio 12,145.716 259,365 296,842
Growth Portfolio 67,940.819 2,451,577 3,048,504
High Income Portfolio 22,836.942 281,130 263,309
Investment Grade Bond Portfolio 16,104.772 202,456 208,718
Money Market Portfolio 2,748,418.390 2,748,419 2,748,419
Overseas Portfolio 18,964.028 376,478 380,231
Van Eck
Worldwide Emerging Markets Portfolio 4,148.930 26,887 29,539
Worldwide Hard Assets Portfolio 3,756.723 47,156 34,560
Weiss,Peck & Greer
Tomorrow Long Term Portfolio 6,383.661 54,490 58,921
Tomorrow MediumTerm Portfolio 509.549 4,670 4,805
Tomorrow Short Term Portfolio 638.247 6,677 6,727
---------------------- -----------------------
Total Investments $ 16,211,397 18,181,279
Total Assets $ 18,181,279
=======================
Contract Owners' Equity $ 18,181,279
-----------------------
Total Equity $ 18,181,279
=======================
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
STATEMENT OF OPERATIONS
For The Year Ended December 31, 1998
<TABLE>
<CAPTION>
Aim Aim
Capital International
Appreciation Equity
Total Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $733,252 $5,326 $1,878
Expenses:
Mortality & Expense Risk Fees 106,392 694 1,405
--------------- ---------------- ----------------
Net Investment Income (Loss) 626,860 4,632 473
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 519,608 (371) (22,044)
Change in Unrealized Appreciation
(Depreciation) 1,519,964 25,833 7,738
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 2,039,572 25,462 (14,306)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $2,666,432 $30,094 ($13,833)
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Alliance
Alliance Alliance Global
Conservative Global Dollar
Investors Bond Government
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $2,086 $18 $0
Expenses:
Mortality & Expense Risk Fees 263 20 0
--------------- ---------------- ----------------
Net Investment Income (Loss) 1,823 (2) 0
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 1,083 19 2
Change in Unrealized Appreciation
(Depreciation) 691 289 10
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 1,774 308 12
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $3,597 $306 $12
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance
Growth Alliance
Alliance & Growth
Growth Income Investors
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $110,505 $111,284 $14,073
Expenses:
Mortality & Expense Risk Fees 16,449 10,688 1,473
--------------- ---------------- ----------------
Net Investment Income (Loss) 94,056 100,596 12,600
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 36,650 55,743 3,763
Change in Unrealized Appreciation
(Depreciation) 394,461 63,586 17,434
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 431,111 119,329 21,197
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $525,167 $219,925 $33,797
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Alliance Alliance
Alliance Money Premier
International Market Growth
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $0 $2,482 $233
Expenses:
Mortality & Expense Risk Fees 334 482 2,105
--------------- ---------------- ----------------
Net Investment Income (Loss) (334) 2,000 (1,872)
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 54,637 0 30,881
Change in Unrealized Appreciation
(Depreciation) 0 0 16,562
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 54,637 0 47,443
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $54,303 $2,000 $45,571
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance
Alliance Total Alliance
Technology Return Quasar
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $715 $0 $31,614
Expenses:
Mortality & Expense Risk Fees 5,537 1 3,978
--------------- ---------------- ----------------
Net Investment Income (Loss) (4,822) (1) 27,636
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 171,268 0 31,274
Change in Unrealized Appreciation
(Depreciation) 197,601 112 (66,300)
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 368,869 112 (35,026)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $364,047 $111 ($7,390)
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Alliance
U.S. Dreyfus
Government Small
High Alliance Company
Grade Utility Stock
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $0 $0 $1,151
Expenses:
Mortality & Expense Risk Fees 0 0 1,653
--------------- ---------------- ----------------
Net Investment Income (Loss) 0 0 (502)
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 0 0 (2,481)
Change in Unrealized Appreciation
(Depreciation) 0 52 8,859
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 0 52 6,378
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $0 $52 $5,876
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Dreyfus
Dreyfus Zero Fidelity
Stock Coupon Asset
Index 2000 Manager
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $30,188 $705 $60,993
Expenses:
Mortality & Expense Risk Fees 16,095 116 5,125
--------------- ---------------- ----------------
Net Investment Income (Loss) 14,093 589 55,868
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 90,160 117 10,634
Change in Unrealized Appreciation
(Depreciation) 348,632 37 18,503
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 438,792 154 29,137
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $452,885 $743 $85,005
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Fidelity
Fidelity Fidelity High
Contrafund Growth Income
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $1,859 $181,333 $33,968
Expenses:
Mortality & Expense Risk Fees 1,067 17,992 2,593
--------------- ---------------- ----------------
Net Investment Income (Loss) 792 163,341 31,375
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 3,199 52,384 (5,310)
Change in Unrealized Appreciation
(Depreciation) 37,476 484,390 (31,433)
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 40,675 536,774 (36,743)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $41,467 $700,115 ($5,368)
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fidelity
Investment Fidelity
Grade Money Fidelity
Bond Market Overseas
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $9,614 $72,672 $29,556
Expenses:
Mortality & Expense Risk Fees 1,360 12,336 3,291
--------------- ---------------- ----------------
Net Investment Income (Loss) 8,254 60,336 26,265
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity (104) 0 22,548
Change in Unrealized Appreciation
(Depreciation) 2,966 0 1,403
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 2,862 0 23,951
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $11,116 $60,336 $50,216
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
VanEck VanEck
VanEck Worldwide Worldwide
Worldwide Emerging Hard
Balanced Markets Assets
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $24,879 $0 $4,567
Expenses:
Mortality & Expense Risk Fees 466 80 292
--------------- ---------------- ----------------
Net Investment Income (Loss) 24,413 (80) 4,275
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity (10,944) (238) (4,776)
Change in Unrealized Appreciation
(Depreciation) (4,930) 2,653 (11,854)
--------------- ---------------- ----------------
Net Gain (Loss) on Investments (15,874) 2,415 (16,630)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $8,539 $2,335 ($12,355)
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WP&G WP&G WP&G
Tomorrow Tomorrow Tomorrow
Long Medium Short
Term Term Term
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $948 $287 $318
Expenses:
Mortality & Expense Risk Fees 423 41 33
--------------- ---------------- ----------------
Net Investment Income (Loss) 525 246 285
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 1,436 31 47
Change in Unrealized Appreciation
(Depreciation) 4,736 390 67
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 6,172 421 114
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $6,697 $667 $399
=============== ================ ================
</TABLE>
See Accompanying 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, 1998 and December 31, 1997
<TABLE>
<CAPTION>
1998
Aim Aim
Capital International
Appreciation Equity
Total Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $626,860 $4,632 $473
Realized Gain (Loss) on Investment Activity 519,608 (371) (22,044)
Change in Unrealized Appreciation
(Depreciation) of Investments 1,519,964 25,833 7,738
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 2,666,432 30,094 (13,833)
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 10,210,370 185,128 275,137
Cost Of Insurance Charge (1,571,906) (12,343) (20,406)
Policy Loans (212,191) 0 0
Transfers Between Funds 18,740 (1,665) 4,554
Contract Withdrawals (202,369) (437) (836)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 8,242,644 170,683 258,449
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 10,909,076 200,777 244,616
Net Assets, at Beginning of Year 7,272,203 0 0
--------------- ---------------- ----------------
Net Assets, at End of Year $18,181,279 $200,777 $244,616
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance
Alliance Alliance Global
Conservative Global Dollar
Investors Bond Government
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $1,823 ($2) $0
Realized Gain (Loss) on Investment Activity 1,083 19 2
Change in Unrealized Appreciation
(Depreciation) of Investments 691 289 10
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 3,597 306 12
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 9,551 8,736 241
Cost Of Insurance Charge (2,651) (507) (31)
Policy Loans 0 0 0
Transfers Between Funds (834) 12 0
Contract Withdrawals (740) 0 0
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 5,326 8,241 210
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 8,923 8,547 222
Net Assets, at Beginning of Year 24,072 0 0
--------------- ---------------- ----------------
Net Assets, at End of Year $32,995 $8,547 $222
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Alliance
Growth Alliance
Alliance & Growth
Growth Income Investors
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $94,056 $100,596 $12,600
Realized Gain (Loss) on Investment Activity 36,650 55,743 3,763
Change in Unrealized Appreciation
(Depreciation) of Investments 394,461 63,586 17,434
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 525,167 219,925 33,797
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 1,469,752 1,709,454 67,574
Cost Of Insurance Charge (210,721) (152,262) (18,064)
Policy Loans (30,640) (25,729) (2,299)
Transfers Between Funds (4,391) 16,628 97
Contract Withdrawals (44,972) (21,460) (2,915)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 1,179,028 1,526,631 44,393
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 1,704,195 1,746,556 78,190
Net Assets, at Beginning of Year 1,123,048 764,335 117,458
--------------- ---------------- ----------------
Net Assets, at End of Year $2,827,243 $2,510,891 $195,648
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance Alliance
Alliance Money Premier
International Market Growth
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($334) $2,000 ($1,872)
Realized Gain (Loss) on Investment Activity 54,637 0 30,881
Change in Unrealized Appreciation
(Depreciation) of Investments 0 0 16,562
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 54,303 2,000 45,571
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits (48,815) 30,048 122,585
Cost Of Insurance Charge (7,879) (11,766) (19,989)
Policy Loans 0 0 (267)
Transfers Between Funds 2,391 202 4,628
Contract Withdrawals 0 0 (561)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions (54,303) 18,484 106,396
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 0 20,484 151,967
Net Assets, at Beginning of Year 0 0 0
--------------- ---------------- ----------------
Net Assets, at End of Year $0 $20,484 $151,967
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Alliance
Alliance Total Alliance
Technology Return Quasar
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($4,822) ($1) $27,636
Realized Gain (Loss) on Investment Activity 171,268 0 31,274
Change in Unrealized Appreciation
(Depreciation) of Investments 197,601 112 (66,300)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 364,047 111 (7,390)
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 274,264 2,477 152,103
Cost Of Insurance Charge (66,804) (58) (36,287)
Policy Loans (12,128) 0 (10,340)
Transfers Between Funds 6,050 0 (7,597)
Contract Withdrawals (12,390) 0 (8,285)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 188,992 2,419 89,594
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 553,039 2,530 82,204
Net Assets, at Beginning of Year 255,061 0 241,676
--------------- ---------------- ----------------
Net Assets, at End of Year $808,100 $2,530 $323,880
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance
U.S. Dreyfus
Government Small
High Alliance Company
Grade Utility Stock
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $0 $0 ($502)
Realized Gain (Loss) on Investment Activity 0 0 (2,481)
Change in Unrealized Appreciation
(Depreciation) of Investments 0 52 8,859
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 0 52 5,876
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 991 991 139,298
Cost Of Insurance Charge (23) (23) (22,440)
Policy Loans 0 0 (1,455)
Transfers Between Funds 0 0 2,014
Contract Withdrawals 0 0 (2,646)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 968 968 114,771
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 968 1,020 120,647
Net Assets, at Beginning of Year 0 0 127,381
--------------- ---------------- ----------------
Net Assets, at End of Year $968 $1,020 $248,028
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Dreyfus
Dreyfus Zero Fidelity
Stock Coupon Asset
Index 2000 Manager
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $14,093 $589 $55,868
Realized Gain (Loss) on Investment Activity 90,160 117 10,634
Change in Unrealized Appreciation
(Depreciation) of Investments 348,632 37 18,503
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 452,885 743 85,005
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 1,652,138 4,327 384,610
Cost Of Insurance Charge (264,577) (2,247) (60,284)
Policy Loans (35,221) 0 (1,634)
Transfers Between Funds (3,827) (10) 1,319
Contract Withdrawals (30,468) 0 (3,078)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 1,318,045 2,070 320,933
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 1,770,930 2,813 405,938
Net Assets, at Beginning of Year 944,435 10,766 387,906
--------------- ---------------- ----------------
Net Assets, at End of Year $2,715,365 $13,579 $793,844
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fidelity
Fidelity Fidelity High
Contrafund Growth Income
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $792 $163,341 $31,375
Realized Gain (Loss) on Investment Activity 3,199 52,384 (5,310)
Change in Unrealized Appreciation
(Depreciation) of Investments 37,476 484,390 (31,433)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 41,467 700,115 (5,368)
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 274,009 1,511,553 20,065
Cost Of Insurance Charge (18,289) (264,617) (31,215)
Policy Loans 0 (38,305) (541)
Transfers Between Funds (301) 8,334 (1,103)
Contract Withdrawals (44) (32,651) (5,710)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 255,375 1,184,314 (18,504)
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 296,842 1,884,429 (23,872)
Net Assets, at Beginning of Year 0 1,164,075 287,181
--------------- ---------------- ----------------
Net Assets, at End of Year $296,842 $3,048,504 $263,309
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Fidelity
Investment Fidelity
Grade Money Fidelity
Bond Market Overseas
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $8,254 $60,336 $26,265
Realized Gain (Loss) on Investment Activity (104) 0 22,548
Change in Unrealized Appreciation
(Depreciation) of Investments 2,966 0 1,403
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 11,116 60,336 50,216
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 133,257 1,798,436 25,198
Cost Of Insurance Charge (15,077) (262,012) (46,489)
Policy Loans 0 (47,336) (4,988)
Transfers Between Funds 372 (3,849) (3,101)
Contract Withdrawals (446) (23,046) (8,945)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 118,106 1,462,193 (38,325)
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 129,222 1,522,529 11,891
Net Assets, at Beginning of Year 79,496 1,225,890 368,340
--------------- ---------------- ----------------
Net Assets, at End of Year $208,718 $2,748,419 $380,231
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VanEck VanEck
VanEck Worldwide Worldwide
Worldwide Emerging Hard
Balanced Markets Assets
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $24,413 ($80) $4,275
Realized Gain (Loss) on Investment Activity (10,944) (238) (4,776)
Change in Unrealized Appreciation
(Depreciation) of Investments (4,930) 2,653 (11,854)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 8,539 2,335 (12,355)
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits (87,825) 28,761 22,441
Cost Of Insurance Charge (7,250) (1,673) (5,001)
Policy Loans 0 0 0
Transfers Between Funds (1,323) 116 (79)
Contract Withdrawals (456) 0 (666)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions (96,854) 27,204 16,695
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets (88,315) 29,539 4,340
Net Assets, at Beginning of Year 88,315 0 30,220
--------------- ---------------- ----------------
Net Assets, at End of Year $0 $29,539 $34,560
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
WP&G WP&G WP&G
Tomorrow Tomorrow Tomorrow
Long Medium Short
Term Term Term
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $525 $246 $285
Realized Gain (Loss) on Investment Activity 1,436 31 47
Change in Unrealized Appreciation
(Depreciation) of Investments 4,736 390 67
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 6,697 667 399
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 38,701 534 4,650
Cost Of Insurance Charge (9,742) (536) (643)
Policy Loans (1,308) 0 0
Transfers Between Funds 103 0 0
Contract Withdrawals (1,420) 0 (197)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 26,334 (2) 3,810
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 33,031 665 4,209
Net Assets, at Beginning of Year 25,890 4,140 2,518
--------------- ---------------- ----------------
Net Assets, at End of Year $58,921 $4,805 $6,727
=============== ================ ================
</TABLE>
See Accompanying 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, 1998 and December 31, 1997
1997
<TABLE>
<CAPTION>
Aim Aim
Capital International
Appreciation Equity
Total Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $166,746 $0 $0
Realized Gain (Loss) on Investment Activity 206,207 0 0
Change in Unrealized Appreciation
(Depreciation) of Investments 366,321 0 0
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 739,274 0 0
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 5,544,641 0 0
Cost Of Insurance Charge (775,349) 0 0
Policy Loans (94,631) 0 0
Transfers Between Funds 18,850 0 0
Contract Withdrawals (82,467) 0 0
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 4,611,044 0 0
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 5,350,318 0 0
Net Assets, at Beginning of Year 1,921,885 0 0
---------------- ----------------- ---------------
Net Assets, at End of Year $7,272,203 $0 $0
================ ================= ===============
</TABLE>
<TABLE>
<CAPTION>
Alliance
Alliance Alliance Global
Conservative Global Dollar
Investors Bond Government
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $167 $0 $0
Realized Gain (Loss) on Investment Activity 600 0 0
Change in Unrealized Appreciation
(Depreciation) of Investments 586 0 0
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 1,353 0 0
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 15,627 0 0
Cost Of Insurance Charge (2,705) 0 0
Policy Loans 0 0 0
Transfers Between Funds 20 0 0
Contract Withdrawals (239) 0 0
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 12,703 0 0
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 14,056 0 0
Net Assets, at Beginning of Year 10,016 0 0
---------------- ----------------- ---------------
Net Assets, at End of Year $24,072 $0 $0
================ ================= ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance
Growth Alliance
Alliance & Growth
Growth Income Investors
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $21,469 $22,999 $1,477
Realized Gain (Loss) on Investment Activity 37,620 18,395 3,687
Change in Unrealized Appreciation
(Depreciation) of Investments 138,629 68,190 5,513
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 197,718 109,584 10,677
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 814,495 571,454 61,194
Cost Of Insurance Charge (117,612) (74,918) (11,672)
Policy Loans (6,689) (5,180) 0
Transfers Between Funds 1,673 2,565 3,415
Contract Withdrawals (19,879) (5,967) (2,220)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 671,988 487,954 50,717
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 869,706 597,538 61,394
Net Assets, at Beginning of Year 253,342 166,797 56,064
---------------- ----------------- ---------------
Net Assets, at End of Year $1,123,048 $764,335 $117,458
================ ================= ===============
</TABLE>
<TABLE>
<CAPTION>
Alliance Alliance
Alliance Money Premier
International Market Growth
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>
Alliance
Alliance Total Alliance
Technology Return Quasar
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($1,115) $0 ($1,464)
Realized Gain (Loss) on Investment Activity 16,995 0 9,057
Change in Unrealized Appreciation
(Depreciation) of Investments (15,270) 0 11,871
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 610 0 19,464
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 270,239 0 232,934
Cost Of Insurance Charge (19,431) 0 (17,506)
Policy Loans (101) 0 (387)
Transfers Between Funds 4,396 0 3,524
Contract Withdrawals (8,527) 0 (1,093)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 246,576 0 217,472
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 247,186 0 236,936
Net Assets, at Beginning of Year 7,875 0 4,740
---------------- ----------------- ---------------
Net Assets, at End of Year $255,061 $0 $241,676
================ ================= ===============
</TABLE>
<TABLE>
<CAPTION>
Alliance
U.S. Dreyfus
Government Small
High Alliance Company
Grade Utility Stock
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $0 $0 $2,102
Realized Gain (Loss) on Investment Activity 0 0 (107)
Change in Unrealized Appreciation
(Depreciation) of Investments 0 0 (5,712)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 0 0 (3,717)
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 0 0 135,191
Cost Of Insurance Charge 0 0 (2,314)
Policy Loans 0 0 0
Transfers Between Funds 0 0 (1,779)
Contract Withdrawals 0 0 0
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 0 0 131,098
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 0 0 127,381
Net Assets, at Beginning of Year 0 0 0
---------------- ----------------- ---------------
Net Assets, at End of Year $0 $0 $127,381
================ ================= ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Dreyfus
Dreyfus Zero Fidelity
Stock Coupon Asset
Index 2000 Manager
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $26,687 $511 $21,546
Realized Gain (Loss) on Investment Activity 41,444 (71) 8,600
Change in Unrealized Appreciation
(Depreciation) of Investments 41,726 83 19,239
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 109,857 523 49,385
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 778,061 11,713 287,927
Cost Of Insurance Charge (90,065) (4,235) (42,651)
Policy Loans (1,032) 0 (167)
Transfers Between Funds 2,970 25 664
Contract Withdrawals (7,423) (171) (9,859)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 682,511 7,332 235,914
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 792,368 7,855 285,299
Net Assets, at Beginning of Year 152,067 2,911 102,607
---------------- ----------------- ---------------
Net Assets, at End of Year $944,435 $10,766 $387,906
================ ================= ===============
</TABLE>
<TABLE>
<CAPTION>
Fidelity
Fidelity Fidelity High
Contrafund Growth Income
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $0 $21,466 $3,283
Realized Gain (Loss) on Investment Activity 0 55,366 11,481
Change in Unrealized Appreciation
(Depreciation) of Investments 0 90,042 11,697
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 0 166,874 26,461
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 0 492,521 226,949
Cost Of Insurance Charge 0 (148,843) (23,779)
Policy Loans 0 (24,473) 0
Transfers Between Funds 0 3,595 1,695
Contract Withdrawals 0 (19,994) (2,049)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 0 302,806 202,816
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 0 469,680 229,277
Net Assets, at Beginning of Year 0 694,395 57,904
---------------- ----------------- ---------------
Net Assets, at End of Year $0 $1,164,075 $287,181
================ ================= ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fidelity
Investment Fidelity
Grade Money Fidelity
Bond Market Overseas
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $2,521 $32,116 $9,687
Realized Gain (Loss) on Investment Activity 322 0 1,460
Change in Unrealized Appreciation
(Depreciation) of Investments 2,132 0 (3,697)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 4,975 32,116 7,450
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 29,955 1,214,777 281,913
Cost Of Insurance Charge (6,686) (159,431) (34,464)
Policy Loans 0 (52,504) (4,098)
Transfers Between Funds 96 (5,335) 951
Contract Withdrawals (16) (1,225) (3,073)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 23,349 996,282 241,229
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 28,324 1,028,398 248,679
Net Assets, at Beginning of Year 51,172 197,492 119,661
---------------- ----------------- ---------------
Net Assets, at End of Year $79,496 $1,225,890 $368,340
================ ================= ===============
</TABLE>
<TABLE>
<CAPTION>
VanEck VanEck
VanEck Worldwide Worldwide
Worldwide Emerging Hard
Balanced Markets Assets
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $343 $0 $319
Realized Gain (Loss) on Investment Activity 856 0 165
Change in Unrealized Appreciation
(Depreciation) of Investments 3,097 0 (1,231)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 4,296 0 (747)
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 60,650 0 24,911
Cost Of Insurance Charge (10,075) 0 (4,740)
Policy Loans 0 0 0
Transfers Between Funds 186 0 104
Contract Withdrawals (712) 0 (20)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 50,049 0 20,255
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 54,345 0 19,508
Net Assets, at Beginning of Year 33,970 0 10,712
---------------- ----------------- ---------------
Net Assets, at End of Year $88,315 $0 $30,220
================ ================= ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WP&G WP&G WP&G
Tomorrow Tomorrow Tomorrow
Long Medium Short
Term Term Term
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $2,058 $331 $243
Realized Gain (Loss) on Investment Activity 303 2 32
Change in Unrealized Appreciation
(Depreciation) of Investments (304) (254) (16)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 2,057 79 259
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 27,159 4,178 2,793
Cost Of Insurance Charge (3,562) (124) (536)
Policy Loans 0 0 0
Transfers Between Funds 76 7 2
Contract Withdrawals 0 0 0
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 23,673 4,061 2,259
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 25,730 4,140 2,518
Net Assets, at Beginning of Year 160 0 0
---------------- ----------------- ---------------
Net Assets, at End of Year $25,890 $4,140 $2,518
================ ================= ===============
</TABLE>
See Accompanying 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 following products are offered by the Account: Vision and
Gallery Life.
