PROSPECTUS
LIFE OF VIRGINIA SEPARATE ACCOUNT III
VARIABLE LIFE INSURANCE POLICY
FORM P1097 1/87
Issued by:
THE LIFE INSURANCE COMPANY OF VIRGINIA
6610 WEST BROAD STREET
RICHMOND, VIRGINIA 23230
(804) 281-6000
This Prospectus describes a variable life insurance policy ("Policy") issued
by The Life Insurance Company of Virginia ("Life of Virginia"). The Policy may
be purchased to operate as a single premium policy, or it may be purchased
through a series of planned premiums paid either monthly, quarterly,
semi-annually or annually; the minimum first-year planned premium is $5,000.
Additional (unplanned) Premium Payments may also be paid, within limits
described in this Prospectus. All premiums paid during a policy year, including
planned premiums and additional premium payments, are assumed to have been paid
on the first day of the policy year (the policy anniversary) for purposes of
calculating certain charges under the Policy (including surrender charges).
The Policy provides for the payment of a Death Benefit upon the death of the
insured, and for a Cash Value that can be obtained by surrendering the Policy.
The Policy is a variable policy because the Death Benefit may, and the Cash
Value will, vary with the investment experience of Life of Virginia Separate
Account III ("Separate Account III"). The Policyowner bears the entire
investment risk; there is no guaranteed minimum Cash Value. In general, Life of
Virginia will not issue the Policy to insure persons older than age 75.
Under the Policy, premiums are placed in Separate Account III. The Policyowner
selects the Investment Subdivision(s) of Separate Account III in which to
invest, and determines the allocation of the premiums among those Investment
Subdivisions. Each Investment Subdivision of Separate Account III will invest
solely in a designated portfolio which is part of a series type of mutual fund.
Currently, there are seven such funds available under this Policy: The Variable
Insurance Products Fund, the Variable Insurance Products Fund II, the Life of
Virginia Series Fund, Inc., the Oppenheimer Variable Account Funds, the Janus
Aspen Series, the Federated Insurance Series, and The Alger American Fund
(collectively referred to as the "Funds"). The Funds, their investment managers
and their currently available portfolios are on the following page.
This Prospectus Must Be Read Along With
Current Prospectuses For The Funds
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
SHARES IN THE FUNDS AND INTERESTS IN THE POLICIES ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, A BANK, AND THE SHARES AND
INTERESTS ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
Please Read This Prospectus Carefully and Retain It For Future Reference.
The Date of This Prospectus is May 1, 1996.
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Variable Insurance Products Fund, which is managed by Fidelity Management &
Research Company, currently has five portfolios, three of which are available to
Policyowners through Separate Account III:
Equity-Income Portfolio
Growth Portfolio
Overseas Portfolio
Variable Insurance Products Fund II, which is managed by Fidelity Management &
Research Company, currently has five portfolios, two of which, Asset Manager
Portfolio and Contrafund Portfolio, are available to Policyowners through
Separate Account III.
Life of Virginia Series Fund, Inc., which is managed by Aon Advisors, Inc.,
currently has six portfolios which are available to Policyowners through
Separate Account III:
Money Market Portfolio
Government Securities Portfolio
Common Stock Index Portfolio
Total Return Portfolio
International Equity Portfolio
Real Estate Securities Portfolio
Oppenheimer Variable Account Funds, which is managed by Oppenheimer Funds
Inc., currently has nine portfolios, five of which are available to Policyowners
through Separate Account III:
Oppenheimer High Income Fund
Oppenheimer Bond Fund
Oppenheimer Capital Appreciation Fund
Oppenheimer Growth Fund
Oppenheimer Multiple Strategies Fund
Janus Aspen Series, which is managed by Janus Capital Corporation, currently
has nine portfolios, six of which are available to Policyowners through Separate
Account III:
Growth Portfolio
Aggressive Growth Portfolio
Worldwide Growth Portfolio
International Growth Portfolio (not available in
California)
Balanced Portfolio
Flexible Income Portfolio
Federated Insurance Series, which is managed by Federated Advisers, currently
has five portfolios, three of which are available to Policyowner through
Separate Account III:
Federated Utility Fund II
Federated High Income Bond Fund II
Federated American Leaders Fund II (not available
in California)
The Alger American Fund, which is managed by Fred Alger Management, Inc.,
currently has six portfolios, two of which, the Alger American Growth Portfolio
and Alger American Small Capitalization Portfolio, are available to Policyowners
through Separate Account III.