The Account invests in shares of AIM Variable Insurance Fund ("AIM Fund"),
Alliance Variable Products Series Fund, Inc. ("Alliance Fund"), Dreyfus Variable
Investment Fund ("Dreyfus Fund"), Fidelity Investments Variable Insurance
Products Fund ("Fidelity Trust"), Fidelity Variable Insurance Products Fund II
("Fidelity Trust II"), Van Eck Investment Trust ("Van Eck Trust") and Weiss,
Peck & Greer ("Tomorrow Funds"). The assets in the policies may be invested in
the following subaccounts:
AIM Fund: Fidelity Trust:
International Equity Portfolio Money Market Portfolio
Capital Appreciation Portfolio High Income Portfolio
Growth Portfolio
Alliance Fund: Overseas Portfolio
Growth & Income Portfolio Contrafund Portfolio
Conservative Investors Portfolio
Growth Portfolio Fidelity Trust II:
Growth Investors Portfolio Investment Grade Bond Portfolio
Quasar Portfolio Asset Manager Portfolio
Technology Portfolio
Global Bond Portfolio Van Eck Trust:
Premier Growth Portfolio Worldwide Hard Assets Portfolio
Money Market Portfolio Worldwide Emerging Markets Portfolio
Worldwide Balanced Portfolio
(Fund closed 06/29/98)
Dreyfus Fund:
Dreyfus Zero Coupon 2000 Portfolio Weiss, Peck & Greer Tomorrow Fund:
Stock Index Portfolio Tomorrow Long Term Portfolio
Small Company Stock Portfolio Tomorrow Medium Term Portfolio
Stock Index Portfolio Tomorrow Short Term 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, 1998, investment activity in the Fund was as
follows:
Cost of Proceeds
Purchases From Sales
Shares of
<S> <C> <C>
Aim
Capital Appreciation Portfolio $ 201,598 $ 26,283
International Equity Portfolio 499,113 240,193
Alliance Funds:
Conservative Investors Portfolio 17,668 10,521
Global Bond Portfolio 9,907 1,670
Global Dollar Government Portfolio 242 31
Growth Portfolio 1,434,835 161,751
Growth & Income Portfolio 7,118,210 5,490,984
Growth Investors Portfolio 83,359 26,366
International Portfolio 7,730,001 7,784,638
Money Market Portfolio 7,530,593 7,510,112
Premier Growth Portfolio 1,721,633 1,617,108
Technology Portfolio 9,312,917 9,128,748
Total Return Portfolio 2,439 21
Quasar Portfolio 9,870,359 9,753,129
U.S. Government High Grade Portfolio 976 8
Utility Income Portfolio 976 8
Dreyfus:
Small Company Portfolio 277,608 163,341
Stock Index Portfolio 1,719,925 387,790
Zero Coupon 2000 Portfolio 7,868 5,215
Fidelity Trust Funds:
Asset Manager Portfolio 637,629 260,827
Contrafund Portfolio 295,002 38,838
Growth Portfolio 1,684,130 336,475
High Income Portfolio 366,333 353,460
Investment Grade Bond Portfolio 252,481 126,121
Money Market Portfolio 3,777,754 2,255,231
Overseas Portfolio 240,411 252,471
Van Eck:
Worldwide Emerging Markets Portfolio 31,817 4,692
Worldwide Hard Assets Portfolio 34,521 13,551
Worldwide Balanced Portfolio 43,581 115,939
Weiss, Peck, & Greer Tomorrow Funds:
Tomorrow Long Term Portfolio 43,881 17,022
Tomorrow Medium Term Portfolio 1,311 1,067
Tomorrow Short Term Portfolio 4,968 873
</TABLE>
For the year ended December 31, 1997, investment activity in the Fund was as
follows: Cost of Proceeds Purchases From Sales
<TABLE>
<S> <C> <C>
Shares of
Alliance Funds:
Conservative Investors Portfolio $ 18,544 $ 5,676
Growth Portfolio 974,204 280,744
Growth & Income Portfolio 674,003 163,065
Growth Investors Portfolio 111,960 63,096
Technology Portfolio 570,493 325,032
Quasar Portfolio 469,753 253,745
Dreyfus:
Small Company Stock Portfolio 134,522 1,321
Stock Index Portfolio 1,010,647 301,445
Zero Coupon 2000 Portfolio 17,381 9,537
Fidelity Trust Funds:
Asset Manager Portfolio 386,303 128,841
Growth Portfolio 1,207,119 882,821
High Income Portfolio 338,288 132,191
Investment Grade Bond Portfolio 36,324 10,571
Money Market Portfolio 2,898,075 1,866,353
Overseas Portfolio 339,597 88,568
Van Eck:
Worldwide Emerging Markets Portfolio 4 4
Worldwide Hard Assets Portfolio 28,081 7,507
Worldwide Balanced Portfolio 58,655 8,264
Weiss, Peck, & Greer Tomorrow Funds:
Tomorrow Long Term Portfolio 28,487 2,754
Tomorrow Medium Term Portfolio 4,465 72
Tomorrow Short Term Portfolio 2,909 406
</TABLE>
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (continued)
5. Net Increase (Decrease) in Accumulation Units
For the year ended December 31, 1998, transactions in accumulation units of the
account were as follows:
<TABLE>
Aim Aim Alliance
Capital International Conservative
Appreciation Equity Investors
Portfolio Portfolio Portfolio
VARIABLE ANNUITY - - -
<S> <C> <C> <C>
Units Purchased 10,966.16 17,130.11 519.94
Units Withdrawn (1,282.07) (1,912.12) (252.21)
Units Transferred Between Funds 7,964.24 5,920.24 151.60
Units Transferred From (To) AI Life 0.00 0.00 0.00
---------- ---------- ---------
Net Increase (Decrease) 17,648.33 21,138.23 419.33
Units, at Beginning of the Year 0.00 0.00 1,986.58
---------- ---------- ---------
Units, at End of the Year 17,648.33 21,138.23 2,405.91
========== ========== =========
Unit Value at December 31, 1998 $ 11.38 $ 11.57 $ 13.71
========== ========== =========
</TABLE>
<TABLE>
Alliance
Alliance Global
Global Dollar Alliance
Bond Government Growth
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 274.70 0.00 48,680.75
Units Withdrawn (47.46) (4.05) (14,982.74)
Units Transferred Between Funds 538.94 33.17 28,539.15
Units Transferred From (To) AI Life 0.00 0.00 0.00
------- ------ -----------
Net Increase (Decrease) 766.18 29.12 62,237.16
Units, at Beginning of the Year 0.00 0.00 63,940.84
------- ------ -----------
Units, at End of the Year 766.18 29.12 126,178.00
======= ====== ===========
Unit Value at December 31, 1998 $ 11.15 $ 7.65 $ 22.41
======= ====== ===========
</TABLE>
<TABLE>
Alliance
Growth Alliance
& Growth Alliance
Income Investors International
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 33,634.28 4,748.04 0.00
Units Withdrawn (10,914.51) (1,602.25) (789.39)
Units Transferred Between Funds 54,953.57 19.95 789.39
Units Transferred From (To) AI Life 0.00 0.00 0.00
----------- ---------- -------
Net Increase (Decrease) 77,673.34 3,165.74 0.00
Units, at Beginning of the Year 44,589.32 8,820.29 0.00
----------- ---------- -------
Units, at End of the Year 122,262.66 11,986.03 0.00
=========== ========== =======
Unit Value at December 31, 1998 $ 20.54 $ 16.32 $ 11.06
=========== ========== =======
</TABLE>
Footnote 1 are all funds except for IVUL 2.
Footnote 2 are the IVUL 2 funds.
<PAGE>
<TABLE>
Alliance Alliance Alliance
Money Premier Premier
Market Growth Growth
Portfolio 1 Portfolio 2 Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 76,950.50 14,340.65 368.47
Units Withdrawn (1,125.28) (1,636.22) (15.78)
Units Transferred Between Funds (73,883.89) (2,993.66) 16.87
Units Transferred From (To) AI Life 0.00 0.00 0.00
---------- ---------- -------
Net Increase (Decrease) 1,941.33 9,710.77 369.56
Units, at Beginning of the Year 0.00 0.00 0.00
---------- ---------- -------
Units, at End of the Year 1,941.33 9,710.77 369.56
========== ========== =======
Unit Value at December 31, 1998 $ 10.55 $ 15.06 $ 15.45
========== ========== =======
</TABLE>
<TABLE>
Alliance
Alliance Total Alliance
Technology Return Quasar
Portfolio Portfolio 1 Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 35,545.90 212.77 16,965.13
Units Withdrawn (7,116.84) (4.98) (4,825.62)
Units Transferred Between Funds (5,978.18) 0.00 (4,170.54)
Units Transferred From (To) AI Life 0.00 0.00 0.00
---------- ------- ----------
Net Increase (Decrease) 22,450.88 207.79 7,968.97
Units, at Beginning of the Year 23,596.78 0.00 20,181.26
---------- ------- ----------
Units, at End of the Year 46,047.66 207.79 28,150.23
========== ======= ==========
Unit Value at December 31, 1998 $ 17.55 $ 12.18 $ 11.34
========== ======= ==========
</TABLE>
<TABLE>
Alliance
U.S.
Government
Alliance High Alliance
Quasar Grade Utility
2 Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 531.58 89.14 72.17
Units Withdrawn (11.11) (2.08) (1.69)
Units Transferred Between Funds 3.26 0.00 0.00
Units Transferred From (To) AI Life 0.00 0.00 0.00
------- ------ ------
Net Increase (Decrease) 523.73 87.06 70.48
Units, at Beginning of the Year 0.00 0.00 0.00
------- ------ ------
Units, at End of the Year 523.73 87.06 70.48
======= ====== ======
Unit Value at December 31, 1998 $ 9.15 $ 11.12 $ 14.47
======= ====== ======
</TABLE>
Footnote 1 are all funds except for IVUL 2.
Footnote 2 are the IVUL 2 funds.
<PAGE>
<TABLE>
Dreyfus Dreyfus
Small Dreyfus Zero
Company Stock Coupon
Stock Index 2000
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 15,130.34 64,100.90 653.34
Units Withdrawn (2,752.76) (17,133.95) (197.62)
Units Transferred Between Funds 1,013.09 21,583.46 (273.54)
Units Transferred From (To) AI Life 0.00 0.00 0.00
---------- ----------- ---------
Net Increase (Decrease) 13,390.67 68,550.41 182.18
Units, at Beginning of the Year 12,290.97 54,287.23 976.29
---------- ----------- ---------
Units, at End of the Year 25,681.64 122,837.64 1,158.47
========== =========== =========
Unit Value at December 31, 1998 $ 9.66 $ 22.11 $ 11.72
========== =========== =========
</TABLE>
<TABLE>
Fidelity
Asset Fidelity Fidelity
Manager Contrafund Growth
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 18,697.45 13,543.93 71,686.34
Units Withdrawn (4,063.22) (1,631.36) (19,446.08)
Units Transferred Between Funds 6,029.71 11,000.06 16,228.87
Units Transferred From (To) AI Life 0.00 0.00 0.00
---------- ---------- -----------
Net Increase (Decrease) 20,663.94 22,912.63 68,469.13
Units, at Beginning of the Year 25,997.34 0.00 76,554.16
---------- ---------- -----------
Units, at End of the Year 46,661.28 22,912.63 145,023.29
========== ========== ===========
Unit Value at December 31, 1998 $ 17.01 $ 12.96 $ 21.02
========== ========== ===========
</TABLE>
<TABLE>
Fidelity
Fidelity Investment Fidelity
High Grade Money
Income Bond Market
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 9,445.60 13,513.40 259,198.27
Units Withdrawn (2,853.91) (1,307.38) (28,981.43)
Units Transferred Between Funds (7,301.62) (2,236.28) (105,109.51)
Units Transferred From (To) AI Life 0.00 0.00 (147.07)
---------- ---------- -----------
Net Increase (Decrease) (709.93) 9,969.74 124,960.26
Units, at Beginning of the Year 21,533.23 6,952.60 109,164.24
---------- ---------- -----------
Units, at End of the Year 20,823.30 16,922.34 234,124.50
========== ========== ===========
Unit Value at December 31, 1998 $ 12.64 $ 12.33 $ 11.74
========== ========== ===========
</TABLE>
Footnote 1 are all funds except for IVUL 2.
Footnote 2 are the IVUL 2 funds.
<PAGE>
<TABLE>
Van Eck
Van Eck Worldwide
Fidelity Worldwide Emerging
Overseas Balanced Markets
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 11,785.44 951.45 1,277.13
Units Withdrawn (4,501.28) (606.33) (278.62)
Units Transferred Between Funds (9,535.93) (7,669.26) 3,870.58
Units Transferred From (To) AI Life 0.00 0.00 0.00
---------- --------- ---------
Net Increase (Decrease) (2,251.77) (7,324.14) 4,869.09
Units, at Beginning of the Year 29,558.72 7,324.14 0.00
---------- --------- ---------
Units, at End of the Year 27,306.95 0.00 4,869.09
========== ========= =========
Unit Value at December 31, 1998 $ 13.92 $ 13.05 $ 6.07
========== ========= =========
</TABLE>
<TABLE>
Van Eck WP&G WP&G
Worldwide Tomorrow Tomorrow
Hard Long Medium
Assets Term Term
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 1,987.17 3,171.98 96.93
Units Withdrawn (614.56) (914.92) (41.35)
Units Transferred Between Funds 411.71 (301.20) (53.41)
Units Transferred From (To) AI Life 0.00 0.00 0.00
--------- -------- -------
Net Increase (Decrease) 1,784.32 1,955.86 2.17
Units, at Beginning of the Year 2,660.66 2,002.12 338.89
--------- --------- -------
Units, at End of the Year 4,444.98 3,957.98 341.06
========= ========= =======
Unit Value at December 31, 1998 $ 7.78 $ 14.89 $ 14.09
========= ========= =======
</TABLE>
<TABLE>
WP&G
Tomorrow
Short
Term
Portfolio
-
<S> <C>
Units Purchased 355.59
Units Withdrawn (66.23)
Units Transferred Between Funds 0.00
Units Transferred From (To) AI Life 0.00
-------
Net Increase (Decrease) 289.36
Units, at Beginning of the Year 207.88
-------
Units, at End of the Year 497.24
=======
Unit Value at December 31, 1998 $ 13.53
=======
</TABLE>
<PAGE>
APPENDIX A
Minimum Premiums
The following table shows for Insureds of varying ages, the current minimum
initial premium for a policy with the Face Amount indicated. This table assumes
that the insured will be placed in a nonsmoker class and that no supplemental
benefits will be added to the base policy.
<TABLE>
Issue Policy Minimum Minimum Planned Periodic Premium
Age of Sex of Face Initial By Premium Payment Mode
Insured Insured Amount Premium Annual Semiannual Quarterly Monthly
<S> <C> <C> <C> <C> <C> <C> <C>
25 Male $75,000 $102.08 $612.50 $306.25 $153.13 $51.04
30 Female $100,000 $107.33 $644.00 $322.00 $161.00 $53.67
35 Male $250,000 $175.42 $1,052.50 $526.25 $263.13 $87.71
40 Female $300,000 $227.83 $1,367.00 $683.50 $341.75 $113.92
45 Male $500,000 $476.67 $2,860.00 $1,430.00 $715.00 $238.33
50 Female $350,000 $427.50 $2,565.00 $1,282.50 $641.25 $213.75
55 Male $300,000 $686.33 $4,118.00 $2,059.00 $1,029.50 $343.17
60 Female $250,000 $620.83 $3,725.00 $1,862.50 $931.25 $310.42
65 Male $200,000 $1,185.67 $7,114.00 $3,557.00 $1,778.50 $592.83
70 Female $100,000 $670.50 $4,023.00 $2,011.50 $1,005.75 $335.25
75 Male $75,000 $1,210.71 $7,264.25 $3,632.13 $1,816.06 $605.35
</TABLE>
A-1
<PAGE>
APPENDIX B
Surrender Charge Premium
The surrender charge premium is an amount used to determine the sales charge
deducted on surrender of the policy. The surrender charge premium is calculated
for each policy based on the issue age, sex, and smoker status of the Insured
and the Face Amount of the policy.
The following table shows for Insureds of varying ages, the surrender charge
premium for a policy with the Face Amount indicated. This table assumes that the
Insured will be placed in a nonsmoker class.
Issue Policy Surrender
Age of Sex of Face Charge
Insured Insured Amount Premium
25 Male $75,000 $483.75
30 Female $100,000 $690.00
35 Male $250,000 $2,562.50
40 Female $300,000 $3,327.00
45 Male $500,000 $8,530.00
50 Female $350,000 $6,373.50
55 Male $300,000 $8,880.00
60 Female $250,000 $7,800.00
65 Male $200,000 $10,762.00
70 Female $100,000 $5,781.00
75 Male $75,000 $7,689.75
B-1
<PAGE>
APPENDIX C
AVERAGE ANNUAL TOTAL RETURNS
As of December 31, 1998
<TABLE>
Inception 1 Yr. 3 Yrs. 5 Yrs. 10 Yrs. Since
Date Inception
<S> <C> <C> <C> <C> <C> <C>
Alliance Variable Products Series Fund
Conservative Investors Portfolio 10/28/94 13.18% 8.64% N/A N/A 10.12%
Global Bond Portfolio 7/15/91 13.10% 0.49% 1.35% N/A 2.30%
Global Dollar Government Portfolio 5/2/94 -22.41% -2.23% N/A N/A 2.07%
Growth Portfolio 9/15/94 27.57% 27.83% N/A N/A 28.60%
Growth and Income Portfolio 1/14/91 19.81% 23.36% 20.09% N/A 14.96%
Growth Investors Portfolio 10/28/94 22.57% 14.81% N/A N/A 14.81%
High Yield Portfolio 10/27/97 -4.55% N/A N/A N/A -1.49%
Money Market Portfolio 12/4/92 4.04% 3.98% 3.67% N/A 3.55%
North American Government Portfolio 5/3/94 3.13% 7.81% N/A N/A 5.70%
International Portfolio 12/28/92 12.00% 5.49% 5.95% N/A 8.24%
Premier Growth Portfolio 6/26/92 46.65% 19.26% 18.35% N/A 17.95%
Quasar Portfolio 8/14/96 -23.61% N/A N/A N/A -2.04%
Real Estate Investors Portfolio 1/9/97 -19.73% N/A N/A N/A -0.96%
Short-Term Multi-Market Portfolio 11/28/90 5.36% 1.12% -0.59% N/A 0.55%
Technology Portfolio 1/11/96 62.32% N/A N/A N/A 23.54%
Total Return Portfolio 12/28/92 15.94% 14.57% 11.53% N/A 11.04%
U.S. Gov-t High Grade Portfolio 9/17/92 7.25% 2.52% 2.87% N/A 3.22%
Utility Income Portfolio 5/10/94 22.80% 16.27% N/A N/A 14.33%
Worldwide Privatization Portfolio 9/23/94 9.84% 11.08% N/A N/A 10.21%
This portfolio performance information is for illustrative purposes only and is
not intended to indicate or predict future performance.
</TABLE>
C-1
<PAGE>
[Back cover]
The Securities and Exchange Commission maintains a Web site (http://www.sec.gov)
that contains additional information about AIG Life Insurance Company, the
policy and the Separate Account which may be of interest to you. The Web site
also contains additional information about the policy's variable investment
options.
<PAGE>
AIG Life Insurance Company
Variable Account II
One Alico Plaza
600 King Street
Wilmington, Delaware 19801
1-302-594-2622
Flexible Premium Variable Universal Life Group Policies
AIG Life Insurance Company is offering life insurance coverage under the group
flexible premium variable universal policy. The policy provides insurance
protection for individuals within groups under corporate owned or sponsored
arrangements. Corporate owned arrangements are when an employer (or trust
established by an employer) purchases life insurance coverage on their
employees. The employer or trust is the beneficiary. Sponsored arrangements are
those instances where an employer, a financial institution or association allows
us to sell insurance policies to its employees, depositors or members.
The description of the policy in this prospectus is fully applicable to your
certificate and the word "policy" includes any such certificate.
The policy allows you as the owner of the policy, within limits, to:
o Select the face amount of life insurance. You may, within
limits, change your initial selection as your insurance
needs change.
o Select the amount and timing of premiums payments. You may
make more premium payments than scheduled or stop making
premium payments.
o Allocate premium payments and your Account Value among the
variable investment options and the guaranteed investment
option.
o Receive payments from your policy while the Insured is
alive through loans, partial surrenders or full surrender.
This document contains information about the policy. You should read this
document carefully before you decide to purchase the policy. You should also
keep this document for future reference.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the policy or determined that this
document is accurate or complete. Any representation to the contrary is a
criminal offense.
INVESTMENTS IN THESE CONTRACTS ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY GOVERNMENT 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.
Prospectus _________, 1999
<PAGE>
Investment Options
Variable Investment Options
The Separate Account is divided into subaccounts. Each subaccount invests in
shares of a specific portfolio of the funds which are named below. The
prospectuses for the funds contain information about each portfolio. You should
read these prospectuses carefully.
Alliance Variable Product Series Fund Morgan Stanley Dean Witter Universal
Funds, Inc.
o Growth and Income Portfolio
o Premier Growth Portfolio o Fixed Income Portfolio
o Quasar Portfolio o Global Equity Portfolio
o High Yield Portfolio
o Money Market Portfolio
o U.S. Real Estate Portfolio
Fidelity Variable Insurance Products Fund II
o VIP II Contrafund Portfolio
o VIP II Index 500 Portfolio Neuberger Berman Advisers Management
Trust
Goldman Sachs Variable Insurance Trust
o AMT Partners Portfolio
o Capital Growth Fund
o CORE U.S. Equity Fund Templeton Variable Products Series
o CORE Large Cap Growth Fund Fund
o CORE Small Cap Equity Fund
o Global Income Fund o Templeton Developing Markets Fund
o Growth and Income Fund -Class 2
o International Equity Fund
o Mid Cap Value Fund o Templeton International Fund
-Class 2
<PAGE>
Guaranteed Investment Option
The Guaranteed Account is part of our general account. We will credit interest
equal to at least 4% per year, compounded annually on that portion of Account
Value that you allocate to the Guaranteed Account. We may, in our discretion,
elect to credit a higher rate of interest. This document generally describes
only that portion of the Account Value allocated to the Variable Account.
<PAGE>
- ------------------------------------------------------------------------------
Table of Contents
- ------------------------------------------------------------------------------
Special Terms.................................................................
Summary of the Policy.........................................................
Overview.................................................................
Applying for a Policy....................................................
Premium Payments.........................................................
Account Value............................................................
Death Benefit............................................................
Cash Benefits During the Life of the Insured.............................
Expenses of the Policy...................................................
Federal Tax Considerations...............................................
Purchasing a Policy...........................................................
Applying for a Policy....................................................
Your Right to Cancel the Policy..........................................
Premiums.................................................................
Restrictions on Premiums.............................................
Minimum Initial Premium..............................................
Planned Periodic Premiums............................................
Additional Premiums..................................................
Effect of Premium Payments...........................................
Grace Period.........................................................
Premium Allocations..................................................
Crediting Premiums...................................................
The Investment Options........................................................
Variable Investment Options..............................................
Guaranteed Investment Option.............................................
Investing Your Account Value..................................................
Determining the Account Value............................................
Transfers................................................................
Dollar Cost Averaging....................................................
Death Benefits................................................................
Life Insurance Proceeds..................................................
Death Benefit Options....................................................
Changes in Death Benefit Options.........................................
Changes in Face Amount...................................................
Cash Benefits During the Insured's Life ......................................
Loans....................................................................
Partial Surrenders.......................................................
Surrendering the Policy for Net Cash Surrender Value.....................
<PAGE>
Payment Options for Benefits..................................................
Expenses of the Policy........................................................
Deductions From Premiums.................................................
Monthly Deductions From Account Value....................................
Deduction From Subaccount Assets.........................................
Deductions Upon Policy Transactions .....................................
Other Policy Provisions.......................................................
Performance Information.......................................................
Federal Income Tax Considerations.............................................
Distribution of the Policy....................................................
About Us and the Accounts.....................................................
The Company..............................................................
The Separate Account.....................................................
The Guaranteed Account...................................................
Our Directors and Executive Officers..........................................
Other Information.............................................................
State Regulation.........................................................
Legal Proceedings........................................................
Experts..................................................................
Legal Matters............................................................
Published Ratings........................................................
Financial Statements..........................................................
Appendices....................................................................
<PAGE>
- --------------------------------------------------------------------------------
Special Terms
- --------------------------------------------------------------------------------
We have capitalized some special terms we use in this document. We have
defined these terms here.
We use Account Value to determine your policy benefits. How we determine Account
Value is described on page __.
Accounts. The Separate Account and the Guaranteed Account.
Account Value. The total amount in the Accounts credited to your
policy.
If you have a request, please write to us at this address.
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.
Attained Age. The Insured's Age as of the Policy Date plus the
number of completed Policy Years since the Policy Date.
Beneficiary. The person(s) who is entitled to the Life Insurance
Proceeds under the policy.
How we determine the Cash Surrender Value is shown on page _.
Cash Surrender Value. Account Value less any applicable surrender charge, that
would be assessed if the policy were surrendered.
Code. The Internal Revenue Code of 1986, as amended.
Death Benefit Amount. The amount determined to be the Life Insurance Proceeds
based on the Face Amount, Death Benefit Qualification Option and the Life
Insurance Proceeds Option which you selected.
<PAGE>
You will specify the initial Face Amount in your policy application. The policy
will also show the initial Face Amount.
Face Amount. The amount of insurance specified by the Owner and from which we
determine the Death Benefit Amount.
Grace Period. The period of time following a monthly anniversary during which
this policy will continue in force even though your Net Cash Surrender Value is
less than the total monthly deduction then due.
Guaranteed Account. An account within the general account which consists of all
of our assets other than the assets of the Separate Account and any of our other
separate accounts.
Insured. A person whose life is covered under the policy. At the time of
application, the insured must be 75 years of age or younger.
We measure contestability periods from the Issue Date.
Issue Date. The date the policy is actually issued and from which we measure
contestability periods. It may be later than the Policy Date.
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 loans.
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 day of the Monthly Anniversary is the 29th, 30th or 31st and a month has
no such day, the monthly anniversary is deemed to be the last day of that month.
We use this value to determine if your policy is in force.
Net Cash Surrender Value. The Cash Surrender Value less any Outstanding Loans.
Net Premium. Any premium paid less any expense charges deducted from the premium
payment.
<PAGE>
You may be an Owner even if you are not the Insured.
Owner. The person who purchased the policy as shown in the application, unless
later changed.
Planned Periodic Premium. The amount and frequency of premium to be paid until
the Maturity Date. You select this at the time of application.
We use the Policy Date as the date coverage begins and to determine all
anniversary dates.
Policy Date. The date as of which we have received the initial premium and an
application in good order. Coverage will not begin unless your policy is issued.
Policy Year. Each period of twelve months commencing with the Policy Date.
Separate Account. Variable Account II, a separate investment account of ours.
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.
<PAGE>
- --------------------------------------------------------------------------------
Summary of the Policy
- --------------------------------------------------------------------------------
Because this is a summary, it does not contain all the information that may
be important to you. You should read this entire document carefully before you
decide to purchase a policy.
If you select any variable investment options, your policy benefits will vary
based upon the returns earned by those variable investment options. The returns
may be zero or negative and you bear this risk.
Overview
The policy is a flexible premium variable universal life policy. Like
traditional life insurance, the policy provides an initial minimum death benefit
and cash benefits that you can access through loans, partial surrenders or a
full surrender. Unlike traditional life insurance, you may choose how to invest
your Account Value.
The policy allows you to make certain choices that will tailor the policy to
your needs. When you apply for the policy, we will ask you to make some of these
choices. You may also change your choices to meet your changing insurance needs.
Applying for a Policy
You may apply for a policy to cover a person, the "Insured," who is between
21-75 years of age.
Amount of life insurance benefits.
When you apply for a policy, you must select the Face Amount. The Face Amount
must be at least $50,000, for all Insureds.
When your coverage will become effective.
Your policy will become effective after:
o We accept your application.
o We receive an initial premium payment in an amount we determine.
o We have completed our review to our satisfaction.
Your right to cancel the policy.
Once you receive your policy, you should read the policy. You have the right to
cancel the policy for any reason within the later of:
o 45 days after you sign Part I of the application.
<PAGE>
o 10 days after you receive the policy. If required by the state where you
live, we will extend the time period to the number of days required by law.
Minimum initial premium.
Premium Payments
Before your policy is effective, you must pay the minimum initial premium. We
will calculate the initial minimum premium based 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 or riders applied for.
Planned periodic premium.
When you apply for a policy you will select the amount of premium payments you
plan to pay during the term of the policy. We will establish a minimum for this
amount. You will also select intervals when you plan to pay this premium amount,
such as monthly quarterly, semiannually, or annually.
Flexibility in premium payments.
During the term of the policy, you may pay premiums at any time and in any
amount, within limits. Thus, you are not required to pay the planned periodic
premium and you may make payments in addition to the planned periodic premium.
Account Value
We will measure your benefits under the policy by your Account Value. Your
Account Value will reflect:
o the premiums you pay;
o the returns earned by the subaccounts you select;
o the interest credited on amounts allocated to the Guaranteed Account;
o any loans or partial surrenders; and
o the policy charges and expenses we deduct.
<PAGE>
Death Benefit Selections.
Death Benefit
When you apply for a policy, you must select:
o The Face Amount.
o The death benefit option, which will be the manner in which we calculate
the death benefit for your policy.
o The tax qualification option, which will be the manner in which we test
your policy under the Code for meeting the definition of life insurance.
Death Benefit Options.
You may select from two death benefit options. They are:
Level Death Benefit Option.
o Level Death Benefit Option
The basic death benefit will be the greater of:
(1) The Face Amount; or
(2) Account Value on the date of death multiplied by the appropriate
minimum death benefit factor.
Increasing Death Benefit Option.
o Increasing Death Benefit Option
The basic death benefit will be the greater of:
(1) The Face Amount plus the Account Value; or
(2) Account Value on the date of death multiplied by the appropriate
minimum death benefit factor.
The minimum death benefit factors we use are based upon the tax qualification
option you select and the Attained Age, sex and smoker status of the Insured.
Tax Qualification Options.
You may select from two tax qualification options. They are:
o Guideline Premium/Cash Value Corridor Test. The minimum death benefit
factors are based upon the Code.
o Cash Value Accumulation Test. The minimum death benefit factors are based
upon the 1980 Commissioners Standard Ordinary Mortality Tables and a 4%
effective annual interest rate.
<PAGE>
Changes You May Make.
Within limits, you may change the death benefit option and, after the first
Policy Year, may change the Face Amount. You may not change the tax
qualification option.
Cash Benefits During the Life of the Insured
During the life of the Insured, your policy has cash benefits that you can
access within limits through loans, partial surrenders or a surrender.
o Loans -- You may borrow against your Net Cash Surrender Value at any time.
If your policy is a modified endowment contract, the Code may treat the
loan as a taxable distribution of income.
o Partial Surrenders -- You may withdraw part of your Account Value after the
first Policy Year. We may deduct an administrative charge. If you make a
partial surrender during the surrender charge period, we will deduct a
surrender charge. A partial surrender may result in a decrease in the Face
Amount of your policy depending upon your death benefit option.
o Surrender -- You may surrender your policy for its Net Cash Surrender
Value. If you surrender your policy during the surrender charge period, we
will deduct a surrender charge. A surrender will terminate your policy.
Expenses reduce your returns under the policy
Expenses of the Policy
We deduct expenses related to your policy. These deductions are made:
o from premium, your Account Value and the assets of the subaccounts, and
o upon certain transactions.
<PAGE>
Deduction From Premium -- we will deduct state premium taxes, federal taxes and
sales charges from your premium payments. Premium taxes are charges at a percent
of premium equal to state and local tax rates based on the Insured's place of
residence. DAC taxes will be deducted from Account Value at a rate imposed by
federal tax law, currently 1.25% of Premium. Total sales charges will not exceed
9% of premium.
Monthly Deductions From Account Value -- we will deduct on each Monthly
Anniversary charges for:
o The administration of your policy up to a maximum of $10 per month per
insured. There is an additional charge of up to $25 a month for the first
Policy Year and the first 12 months following an increase in Face Amount.
o The cost of insurance for your policy.
o The costs associated with mortality and expense risk charges. We will
deduct a daily charge from your Policy Account Value in the subaccounts for
assuming certain mortality and expense risks under the policy. This charge
does not apply to the amounts you allocate in the Guaranteed Account. The
current charge is at an annual rate of 0.75% of net assets in the
subaccounts. Although, we reserve the right to increase or decrease this
charge, it is guaranteed not to exceed 1.00% for the duration of your
policy. If your policy is issued at a charge of less than 1.00%, we will
notify you before we increase this charge. We may realize a profit from
this charge.
o The cost of any supplemental benefits and riders.
If you elect, we will take the monthly deductions from your Account Value
allocated to the Money Market Subaccount or Guaranteed Account. Otherwise, we
will take the monthly deductions from each subaccount on a pro rata basis.
Deductions Upon Certain Policy Transactions -- If you make a transaction, a
charge may apply. They are:
o Transfer Charge -- You may make twelve transfers each Policy Year free of
charge. Thereafter, we will deduct a fee of $25 per transfer from the
transferred amount.
<PAGE>
Administrative Charges for Partial Surrenders.
o Partial Surrenders -- We charge the lesser of $25 or 2% of the amount
surrendered for processing any withdrawal. In certain states the charge may
be the lesser of $25 or 2% of the amount surrendered.
Surrender Charges for Partial surrenders.
A partial surrender may also be subject to a surrender charge. A surrender
charge for partial surrenders is equal to a pro rata portion of the
surrender charge that would apply to a full surrender. This applies during
the first 14 Policy Years and for the first 14 years immediately following
an increase in Face Amount.
o Surrender -- If you request a full surrender during the first 14 Policy
Years, we may deduct a surrender charge based on the initial Face Amount.
If you request a surrender within 14 Policy 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.
Surrender Charge for Face Amount Decreases.
o Decrease in Face Amount -- We may also deduct a surrender charge from the
Account Value upon a decrease in Face Amount. If you request a decrease in
Face Amount during the first 14 Policy Years, we will deduct a surrender
charge based on the initial Face Amount. If you request a decrease within
14 years immediately following an increase in Face Amount, we will deduct a
surrender charge based on the increase in Face Amount.
Policy Charges and Deductions
Transaction Charges
Sales Charge -- not to exceed 9% of each premium payment.
DAC Tax Charge--1.25% of each premium payment.
Premium Tax Charge (1)-- depends on the state of residence.
Transfer Charge -- $25 for each transfer in excess of 12 each Policy Year
Surrender Charge -- during the first 14 Policy Years and the first years
immediately following an increase in Face Amount, there may be a surrender
charge. (2)
<PAGE>
Partial Surrender Administrative Charge
lesser of $25 or 2% of the amount surrendered
Account Value Charges (deducted monthly)
Cost of Insurance Charge (3)
Current COI rates will never exceed the 1980 Commissioners Standard Ordinary
Mortality Tables.
Monthly Expense Charge Per Policy
Current Charge - $7.50 Guaranteed Charge - $10.00
For fully underwritten business, there is an additional monthly administrative
charge during the first Policy Year or an increase in Face Amount currently at a
monthly rate of $20 per insured, guaranteed not to exceed $25 per insured per
policy month
Annual Separate Account Charges (deducted daily and shown as an annualized
percentage of average net assets)
Mortality and Expense Risk Charge.
Current Charge - .75% Guaranteed Charge - 1.00%
(1) We deduct a premium tax charge equal to the actual state tax rate from each
premium payment. Typical State and local premium tax rates currently range
from 2% to 2.5%.
(2) A policy's surrender charge is based on the Policy Year, issue age, sex and
smoker status of the Insured and the policy's Face Amount. If a policy were
surrendered in the ninth Policy Year, a 45-year old nonsmoking male with
$500,000 Face Amount policy, the surrender charge would be $7,800.00. For a
65-year-old nonsmoking male purchasing a $200,000 Face Amount policy, the
surrender charge premium would be $5,520.00. The lowest and highest maximum
surrender charge will range from $13.00 to $48.00 per $1,000 of Face
Amount. (See Appendix A for additional examples of surrender charges).
(3) Current and guaranteed cost of insurance charges are based on the issue age
(or attained age in the case of increase in Specified Amount), sex, rate
class of the Insured, and Policy Year. The current cost of insurance charge
will never exceed the guaranteed cost of insurance charge shown in the
policy. (See "Charges and Deductions - Cost of Insurance Charge.")
<PAGE>
Annual Portfolio Expenses
Before Waiver/Reimbursement
As of December 31, 1998
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 before waivers and/or
reimbursements, if applicable, for the year ended December 31, 1998, 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>
Management Other 12b-1 Total
Fees Expenses(1) Fees Expenses
<S> <C> <C> <C> <C>
Alliance Variable Product Series Fund(2)
Growth and Income Portfolio 0.63% 0.10% 0.00% 0.73%
Premier Growth Portfolio 1.00% 0.09% 0.00% 1.09%
Quasar Portfolio 1.00% 0.30% 0.00% 1.30%
Fidelity Variable Insurance Products Fund II(3)
VIP II Contrafund Portfolio 0.59% 0.11% 0.00% 0.70%
VIP II Index 500 Portfolio 0.24% 0.11% 0.00% 0.35%
Goldman Sachs Varibale Insurance Trust(4)
Capital Growth Fund 0.75% 1.03% 0.00% 1.78%
CORE U.S. Equity Fund 0.70% 2.13% 0.00% 2.83%
CORE Large Cap Growth Fund 0.70% 2.17% 0.00% 2.87%
CORE Small Cap Equity Fund 0.75% 3.17% 0.00% 3.92%
Global Income Fund 0.90% 2.40% 0.00% 3.30%
Growth and Income Fund 0.75% 1.94% 0.00% 2.69%
International Equity Fund 1.00% 1.97% 0.00% 2.97%
Mid Cap Value Fund 0.80% 0.57% 0.00% 1.37%
Morgan Stanley Dean Witter Universal Funds, Inc. (5)
Fixed Income Portfolio 0.40% 0.64% 0.00% 1.04%
Global Equity Portfolio 0.80% 0.83% 0.00% 1.63%
High Yield Portfolio 0.50% 0.65% 0.00% 1.15%
Money Market Portfolio 0.30% 0.47% 0.00% 0.77%
U.S. Real Estate Portfolio 0.80% 0.93% 0.00% 1.73%
Neuberger Berman Advisers Management Trust(6)
AMT Partners Portfolio 0.78% 0.06% 0.00% 0.84%
Templeton Variable Products Series Fund
TempletonDeveloping Markets Fund - Class 2(7) 1.25% 0.41% 0.25% 1.91%
TempletonInternational Fund - Class 2 0.69% 0.17% 0.25% 1.11%
</TABLE>
<PAGE>
Other Expenses
(1) Other expenses are based on the expenses outlined in the funds'
prospectuses
After Waivers/Reimbursement
(2) As a percentage of average daily net assets, "Total Operating Expenses"
after reimbursement by Alliance Capital Management L.P. for the period
ended December 31, 1998, were 1.06% for Premier Growth Portfolio and 0.95%
for Quasar Portfolio.
(3) Fidelity Management & Research Company agreed to reimburse a portion of VIP
II Index 500 and Contrafund Portfolio's expenses during the period. With
this reimbursement, "Management Fee," "Other Expenses" and "Total Operating
Expenses" are 0.24%, 0.04% and 0.28% for Index 500 and 0.59%, 0.07% and
0.66% for Contrafund, respectively.
(4) Each Fund's expenses are based on actual expenses for fiscal year ended
December 31, 1998 except with respect to Capital Growth Fund and Mid Cap
Equity Fund whose expenses are estimated due to the Funds being in
existence for less than 10 months. Goldman Sachs Asset Management and
Goldman Sachs Asset Management International have voluntarily agreed to
reduce or limit certain expenses (excluding management fees, taxes,
interest and brokerage fees, and litigation, indemnification and other
extraordinary expenses) to the extent such expenses exceed the percentage
stated in the table below (as calculated per annum) of each Fund's
respective average daily net assets. With these limitations described
above, "Other Expenses" and "Total Operating Expenses" are: Growth and
Income Fund, 0.15% and 0.90%; the CORE U.S. Equity Fund, 0.10% and 0.80%;
the CORE Large Cap Growth Fund, 0.10% and 0.80%; the CORE Small Cap Equity
Fund, 0.15% and 0.90%; the Capital Growth Fund, 0.15% and 0.90%; the Mid
Cap Value Fund, 0.15% and 0.95%; the International Equity Fund, 0.25% and
1.25%; and the Global Income Fund, 0.15% and 1.05%. The investment advisers
may discontinue or modify any limitations in the future at its discretion.
(5) 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 Money Market, 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 so such fees would not cause their respective "Total Operating
Expenses" to exceed those set forth in the table below.
<PAGE>
Portfolio Management Other Total Operating
Fee Expenses Expenses
Fixed Income 0.06% 0.64% 0.70%
High Yield 0.15% 0.65% 0.80%
Global Equity 0.32% 0.83% 1.15%
U.S. Real Eestate 0.17% 0.93% 1.10%
Money Market* 0.08% 0.47% 0.55%
* The Money Market Portfolio was not operational in 1998 "Total Fund
Operating Expenses" are based on estimates assuming the average daily net
assets of the Portfolio were not more than $50,000,000.
(6) Neuberger Berman Advisers Management Trust is divided into portfolios
("Portfolios"), each of which invests all of its net investable assets in a
corresponding series ("Series") of Advisers Management Trust. The figures
reported under "Investment Management and Administration Fees" include the
aggregate of the administration fees paid by the Portfolio and the
management fees paid by its corresponding Series. Similarly, "Other
Expenses" includes all other expenses of the Portfolio and its
corresponding Series.
(7) Class 2 shares of the portfolio have a distribution plan or "Rule 12B-1
Plan" which is described in the Templeton Funds' prospectus.
Expenses of the variable investment options also reduce your returns.
In addition, you will indirectly bear the costs of the investment management
fees and expenses paid from the assets of the portfolios you select.
Federal Tax Considerations
You should consider the impact of the Code.
Your purchase of, and transactions under, your policy may have tax consequences
that you should consider before purchasing the policy. You may wish to consult a
tax adviser. In general, the Life Insurance Proceeds will not be taxable income
to the Beneficiary. You will not be taxed as your Account Value increases. Upon
a distribution from your policy, however, you may be taxed on any increase in
policy Account Value.
<PAGE>
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Purchasing a Policy
- --------------------------------------------------------------------------------
Applying for a Policy
To purchase a policy, you must complete an application and submit it to us. You
must specify certain information in the application, including the Face Amount,
the death benefit option and supplemental benefit riders, if any. We may also
require information to determine if the Insured is an acceptable risk to us. We
may require a medical examination of the Insured and ask for additional
information.
Our age requirement for the Insured.
You may apply for a policy to cover a person who is at least 21 but 75 or
younger.
The minimum Face Amount.
The Face Amount must be at least $50,000, for each Insured.
We require a minimum initial premium.
We require that you pay a minimum initial premium before we will issue the
policy. You may pay the minimum initial premium when you submit the application
or at a later date.
We will not issue a policy until we have accepted the application. We reserve
the right to reject an application for any reason or "rate" an Insured as a
substandard risk.
When your coverage will be effective.
Your policy will become effective after:
o We accept your application.
o We receive an initial premium payment in an amount we determine.
o We have completed our review of your application to our satisfaction.
<PAGE>
Period to Examine and Cancel.
Your Right to Cancel the Policy
Once you receive your policy, you should read the policy. You have the right to
cancel the policy for any reason within the later of:
o 45 days after you sign Part I of the application; or
o 10 days after you received the policy. If required by the state where you
live, we will extend the time period to the number of days required by law.
This is your "Period to Examine and Cancel."
Your right to cancel also applies to the amount of any increase in Face Amount.
How to cancel your policy.
You may cancel the policy by returning it to our Administrative Office or to
your agent within the applicable time with a written request for cancellation.
We will refund you the premium paid on the policy. Thus, the amount we return
will not reflect the returns of the subaccounts you selected in your
application.
Premiums
The policy allows you to select the timing and amount of premium payments within
limits. Send premium payments to our Administrative Office.
All your premium payments must comply with our requirements.
Restrictions on Premiums. We may not accept any premium payment:
o If it is less than $50.
o If the premium would cause the policy to fail to qualify as a life
insurance contract as defined in Section 7702 of the Code, we will refund
any portion of any premium that causes the policy to fail. In addition, we
will monitor the policy and will attempt to notify you on a timely basis if
your policy is in jeopardy of becoming a modified endowment contract under
the Code.
o If the premium would increase the amount of our risk under your policy by
an amount greater than that premium amount. In such cases, we may require
satisfactory evidence of insurability before accepting that premium.
<PAGE>
Types of premium payments.
Minimum Initial Premium. We will calculate the minimum initial premium. The
amount is based on a number of factors, including the Age, sex and underwriting
class of the proposed Insured, the desired Face Amount and any supplemental
benefits or riders applied for.
We establish a minimum planned periodic premium.
Planned Periodic Premiums. When you apply for a policy, you select a plan for
paying level premiums at specified intervals. The intervals may be monthly,
quarterly, semi-annually or annually, for the life of the policy. We will
establish a minimum amount that may be used as the planned periodic premium. We
may recalculate this minimum amount if the Face Amount of the policy is
increased or decreased.
You are not required to pay premiums in accordance with this plan. Rather, you
can pay more or less than the planned periodic premium or skip a planned
periodic premium entirely.
At any time you can change the amount and frequency of planned periodic premium
by sending a written notice to our Administrative Office.
Additional Premiums. Additional premiums are premiums other than planned
premiums. Additional premiums may be paid in any amount and at any time subject
to the Code.
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 may be needed to
prevent your policy from terminating.
Paying premiums may not ensure that your policy remains in force.
Effect of Premium Payments. In general, paying all planned periodic premiums may
not prevent your policy from lapsing. In addition, if you fail to pay any
planned periodic premiums, your policy will not necessarily lapse.
Your policy will lapse only when the Net Cash Surrender Value on a Monthly
Anniversary is less than the amount of that date's monthly deduction. This could
happen if the Net Cash Surrender Value has decreased because:
o of the negative return or insufficient return earned by one or more of the
subaccounts you selected; or
o of any combination of the following -- you have outstanding loans, you have
taken partial surrenders, we have deducted policy expenses, or you have
made insufficient premium payments to offset the monthly deduction.
<PAGE>
Your policy will not terminate immediately after your Account Value is
insufficient.
Grace Period. In order for insurance coverage to remain in force, the Net Cash
Surrender Value on each Monthly Anniversary must be equal to or greater than the
total monthly deductions for that Monthly Anniversary. If it is not, you have a
Grace Period of 61 days during which the policy will continue in force. The
Grace Period begins on the Monthly Anniversary that the Net Cash Surrender Value
is less than the total monthly deductions then due. If we do not receive a
sufficient premium before the end of the Grace Period, the policy will terminate
without value.
We will send you a written notice within 30 days of the beginning of any Grace
Period. The notice will state:
o A Grace Period of 61 days has begun.
How much you must pay to prevent your policy from terminating.
o The amount of premium required to prevent your policy from terminating.
This amount is equal to the amount needed to increase the Net Cash
Surrender Value sufficiently to cover total monthly deductions for the next
three (3) Monthly Anniversaries.
If the Insured dies during the Grace Period, we will still pay the Life
Insurance Proceeds to the Beneficiary. The amount we pay will reflect a
reduction for the unpaid monthly deductions due on or before the date of the
Insured's death.
If your policy lapses with an outstanding loan you may have taxable income.
Premium Allocations. In the application, you specify the percentage of Net
Premiums to be allocated to each subaccount and Guaranteed Account. However,
until the period to examine and cancel expires, we invest this amount in the
Money Market Subaccount. On the first business day after the period expires, we
will reallocate your Account Value based on the premium allocation percentages
in your application.
For all subsequent premiums, we will use the allocation percentages you
specified in the application until you change them. You can change the
allocation percentages at any time by sending written notice to our
Administrative Office. The change will apply to all Premiums received with or
after your notice.
<PAGE>
Allocation Rules. Your allocation instructions must meet the following
requirements:
o Each allocation percentage must be a whole number; and
o Any allocation to a subaccount must be at least 5%; and the sum of your
allocations must equal 100%.
Crediting Premiums. Your initial Net Premium will be credited to your Account
Value as of the Policy Date. We will credit and invest subsequent Net Premiums
on the date we receive the premium or notice of deposit at our Administrative
Office.
If any premium requires us to accept additional risk, we will allocate this
amount to the Money Market Subaccount until we complete our underwriting. When
accepted, and at the end of the period to examine and cancel the policy, we will
allocate it in accordance with your allocation percentages.
- -------------------------------------------------------------------------------
The Investment Options
- -------------------------------------------------------------------------------
You may allocate your Account Value to:
o the subaccounts which invest in the variable investment options; or
o the Guaranteed Account.
Variable Investment Options
Under the policy, you may currently allocate your Account Value into any of the
available subaccounts. Each subaccount invests in shares of a corresponding
portfolio of a fund. These portfolios operate similarly to a mutual fund but are
only available through the purchase of certain insurance contracts. The funds
may also include other portfolios which are not available under the policy.
<PAGE>
Alliance Variable Products Series Fund
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.
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.
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 Variable Products Series Fund is managed by Alliance Capital
Management L.P.
Fidelity Variable Insurance Products Fund II
VIP II Contrafund Portfolio -- seeks long term capital appreciation.
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 S&P 500.
Fidelity Management & Research Company is the investment adviser for the
Fidelity Variable Insurance Products Fund II. Bankers Trust Company, a
wholly-owned subsidiary of Bankers Trust Corporation (formerly Bankers Trust of
New York Corporation), currently serves as the sub-adviser to VIP II Index 500
Portfolio.
Goldman Sachs Variable Insurance Trust
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.
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.
<PAGE>
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.
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.
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.
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.
Mid Cap Value 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).
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 Value Funds. Goldman Sachs Asset Management International
serves as investment adviser to the International Equity and Global Income
Funds.
<PAGE>
Morgan Stanley Dean Witter Universal Funds, Inc.
Fixed Income Portfolio -- seeks above average total return over a market cycle
of three to five years by investing primarily in a diversified portfolio of U.S.
government and agency securities, corporate bonds, foreign bonds,
mortgage-backed securities and other fixed income securities and derivatives.
Under normal circumstances, the portfolio generally invests at least 65% of its
total assets in investment grade fixed income securities, but may invest up to
20% of its assets in investment grade securities (commonly referred to as "high
yield securities" or "junk bonds").
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.
High Yield Portfolio -- seeks total return over a market cycle of three to five
years by investing primarily in a diversified portfolio of high yield securities
of U.S. and foreign issuers including corporate bonds and other fixed income
securities.
Money Market Portfolio -- seeks as high a level of current income as is
consistent with preservation of capital while maintaining high levels of
liquidity through investing in high quality money market instruments while
maintaining maturities of 397 days or less. While the portfolio is managed with
the goal of keeping its share price stable at $1.00, there can be no assurance
this goal will be achieved. The rate of income will vary from day to day,
generally reflecting short-term interest rates.
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 real estate investment trust and real
estate operating companies.
The investment adviser for Global Equity Portfolio and U.S. Real Estate
Portfolio is Morgan Stanley Dean Witter Investment 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.
<PAGE>
Neuberger Berman Advisers Management Trust
AMT Partners Portfolio -- seeks to achieve capital growth by investing mainly in
stocks of medium to large capitalization companies. The managers look for
well-managed companies whose stock prices are undervalued.
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.
The investments for the Portfolios are managed by the same portfolio manager(s)
who manage one or more other mutual funds that have similar names, investment
objectives and investment styles as the Portfolio. You should be aware that the
portfolio is likely to differ from the other mutual funds in size, cash flow
pattern and tax matters. Accordingly, the holdings and the performance of the
Portfolio can be expected to vary from those of the other mutual funds.
Shares of the separate Portfolios of Neuberger Berman Advisers Management Trust
are sold only through the currently effective prospectus and are not available
to the general public. Shares of the AMT Portfolios may be purchased only by
life insurance companies to be used with their separate accounts, which fund
variable annuity and variable life insurance policies.
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 Variable Products Series Fund
Templeton Developing Markets Fund - Class 2 seeks long-term capital
appreciation. The fund seeks to achieve this objective by investing primarily at
least 65% of its assets in equity securities of issuers in countries having
developing markets.
Templeton International Fund - Class 2 seeks long-term capital growth through a
flexible policy of investing in stocks and debt obligations
<PAGE>
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
Templeton Developing Markets Fund and Templeton Investment Counsel, Inc. serves
as the investment manager to the Templeton International Fund. Only Class 2
shares of Templeton Developing Markets Fund and Templeton International Fund are
available under the policy.
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.
Guaranteed Investment Option
Under the policy, you may currently allocate your Account Value to the
Guaranteed Account. In addition, if you request a loan, we will allocate part of
your Account Value to the Loan Account which is part of the Guaranteed Account.
We may treat each allocation and transfer separately for purposes of crediting
interest and making deductions from the Guaranteed Account.
Interest Credited On the Guaranteed Account. All of your Account Value held in
the Guaranteed Account will earn interest at a rate we determine in our sole
discretion. This rate will never be less than 4% per year compounded annually.
The Loan Account portion of your Account Value may earn a different interest
rate than the remaining portion of your Account Value in the Guaranteed Account.
Deductions from the Guaranteed Account. We will deduct any transfers, partial
surrenders or any policy expenses from the Guaranteed Account and your variable
investment options on a pro rata basis, unless you provide other directions. No
portion of the Loan Account may be used for this purpose.
<PAGE>
Payments from the Guaranteed Account. If we must pay any part
of the proceeds for a loan, partial surrender or full surrender from the
Guaranteed Account, we may defer the payment for up to six months
from the date we receive the written request. If we defer payment
from the Guaranteed Account for 30 days or more, we will pay interest on the
amount we deferred at a rate of 4% per year, compounded annually, until we make
payment.
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Investing Your Account Value
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The policy allows you to choose how to invest your Account Value. Your Account
Value will increase or decrease based on:
o The returns earned by the subaccounts you select.
o Interest credited on amounts allocated to the Guaranteed Account.
We will determine your policy benefits based upon your Account Value. If your
Account Value is insufficient, your policy may terminate. If the Net Cash
Surrender Value on a monthly anniversary is less than the amount of that date's
monthly deduction, the policy will be in default and a Grace Period will begin.
Determining the Account Value
On the policy Date, your Account Value is equal to your initial Net Premium. If
the Policy Date and the Issue Date are the same day, the Account Value is equal
to your initial premium, less the premium expenses and monthly deduction.
On each Valuation Date thereafter, your Account Value is equal to:
o Your Account Value held in the subaccounts; and
o Your Account Value held in the Guaranteed Account.
<PAGE>
Your Account Value will reflect:
o the premiums you pay;
o the returns earned by the subaccounts you select;
o the interest credited on amounts allocated to the Guaranteed Account;
o any loans or partial surrender; and
o the policy expenses we deduct.
Account Value in the Subaccounts. We measure your Account Value in the
subaccounts by the value of the subaccounts' accumulation units we credit to
your policy. When you allocate premiums or transfer part of your Account Value
to a subaccount, we credit your policy with accumulation units in that
subaccount. The number of accumulation units equals the amount allocated to the
subaccount divided by that subaccount's accumulation unit value for the
Valuation Date when the allocation is effected.
The number of subaccount accumulation units we credit to your policy will:
o increase when Net Premium is allocated to the subaccount, amounts are
transferred to the subaccount and loan repayments are credited to the
subaccount.
o decrease when the allocated portion of the monthly deduction is taken from
the subaccount, a loan is taken from the subaccount, an amount is
transferred from the subaccount, or a partial surrender, including the
partial surrender charges, is taken from the subaccount.
<PAGE>
Accumulation Unit Values. A subaccount's accumulation unit value varies to
reflect the return of the portfolio and may increase or decrease from one
Valuation Date to the next. We arbitrarily set the accumulation unit value for
each subaccount at $10 when the subaccount was established. Thereafter, the
accumulation unit value equals the accumulation unit value for the prior
Valuation Period multiplied by the Net Investment Factor for the current
Valuation Period.
Net Investment Factor. The net investment factor is an index we use to measure
the investment return earned by a subaccount during a Valuation Period. It is
based on the change in net asset value of the portfolio shares held by the
subaccount, and reflects any dividend or capital gain distributions on the
portfolio shares and the deduction of the daily mortality and expense risk
charge.
Guaranteed Account Value. On any Valuation Date, the Guaranteed Account portion
of your policy Account Value equals:
o the total of all Net Premium, allocated to the Guaranteed Account, plus
o any amounts transferred to the Guaranteed Account, plus
o interest credited on the amounts allocated and transferred to the
Guaranteed Account, less
o the amount of any transfers from the Guaranteed Account, less
o the amount of any partial surrender, including the partial surrender
charges, taken from the Guaranteed Account, and less
o the allocated portion of the monthly deduction deducted from the Guaranteed
Account, plus
o the amount of the Loan Account.
<PAGE>
If you take a loan, we transfer the amount of the loan to the Loan Account held
in the Guaranteed Account. The value of your Loan Account includes transfers to
and from the Loan Account as you take and repay loans 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.
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 you
surrendered the policy on that date.
The amount you would receive on a Surrender of your policy.
Net Cash Surrender Value. The Net Cash Surrender Value on a Valuation Date is
the amount you would receive on a surrender of your policy and is equal to:
o the Cash Surrender Value, less
o the outstanding loan on that date.
Transfers
You may transfer Account Value among the subaccounts and to the Guaranteed
Account after the period to examine and cancel. All transfer requests, except
for those made under the Dollar Cost Averaging or Automatic Rebalancing
programs, must satisfy the following requirements:
o Minimum amount of transfer -- You must transfer at least $250 or, the
balance in the subaccount or the Guaranteed Account, if less;
o Form of transfer request -- You must make a written request unless you have
established prior authorization to make telephone transfers or other means
we make available;
<PAGE>
o Transfers from the Guaranteed Account -- The maximum you may transfer in a
Policy Year is equal to 25% of your guaranteed Account value that is not in
the Loan Account on the most recent policy anniversary reduced by all
partial surrenders and transfers taken from the Guaranteed Account during
that Policy Year.
Date We Process Your Transfer Request. We must receive your transfer request at
our Administrative Office. We process transfers at the next price next computed
after date we receive your transfer request. We may, however, defer transfers
under the same conditions as described under Other Policy Provision --When
Proceeds Are Paid.
Number of Allowable Transfers/Transfer Fee. We do not currently limit the number
of transfers you may make. We will currently assess a $25 transfer charge,
however, for each transfer in excess of 12 during a Policy Year. All transfers
processed on the same business day will count as one transfer for purposes of
determining the number of transfers you have made in a Policy Year. We reserve
the right to increase or decrease the number of "free" transfers allowed in any
Policy Year.
Telephone Transfers. If you have completed an authorization form allowing
telephone transfers, you may request transfers by telephone. Upon receipt of a
telephone transfer authorization form, we will issue you a personal
identification number. We confirm all telephone transfers in writing. We will
confirm transfer requests received by fax before processing them. You should
review all confirmations to determine if there have been any unauthorized
transfers.
We will use reasonable procedures to confirm that telephone transfers requests
are genuine. We will not be liable for any losses due to unauthorized or
fraudulent instructions.
We reserve the right to suspend telephone transfer privileges at any time, for
some or all Policies.
Dollar Cost Averaging
Dollar cost averaging is a systematic method of investing at regular intervals.
By investing at regular intervals, the cost of the securities is averaged over
time and perhaps over various market cycles.
Under this program we will automatically transfer monthly a portion of your
Account Value. Unless you give us other instructions, we will allocate the
transfer as you have specified in your most current premium allocation
instructions. However, no less than 5% may be
<PAGE>
allocated to any one subaccount or to the Guaranteed Account. We will make the
transfers from the Money Market Subaccount so long the Account value is at least
$2,000. There is no charge for this option. Transfers in connection with the
dollar cost averaging and Automatic Rebalancing features will not count against
the 12 free transfers in a Policy Year.
Dollar Cost Averaging From a Subaccount. If you instruct us to make
the transfers from the Money Market Subaccount, you may request
that we transfer:
o A specified dollar amount -- we will automatically transfer this amount in
accordance with your most current premium allocation instructions for a
specified period until your Account Value in the transferring subaccount is
depleted.
o A specified percentage-- we will automatically transfer a specified
percentage of the amount in the transferring subaccount in accordance with
your most current premium allocation instructions for a specified period
until your Account Value in the transferring subaccount is depleted.
You may allocate additional amounts into the transferring subaccount at any
time.
We reserve the right to establish transfer limits and to restrict the
subaccounts from which transfers may be made.
When we will Process your Automatic Transfers. We will begin to process your
automatic transfers:
o On the first monthly anniversary following the end of the period to examine
and cancel if you requested the automatic transfers when you applied for
your policy
o On the second Monthly Anniversary following the receipt of your request at
our Administrative Office, if you elect the option after you applied for
the policy
We will stop processing automatic transfers if:
<PAGE>
o The funds in the transferring subaccount or the Guaranteed Account have
been depleted;
o We receive your written request at our Administrative Office to cancel
future transfers;
o We receive notification of death of the Insured; or
o Your policy goes into the Grace Period.
Dollar cost averaging may lessen the impact of market fluctuations on your
investment. Using dollar cost averaging does not guarantee investment gains or
protect against loss in a declining market.
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Death Benefits
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Life Insurance Proceeds
During the policy term, we will pay the Life Insurance Proceeds to the
Beneficiary after the Insured's death. To make payment, we must receive at our
Administrative Office:
o satisfactory proof of the Insured's death; and
o the policy.
The Beneficiary may receive the Life Insurance Proceeds in one lump sum or under
any other payment option.
Payment of Life Insurance Proceeds. We will pay the Life Insurance Proceeds
generally within seven days after we receive the information we require. We will
pay the Life Insurance Proceeds to the Beneficiary in one lump sum or, if
elected, under a payment option. Payment of the Life Insurance Proceeds may also
be affected by other provisions of the policy.
We will pay interest on the Life Insurance Proceeds from the date of the
Insured's death to the date of payment as required by applicable state law.
<PAGE>
Amount of Life Insurance Proceeds. We will determine the Life Insurance Proceeds
as of the date of the Insured's death. The Life Insurance Proceeds will equal:
o the death benefit amount determined according to the death benefit option
selected; plus
o any other benefits then due from riders to the policy; minus
o the outstanding loan, if any, and accrued loan interest; minus
o any overdue monthly deductions if the Insured dies during a Grace Period.
Death Benefit Options
You may select from two death benefit options. They are:
Level Death Benefit Option I.
o Option I
The basic death benefit will be the greater of:
(1) the Face Amount; or
(2) Account Value at date of death multiplied by the appropriate minimum
death benefit factor.
This death benefit option should be considered if you want to minimize your
cost of insurance.
Increasing Death Benefit Option II.
o Option II.
The basic death benefit will be the greater of:
(1) the Face Amount plus the Account Value; or
(2) Account Value at date of death multiplied by the appropriate minimum
death benefit factor.
This death benefit option should be considered if you want your death
benefit to increase with your policy's Account Value.
<PAGE>
Tax Qualification Options.
Section 7702 of the Code provides alternative testing procedures for meeting the
definition of life insurance. Each policy must qualify under one of these two
tests and you may select the test we use for ensuring your policy meets the
definition of life insurance.
Under both tests under Section 7702, there is a minimum death benefit required
at all times. This is equal to the Account Value multiplied by the appropriate
minimum death benefit factor. These factors depend on the tax qualification
option and may be based on the Attained Ages, sex and rate class of the Insured.
A table of the applicable factors is located in the policy.
The two tax qualification options are:
Guideline Premium/Cash Value Corridor Test.
o Guideline Premium/Cash Value Corridor Test.
Cash Value Accumulation Test.
o Cash Value Accumulation Test.
Once you have selected the tax qualification option for your policy, it may not
be changed.
Changes in Death Benefit Options
If you have selected the Level Death Benefit Option you may change to the
Increasing Death Benefit Option. You may also change from the Increasing Death
Benefit Option to the Level Death Benefit Option.
How to request a change.
You may change your Death Benefit Option by providing your agent with a written
request or by writing us at our Administrative Office. We may require that you
submit satisfactory evidence of insurability to us.
<PAGE>
If you request a change from the Level Death Benefit Option to the Increasing
Death Benefit Option, 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 a change if it would reduce the Face Amount below
the minimum Face Amount.
If you request a change from the Increasing Death Benefit Option to the Level
Death Benefit Option, 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 remain
the same on the date the change takes effect.
Once approved, we will issue new policy information pages and attach a copy of
your application for change. 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 changes that we determine
would cause the policy to fail to qualify as life insurance under our
interpretation of the Code.
The change will take effect on the next Monthly Anniversary that coincides with
or next follows the date we approve your request.
Changes in Face Amount
At any time after the first policy anniversary while the policy is in force you
may request a change in the Face Amount. We will not make a change in Face
Amount that causes your policy to fail to qualify as life insurance under of the
Code.
<PAGE>
Increases in Face Amount. Any request for an increase:
o Must be for at least $10,000.
o May not be requested in the same Policy Year as another request for an
increase.
o May not be requested after the Insured is Attained Age 85.
A written application must be submitted to our Administration Office along with
satisfactory evidence of insurability. You must return the policy so we can
amend it to reflect the increase. 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.
Decreases in Face Amount. Any request for a decrease:
o Must be at least $5,000.
o Must not cause the Face Amount after the decrease to be less than the
minimum Face Amount at which we would issue a policy.
o And, during any one of the first five (5) Policy Years, the Face
Amount may not be decreased by more than 10% of the initial Face
Amount. 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.
Consequences of a Change in Face Amount. 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 modified endowment
contract.
<PAGE>
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Cash Benefits During the Insured's Life
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During the life of the Insured, your policy has cash benefits which you may
access within limits by taking loans, partial surrenders or a surrender.
Loans
You may request a loan against your policy at any time while the policy has a
Net Cash Surrender Value. We limit the minimum and maximum amount of loan you
may take.
o Maximum Loan Amount
- After the First Policy Year -- The maximum loan amount is 90% of
your Net Cash Surrender Value.
How to request a loan.
You must submit a written request for a loan to the Administrative Office. L
oans will be processed as of the date we receive the request at our
Administrative Office. Loan proceeds generally will be sent to you within seven
days.
Interest. We charge interest daily on any outstanding loan at a declared annual
rate not in excess of 8%. The maximum net cost (the difference between the rate
of interest we charge on loans and the amount we credit on the equivalent amount
held in the Loan Account) of a loan is 2% per year. Interest is due and payable
at the end of each Policy Year while a 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 loan.
<PAGE>
Loan Account. You may direct us to take an amount equal to the loan proceeds and
any amount attributed to unpaid interest from any subaccount or from the
Guaranteed Account. Otherwise, we will withdraw this amount from each subaccount
on a pro rata basis. We transfer this amount to the Loan Account in the
Guaranteed Account.
When a loan is repaid, an amount equal to the repayment will be transferred from
the Loan Account to the subaccounts and Guaranteed Account in accordance with
your allocation percentages in effect at the time of repayment.
Effect of a Loan. A 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 loan is outstanding, the effect could be favorable
or unfavorable.
In addition, loans from modified endowment contracts may be treated for tax
purposes as distributions of income.
If the Life Insurance Proceeds become payable while a loan is outstanding, the
outstanding loan will be deducted in calculating the Life Insurance Proceeds.
If the outstanding loan exceeds the 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.
<PAGE>
Outstanding Loan. The outstanding loan on a Valuation Date equals:
o All loans that have not been repaid (including past due unpaid interest
added to the loan), plus
o accrued interest not yet due.
Loan Repayment. 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.
Partial Surrender
Requirements for Partial Surrender.
We will not allow a partial surrender during the first Policy Year or during the
first 12 months following an increase in Face Amount. We limit the number of
partial surrenders you may make to two per year. We may limit the minimum amount
of partial surrenders.
o Maximum Partial Surrender Amount -- Up to a maximum of 90% of your policy's
Net Cash Surrender Value except that the partial surrender must be at least
$500 and may not cause the Face Amount to be less than the required minimum
Face Amount.
o Minimum Partial Surrender Amount -- $500.
How to request a partial surrender.
In order to make a partial surrender you must submit a written request to our
Administrative Office. We will reduce your Account Value by the partial
surrender amount plus any applicable charges. When you request a partial
surrender, you may direct us to take the requested amount from any subaccount or
from the Guaranteed Account. If the Guaranteed Account or subaccount value is
insufficient to withdraw the amount requested, we will withdraw the difference
from the remaining subaccounts on a pro rata basis unless you have provided
specific instructions to withdraw the amount from one or several subaccounts.
We will process partial surrender requests at the price next computed after we
receive your written request at our Administrative Office. We will generally pay
partial surrenders within seven days.
<PAGE>
Expenses for Partial Surrender. We will deduct the applicable surrender charge
on a partial surrender. 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"). Currently, we
assess a processing charge for each withdrawal of the lesser of $25 or 2% of the
amount surrendered.
Effect of Partial Surrender on Your Face Amount. The Face Amount of your policy
will also be reduced by the partial surrender amount if the current death
benefit option at the time of surrender is Option I.
We will reduce the Face Amount 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.
No partial surrender may be made that would reduce the Face Amount below the
minimum Face Amount.
If we issued the policy under a corporate owned arrangement, a partial surrender
will be applied prorata over all Insureds under the policy.
Partial surrenders from your policy may have tax consequences.
Surrendering the Policy for Net Cash Surrender Value
You may surrender your policy in full 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. We will process a
surrender request as of the date we receive your written request and all
required documents. Your surrender request generally will be paid within seven
days. The Net Cash Surrender Value may be taken in one sum or it may be applied
to a payment option. Your policy will terminate and cease to be in force if it
is surrendered for one sum. It cannot later be reinstated.
<PAGE>
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Payment Options for Benefits
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The policy offers a wide variety of optional ways of receiving proceeds payable
under the policy, such as on a surrender or death, 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.
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Expenses of the Policy
- --------------------------------------------------------------------------------
Periodically, we will deduct expenses related to your policy. We will deduct
these:
o from premium, Account Value and from subaccount assets; and
o upon certain transactions.
The amount of these expenses are described in your policy as either guaranteed
or current. We will never charge more than the guaranteed amount. We may in our
discretion deduct on a current basis less than the guaranteed amount.
<PAGE>
Deduction From Premium
Deduction from Premium -- From each premium we will deduct state premium taxes,
federal deferred acquisition cost ("DAC") taxes, and sales charges, if any.
We deduct for premium taxes at an explicit percent of premium equal to state and
local tax rates based on the Insured's place of residence. A typical state
premium tax is in the range of 2% to 2.5% of premium.
DAC taxes are also based on premium. We will deduct DAC taxes from your Account
Value at the time premium is received at a rate equal to 1.25% of premium.
In place of the lump sum deduction described above for premium and DAC taxes, we
may offer optional methods of payment at the time you apply for a policy.
We may deduct a sales charge from each premium and we may also deduct a sales
charge from Account Value. A deduction from Account Value may be either in place
of a deduction from premium or in combination with a deduction from premium. We
will not deduct a sales charge from your Account Value without your agreement to
do so. The total sales charge will never exceed 9% of premium.
<PAGE>
The sales charge partially compensates Us for the expense of selling and
distributing the policy, printing prospectuses, preparing sales literature and
paying for other promotional activities. Some of these expenses or other
administrative expenses may be assumed by an employer or group sponsor under
some employer-owned, trust- owned, or sponsored arrangements. If so, in our sole
discretion, we may offer the policy with no sales charge or a reduced sales
charge.
Monthly Deductions From Account Value
On the Policy Date and each Monthly Anniversary thereafter, we make a 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.
We will deduct charges on each Monthly Anniversary for:
o The administration of your policy.
o The cost of insurance for your policy.
o The acquisition and underwriting costs of your policy.
Administrative Charge. This charge compensates us for administrative expenses
associated with the policy. These expenses relate to premium billing and
collection, record keeping, processing claims, loans, policy changes, reporting
and overhead costs, processing applications and establishing policy records.
This charge will be no more than $10 per month for all Policy Years. We may
reduce this charge. There may be an additional monthly administrative charge
during the first Policy Year and the 12 months after an increase in Face Amount
per Insured. This charge will not exceed $25 a month per Insured.
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 month to month. 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.
<PAGE>
Net Amount at Risk.
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.
However, if the Life Insurance Proceeds is a percentage of the Account Value of
this Certificate, then the net amount at risk is the Death Benefit Amount minus
the amount in the Certificate Account at that time.
Rate Classes for Insureds. We currently rate Insureds in one of
following basic rate classifications based on our underwriting:
o nonsmoker;
o smoker;
o substandard for those involving a higher mortality risk.
At our discretion we may offer this policy on a guaranteed issue basis.
We place the Insured in a rate class when we issue the policy based on our
underwriting determination. 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 a lower guaranteed 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 a higher guaranteed 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.
<PAGE>
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 rate 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).
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 our 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 risk class are generally lower than rates for an Insured of the same
age and sex in a smoker risk class. Cost of insurance rates (whether guaranteed
or current) for an Insured in a nonsmoker or smoker risk class are generally
lower than rates for an Insured of the same age and sex and smoking status in a
substandard risk class.
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.
<PAGE>
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.
Acquisition Expense. We will make a deduction from your policy Account Value for
expenses associated with the acquisition and underwriting costs to issue your
policy. This charge will vary based on the Insured's Age, sex and rate class.
Deduction From Subaccount Assets
Mortality and Expense Risk Charge. We deduct a daily charge from your Account
Value in the subaccounts for assuming certain mortality and expense risks under
the policy. This charge does not apply to the amounts you allocate to the
Guaranteed Account. The current charge is at an annual rate of 0.75% of net
assets. The guaranteed charge is at an annual rate of 1.00% of the subaccount
assets. Although, the charge may be increased or decreased at the sole
discretion of the Company, it is guaranteed not to exceed an annual rate of
1.00% of your Account Value in the subaccounts for the duration of a policy.
The mortality risk we assume is that the Insured under a policy may die sooner
than anticipated, and therefore we 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 all Policies and the Separate
Account will exceed the amounts realized from the administrative charges
assessed against all Policies.
Deductions Upon Policy Transactions
Transfer Charge. We currently impose a $25 transfer charge on any transfer of
Account Value among the subaccounts and the Guaranteed Account in excess of the
12 free transfers permitted each Policy Year. If the charge is imposed, we will
deduct it from the amount requested to be transferred before allocation to the
new subaccount(s) and shown in the confirmation of the transaction.
Surrender Charge. 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.
<PAGE>
Surrender Charge Calculation. In general, the surrender charge is based on the
premiums you pay. The Surrender Charge 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 Age, sex and underwriting class; and
(3) is a factor based on the the Policy Year when the surrender occurs as
described in the following table:
Policy
Year Factor
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%
<PAGE>
A table of surrender charge factors per $1,000 of Face Amount is shown in
Appendix A.
Surrender Charge Based On An Increase Or Decrease In Face Amount. An increase in
Face Amount of the policy may 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. We may deduct a partial surrender charge:
o upon a partial surrender; and
o if you decrease your policy's Face Amount.
We deduct the partial surrender charge from the subaccounts or the Guaranteed
Account in the same proportion as we deduct the amounts for your partial
surrender.
Partial Surrender Charge Due to Decrease in Face Amount. We deduct an amount
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 reserve the right to
deduct an administrative charge upon a partial surrender of up to $25
or 2% of amount surrendered, whichever is less.
<PAGE>
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 our opinion results in expense
savings. For purchases made by our officers, directors and employees, those of
an affiliate, or any individual, firm, or a company that has executed the
necessary agreements to sell the policy, and members of the immediate families
of such officers, directors, and employees, we 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.
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Other Policy Provisions
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Right to Exchange
You may exchange this policy to 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,
we will notify you and give you information on the options available.
<PAGE>
When an exchange is requested, we accomplish 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 new 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 (unless otherwise specified by state law) 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, 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 (unless
otherwise specified by state law) 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 shall be
those which would be purchased at the then current cost of insurance charge for
the correct age and sex.
Other Changes. At any time we may make such changes in the policy as are
necessary to assure compliance at all times with the definition of life
insurance prescribed by the Code or to make the policy conform with any law or
regulation issued by any government agency to which it is subject.
<PAGE>
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 required documents. Other than the Life Insurance Proceeds,
which are 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
Securites Exchange and Commission, or the Securites Exchange and Commission
declares that an emergency exists; or
(2) the SEC by order permits postponement of payment for your protection.
In addition we may delay making deductions from the Guaranteed Account.
As to amount allocated to Our Guaranteed Account, We may defer payment of any
surrender or loan amount for up to six months after We receive a request for it.
We will allow interest, at a rate of at least 4% a year, on any Net Cash
Surrender Value payment derived from Our Guaranteed Account that We defer for 10
days or more after We receive a request for it.
Reports to Owners
You will receive a confirmation within seven days of the transaction of:
o the receipt of any premium;
o any change of allocation of premiums;
o any transfer between subaccounts;
<PAGE>
o any loan, interest repayment, or loan repayment;
o any partial surrender;
o any return of premium necessary to comply with applicable maximum
receipt of any premium payment;
o any exercise of your right to cancel;
o an exchange of the policy;
o full surrender of the policy.
Within 30 days after each policy anniversary we will send you an annual
statement. The statement will show the Life Insurance Proceeds currently
payable, and the current Account Value, Cash Surrender Value, and the
Outstanding Loan. The statement will also show premiums paid, all charges
deducted during the Policy Year, and all transactions. We will also send to you
annual and semi-annual reports of the Separate Account.
Assignment
You may assign the policy 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 this
assignment form at our Administrative Office. We assume no responsibility for
the validity or sufficiency of any assignment. Any assignment or pledge of a
modified endowment contract as collateral for a loan may result in a taxable
event.
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 years (unless
otherwise specified by state law) from the end of the Grace Period;
<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
months, calculated from the effective date of reinstatement; and (iii) the
premium expense 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 loan which existed on the date the policy ended.
The effective date of the reinstatement of policy benefits will be the next
Monthly Anniversary which coincides with or next follows the date we approve
your request. From the required payment we will deduct the premium expenses. The
Account Value, 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.
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Performance Information
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From time to time we may advertise the "total return" and the "average annual
total return" of the subaccounts and the portfolios. Both total return and
average total return figures are based on historical earnings and are not
intended to indicate future
performance.
<PAGE>
"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 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 set forth in Appendix B reflects the total of the
income generated by the portfolio net of the total portfolio operating expenses,
(i.e., management fees and other portfolio 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.
<PAGE>
We 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.
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.
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Federal Income Tax Considerations
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The following summarizes the current federal income tax law that applies to life
insurance in general. This summary does not cover all situations. This summary
is based upon our understanding of the current federal income tax laws and
current interpretations by the Internal Revenue Service. We cannot predict
whether the Code will change. You should speak to a competent tax adviser to
discuss how the purchase of a policy and the transactions you make under the
policy will impact your federal tax liability.
<PAGE>
Tax Status of the Policy
A policy has certain tax advantages when it is treated as a "life insurance
contract" under the Code. We believe that the policy meets the definition of a
life insurance contract under Section 7702 of the Code. You bear the risk that
the policy may not meet the definition of a life insurance contract. You should
consult your own tax adviser to discuss these risks.
The Company
We are taxed as a life insurance company under the Code. For federal tax
purposes, the Separate Account and its operations are considered to be part of
our operations and are not taxed separately.
Diversification and Investor Control
The Code requires that we diversify the investments underlying variable
insurance contracts. If the investments are not properly diversified and any
remedial period has passed, Section 817(h) of the Code provides in general the
contract is immediately disqualified from treatment as a life insurance contract
for federal income tax purposes. Disqualification of the policy as a life
insurance contract would result in taxable income to you at the time that we
allocate any earnings to your policy. You would have taxable income even though
you have not received any payments under the policy.
To the extent that any segregated asset account with respect to a variable life
insurance contract invests exclusively in securities issued by the U.S.
Treasury, the diversification standard is satisfied. A segregated asset account
underlying life insurance contracts such as the policy will also meet the
diversification requirements if, as of the close of each quarter:
<PAGE>
o the regulated investment companies in which the segregated asset
account invest satisfy the diversification requirements described
below; and
o 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.
Alternatively, the diversification requirements may be met for each if:
o no more than 55% of the value of the total assets of the
portfolio is represented by any one investment;
o no more than 70% of the value of the total assets of the
portfolio is represented by any two investments;
o no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and
o no more than 90% of the value of the total assets of the portfolio is
represented by any four investments.
There are several ways for investments to meet the diversification requirements.
Generally, each United States government agency or instrumentality is treated as
a separate issuer under these rules.
All securities of the same issuer are generally treated as a single investment.
We intend that each portfolio in which the subaccounts invest will be managed by
its investment adviser in compliance with these diversification requirements.
<PAGE>
A variable life insurance policy could fail to be treated as a life insurance
contract for tax purposes if the owner of the policy has such control over the
investments underlying the policy (e.g., by being able to transfer values among
subaccounts with only limited restrictions) so as to be considered the owner of
the underlying investments. There is some uncertaintly on this point because no
guidelines have been issued by the Treasury Department. If and when guidelines
are issued, we may be required to impose limitations on your rights to control
investment designations under the policy. We do not know whether any such
guidelines will be issued or whether any such guidelines would have retroactive
effect. We, therefore, reserve the right to make changes that we deem necessary
to insure that the policy qualifies as a life insurance contract.
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 has not issued final
regulations 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 contract.
With respect to a policy issued on the basis of a standard rate class, we
believe 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 you pay the full
amount of premiums permitted under the policy.
If subsequent guidance issued under Section 7702 leads us to conclude that a
policy does not (or may not) satisfy Section 7702, we will take appropriate and
necessary steps for the purpose of bringing the policy into compliance, but we
can give no assurance that it will be possible to achieve that result. We
expressly reserve the right to restrict policy transactions if we determine such
action to be necessary to qualify the policy as a life insurance contracts under
Section 7702.
<PAGE>
Tax Treatment of Policy Benefits In General
This discussion assumes that each policy will qualify as a life insurance
contract for federal income tax purposes under Section 7702. The Life Insurance
Proceeds under the policy should be excluded from the taxable gross income of
the Beneficiary. In addition, the increases in a policy's Account Value should
not be taxed until there has been a distribution from the policy such as a
surrender, partial surrender or lapse with loan.
Pre-Death Distribution
The tax treatment of any distribution you receive before the insured's death
depends on whether the policy is classified as a modified endowment contract.
Policies Not Classified as Modified Endowment Contracts
o If you surrender the policy or allow it to lapse, you will not be
taxed except to the extent the amount you receive is in excess of the
premiums you paid less the untaxed portion of any prior withdrawals.
For this purpose, you will be treated as receiving any portion of the
cash surrender value used to repay policy debt. The tax consequences
of a surrender may differ if you take the proceeds under an income
payment settlement option.
o Generally, you will be taxed on a withdrawal to the extent the amount
you receive exceeds the premiums you paid for the policy less the
untaxed portion of any prior withdrawals. However, under some limited
circumstances, in the first 15 Policy Years, all or a portion of a
withdrawal may be taxed if the cash value exceeds the total premiums
paid less the untaxed portions of any prior withdrawals, even if total
withdrawals do not exceed total premiums paid.
o Extra premiums for optional benefits and riders generally do not count
in computing the premiums paid for the policy for the purposes of
determining whether a withdrawal is taxable.
o Loans you take against the policy are ordinarily treated as debt and
are not considered distributions subject to tax.
<PAGE>
Modified Endowment Contracts
o The rules change if the policy is classified as a modified endowment
contract ("MEC"). The policy could be classified as a MEC if premiums
substantially in excess of scheduled premiums are paid or a decrease
in the face amount of insurance is made (or a rider removed). The
addition of a rider or an increase in the face amount of insurance may
also cause the policy to be classified as a MEC. The rules on whether
a policy will be treated as a MEC are very complex and cannot be fully
described in this summary. You should consult a qualified tax adviser
to determine whether a policy transaction will cause the policy to be
classified as a MEC. We will monitor your policy and will take steps
reasonably necessary to notify you on a timely basis if your policy is
in jeopardy of becoming a MEC.
o If the policy is classified as a MEC, then amounts you receive under
the policy before the insured's death, including loans and
withdrawals, are included in income to the extent that the cash value
before surrender charges exceeds the premiums paid for the policy
increased by the amount of any loans previously included in income and
reduced by any untaxed amounts previously received other than the
amount of any loans excludable from income. An assignment of a MEC is
taxable in the same way. These rules also apply to pre-death
distributions, including loans, made during the two- year period
before the time that the policy became a MEC.
o Any taxable income on pre-death distributions (including full
surrenders) is subject to a penalty of 10% unless the amount is
received on or after age 59 1/2, on account of your becoming disabled
or as a life annuity. It is presently unclear how the penalty tax
provisions apply to the Policies owned by businesses.
o All MECs issued by us to you during the same calendar year are treated
as a single policy for purposes of applying these rules.
<PAGE>
Interest on 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 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 loan, you 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 death benefit option, a 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. We are 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. You are not permitted to
elect out of withholding if you do not provide a social security number or other
taxpayer identification number. Special withholding rules apply to payments made
to non-resident aliens.
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, you should examine the
applicable tax rules relating to such plans and life insurance thereunder in
consultation with a qualified tax adviser.
<PAGE>
Possible Charge for the Company's Taxes
At the present time, we do not deduct any charges for any federal, state or
local income taxes. However, we do currently deduct charges for state and
federal premium based taxes and the federal DAC tax. We reserve the right in the
future to deduct a charge for any such tax or other economic burden resulting
from the application of the tax laws that we determine to be properly
attributable to the Separate Account or to the policy.
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Distribution of the Policy
- --------------------------------------------------------------------------------
The policy is sold by licensed insurance agents, where the policy may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc.
The policy will be distributed through the principal underwriter for the
Separate Account, AIG Equity Sales Corp. ("AIGESC") 80 Pine Street, New York,
New York, an affiliate of ours. AIGESC may also enter into selling agreements
with other broker dealers that will offer
the policy.
Commissions may be paid to registered representatives based on premiums paid for
Policies sold. Other expense reimbursements, allowances, and overrides may also
be paid. Registered representatives who meet certain productivity and
profitability standards may be eligible for additional compensation. Additional
payments may be made for administrative or other services not directly related
to the sale of the Policies.
Other Policies Issued by the Company
The Company may offer other policies similar to those offered herein.
<PAGE>
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About Us and the Accounts
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We are a member of the American International Group, Inc.
The Company
AIG Life Insurance Company is a stock life insurance company initially organized
under the laws of Pennsylvania and reorganized under the laws of Delaware. We
were incorporated in 1962. We provide a full range of individual and group life,
disability, accidental death and dismemberment policies and annuities. We are a
subsidiary of American International Group, Inc., which is a 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.
Year 2000.
The Year 2000 issue arises from computer programs being written using two digits
rather than four digits to define the applicable year. This could result in a
failure of the information technology systems (IT systems) and other equipment
containing imbedded technology (non-IT systems) in the year 2000, causing
disruption of our operations and of our lessees, vendors, or business partners.
We have developed a plan to address the Year 2000 issue as it affects our
internal IT and non-IT systems, and to assess Year 2000 issues relating to third
parties with whom we have critical relationships.
Our plan for addressing internal systems includes:
o an assessment of internal IT and non-IT systems and equipment affected
by the Year 2000 issue;
o definition of strategies to address affected systems and equipment;
o remediation of identified affected systems and equipment; and
o internal certification that each internal system is Year 2000
compliant.
<PAGE>
We have remediated, tested and returned to production substantially all of our
internal IT systems. We continue to remediate and test internal non-IT systems
and expect to complete our remediation by mid-1999.
We have also initiated formal communications with respect to the Year 2000 issue
to those third parties which have significant interaction with us. Currently, we
are unable to ascertain whether all such third parties will successfully address
the Year 2000 issue, particularly those third parties outside the United States
where it is believed that remediation efforts relating to the Year 2000 issue
may be less advanced. While we expect to have no interruption of operations as a
result of internal IT and non-IT systems, significant uncertainties remain about
the effect on us of third parties who are not Year 2000 compliant. We will
continue to monitor third party Year 2000 issue readiness to determine whether
additional or alternative measures may be necessary. Such measures may include
selecting alternate third parties or other actions designed to mitigate the
effects of a third party's lack of preparedness. There can be no assurance that
unresolved Year 2000 issues of third parties will not have a material adverse
impact on our results of operations, financial condition or liquidity. We are
considering the effects of Year 2000 related failures on our business and, as
the most reasonably likely worst case scenarios become more clearly identified,
we will develop appropriate contingency plans.
The funds like other third parties, may not have resolved their Year 2000 issues
that may have a material adverse impact on your contract values as well as our
operations and we cannot assure that it will. Please refer to Year 2000
discussions in each fund's prospectus.
The Separate Account
We established the Separate Account as a separate investment account on June 5,
1986. It is used to support the policy and other variable life insurance
policies, and used for other permitted purposes. The Separate Account is
registered with the Securities and Exchange Commission as a unit investment
trust under the federal securities laws and qualifies as a "separate account"
within the meaning of these laws.
Although you may have allocated your Account Values to the subaccounts, you do
not own these assets. You only own your policy.
We own the assets in the Separate Account. The Separate Account is divided into
subaccounts. The Separate Account may include other subaccounts which are not
available under the policy.
<PAGE>
Income, gains and losses, realized or unrealized, of a subaccount are credited
to or charged against the subaccount without regard to any of our other income,
gains or losses. Assets equal to the reserves and other contract liabilities
with respect to each subaccount are not chargeable with liabilities arising out
of any of our other businesses or separate accounts. 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.
Rights we have reserved.
We have reserved certain rights regarding the Separate Account. We will exercise
these rights only in compliance with all applicable regulatory requirements. We
have the right to:
o Change, add or delete designated investment options.
o Add or remove subaccounts.
o Withdraw assets of a class of policies to which the policy belongs from a
subaccount and put them in another subaccount.
o Combine any two or more subaccounts.
o Register other separate accounts or deregister the Separate Account with
the Securities and Exchange Commission.
o Run the Separate Account under the direction of a committee, and discharge
such committee at any time.
o Restrict or eliminate any voting rights of Owners, or other persons who
have voting rights as to the Separate Account.
o 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
investments that are legal, as determined by our counsel.
We will not change an investment adviser or any investment of a subaccount of
our Separate Account unless approved by the Commissioner of Insurance of
Delaware or deemed approved in accordance with such law or regulation. Any
approval process is on file with the insurance supervisory official of the
jurisdiction in which this policy is delivered.
<PAGE>
If any change we make results in a material change in the underlying investments
of a subaccount, we will notify you of such change. If you have value in that
subaccount:
o We will transfer it at your written direction from that subaccount (without
charge) to another subaccount or to the Guaranteed Account, and
o You may then change your premium allocation percentages.
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 portfolios.
However, as required by law, we will vote shares held in the subaccounts at
regular and special meetings of shareholders of the portfolios in accordance
with instructions we receive from Owners with Account Value in the subaccounts.
If allowed by law or required by law we may vote shares of the portfolios
without obtaining instructions or in disregard to instructions we have received.
If we ever disregard voting instructions, we will advise you of that action and
our reasons for such action in the next semiannual report.
The Guaranteed Account
The Guaranteed Account is an account within the general account of the company.
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.
We have not registered:
o interests in the Guaranteed Account under the Securities Act of 1933, and
o the Guaranteed Account as an investment company.
The staff of the Securities and Exchange Commission has not reviewed our
disclosure on the Guaranteed Account. Our disclosure regarding the Guaranteed
Account must comply with generally applicable provisions of the federal
securities laws relating to the accuracy and completeness of statements made in
a prospectus.
<PAGE>
- --------------------------------------------------------------------------------
Our Directors and Executive Officers
- --------------------------------------------------------------------------------
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.
Principal Business
Affiliations and
Principal Occupations
Name and Address Office During Past Five Years
Michele L. Abruzzo Director, Sr. Exec. Senior Vice President
80 Pine Street Vice President of American International
New York, NY 10005 Life Assurance Company of
New York
Paul S. Bell Director, Sr. Vice Sr. Vice President, Actuary
One Alico Plaza President Chief Actuary of American International
600 King Street Life Assurance Company of
Wilmington, DE 19801 New York
Maurice R. Greenberg Director Director, Chairman and Chief
70 Pine Street Executive Officer of AIG,
New York, NY 10270 Inc.
Howard E. Gunton, Jr. Chief Financial Officer, Sr. Vice President and
One Alico Plaza Senior Vice President Comptroller of American
600 King Street International Life Assurance
Wilmington, DE 19801 Company of New York
Edward Easton Matthews Director, Senior Vice Vice Chairman of
70 Pine Street President Investments and Financial
New York, NY 10270 Services of AIG, Inc.
Jerome T. Muldowney Director, Senior Vice Managing Director of AIG
175 Water Street President Investments Corp.,
New York, NY 10038 Senior Vice President of
American International Life
Assurance Company of New
York
Michael Mullin Chief Operating Officer, Vice President of American
One Alico Plaza Senior Vice President International Life Assurance
600 King Street Company of New York
Wilmington, DE 19801
<PAGE>
Robinson K. Nottingham Director, Chairman of Chairman of the Board and
70 Pine Street the Board Chief Executive Officer of
New York, NY 10270 American International Life
Insurance Company
(ALICO)
Nicholas A. O'Kulich Director, Vice Chairman, Vice President, Senior Vice
70 Pine Street Treasurer President, Life Insurance of
New York, NY 10270 AIG, Inc.
Howard Ian Smith Director Director, Executive Vice
70 Pine Street President, Chief Financial
New York, NY 10270 Officer and Comptroller of
AIG, Inc.
Edmund Sze-Wing Tse Director Vice Chairman, Life
AIA Building Insurance of AIG, Inc.
70 Pine Street
New York, NY 10270
Elizabeth M. Tuck Secretary Secretary and Assistant
70 Pine Street Secretary of AIG, Inc. and
New York, NY 10270 certain affiliates
Gerald Walter Wyndorf Director, Chief Exec. Executive Vice President of
80 Pine Street Officer and President American International Life
New York, NY 10038 Assurance Company of New
York
<PAGE>
- --------------------------------------------------------------------------------
Other Information
- --------------------------------------------------------------------------------
State Regulation
We are subject to the laws of Delaware governing insurance companies and to
regulation by the Delaware Insurance Department. We file an annual statement in
a prescribed form with the Insurance Department each year covering our operation
for the preceding year and our final condition as of the end of such year.
Regulation by the Insurance Department includes periodic examinations to
determine our policy liabilities and reserves so that the Insurance Department
may certify the items are correct. Our 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, we are subject to regulation under the insurance laws
of other jurisdictions in which we may operate.
Legal Proceedings
There are no legal proceedings to which the Separate Account or the principal
underwriter is a party. We are engaged in various kinds of routine litigation
which, in our opinion, are not of material importance in relation to our total
capital and surplus.
Experts
The financial statements which appear in this prospectus have been audited by
PricewaterhouseCoopers LLP, independent certified public accountants, as stated
in its 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.
<PAGE>
Published Ratings
We may occasionally publish in advertisements, sales literature and reports the
ratings and other information assigned to us 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 rating organization's opinion of our
financial strength and should not be considered as bearing on the investment
performance of assets held in the Separate Account.
The ratings are not recommendations to purchase our 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 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.
<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, 1998, 1997 AND 1996
<PAGE>
Report of Independent Accountants
To the Stockholders and Board of Directors
AIG Life Insurance Company
In our opinion, the accompanying balance sheets and the related statements of
income, capital funds, cash flows, and comprehensive income present fairly, in
all material respects, the financial position of AIG Life Insurance Company (a
wholly-owned subsidiary of American International Group, Inc.) at December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
February 5, 1999
<PAGE>
AIG LIFE INSURANCE COMPANY
BALANCE SHEETS
(in thousands)
<TABLE>
December31, December 31,
1998 1997
Assets
<S> <C> <C>
Investments and cash:
Fixed maturities:
Bonds available for sale, at market value $ 4,238,045 $ 2,984,255
(cost: 1998 - $4,081,008: 1997 - $2,826,088)
Equity securities:
Common stock
(cost: 1998 - $901: 1997 - $1,381) 2,410 2,775
Preferred stock
(cost: 1998 - $18,250 : 1997 - $250) 19,338 250
Mortgage loans on real estate, net 468,342 350,823
Real estate, net of accumulated
depreciation of $4,351 in 1998; and $4,740 in 1997 13,002 15,940
Policy loans 1,010,969 1,496,837
Other invested assets 81,916 56,219
Short-term investments 163,704 667,912
Cash 4,788 5,132
-------------- -------------
Total investments and cash 6,002,514 5,580,143
Amounts due from related parties 17,330 11,446
Investment income due and accrued 94,029 85,135
Premium and insurance balances receivable-net 56,583 46,937
Reinsurance assets 72,044 60,744
Deferred policy acquisition costs 167,840 118,535
Federal income tax receivable 4,207 -
Separate and variable accounts 1,971,280 1,204,643
Other assets 6,228 4,855
-------------- -------------
Total assets $ 8,392,055 $ 7,112,438
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
December 31, December 31,
1998 1997
Liabilities
<S> <C> <C>
Policyholders' funds on deposit $ 4,472,854 $ 3,745,902
Future policy benefits 1,002,244 749,918
Reserve for unearned premiums 21,468 24,108
Policy and contract claims 200,193 199,069
Reserve for commissions, expenses and taxes 25,702 16,103
Insurance balances payable 56,263 47,372
Amounts due to related parties 4,119 3,945
Federal income tax payable - 1,684
Deferred income taxes 56,519 37,498
Separate and variable accounts 1,971,280 1,204,643
Minority interest 5,987 6,067
Other liabilities 59,189 621,585
------------- ------------
Total liabilities 7,875,818 6,657,894
----------- -----------
Capital funds
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
Retained earnings 236,521 181,887
Accumulated other comprehensive income 121,549 114,490
------------ -------------
Total capital funds 516,237 454,544
------------ ------------
Total liabilities and capital funds $ 8,392,055 $ 7,112,438
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
(in thousands)
<TABLE>
Years ended December 31,
1998 1997 1996
--------- -------------- -------------
<S> <C> <C> <C>
Revenues:
Premiums $ 616,964 $ 437,650 $ 394,480
Net investment income 457,148 381,868 504,661
Realized capital (losses) (334) (3,025) (51)
------------- ------------- -------------
Total revenues 1,073,778 816,493 899,090
--------- ----------- ----------
Benefits and expenses:
Benefits to policyholders 272,368 188,969 189,933
Increase in future policy benefits
and policyholders' funds on deposit 547,100 397,481 495,529
Acquisition and insurance expenses 168,075 163,533 161,841
---------- ----------- ----------
Total benefits and expenses 987,543 749,983 847,303
---------- ----------- ----------
Income before income taxes 86,235 66,510 51,787
----------- ------------ ----------
Income taxes (benefits):
Current 16,218 20,059 25,087
Deferred 15,220 3,964 (5,486)
----------- ------------- -----------
Total income taxes 31,438 24,023 19,601
----------- ----------- ----------
Net income before minority interest 54,797 42,487 32,186
Minority interest income (loss) (163) (128) 154
------------ ------------- ------------
Net income $ 54,634 $ 42,359 $ 32,340
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF CAPITAL FUNDS
(in thousands)
<TABLE>
Years ended December 31,
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Common Stock
Balance at beginning of year $ 4,884 $ 4,884 $ 4,884
------------ ----------- -----------
Balance at end of year 4,884 4,884 4,884
------------ ----------- -----------
Additional paid-in capital
Balance at beginning of year: 153,283 123,283 123,283
Capital contribution - 30,000 -
--------------- ---------- --------------
Balance at end of year 153,283 153,283 123,283
--------- --------- ---------
Retained earnings
Balance at beginning of year 181,887 139,528 107,188
Net income 54,634 42,359 32,340
---------- ---------- -----------
Balance at end of year 236,521 181,887 139,528
--------- --------- ----------
Accumulated other comprehensive income
Balance at beginning of year 114,490 62,814 87,673
Unrealized appreciation (depreciation) of
investments - net of reclassification
adjustments 10,860 79,497 (50,245)
Deferred income tax (expense) benefit on
changes (3,801) (27,821) 25,386
----------- ---------- ----------
Balance at end of year 121,549 114,490 62,814
--------- --------- ----------
Total capital funds $ 516,237 $ 454,544 $ 330,509
========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
Years ended December 31,
1998 1997 1996
----------- ---------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 54,634 $ 42,359 $ 32,340
--------- ----------- ------------
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 250,810 121,325 72,151
Change in premiums and insurance balances
receivable and payable -net (753) (5,346) 11,782
Change in reinsurance assets (11,301) 157,710 (10,627)
Change in deferred policy acquisition costs (49,305) (34,248) (23,662)
Change in investment income due and accrued (8,894) 22,133 135,480
Realized capital losses 334 3,025 51
Change in current and deferred income taxes -net 9,330 2,689 (7,133)
Change in reserves for commissions, expenses and taxes 9,599 13,243 (21,274)
Change in other assets and liabilities - net (61,575) 69,582 12,733
----------- ----------- ------------
Total adjustments 138,245 350,113 169,501
--------- ---------- -----------
Net cash provided by operating activities 192,879 392,472 201,841
--------- ---------- -----------
Cash flows from investing activities:
Cost of fixed maturities at market, sold 282,756 23,816 40,098
Cost of fixed maturities at market, matured or redeemed 340,435 153,963 124,621
Cost of equity securities sold 1,039 3,676 2,607
Cost of real estate sold 2,585 - -
Realized capital gains 1,666 1,975 (51)
Purchase of fixed maturities (1,865,768) (804,262) (524,245)
Purchase of equity securities (18,559) (1,750) (1,678)
Purchase of real estate (341) (413) (881)
Mortgage loans granted (202,484) (87,690) (74,590)
Repayments of mortgage loans 83,035 29,298 16,416
Change in policy loans 485,868 377,124 1,087,765
Change in short-term investments 504,208 (567,876) 102,616
Change in other invested assets (11,706) 6,294 11,002
Other - net (27,908) 11,917 (38)
---------- ----------- --------------
Net cash (used in) provided by investing activities (425,174) (853,928) 783,642
---------- ----------- ----------
Cash flows from financing activities:
Change in policyholders' funds on deposit 231,951 430,808 (980,835)
Proceeds from capital contribution - 30,000 -
--------------- ----------- -----------------
Net cash provided by (used in) financing activities 231,951 460,808 (980,835)
--------- ---------- ------------
Change in cash (344) (648) 4,648
Cash at beginning of year 5,132 5,780 1,132
------------ ------------ -------------
Cash at end of year $ 4,788 $ 5,132 $ 5,780
=========== ============ =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AIG LIFE INSURANCE COMPANY
STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
Years ended December 31,
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Comprehensive income
Net income $ 54,634 $ 42,359 $ 32,340
------------ ------------ -----------
Other comprehensive income
Unrealized appreciation (depreciation) of
investments - net of reclassification
adjustments 10,860 79,497 (50,245)
Changes due to deferred income tax benefit
(expense) on changes and
future policy benefits (3,801) (27,821) 25,386
------------ ------------- -----------
Other comprehensive income 7,059 51,676 (24,859)
------------ ------------ -----------
Comprehensive income $ 61,693 $ 94,035 $ 7,481
=========== =========== ============
</TABLE>
See accompanying notes to financial statements.
<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 their estimated life.
Common and non-redeemable preferred stocks are carried at current
market value. Dividend income is generally recognized when receivable.
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 as a separate
component of comprehensive income, net of deferred income taxes and
future policy benefits in capital funds currently.
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 as a
separate component of comprehensive income, net of deferred income
taxes in capital funds currently.
(c) Income Taxes: The Company joins in a consolidated federal income tax
return with the Parent and its domestic subsidiaries. The Company and
the Parent have a written tax allocation agreement whereby the Parent
agrees not to charge the Company a greater portion of the consolidated
tax liability than would have been paid by the Company if it had filed
a separate return. Additionally, the Parent agrees to reimburse the
Company for any tax benefits arising out of its net losses within
ninety days after the filing of that consolidated tax return for the
year in which these losses are utilized. Deferred federal income taxes
are provided for temporary differences related to the expected future
tax consequences of events that have been recognized in the Company's
financial statements or tax returns.
(d) Premium Recognition and Related Benefits and Expenses: Premiums on
traditional life insurance and life contingent annuity contracts are
recognized when due. Revenues for universal life and investment-type
products consist of policy charges for the cost of insurance,
administration, and surrenders during the period. Premiums on accident
and health insurance are reported as earned over the contract term.
The portion of accident and health premiums which is not earned at the
end of a reporting period is recorded as unearned premiums. Estimates
of premiums due but not yet collected are accrued. Policy benefits and
expenses are associated with earned premiums on long-duration
contracts resulting in a level recognition of profits over the
anticipated life of the contracts.
Policy acquisition costs for traditional life insurance products are
generally deferred and amortized over the premium paying period of the
policy. Deferred policy acquisition costs and policy initiation costs
related to universal life and investment-type products are amortized
in relation to expected gross profits over the life of the policies
(see Note 3).
The liability for future policy benefits and policyholders' contract
deposits is established using assumptions described in Note 4.
(e) Policy and Contract Claims: Policy and contract claims include amounts
representing: (1) the actual in-force amounts for reported life claims
and an estimate of incurred but unreported claims; and (2) an
estimate, based upon prior experience, for accident and health
reported and incurred but unreported losses. The methods of making
such estimates and establishing the resulting reserves are continually
reviewed and updated and any adjustments resulting therefrom are
reflected in income currently.
(f) Separate and Variable Accounts: These accounts represent funds for
which investment income and investment gains and losses accrue
directly to the policyholders. Each account has specific investment
objectives, and the assets are carried at market value. The assets of
each account are legally segregated and are not subject to claims
which arise out of any other business of the Company.
<PAGE>
1. Summary of Significant Accounting Policies - (continued)
(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) Accounting Standards:
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" (FASB 130) and Statement of Financial Accounting
Standards No. 131 "Disclosure about Segments of an Enterprise and
Related Information" (FASB 131).
FASB 130 establishes standards for reporting comprehensive income and
its components in a full set of general purpose financial statements.
FASB 130 was effective for the Company as of January 1, 1998. FASB 130
had no impact on the Company's results of operations, financial
condition or liquidity.
FASB 131 establishes standards for the way companies are required to
disclose information about their operating segments in annual
financial statements and in interim financial statements. FASB 131
establishes, where practicable, standards with respect to geographic
areas, among other things. Certain descriptive information is also
required. FASB 131 has been adopted for the year ended December 31,
1998 by the Parent, whose operations are conducted principally through
three business segments: General Insurance, Life Insurance and
Financial Services. All operations of the Company fall within the Life
Insurance segment.
In February 1998, FASB issued Statement of Financial Accounting
Standards No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (FASB 132). This statement requires revised
disclosures about pension and other postretirement benefit plans and
does not change the measurement or recognition of these plans. Also,
FASB 132 requires additional information on changes in the benefit
obligations and fair values of plan assets. FASB 132 was effective for
the year ended December 31, 1998 and has been adopted by the Parent.
Information regarding the pension and postretirement benefit plans is
not computed on a subsidiary basis, but rather on a consolidated basis
for all subsidiaries of the Parent and, accordingly, is not presented
herein.
In June 1998, FASB issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities"
(FASB 133). This statement requires the Company to recognize all
derivatives in the consolidated balance sheet measuring these
derivatives at fair value. The recognition of the change in the fair
value of a derivative depends on a number of factors, including the
intended use of the derivative. The Company believes that the impact
of FASB 133 on its results of operations, financial condition or
liquidity will not be significant. FASB 133 is effective for the year
commencing January 1, 2000.
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AcSEC) issued
Statement of Position (SOP) 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." This statement
provides guidance for the recording of a liability for
insurance-related assessments. The statement requires that a liability
be recognized in certain defined circumstances. The Company believes
that the impact of this statement on its results of operations,
financial condition or liquidity will not be significant. This
statement is effective for the year commencing January 1, 1999.
<PAGE>
1. Summary of Significant Accounting Policies - (continued)
(h) Accounting Standards - (continued):
In October 1998, AcSEC issued SOP 98-7, "Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk." This statement identifies several methods of
deposit accounting and provides guidance on the application of each
method. This statement classifies insurance and reinsurance contracts
for which the deposit method is appropriate as contracts that (i)
transfer only significant timing risk, (ii) transfer only significant
underwriting risk, (iii) transfer neither significant timing nor
underwriting risk, and (iv) have an indeterminate risk. The Company
believes that the impact of this statement on its results of
operations, financial condition or liquidity will not be significant.
This statement is effective for the year commencing January 1, 2000.
Restatement of previously issued financial statements is not
permitted.
(i) The financial statements for 1997 and 1996 have been reclassified to
conform to the 1998 presentation.
2. Investment Information
(a) Statutory Deposits: Securities with a carrying value of $2,448,000 and
$2,454,000 were deposited by the Company under requirements of
regulatory authorities as of December 31, 1998 and 1997, respectively.
(b) Net Investment Income: An analysis of net investment income is as
follows (in thousands):
<TABLE>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Fixed maturities $284,267 $200,097 $164,548
Equity securities 622 58 219
Mortgage loans 36,464 28,714 22,797
Real estate 2,406 2,254 2,125
Policy loans 120,927 148,555 314,020
Cash and short-term investments 9,346 3,582 2,924
Other invested assets 8,015 2,380 2,549
--------- --------- ---------
Total investment income 462,047 385,640 509,182
Investment expenses 4,899 3,772 4,521
--------- --------- ---------
Net investment income $457,148 $381,868 $504,661
======= ======= =======
</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 1998, 1997 and 1996 are summarized below (in thousands):
<TABLE>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Net realized (losses) gains on investments:
Fixed maturities $ - $ - $ (79)
Equity securities 84 1,975 28
Mortgage loans (2,000) (5,000) -
Real estate 1,561 - -
Other invested assets 21 - -
--------- ----------- ------------
Net realized gains $ (334) $ (3,025) $ (51)
======= ======= ==========
Change in unrealized appreciation (depreciation) of investments:
Fixed maturities $ (1,131) $77,422 $(58,659)
Equity securities 1,203 (626) 1,517
Other invested assets 10,788 2,701 6,897
--------- ------- ---------
Net change in unrealized appreciation
(depreciation) of investments $ 10,860 $79,497 $(50,245)
======== ====== =======
</TABLE>
Proceeds from the sale of investments in fixed maturities during 1998, 1997
and 1996 were $282,756,000, $23,816,000, and $40,098,000, respectively.
During 1998, 1997 and 1996, gross gains of $0, $0, and $176,000,
respectively, and gross losses of $0, $0, and $255,000, respectively, were
realized on dispositions of fixed maturity investments.
During 1998, 1997 and 1996, gross gains of $84,000, $1,975,000, and
$28,000, respectively, were realized on disposition of equity securities.
(d) Market Value of Fixed Maturities and Unrealized Appreciation of
Investments: At December 31, 1998 and 1997, unrealized appreciation of
investments in equity securities (before applicable taxes) included gross
gains of $2,854,000 and $1,530,000 and gross losses of $257,000 and
$136,000, respectively.
The amortized cost and estimated market values of investments in fixed
maturities at December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
Gross Gross
1998 Amortized Unrealized Unrealized Market
---- Cost Gains Losses Value
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government and government
agencies and authorities $ 50,617 $ 19,220 $ 10 $ 69,827
States, municipalities and
political subdivisions 370,790 23,962 4,961 389,791
Foreign governments 30,431 7,201 - 37,632
All other corporate 3,629,170 156,316 44,691 3,740,795
--------- ---------- --------- ---------
Total fixed maturities $4,081,008 $ 206,699 $ 49,662 $4,238,045
========= ========== ========= =========
</TABLE>
<PAGE>
2. Investment Information - (continued)
<TABLE>
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>
The amortized cost and estimated market value of fixed maturities,
available for sale at December 31, 1998, 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>
Estimated
Amortized Market
Cost Value
<S> <C> <C>
Due in one year or less $ 139,701 $ 144,918
Due after one year through five years 1,097,111 1,136,468
Due after five years through ten years 1,538,510 1,586,346
Due after ten years 1,305,686 1,370,313
---------- ---------
$ 4,081,008 $4,238,045
========= =========
</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, 1998 and 1997, the market value of the CMO
portfolio was $522,844,000 and $445,739,000, respectively; the
estimated amortized cost was approximately $504,077,000 in 1998 and
$426,760,000 in 1997. The Company's CMO portfolio is readily
marketable. There were no derivative (high risk) CMO securities
contained in the portfolio at December 31, 1998.
(f) Fixed Maturities Below Investment Grade: At December 31, 1998 and
1997, the fixed maturities held by the Company that were below
investment grade had an aggregate amortized cost of $344,609,000 and
$242,573,000, respectively, and an aggregate market value of
$327,217,000 and $244,417,000, 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 capital
funds at December 31, 1998 (in thousands):
Other Invested Assets:
Equity Linked Investors II, L.P. $ 60,271
<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).
Years ended December 31,
1998 1997 1996
Balance at beginning of year $118,535 $84,287 $60,625
Acquisition costs deferred 71,430 50,927 43,534
Amortization charged to income (22,125) (16,679) (19,872)
-------- -------- ------
Balance at end of year $167,840 $118,535 $84,287
======= ======= ======
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, 1998 and 1997 follows (in thousands):
<TABLE>
1998 1997
----------- ----------
<S> <C> <C>
Future Policy Benefits:
Long duration contracts $ 987,503 $ 740,969
Short duration contracts 14,741 8,949
----------- ------------
$1,002,244 $ 749,918
========= ==========
Policyholders' funds on deposit:
Annuities $ 1,385,203 $ 1,265,490
Universal life 184,460 149,202
Guaranteed investment contracts (GICs) 669,035 379,049
Corporate owned life insurance 2,229,843 1,948,558
Other investment contracts 4,313 3,603
------------ ------------
$ 4,472,854 $ 3,745,902
============ ============
</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 10.1 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 7.1 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 1 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 1998 was 7.0 percent.
(iv) The universal life funds, exclusive of corporate owned life
insurance business, have credited interest rates of 5.6 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 1998, 1997 and 1996. 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>
Years ended December 31,
-------------------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- ------------------------
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 $ 30,183 35.0% $ 23,279 35.0% $ 18,125 35.0%
Prior year federal
income tax benefit 268 0.3 (6) - (51) (0.1)
State income tax 599 0.7 673 1.0 850 1.6
Other 388 0.5 77 0.1 677 1.3
-------- ------- ---------- ----- --------- -----
Actual income tax expense $31,438 36.5% $ 24,023 36.1% $ 19,601 37.8%
====== ====== ======= ==== ======= ====
</TABLE>
<PAGE>
5. Income Taxes - (continued)
(b) The components of the net deferred tax liability were as follows (in
thousands):
<TABLE>
Years ended December 31,
1998 1997
<S> <C> <C>
Deferred tax assets:
Adjustment to life reserves $ 59,903 $ 51,992
Adjustments to mortgage loans and
investment income due and accrued 4,913 4,250
Adjustment to policy and contract claims 5,456 8,816
Other 2,406 4,292
---------- ---------
72,678 69,350
--------- --------
Deferred tax liabilities:
Deferred policy acquisition costs $ 55,308 $ 37,559
Unrealized appreciation on investments 65,445 61,644
Bond discount 4,911 4,843
Other 3,533 2,802
---------- -----------
129,197 106,848
-------- ---------
Net deferred tax liability $ 56,519 $ 37,498
========= =========
</TABLE>
(c) At December 31, 1998, 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 1998, 1997, and 1996 amounted to $21,184,000,
$20,311,000, and $25,412,000, 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. Contributions totaling
$10,963,000 have been made through December 31, 1998.
During 1998, the Company entered into a partnership agreement with Sankaty
High Yield Asset Partners, L.P. The agreement requires the Company to make
capital contributions totaling $2,500,000. Contributions totaling
$1,868,000 have been made through December 31, 1998.
<PAGE>
7. Fair Value of Financial Instruments
(a) Statement of Financial Accounting Standards No. 107 "Disclosures about
Fair Value of Financial Instruments" (FASB 107) requires disclosure of
fair value information about financial instruments for which it is
practicable to estimate such fair value. These financial instruments
may or may not be recognized in the balance sheet. In the measurement
of the fair value of certain of the financial instruments, quoted
market prices were not available and other valuation techniques were
utilized. These derived fair value estimates are significantly
affected by the assumptions used. FASB 107 excludes certain financial
instruments, including those related to insurance contracts.
The following methods and assumptions were used by the Company in
estimating the fair value of the financial instruments presented:
Cash and short term investments: The carrying amounts reported in the
balance sheet for these instruments approximate fair values.
Fixed maturities: Fair values for fixed maturity securities carried at
market value are generally based upon quoted market prices. For
certain fixed maturities for which market prices were not readily
available, fair values were estimated using values obtained from
independent pricing services.
Equity securities: Fair values for equity securities were based upon
quoted market prices.
Mortgage and policy loans: Where practical, the fair values of loans
on real estate were estimated using discounted cash flow calculations
based upon the Company's current incremental lending rates for similar
type loans. The fair value of the policy loans were not calculated as
the Company believes it would have to expend excessive costs for the
benefits derived. Therefore, the fair value of policy loans was
estimated at carrying value.
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>
1998 Fair Carrying
Value Amount
<S> <C> <C>
Cash and short-term investments $ 168,492 $ 168,492
Fixed maturities 4,238,045 4,238,045
Equity securities 21,748 21,748
Mortgage and policy loans 1,500,447 1,479,311
Policyholders' funds on deposit $ 4,554,644 $ 4,472,854
1997 Fair Carrying
Value Amount
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
</TABLE>
<PAGE>
8. Capital Funds
(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 $35,350,000 during 1998, however, no
dividends were paid during the year.
(b) The Company's capital funds as determined in accordance with statutory
accounting practices was $298,047,000 at December 31, 1998 and
$285,350,000 at December 31, 1997. Statutory net income amounted to
$28,789,000, $35,350,000 and $47,074,000 for 1998, 1997 and 1996,
respectively.
(c) During 1997, the Company received a $30,000,000 surplus contribution
from American International Group Inc., the parent.
(d) Statement of Accounting Standards No. 130 "Comprehensive Income" (FASB
130) was adopted by the Company effective January 1, 1998. FASB 130
establishes standards for reporting comprehensive income and its
components as part of capital funds. The reclassification adjustments
with respect to available for sale securities were $(334,000),
$(3,025,000) and $(51,000) for December 31, 1998, 1997 and 1996,
respectively.
9. Employee Benefits
(a) The Company participates with its affiliates in a qualified,
non-contributory, defined benefit pension plan which is administered
by the Parent. All qualified employees who have attained age 21 and
completed twelve months of continuous service are eligible to
participate in this plan. An employee with 5 or more years of service
is entitled to pension benefits beginning at normal retirement age 65.
Benefits are based upon a percentage of average final compensation
multiplied by years of credited service limited to 44 years of
credited service. 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, 1998, 1997 and 1996 were approximately $272,000,
$373,000, and $400,000, 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, 1998 by
$100,000,000.
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 unfunded.
(b) The Parent also sponsors a voluntary savings plan for domestic
employees (a 401(k) plan), which, during the three years ended
December 31, 1998, 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.
<PAGE>
9. Employee Benefits - (continued)
(c) In addition to the Parent's defined benefit pension plan, the Parent
and its subsidiaries provide a post-retirement benefit program for
medical care and life insurance. Eligibility in the various plans is
generally based upon completion of a specified period of eligible
service and reaching a specified age.
(d) The Parent applies APB Opinion 25 "Accounting for Stock issued to
Employees" and related interpretations in accounting for its stock
based compensation 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, 1998, the
future minimum lease payments under operating leases were as follows
(in thousands):
Year Payment
1999 $ 4,251
2000 2,980
2001 2,530
2002 2,380
2003 1,870
Remaining years after 2003 1,571
-------
Total $ 15,582
Rent expense approximated $4,450,000, $3,881,000, and $4,263,000 for
the years ended December 31, 1998, 1997 and 1996, 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>
Percentage
December 31, 1998 of Amount
Assumed
Gross Ceded Assumed Net to Net
<S> <C> <C> <C> <C> <C>
Life Insurance in Force $53,884,853 $19,921,930 $ 896,285 $34,859,208 2.6%
============= ========== ======== ==========
Premiums:
Life 184,487 54,134 2,022 132,375 1.5%
Accident and Health 155,199 82,614 142,878 215,463 66.3%
Annuity 269,126 - - 269,126 -
------------ ----------------- -------------- ------------
Total Premiums $ 608,812 $ 136,748 $ 144,900 $ 616,964 23.5%
============ =========== ======== ============
Percentage
of Amount
December 31, 1997 Assumed
Gross Ceded Assumed Net to Net
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%
============ ============== ======== ============
</TABLE>
(b) The maximum amount retained on any one life by the Company is
$1,000,000.
(c) Reinsurance recoveries, which reduced death and other benefits,
approximated $111,580,000, $100,029,000, and $54,456,000,
respectively, for each of the years ended December 31, 1998, 1997 and
1996.
The Company's reinsurance arrangements do not relieve the Company from
its direct obligation to its insureds.
<PAGE>
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 1998 amounted to
$1,237,000 and $1,000, respectively. Premium income and commission
ceded for 1997 amounted to $1,251,000 and $1,000, respectively.
Premium income and commission ceded to affiliates amounted to
$1,345,000 and $0 for the year ended December 31, 1996. Premium income
and ceding commission expense assumed from affiliates aggregated
$131,771,000 and $31,584,000, respectively, for 1998, compared to
$110,529,000 and $24,853,000, respectively, for 1997, and $103,885,000
and $27,609,000, respectively for 1996.
(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, 1998, 1997 and 1996, the Company was
charged $40,417,000, $37,846,000 and $28,277,000, respectively, for
expenses attributed to the Company but incurred by affiliates. During
the same period, the Company received reimbursements from affiliates
aggregating $23,132,000, $18,134,000 and $17,598,000, 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 to the Company from Delaware American Life Insurance
Company.
(d) During 1996, the Company purchased 1,500,000 shares of AIG Life
Ireland, LTD., a subsidiary.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of
AIG Life Insurance Company
Variable Account II
In our opinion, the accompanying statements of assets and liabilities of AIG
Life Insurance Company Variable Account II (comprising twenty-seven subaccounts,
hereafter collectively referred to as "Variable Account II") and the related
statements of operations and changes in net assets present fairly, in all
material respects, the financial position of Variable Account II at December 31,
1998, and the results of its operations for the year then ended and the changes
in its net assets for each of the two years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the management of Variable Account II; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
March 12, 1999
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments at Market Value:
Shares Cost Market Value
------------------------------------------------------------------------
------------------------------------------------------------------------
<S> <C> <C> <C>
Aim
Capital Appreciation Portfolio 7,967.361 $ 174,945 $ 200,777
International Equity Portfolio 12,467.656 236,877 244,616
Alliance
Conservative Investors Portfolio 2,351.573 31,263 32,995
Global Bond Portfolio 688.066 8,257 8,547
Global Dollar Government Portfolio 21.880 212 222
Growth Portfolio 103,752.036 2,269,574 2,827,243
Growth & Income Portfolio 114,967.436 2,371,168 2,510,891
Growth Investors Portfolio 11,980.789 170,031 195,648
Money Market Portfolio 20,485.370 20,484 20,484
Premier Growth Portfolio 4,897.459 135,406 151,967
Technology Portfolio 42,154.382 625,961 808,100
Total Return Portfolio 140.114 2,418 2,530
Quasar Portfolio 29,073.531 378,222 323,880
U.S. Government High Grade Portfolio 78.903 967 968
Utility Income Portfolio 53.953 967 1,020
Dreyfus
Small Company Stock Portfolio 16,436.564 244,881 248,028
Stock Index Portfolio 83,498.512 2,317,307 2,715,365
Zero Coupon 2000 Portfolio 1,086.434 13,465 13,579
Fidelity
Asset Manager Portfolio 43,714.023 749,687 793,844
Contrafund Portfolio 12,145.716 259,365 296,842
Growth Portfolio 67,940.819 2,451,577 3,048,504
High Income Portfolio 22,836.942 281,130 263,309
Investment Grade Bond Portfolio 16,104.772 202,456 208,718
Money Market Portfolio 2,748,418.390 2,748,419 2,748,419
Overseas Portfolio 18,964.028 376,478 380,231
Van Eck
Worldwide Emerging Markets Portfolio 4,148.930 26,887 29,539
Worldwide Hard Assets Portfolio 3,756.723 47,156 34,560
Weiss,Peck & Greer
Tomorrow Long Term Portfolio 6,383.661 54,490 58,921
Tomorrow MediumTerm Portfolio 509.549 4,670 4,805
Tomorrow Short Term Portfolio 638.247 6,677 6,727
---------------------- -----------------------
Total Investments $ 16,211,397 18,181,279
Total Assets $ 18,181,279
=======================
Contract Owners' Equity $ 18,181,279
-----------------------
Total Equity $ 18,181,279
=======================
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
STATEMENT OF OPERATIONS
For The Year Ended December 31, 1998
<TABLE>
<CAPTION>
Aim Aim
Capital International
Appreciation Equity
Total Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $733,252 $5,326 $1,878
Expenses:
Mortality & Expense Risk Fees 106,392 694 1,405
--------------- ---------------- ----------------
Net Investment Income (Loss) 626,860 4,632 473
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 519,608 (371) (22,044)
Change in Unrealized Appreciation
(Depreciation) 1,519,964 25,833 7,738
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 2,039,572 25,462 (14,306)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $2,666,432 $30,094 ($13,833)
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Alliance
Alliance Alliance Global
Conservative Global Dollar
Investors Bond Government
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $2,086 $18 $0
Expenses:
Mortality & Expense Risk Fees 263 20 0
--------------- ---------------- ----------------
Net Investment Income (Loss) 1,823 (2) 0
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 1,083 19 2
Change in Unrealized Appreciation
(Depreciation) 691 289 10
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 1,774 308 12
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $3,597 $306 $12
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance
Growth Alliance
Alliance & Growth
Growth Income Investors
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $110,505 $111,284 $14,073
Expenses:
Mortality & Expense Risk Fees 16,449 10,688 1,473
--------------- ---------------- ----------------
Net Investment Income (Loss) 94,056 100,596 12,600
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 36,650 55,743 3,763
Change in Unrealized Appreciation
(Depreciation) 394,461 63,586 17,434
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 431,111 119,329 21,197
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $525,167 $219,925 $33,797
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Alliance Alliance
Alliance Money Premier
International Market Growth
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $0 $2,482 $233
Expenses:
Mortality & Expense Risk Fees 334 482 2,105
--------------- ---------------- ----------------
Net Investment Income (Loss) (334) 2,000 (1,872)
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 54,637 0 30,881
Change in Unrealized Appreciation
(Depreciation) 0 0 16,562
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 54,637 0 47,443
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $54,303 $2,000 $45,571
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance
Alliance Total Alliance
Technology Return Quasar
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $715 $0 $31,614
Expenses:
Mortality & Expense Risk Fees 5,537 1 3,978
--------------- ---------------- ----------------
Net Investment Income (Loss) (4,822) (1) 27,636
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 171,268 0 31,274
Change in Unrealized Appreciation
(Depreciation) 197,601 112 (66,300)
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 368,869 112 (35,026)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $364,047 $111 ($7,390)
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Alliance
U.S. Dreyfus
Government Small
High Alliance Company
Grade Utility Stock
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $0 $0 $1,151
Expenses:
Mortality & Expense Risk Fees 0 0 1,653
--------------- ---------------- ----------------
Net Investment Income (Loss) 0 0 (502)
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 0 0 (2,481)
Change in Unrealized Appreciation
(Depreciation) 0 52 8,859
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 0 52 6,378
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $0 $52 $5,876
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Dreyfus
Dreyfus Zero Fidelity
Stock Coupon Asset
Index 2000 Manager
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $30,188 $705 $60,993
Expenses:
Mortality & Expense Risk Fees 16,095 116 5,125
--------------- ---------------- ----------------
Net Investment Income (Loss) 14,093 589 55,868
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 90,160 117 10,634
Change in Unrealized Appreciation
(Depreciation) 348,632 37 18,503
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 438,792 154 29,137
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $452,885 $743 $85,005
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Fidelity
Fidelity Fidelity High
Contrafund Growth Income
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $1,859 $181,333 $33,968
Expenses:
Mortality & Expense Risk Fees 1,067 17,992 2,593
--------------- ---------------- ----------------
Net Investment Income (Loss) 792 163,341 31,375
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 3,199 52,384 (5,310)
Change in Unrealized Appreciation
(Depreciation) 37,476 484,390 (31,433)
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 40,675 536,774 (36,743)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $41,467 $700,115 ($5,368)
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fidelity
Investment Fidelity
Grade Money Fidelity
Bond Market Overseas
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $9,614 $72,672 $29,556
Expenses:
Mortality & Expense Risk Fees 1,360 12,336 3,291
--------------- ---------------- ----------------
Net Investment Income (Loss) 8,254 60,336 26,265
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity (104) 0 22,548
Change in Unrealized Appreciation
(Depreciation) 2,966 0 1,403
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 2,862 0 23,951
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $11,116 $60,336 $50,216
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
VanEck VanEck
VanEck Worldwide Worldwide
Worldwide Emerging Hard
Balanced Markets Assets
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $24,879 $0 $4,567
Expenses:
Mortality & Expense Risk Fees 466 80 292
--------------- ---------------- ----------------
Net Investment Income (Loss) 24,413 (80) 4,275
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity (10,944) (238) (4,776)
Change in Unrealized Appreciation
(Depreciation) (4,930) 2,653 (11,854)
--------------- ---------------- ----------------
Net Gain (Loss) on Investments (15,874) 2,415 (16,630)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $8,539 $2,335 ($12,355)
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WP&G WP&G WP&G
Tomorrow Tomorrow Tomorrow
Long Medium Short
Term Term Term
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment Income (Loss):
Dividends $948 $287 $318
Expenses:
Mortality & Expense Risk Fees 423 41 33
--------------- ---------------- ----------------
Net Investment Income (Loss) 525 246 285
--------------- ---------------- ----------------
Realized & Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investment
Activity 1,436 31 47
Change in Unrealized Appreciation
(Depreciation) 4,736 390 67
--------------- ---------------- ----------------
Net Gain (Loss) on Investments 6,172 421 114
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets
Resulting From Operations $6,697 $667 $399
=============== ================ ================
</TABLE>
See Accompanying 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, 1998 and December 31, 1997
<TABLE>
<CAPTION>
1998
Aim Aim
Capital International
Appreciation Equity
Total Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $626,860 $4,632 $473
Realized Gain (Loss) on Investment Activity 519,608 (371) (22,044)
Change in Unrealized Appreciation
(Depreciation) of Investments 1,519,964 25,833 7,738
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 2,666,432 30,094 (13,833)
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 10,210,370 185,128 275,137
Cost Of Insurance Charge (1,571,906) (12,343) (20,406)
Policy Loans (212,191) 0 0
Transfers Between Funds 18,740 (1,665) 4,554
Contract Withdrawals (202,369) (437) (836)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 8,242,644 170,683 258,449
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 10,909,076 200,777 244,616
Net Assets, at Beginning of Year 7,272,203 0 0
--------------- ---------------- ----------------
Net Assets, at End of Year $18,181,279 $200,777 $244,616
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance
Alliance Alliance Global
Conservative Global Dollar
Investors Bond Government
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $1,823 ($2) $0
Realized Gain (Loss) on Investment Activity 1,083 19 2
Change in Unrealized Appreciation
(Depreciation) of Investments 691 289 10
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 3,597 306 12
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 9,551 8,736 241
Cost Of Insurance Charge (2,651) (507) (31)
Policy Loans 0 0 0
Transfers Between Funds (834) 12 0
Contract Withdrawals (740) 0 0
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 5,326 8,241 210
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 8,923 8,547 222
Net Assets, at Beginning of Year 24,072 0 0
--------------- ---------------- ----------------
Net Assets, at End of Year $32,995 $8,547 $222
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Alliance
Growth Alliance
Alliance & Growth
Growth Income Investors
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $94,056 $100,596 $12,600
Realized Gain (Loss) on Investment Activity 36,650 55,743 3,763
Change in Unrealized Appreciation
(Depreciation) of Investments 394,461 63,586 17,434
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 525,167 219,925 33,797
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 1,469,752 1,709,454 67,574
Cost Of Insurance Charge (210,721) (152,262) (18,064)
Policy Loans (30,640) (25,729) (2,299)
Transfers Between Funds (4,391) 16,628 97
Contract Withdrawals (44,972) (21,460) (2,915)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 1,179,028 1,526,631 44,393
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 1,704,195 1,746,556 78,190
Net Assets, at Beginning of Year 1,123,048 764,335 117,458
--------------- ---------------- ----------------
Net Assets, at End of Year $2,827,243 $2,510,891 $195,648
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance Alliance
Alliance Money Premier
International Market Growth
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($334) $2,000 ($1,872)
Realized Gain (Loss) on Investment Activity 54,637 0 30,881
Change in Unrealized Appreciation
(Depreciation) of Investments 0 0 16,562
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 54,303 2,000 45,571
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits (48,815) 30,048 122,585
Cost Of Insurance Charge (7,879) (11,766) (19,989)
Policy Loans 0 0 (267)
Transfers Between Funds 2,391 202 4,628
Contract Withdrawals 0 0 (561)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions (54,303) 18,484 106,396
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 0 20,484 151,967
Net Assets, at Beginning of Year 0 0 0
--------------- ---------------- ----------------
Net Assets, at End of Year $0 $20,484 $151,967
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Alliance
Alliance Total Alliance
Technology Return Quasar
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($4,822) ($1) $27,636
Realized Gain (Loss) on Investment Activity 171,268 0 31,274
Change in Unrealized Appreciation
(Depreciation) of Investments 197,601 112 (66,300)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 364,047 111 (7,390)
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 274,264 2,477 152,103
Cost Of Insurance Charge (66,804) (58) (36,287)
Policy Loans (12,128) 0 (10,340)
Transfers Between Funds 6,050 0 (7,597)
Contract Withdrawals (12,390) 0 (8,285)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 188,992 2,419 89,594
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 553,039 2,530 82,204
Net Assets, at Beginning of Year 255,061 0 241,676
--------------- ---------------- ----------------
Net Assets, at End of Year $808,100 $2,530 $323,880
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance
U.S. Dreyfus
Government Small
High Alliance Company
Grade Utility Stock
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $0 $0 ($502)
Realized Gain (Loss) on Investment Activity 0 0 (2,481)
Change in Unrealized Appreciation
(Depreciation) of Investments 0 52 8,859
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 0 52 5,876
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 991 991 139,298
Cost Of Insurance Charge (23) (23) (22,440)
Policy Loans 0 0 (1,455)
Transfers Between Funds 0 0 2,014
Contract Withdrawals 0 0 (2,646)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 968 968 114,771
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 968 1,020 120,647
Net Assets, at Beginning of Year 0 0 127,381
--------------- ---------------- ----------------
Net Assets, at End of Year $968 $1,020 $248,028
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Dreyfus
Dreyfus Zero Fidelity
Stock Coupon Asset
Index 2000 Manager
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $14,093 $589 $55,868
Realized Gain (Loss) on Investment Activity 90,160 117 10,634
Change in Unrealized Appreciation
(Depreciation) of Investments 348,632 37 18,503
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 452,885 743 85,005
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 1,652,138 4,327 384,610
Cost Of Insurance Charge (264,577) (2,247) (60,284)
Policy Loans (35,221) 0 (1,634)
Transfers Between Funds (3,827) (10) 1,319
Contract Withdrawals (30,468) 0 (3,078)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 1,318,045 2,070 320,933
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 1,770,930 2,813 405,938
Net Assets, at Beginning of Year 944,435 10,766 387,906
--------------- ---------------- ----------------
Net Assets, at End of Year $2,715,365 $13,579 $793,844
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fidelity
Fidelity Fidelity High
Contrafund Growth Income
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $792 $163,341 $31,375
Realized Gain (Loss) on Investment Activity 3,199 52,384 (5,310)
Change in Unrealized Appreciation
(Depreciation) of Investments 37,476 484,390 (31,433)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 41,467 700,115 (5,368)
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 274,009 1,511,553 20,065
Cost Of Insurance Charge (18,289) (264,617) (31,215)
Policy Loans 0 (38,305) (541)
Transfers Between Funds (301) 8,334 (1,103)
Contract Withdrawals (44) (32,651) (5,710)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 255,375 1,184,314 (18,504)
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 296,842 1,884,429 (23,872)
Net Assets, at Beginning of Year 0 1,164,075 287,181
--------------- ---------------- ----------------
Net Assets, at End of Year $296,842 $3,048,504 $263,309
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
Fidelity
Investment Fidelity
Grade Money Fidelity
Bond Market Overseas
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $8,254 $60,336 $26,265
Realized Gain (Loss) on Investment Activity (104) 0 22,548
Change in Unrealized Appreciation
(Depreciation) of Investments 2,966 0 1,403
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 11,116 60,336 50,216
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 133,257 1,798,436 25,198
Cost Of Insurance Charge (15,077) (262,012) (46,489)
Policy Loans 0 (47,336) (4,988)
Transfers Between Funds 372 (3,849) (3,101)
Contract Withdrawals (446) (23,046) (8,945)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 118,106 1,462,193 (38,325)
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 129,222 1,522,529 11,891
Net Assets, at Beginning of Year 79,496 1,225,890 368,340
--------------- ---------------- ----------------
Net Assets, at End of Year $208,718 $2,748,419 $380,231
=============== ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VanEck VanEck
VanEck Worldwide Worldwide
Worldwide Emerging Hard
Balanced Markets Assets
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $24,413 ($80) $4,275
Realized Gain (Loss) on Investment Activity (10,944) (238) (4,776)
Change in Unrealized Appreciation
(Depreciation) of Investments (4,930) 2,653 (11,854)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 8,539 2,335 (12,355)
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits (87,825) 28,761 22,441
Cost Of Insurance Charge (7,250) (1,673) (5,001)
Policy Loans 0 0 0
Transfers Between Funds (1,323) 116 (79)
Contract Withdrawals (456) 0 (666)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions (96,854) 27,204 16,695
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets (88,315) 29,539 4,340
Net Assets, at Beginning of Year 88,315 0 30,220
--------------- ---------------- ----------------
Net Assets, at End of Year $0 $29,539 $34,560
=============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
WP&G WP&G WP&G
Tomorrow Tomorrow Tomorrow
Long Medium Short
Term Term Term
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $525 $246 $285
Realized Gain (Loss) on Investment Activity 1,436 31 47
Change in Unrealized Appreciation
(Depreciation) of Investments 4,736 390 67
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Operations 6,697 667 399
--------------- ---------------- ----------------
Capital Transactions:
Contract Deposits 38,701 534 4,650
Cost Of Insurance Charge (9,742) (536) (643)
Policy Loans (1,308) 0 0
Transfers Between Funds 103 0 0
Contract Withdrawals (1,420) 0 (197)
--------------- ---------------- ----------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 26,334 (2) 3,810
--------------- ---------------- ----------------
Total Increase (Decrease) in Net Assets 33,031 665 4,209
Net Assets, at Beginning of Year 25,890 4,140 2,518
--------------- ---------------- ----------------
Net Assets, at End of Year $58,921 $4,805 $6,727
=============== ================ ================
</TABLE>
See Accompanying 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, 1998 and December 31, 1997
1997
<TABLE>
<CAPTION>
Aim Aim
Capital International
Appreciation Equity
Total Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $166,746 $0 $0
Realized Gain (Loss) on Investment Activity 206,207 0 0
Change in Unrealized Appreciation
(Depreciation) of Investments 366,321 0 0
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 739,274 0 0
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 5,544,641 0 0
Cost Of Insurance Charge (775,349) 0 0
Policy Loans (94,631) 0 0
Transfers Between Funds 18,850 0 0
Contract Withdrawals (82,467) 0 0
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 4,611,044 0 0
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 5,350,318 0 0
Net Assets, at Beginning of Year 1,921,885 0 0
---------------- ----------------- ---------------
Net Assets, at End of Year $7,272,203 $0 $0
================ ================= ===============
</TABLE>
<TABLE>
<CAPTION>
Alliance
Alliance Alliance Global
Conservative Global Dollar
Investors Bond Government
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $167 $0 $0
Realized Gain (Loss) on Investment Activity 600 0 0
Change in Unrealized Appreciation
(Depreciation) of Investments 586 0 0
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 1,353 0 0
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 15,627 0 0
Cost Of Insurance Charge (2,705) 0 0
Policy Loans 0 0 0
Transfers Between Funds 20 0 0
Contract Withdrawals (239) 0 0
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 12,703 0 0
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 14,056 0 0
Net Assets, at Beginning of Year 10,016 0 0
---------------- ----------------- ---------------
Net Assets, at End of Year $24,072 $0 $0
================ ================= ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alliance
Growth Alliance
Alliance & Growth
Growth Income Investors
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $21,469 $22,999 $1,477
Realized Gain (Loss) on Investment Activity 37,620 18,395 3,687
Change in Unrealized Appreciation
(Depreciation) of Investments 138,629 68,190 5,513
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 197,718 109,584 10,677
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 814,495 571,454 61,194
Cost Of Insurance Charge (117,612) (74,918) (11,672)
Policy Loans (6,689) (5,180) 0
Transfers Between Funds 1,673 2,565 3,415
Contract Withdrawals (19,879) (5,967) (2,220)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 671,988 487,954 50,717
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 869,706 597,538 61,394
Net Assets, at Beginning of Year 253,342 166,797 56,064
---------------- ----------------- ---------------
Net Assets, at End of Year $1,123,048 $764,335 $117,458
================ ================= ===============
</TABLE>
<TABLE>
<CAPTION>
Alliance Alliance
Alliance Money Premier
International Market Growth
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>
Alliance
Alliance Total Alliance
Technology Return Quasar
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) ($1,115) $0 ($1,464)
Realized Gain (Loss) on Investment Activity 16,995 0 9,057
Change in Unrealized Appreciation
(Depreciation) of Investments (15,270) 0 11,871
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 610 0 19,464
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 270,239 0 232,934
Cost Of Insurance Charge (19,431) 0 (17,506)
Policy Loans (101) 0 (387)
Transfers Between Funds 4,396 0 3,524
Contract Withdrawals (8,527) 0 (1,093)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 246,576 0 217,472
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 247,186 0 236,936
Net Assets, at Beginning of Year 7,875 0 4,740
---------------- ----------------- ---------------
Net Assets, at End of Year $255,061 $0 $241,676
================ ================= ===============
</TABLE>
<TABLE>
<CAPTION>
Alliance
U.S. Dreyfus
Government Small
High Alliance Company
Grade Utility Stock
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $0 $0 $2,102
Realized Gain (Loss) on Investment Activity 0 0 (107)
Change in Unrealized Appreciation
(Depreciation) of Investments 0 0 (5,712)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 0 0 (3,717)
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 0 0 135,191
Cost Of Insurance Charge 0 0 (2,314)
Policy Loans 0 0 0
Transfers Between Funds 0 0 (1,779)
Contract Withdrawals 0 0 0
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 0 0 131,098
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 0 0 127,381
Net Assets, at Beginning of Year 0 0 0
---------------- ----------------- ---------------
Net Assets, at End of Year $0 $0 $127,381
================ ================= ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Dreyfus
Dreyfus Zero Fidelity
Stock Coupon Asset
Index 2000 Manager
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $26,687 $511 $21,546
Realized Gain (Loss) on Investment Activity 41,444 (71) 8,600
Change in Unrealized Appreciation
(Depreciation) of Investments 41,726 83 19,239
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 109,857 523 49,385
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 778,061 11,713 287,927
Cost Of Insurance Charge (90,065) (4,235) (42,651)
Policy Loans (1,032) 0 (167)
Transfers Between Funds 2,970 25 664
Contract Withdrawals (7,423) (171) (9,859)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 682,511 7,332 235,914
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 792,368 7,855 285,299
Net Assets, at Beginning of Year 152,067 2,911 102,607
---------------- ----------------- ---------------
Net Assets, at End of Year $944,435 $10,766 $387,906
================ ================= ===============
</TABLE>
<TABLE>
<CAPTION>
Fidelity
Fidelity Fidelity High
Contrafund Growth Income
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $0 $21,466 $3,283
Realized Gain (Loss) on Investment Activity 0 55,366 11,481
Change in Unrealized Appreciation
(Depreciation) of Investments 0 90,042 11,697
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 0 166,874 26,461
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 0 492,521 226,949
Cost Of Insurance Charge 0 (148,843) (23,779)
Policy Loans 0 (24,473) 0
Transfers Between Funds 0 3,595 1,695
Contract Withdrawals 0 (19,994) (2,049)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 0 302,806 202,816
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 0 469,680 229,277
Net Assets, at Beginning of Year 0 694,395 57,904
---------------- ----------------- ---------------
Net Assets, at End of Year $0 $1,164,075 $287,181
================ ================= ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fidelity
Investment Fidelity
Grade Money Fidelity
Bond Market Overseas
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $2,521 $32,116 $9,687
Realized Gain (Loss) on Investment Activity 322 0 1,460
Change in Unrealized Appreciation
(Depreciation) of Investments 2,132 0 (3,697)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 4,975 32,116 7,450
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 29,955 1,214,777 281,913
Cost Of Insurance Charge (6,686) (159,431) (34,464)
Policy Loans 0 (52,504) (4,098)
Transfers Between Funds 96 (5,335) 951
Contract Withdrawals (16) (1,225) (3,073)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 23,349 996,282 241,229
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 28,324 1,028,398 248,679
Net Assets, at Beginning of Year 51,172 197,492 119,661
---------------- ----------------- ---------------
Net Assets, at End of Year $79,496 $1,225,890 $368,340
================ ================= ===============
</TABLE>
<TABLE>
<CAPTION>
VanEck VanEck
VanEck Worldwide Worldwide
Worldwide Emerging Hard
Balanced Markets Assets
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $343 $0 $319
Realized Gain (Loss) on Investment Activity 856 0 165
Change in Unrealized Appreciation
(Depreciation) of Investments 3,097 0 (1,231)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 4,296 0 (747)
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 60,650 0 24,911
Cost Of Insurance Charge (10,075) 0 (4,740)
Policy Loans 0 0 0
Transfers Between Funds 186 0 104
Contract Withdrawals (712) 0 (20)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 50,049 0 20,255
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 54,345 0 19,508
Net Assets, at Beginning of Year 33,970 0 10,712
---------------- ----------------- ---------------
Net Assets, at End of Year $88,315 $0 $30,220
================ ================= ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WP&G WP&G WP&G
Tomorrow Tomorrow Tomorrow
Long Medium Short
Term Term Term
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net Investment Income (Loss) $2,058 $331 $243
Realized Gain (Loss) on Investment Activity 303 2 32
Change in Unrealized Appreciation
(Depreciation) of Investments (304) (254) (16)
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Operations 2,057 79 259
---------------- ----------------- ---------------
Capital Transactions:
Contract Deposits 27,159 4,178 2,793
Cost Of Insurance Charge (3,562) (124) (536)
Policy Loans 0 0 0
Transfers Between Funds 76 7 2
Contract Withdrawals 0 0 0
---------------- ----------------- ---------------
Increase (Decrease) in Net Assets Resulting
From Capital Transactions 23,673 4,061 2,259
---------------- ----------------- ---------------
Total Increase (Decrease) in Net Assets 25,730 4,140 2,518
Net Assets, at Beginning of Year 160 0 0
---------------- ----------------- ---------------
Net Assets, at End of Year $25,890 $4,140 $2,518
================ ================= ===============
</TABLE>
See Accompanying 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 following products are offered by the Account: Vision and
Gallery Life.
The Account invests in shares of AIM Variable Insurance Fund ("AIM Fund"),
Alliance Variable Products Series Fund, Inc. ("Alliance Fund"), Dreyfus Variable
Investment Fund ("Dreyfus Fund"), Fidelity Investments Variable Insurance
Products Fund ("Fidelity Trust"), Fidelity Variable Insurance Products Fund II
("Fidelity Trust II"), Van Eck Investment Trust ("Van Eck Trust") and Weiss,
Peck & Greer ("Tomorrow Funds"). The assets in the policies may be invested in
the following subaccounts:
AIM Fund: Fidelity Trust:
International Equity Portfolio Money Market Portfolio
Capital Appreciation Portfolio High Income Portfolio
Growth Portfolio
Alliance Fund: Overseas Portfolio
Growth & Income Portfolio Contrafund Portfolio
Conservative Investors Portfolio
Growth Portfolio Fidelity Trust II:
Growth Investors Portfolio Investment Grade Bond Portfolio
Quasar Portfolio Asset Manager Portfolio
Technology Portfolio
Global Bond Portfolio Van Eck Trust:
Premier Growth Portfolio Worldwide Hard Assets Portfolio
Money Market Portfolio Worldwide Emerging Markets Portfolio
Worldwide Balanced Portfolio
(Fund closed 06/29/98)
Dreyfus Fund:
Dreyfus Zero Coupon 2000 Portfolio Weiss, Peck & Greer Tomorrow Fund:
Stock Index Portfolio Tomorrow Long Term Portfolio
Small Company Stock Portfolio Tomorrow Medium Term Portfolio
Stock Index Portfolio Tomorrow Short Term 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, 1998, investment activity in the Fund was as
follows:
Cost of Proceeds
Purchases From Sales
Shares of
<S> <C> <C>
Aim
Capital Appreciation Portfolio $ 201,598 $ 26,283
International Equity Portfolio 499,113 240,193
Alliance Funds:
Conservative Investors Portfolio 17,668 10,521
Global Bond Portfolio 9,907 1,670
Global Dollar Government Portfolio 242 31
Growth Portfolio 1,434,835 161,751
Growth & Income Portfolio 7,118,210 5,490,984
Growth Investors Portfolio 83,359 26,366
International Portfolio 7,730,001 7,784,638
Money Market Portfolio 7,530,593 7,510,112
Premier Growth Portfolio 1,721,633 1,617,108
Technology Portfolio 9,312,917 9,128,748
Total Return Portfolio 2,439 21
Quasar Portfolio 9,870,359 9,753,129
U.S. Government High Grade Portfolio 976 8
Utility Income Portfolio 976 8
Dreyfus:
Small Company Portfolio 277,608 163,341
Stock Index Portfolio 1,719,925 387,790
Zero Coupon 2000 Portfolio 7,868 5,215
Fidelity Trust Funds:
Asset Manager Portfolio 637,629 260,827
Contrafund Portfolio 295,002 38,838
Growth Portfolio 1,684,130 336,475
High Income Portfolio 366,333 353,460
Investment Grade Bond Portfolio 252,481 126,121
Money Market Portfolio 3,777,754 2,255,231
Overseas Portfolio 240,411 252,471
Van Eck:
Worldwide Emerging Markets Portfolio 31,817 4,692
Worldwide Hard Assets Portfolio 34,521 13,551
Worldwide Balanced Portfolio 43,581 115,939
Weiss, Peck, & Greer Tomorrow Funds:
Tomorrow Long Term Portfolio 43,881 17,022
Tomorrow Medium Term Portfolio 1,311 1,067
Tomorrow Short Term Portfolio 4,968 873
</TABLE>
For the year ended December 31, 1997, investment activity in the Fund was as
follows: Cost of Proceeds Purchases From Sales
<TABLE>
<S> <C> <C>
Shares of
Alliance Funds:
Conservative Investors Portfolio $ 18,544 $ 5,676
Growth Portfolio 974,204 280,744
Growth & Income Portfolio 674,003 163,065
Growth Investors Portfolio 111,960 63,096
Technology Portfolio 570,493 325,032
Quasar Portfolio 469,753 253,745
Dreyfus:
Small Company Stock Portfolio 134,522 1,321
Stock Index Portfolio 1,010,647 301,445
Zero Coupon 2000 Portfolio 17,381 9,537
Fidelity Trust Funds:
Asset Manager Portfolio 386,303 128,841
Growth Portfolio 1,207,119 882,821
High Income Portfolio 338,288 132,191
Investment Grade Bond Portfolio 36,324 10,571
Money Market Portfolio 2,898,075 1,866,353
Overseas Portfolio 339,597 88,568
Van Eck:
Worldwide Emerging Markets Portfolio 4 4
Worldwide Hard Assets Portfolio 28,081 7,507
Worldwide Balanced Portfolio 58,655 8,264
Weiss, Peck, & Greer Tomorrow Funds:
Tomorrow Long Term Portfolio 28,487 2,754
Tomorrow Medium Term Portfolio 4,465 72
Tomorrow Short Term Portfolio 2,909 406
</TABLE>
<PAGE>
AIG LIFE INSURANCE COMPANY
(AIG LIFE)
VARIABLE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (continued)
5. Net Increase (Decrease) in Accumulation Units
For the year ended December 31, 1998, transactions in accumulation units of the
account were as follows:
<TABLE>
Aim Aim Alliance
Capital International Conservative
Appreciation Equity Investors
Portfolio Portfolio Portfolio
VARIABLE ANNUITY - - -
<S> <C> <C> <C>
Units Purchased 10,966.16 17,130.11 519.94
Units Withdrawn (1,282.07) (1,912.12) (252.21)
Units Transferred Between Funds 7,964.24 5,920.24 151.60
Units Transferred From (To) AI Life 0.00 0.00 0.00
---------- ---------- ---------
Net Increase (Decrease) 17,648.33 21,138.23 419.33
Units, at Beginning of the Year 0.00 0.00 1,986.58
---------- ---------- ---------
Units, at End of the Year 17,648.33 21,138.23 2,405.91
========== ========== =========
Unit Value at December 31, 1998 $ 11.38 $ 11.57 $ 13.71
========== ========== =========
</TABLE>
<TABLE>
Alliance
Alliance Global
Global Dollar Alliance
Bond Government Growth
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 274.70 0.00 48,680.75
Units Withdrawn (47.46) (4.05) (14,982.74)
Units Transferred Between Funds 538.94 33.17 28,539.15
Units Transferred From (To) AI Life 0.00 0.00 0.00
------- ------ -----------
Net Increase (Decrease) 766.18 29.12 62,237.16
Units, at Beginning of the Year 0.00 0.00 63,940.84
------- ------ -----------
Units, at End of the Year 766.18 29.12 126,178.00
======= ====== ===========
Unit Value at December 31, 1998 $ 11.15 $ 7.65 $ 22.41
======= ====== ===========
</TABLE>
<TABLE>
Alliance
Growth Alliance
& Growth Alliance
Income Investors International
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 33,634.28 4,748.04 0.00
Units Withdrawn (10,914.51) (1,602.25) (789.39)
Units Transferred Between Funds 54,953.57 19.95 789.39
Units Transferred From (To) AI Life 0.00 0.00 0.00
----------- ---------- -------
Net Increase (Decrease) 77,673.34 3,165.74 0.00
Units, at Beginning of the Year 44,589.32 8,820.29 0.00
----------- ---------- -------
Units, at End of the Year 122,262.66 11,986.03 0.00
=========== ========== =======
Unit Value at December 31, 1998 $ 20.54 $ 16.32 $ 11.06
=========== ========== =======
</TABLE>
Footnote 1 are all funds except for IVUL 2.
Footnote 2 are the IVUL 2 funds.
<PAGE>
<TABLE>
Alliance Alliance Alliance
Money Premier Premier
Market Growth Growth
Portfolio 1 Portfolio 2 Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 76,950.50 14,340.65 368.47
Units Withdrawn (1,125.28) (1,636.22) (15.78)
Units Transferred Between Funds (73,883.89) (2,993.66) 16.87
Units Transferred From (To) AI Life 0.00 0.00 0.00
---------- ---------- -------
Net Increase (Decrease) 1,941.33 9,710.77 369.56
Units, at Beginning of the Year 0.00 0.00 0.00
---------- ---------- -------
Units, at End of the Year 1,941.33 9,710.77 369.56
========== ========== =======
Unit Value at December 31, 1998 $ 10.55 $ 15.06 $ 15.45
========== ========== =======
</TABLE>
<TABLE>
Alliance
Alliance Total Alliance
Technology Return Quasar
Portfolio Portfolio 1 Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 35,545.90 212.77 16,965.13
Units Withdrawn (7,116.84) (4.98) (4,825.62)
Units Transferred Between Funds (5,978.18) 0.00 (4,170.54)
Units Transferred From (To) AI Life 0.00 0.00 0.00
---------- ------- ----------
Net Increase (Decrease) 22,450.88 207.79 7,968.97
Units, at Beginning of the Year 23,596.78 0.00 20,181.26
---------- ------- ----------
Units, at End of the Year 46,047.66 207.79 28,150.23
========== ======= ==========
Unit Value at December 31, 1998 $ 17.55 $ 12.18 $ 11.34
========== ======= ==========
</TABLE>
<TABLE>
Alliance
U.S.
Government
Alliance High Alliance
Quasar Grade Utility
2 Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 531.58 89.14 72.17
Units Withdrawn (11.11) (2.08) (1.69)
Units Transferred Between Funds 3.26 0.00 0.00
Units Transferred From (To) AI Life 0.00 0.00 0.00
------- ------ ------
Net Increase (Decrease) 523.73 87.06 70.48
Units, at Beginning of the Year 0.00 0.00 0.00
------- ------ ------
Units, at End of the Year 523.73 87.06 70.48
======= ====== ======
Unit Value at December 31, 1998 $ 9.15 $ 11.12 $ 14.47
======= ====== ======
</TABLE>
Footnote 1 are all funds except for IVUL 2.
Footnote 2 are the IVUL 2 funds.
<PAGE>
<TABLE>
Dreyfus Dreyfus
Small Dreyfus Zero
Company Stock Coupon
Stock Index 2000
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 15,130.34 64,100.90 653.34
Units Withdrawn (2,752.76) (17,133.95) (197.62)
Units Transferred Between Funds 1,013.09 21,583.46 (273.54)
Units Transferred From (To) AI Life 0.00 0.00 0.00
---------- ----------- ---------
Net Increase (Decrease) 13,390.67 68,550.41 182.18
Units, at Beginning of the Year 12,290.97 54,287.23 976.29
---------- ----------- ---------
Units, at End of the Year 25,681.64 122,837.64 1,158.47
========== =========== =========
Unit Value at December 31, 1998 $ 9.66 $ 22.11 $ 11.72
========== =========== =========
</TABLE>
<TABLE>
Fidelity
Asset Fidelity Fidelity
Manager Contrafund Growth
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 18,697.45 13,543.93 71,686.34
Units Withdrawn (4,063.22) (1,631.36) (19,446.08)
Units Transferred Between Funds 6,029.71 11,000.06 16,228.87
Units Transferred From (To) AI Life 0.00 0.00 0.00
---------- ---------- -----------
Net Increase (Decrease) 20,663.94 22,912.63 68,469.13
Units, at Beginning of the Year 25,997.34 0.00 76,554.16
---------- ---------- -----------
Units, at End of the Year 46,661.28 22,912.63 145,023.29
========== ========== ===========
Unit Value at December 31, 1998 $ 17.01 $ 12.96 $ 21.02
========== ========== ===========
</TABLE>
<TABLE>
Fidelity
Fidelity Investment Fidelity
High Grade Money
Income Bond Market
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 9,445.60 13,513.40 259,198.27
Units Withdrawn (2,853.91) (1,307.38) (28,981.43)
Units Transferred Between Funds (7,301.62) (2,236.28) (105,109.51)
Units Transferred From (To) AI Life 0.00 0.00 (147.07)
---------- ---------- -----------
Net Increase (Decrease) (709.93) 9,969.74 124,960.26
Units, at Beginning of the Year 21,533.23 6,952.60 109,164.24
---------- ---------- -----------
Units, at End of the Year 20,823.30 16,922.34 234,124.50
========== ========== ===========
Unit Value at December 31, 1998 $ 12.64 $ 12.33 $ 11.74
========== ========== ===========
</TABLE>
Footnote 1 are all funds except for IVUL 2.
Footnote 2 are the IVUL 2 funds.
<PAGE>
<TABLE>
Van Eck
Van Eck Worldwide
Fidelity Worldwide Emerging
Overseas Balanced Markets
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 11,785.44 951.45 1,277.13
Units Withdrawn (4,501.28) (606.33) (278.62)
Units Transferred Between Funds (9,535.93) (7,669.26) 3,870.58
Units Transferred From (To) AI Life 0.00 0.00 0.00
---------- --------- ---------
Net Increase (Decrease) (2,251.77) (7,324.14) 4,869.09
Units, at Beginning of the Year 29,558.72 7,324.14 0.00
---------- --------- ---------
Units, at End of the Year 27,306.95 0.00 4,869.09
========== ========= =========
Unit Value at December 31, 1998 $ 13.92 $ 13.05 $ 6.07
========== ========= =========
</TABLE>
<TABLE>
Van Eck WP&G WP&G
Worldwide Tomorrow Tomorrow
Hard Long Medium
Assets Term Term
Portfolio Portfolio Portfolio
- - -
<S> <C> <C> <C>
Units Purchased 1,987.17 3,171.98 96.93
Units Withdrawn (614.56) (914.92) (41.35)
Units Transferred Between Funds 411.71 (301.20) (53.41)
Units Transferred From (To) AI Life 0.00 0.00 0.00
--------- -------- -------
Net Increase (Decrease) 1,784.32 1,955.86 2.17
Units, at Beginning of the Year 2,660.66 2,002.12 338.89
--------- --------- -------
Units, at End of the Year 4,444.98 3,957.98 341.06
========= ========= =======
Unit Value at December 31, 1998 $ 7.78 $ 14.89 $ 14.09
========= ========= =======
</TABLE>
<TABLE>
WP&G
Tomorrow
Short
Term
Portfolio
-
<S> <C>
Units Purchased 355.59
Units Withdrawn (66.23)
Units Transferred Between Funds 0.00
Units Transferred From (To) AI Life 0.00
-------
Net Increase (Decrease) 289.36
Units, at Beginning of the Year 207.88
-------
Units, at End of the Year 497.24
=======
Unit Value at December 31, 1998 $ 13.53
=======
</TABLE>
<PAGE>
APPENDIX A
Maximum Initial Surrender Charge Per $1,000
of Initial Specified Face Amount
Issue Age Sex Smoker Status Surrender Charge
- --------- --- ------------- ----------------
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
<PAGE>
APPENDIX B
AVERAGE ANNUAL TOTAL RETURNS
As of December 31, 1998
<TABLE>
FUND NAME Inception YTD 1 Year 3Year 5 Year 10 Year Since
Date Inception
Alliance Variable Products Series Fund, Inc.
<S> <C> <C> <C> <C> <C> <C> <C>
Growth and Income 1/14/91 20.89% 20.89% 24.55% 21.19% N/A 16.01%
Premier Growth 6/26/92 47.97% 47.97% 34.45% 27.85% N/A 25.42%
Quasar 8/5/96 -4.49% -4.49% N/A N/A N/A 8.05%
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
VIP II Contrafund 1/3/95 29.98% 29.98% 25.06% N/A N/A 28.62%
VIP II Index 500 8/27/92 28.31% 28.31% 27.88% 23.72% N/A 21.16%
GOLDMAN SACHS VARIABLE INSURANCE TRUST (1)
Capital Growth 5/1/98(2) 13.40% N/A N/A N/A N/A 13.40%
Global Income 1/12/98(2) 8.29% N/A N/A N/A N/A 8.29%
Growth and Income 1/12/98(2) 5.47% N/A N/A N/A N/A 5.47%
CORE Large Cap Growth 2/13/98 16.99% N/A N/A N/A N/A 16.99%
CORE Small Cap Equity 2/13/98(3) -9.30% N/A N/A N/A N/A -9.30%
CORE U.S. Equity 2/13/98 14.73% N/A N/A N/A N/A 14.73%
International Equity 1/12/98(4) 20.07% N/A N/A N/A N/A 20.07%
Mid Cap Value 5/1/98(2) -13.56% N/A N/A N/A N/A -13.56%
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
Fixed Income 1/2/97 7.90% 7.90% N/A N/A N/A 8.94%
Global Equity 1/2/97 13.47% 13.47% N/A N/A N/A 16.76%
High Yield 1/2/97 4.80% 4.80% N/A N/A N/A 9.10%
Money Market 1/4/99(7) N/A N/A N/A N/A N/A N/A
U.S. Real Estate 3/3/97 -10.86% -10.86% N/A N/A N/A 2.79%
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST(5)
AMT Partners Portfolio 3/22/94 4.21% 4.21% 21.01% N/A N/A 19.71%
TEMPLETON VARIABLE PRODUCTS SERIES FUND (6)
Templeton Developing Markets - Class 2 3/1/96 -21.03% -21.03% N/A N/A N/A -20.27%
Templeton International - Class 2 5/1/92 9.08% 9.08% 15.44% 11.74% N/A 14.10%
</TABLE>
This performance information reflects the total income generated by the fund net
of total fund operating expenses, plus capital gains and losses, realized or
unrealized and assumes reinvestment of dividends and distributions. The data
assumes the relevant subaccount was in existence on the fund's inception date.
The performance results do not reflect: monthly deductions; cost of insurance;
surrender charges; sales loads; mortality and expense risk charges; DAC taxes;
and any state or local premium taxes. If these charges were included, the total
return figures would be lower. These charges and deductions can have a
significant effect on policy, account, insurance benefits and cash surrender
values, as illustrated in the prospectus.
This portfolio performance informance is for illustrative purposes only and is
not intended to indicate or predict future performance. Past performance cannot
predict or guarantee future results . The investment return and principal value
will fluctuate, so that units, when redeemed may be worth more or less than
their original cost. For more information, please refer to the Funds Prospectus.
<PAGE>
(1) These funds were established in 1998. Performance numbers are cumulative
not annualized.
(2) A fund's foreign investments and active management techniques entail risks
in addition to those customarily associated with investing in
dollar-denominated securities of U.S. issuers. Compared with U.S.
securities markets, foreign markets may be less liquid, more volatile and
less subject to governmental regulation, and may make available less public
information about issuers. The fund may incur losses because of changes in
securities prices expressed in local currencies, movements in exchange
rates, or both. These risks are more fully described in the prospectus.
(3) The stocks of smaller companies are often associated with higher risks than
stocks of larger companies including higher volatility.
(4) In particular, the securities markets of Emerging Countries in which
certain funds may invest without limit are less liquid, subject to greater
price volatility, have smaller market capitalizations, have problems with
share registration and custody, have less government regulation and are not
subject to as extensive and frequent accounting, financial and other
reporting requirements as the securities markets of more developed
countries.
(5) Shares of the separate AMT Portfolios of Neuberger Berman Advisers
Management Trust are sold only through the currently effective prospectus
and are not available to the general public. Shares of the AMT Portfolios
may be purchased only by life insurance companies, to be used with their
separate accounts which fund variable annuity and variable life insurance
policies. Neuberger Berman Management may absorb certain expenses of the
AMT Portfolios. Without this arrangement which is subject to change, the
total returns of the portfolios could have been less. Total return includes
reinvestment of dividends and capital gains distributions. Performance data
quoted represents past performance and the investment return and principal
value of an investment will fluctuate so that the shares, when redeemed,
may be worth more or less than the original cost. Please read the
prospectus carefully before you invest or send money.
The investments for the AMT Portfolios are managed by the same portfolio
manager(s) who manage one or more other mutual funds that have similar
names, investment objectives and investment styles as the AMT Portfolios.
You should be aware that the AMT Portfolios are likely to differ from the
other mutual funds in size, cash flow pattern and tax matters. Accordingly,
the holdings and performance of the AMT Portfolios can be expected to vary
from those of the other mutual funds.
(6) Because Class 2 shares of the portfolios were not offered until May 1,
1997, performance shown for periods prior to that date represents the
historical result of Class 1 shares. Performance shown for periods after
May 1, 1997 reflect the higher annual fees and expenses resulting from the
Rule 12b-1 plan. Maximum annual plan expenses are 0.25%.
(7) Performance in the fund is not included because the Money Market Portfolio
was not operational in 1998. Investment in the Money Market Portfolio is
neither insured nor guaranteed by the FDIC or the U.S. Government. There
can be no assurance that the portfolio will be able to maintain a stable
net asset value.
<PAGE>
[Back cover]
The Securities and Exchange Commission maintains a Web site
(http://www.sec.gov) that contains additional information about AIG Life
Insurance Company, the policy and the Separate Account which may be of interest
to you. The Web site also contains additional information about the policy's
variable investment options.
<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 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 provision 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.
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
The Prospectus consisting of ___ pages.
The undertaking to file reports.
Representation.
The signatures
Written consents of the following persons:
Kenneth D. Walma
Michael Burns and A. Hasan Qureshi
Jorden Burt Cicchetti Berenson & Johnson LLP
PriceWaterhouseCoopers LLP
Powers of Attorney
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. Certificate of Resolution for AIG Life Insurance Company dated June 5,
1986, authorizing the issuance and sale of variable life contracts.*
2. N/A
3. Principal Underwriter's Agreement between AIG Life Insurance Company
and American International Fund Distributors, dated August 15, 1989;*
4. N/A
5. (a) Form of Flexible Premium Variable Life Insurance Policy (1VUL1294)*
(b) Form of Group Flexible Variable Universal Life Policy (11
GVUL0597)*
(c) Form of Certificate of Group Flexible Variable Universal Life
(16GVUL0597)*
(d) Form of Group Flexible Variable Life Insurance Policy
(11GVULD997)**
(e) Form of Certificate of Group Flexible Variable Universal Life
(16GVULD997)**
6. (a) By-Laws of AIG Life Insurance Company as amended through December
31, 1991;*
(b) Certificate of Incorporation of AIG Life Insurance Company,
dated December 31, 1991*
(c) Restated Certificate of Incorporation, of AIG Life Insurance
Company, dated December 31, 1991. The original Certificate of
Incorporation was filed in Pennsylvania on June 18, 1962*
7. N/A.
8. N/A.
9. N/A.
10. (a) Form of Life Insurance Application (14APP0396)*
(b) Form of Supplemental Application (14SGVUL0597NJ)*
(c) Form of Group Life Insurance Application (14GAPP0397NJ)*
(d) Form of Group Life Insurance Application (14GVAPP997)**
11. Powers of Attorney (filed electronically herein)
B. Opinion and Consent of Counsel (filed electronically herein)
C. Opinion and Consent of Actuary (filed electronically herein)
D. Consent of Independent Certified Public Accountants (filed electronically
herein)
E. Consent of Jorden Burt Boros Cicchetti Berenson & Johnson LLP (filed
electronically herein)
F. Memorandum Regarding Administrative Procedures*
* Incorporated by reference to Registrant's Post-Effective Amendment, No. 4
filed on Form S-6 (File No. 33-90684), dated October 27, 1998.
**Incorporated by reference to Registrant's Post-Effective Amendment No. 1 filed
on Form S-6 (File No. 333-34199), dated March 13, 1998.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company
Act of 1940, the Registrant certifies that it meets the requirements of
Securities Act Rule 485(a) for effectiveness of this Registration Statement and
has caused this Registration Statement to be signed on its behalf, in the City
of Wilmington, and State of Delaware on this 30th day of April, 1999.
VARIABLE ACOUNT II
-------------------------------
(Registrant)
By: AIG LIFE INSURANCE COMPANY
---------------------------------------------------
(Sponsor)
By: /s/ Kenneth D. Walma
--------------------------------------------------
Kenneth D. Walma, Assistant Secretary and
General Counsel
<PAGE>
Pursuant to the requirements of the Securities and Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
Michele L. Abruzzo Director April 30, 1999
- ------------------
/s/ Michele L. Abruzzo
Paul S. Bell Director April 30, 1999
- ------------------
/s/ Paul Bell
Maurice R. Greenberg Director April 30, 1999
- ------------------
/s/ Maurice R. Greenberg
Howard E. Gunton, Jr. Chief Financial April 30, 1999
__________________ Officer
/s/ Howard E. Gunton, Jr
Edward Easton Matthews Director April 30, 1999
- ------------------
/s/ Edward Easton Matthews
Jerome T. Muldowney Director April 30, 1999
- ------------------
/s/ Jerome T. Muldowney
Michael Mullin Chief Operating April 30, 1999
__________________ Officer
/s/ Michael Mullin
Robinson K. Nottingham Director April 30, 1999
- ------------------
/s/ Robinson K. Nottingham
Nicholas A. O'Kulich Director April 30, 1999
- ------------------
/s/ Nicholas A. O'Kulich
Howard Ian Smith Director April 30, 1999
- ------------------
/s/ Howard Ian Smith
Edmund Sze-Wing Tse Director April 30, 1999
- ------------------
/s/ Edmund Sze-Wing Tse
Elizabeth M. Tuck Secretary April 30, 1999
- ------------------
/s/ Elizabeth M. Tuck
Gerald Walter Wyndorf Director April 30, 1999
- ------------------
/s/ Gerald Walter Wyndorf
<PAGE>
INDEX TO EXHIBITS
EXHIBIT PAGE
B. Opinion of Counsel
C. Opinion and Consent of Actuary
D. Consent of Independent Accountants
E. Consent of Counsel
EXHIBIT B
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 domiciled in the State of Delaware.
2. Variable Account II is a separate investment account of AIG Life
Insurance Company validly existing pursuant to the Delaware Insurance Laws and
the Regulations thereunder.
3. All of the prescribed corporate procedures for the issuance of the
Flexible Premium Variable Universal Life Individual and Group Policies (the
"Policy") have been followed, and when such Contracts are issued in accordance
with the Prospectuses contained in the Registration Statement, all state
requirements relating to such Contracts will have been complied with.
4. Upon the acceptance of premiums made by Contract Owners pursuant to
a Contract issued in accordance with the Prospectuses contained in the
Registration Statement and upon compliance with applicable law, such Contract
Owner will have a legally-issued, fully-paid, nonassessable interest in such
Contract.
This opinion, or a copy thereof, may be used as an exhibit to or in connection
with the filing with the Securities and Exchange Commission of the Post
Effective Amendment No. 5 to the Registration Statement on Form S-6 for the
Contracts 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
General Counsel
Dated: April 30, 1999
<PAGE>
EXHIBIT C
OPINION AND CONSENT OF ACTUARY
On behalf of AIG Life Insurance Company, I hereby consent to the
inclusion of the Table of Minimum Premiums and Surrender Charge Premiums in a
Registration Statement of Form S-6 registering Variable Life Insurance Policies.
/s/ Michael J. Burns, FSA, MAAA
---------------------------
Michael J. Burns, FSA, MAAA
Dated: April 30, 1999
<PAGE>
EXHIBIT C
OPINION AND CONSENT OF ACTUARY
On behalf of AIG Life Insurance Company, I hereby consent to the
inclusion of the Maximum Initial Surrender Charge per $1,000 of Initial
Specified Face Amount in a Registration Statement of Form S-6 registering
Variable Life Insurance Policies.
/s/ A. Hasan Qureshi
---------------------------
A. Hasan Qureshi, FIA, MAAA
Dated: April 30, 1999
<PAGE>
EXHIBIT D
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the following with respect to Post-effective
Amendment No. 5 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 AIG Life Insurance Company of our
report dated February 5, 1999 relating to our audits 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 March 12, 1999 relating to our audit of
the financial statements of Variable Account II.
3. The reference to our firm under the heading "Experts."
PriceWaterhouseCoopers LLP
- ------------------
PriceWaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 26, 1999
<PAGE>
<PAGE>
JORDEN BURT BOROS CICCHETTI BERENSON & JOHNSON LLP
SUITE 400 EAST
1025 THOMAS JEFFERSON STREET, N.W.
WASHINGTON, D.C. 2007-0805
TELECOPIER (202) 965-8014
AIG Life Insurance Company
One Alico Plaza
600 King Street
Wilmington, DE 19801
April 30, 1999
Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the Prospectus contained in Post Effective Amendment No. 5 to the
Registration Statement on Form S-6 (File No. 333-34199) filed 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
Jorden Burt Boros Cicchetti Berenson & Johnson