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The accompanying prospectuses for the Funds describe the investment objectives
and the risks of each of the Funds' portfolios.
During the Initial Investment Period, all premiums will be placed in the
Investment Subdivision of Separate Account III that invests exclusively in the
Money Market Portfolio of the Life of Virginia Series Fund, Inc. At the end of
that period, the cash value at that time and all subsequent premiums will be
allocated in accordance with Policyowner instructions.
This policy is or may be a modified endowment contract. Any policy loan,
partial withdrawal or surrender may result in adverse tax consequences and/or
penalties.
It may not be advantageous to purchase a Policy as a replacement for another
type of life insurance or as a means to obtain additional insurance protection
if the purchaser already owns a variable life insurance policy.
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TABLE OF CONTENTS
Page
Definitions.............................................................. 5
Summary
The Policy............................................................. 7
Premiums............................................................... 7
Policy Benefits........................................................ 8
Benefits at Maturity................................................... 9
Charges and Deductions................................................. 9
Distribution of the Policy.............................................10
Tax Treatment..........................................................10
Refund Privilege.......................................................10
Exchange Privilege.....................................................10
Illustrations of Death Benefits, Cash Values and Surrender Values......10
Life of Virginia and Separate Account III
The Life Insurance Company of Virginia.................................11
General Electric Company...............................................11
Separate Account III...................................................11
Addition, Deletion, or Substitution of Investments.....................11
The Funds
Variable Insurance Products Fund.......................................13
Variable Insurance Products Fund II....................................13
Life of Virginia Series Fund, Inc......................................14
Oppenheimer Variable Account Funds.....................................16
Janus Aspen Series.....................................................16
Federated Insurance Series.............................................16
The Alger American Fund................................................16
Resolving Material Conflicts...........................................17
Termination of Participation Agreements................................17
The Policy
Purpose of the Policy..................................................18
Purchasing the Policy..................................................18
Dates Under the Policy.................................................18
Payments Made Under the Policy.........................................18
Allocation of Premiums.................................................20
Policy Lapse and Reinstatement.........................................20
Examination of Policy (Refund Privilege)...............................21
Exchange Privilege.....................................................21
Policy Rights and Benefits
Cash Value Benefits....................................................22
Transfers..............................................................23
Dollar-Cost Averaging..................................................24
Powers of Attorney.....................................................24
Loan Benefits..........................................................25
Death Benefit..........................................................26
Changes in the Specified Amount........................................27
Benefits at Maturity...................................................28
Optional Payment Plans.................................................28
Charges and Deductions
Monthly Deduction......................................................29
Charges Against Separate Account III...................................30
Surrender Charge.......................................................31
Transfer Charge........................................................32
Other Charges..........................................................32
Reduction of Charges for Group Sales...................................32
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TABLE OF CONTENTS (Cont.)
Page
General Provisions
Postponement of Payment................................................33
Limits on Contesting the Policy........................................33
The Contract...........................................................33
Misstatement of Age or Sex.............................................33
Suicide................................................................33
Annual Statement.......................................................33
Nonparticipating.......................................................34
Written Notice.........................................................34
The Owner..............................................................34
The Beneficiary........................................................34
Changing the Owner or Beneficiary......................................34
Using the Policies as Collateral.......................................34
Optional Insurance Benefits............................................34
Reinsurance............................................................34
Distribution of the Policy...............................................35
Federal Tax Matters
Tax Status of the Policy...............................................36
Tax Treatment of Policy Proceeds.......................................37
Tax Treatment of Policy Loans and Other Distributions..................37
Taxation of Life of Virginia...........................................38
Income Tax Withholding.................................................38
Other Considerations...................................................38
Legal Developments Regarding Employment-Related Benefit Plans............39
Safekeeping of the Assets of Separate Account III........................39
Voting Rights............................................................39
State Regulation of Life of Virginia.....................................39
Executive Officers and Directors of Life of Virginia.....................40
Legal Matters............................................................41
Legal Proceedings........................................................41
Experts..................................................................41
Additional Information...................................................41
Financial Statements.....................................................41
Appendix................................................................A-1
This Policy is not available in all States.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO DEALER, SALESMAN, OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THE PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE INSURANCE
PROTECTION. LIFE INSURANCE IS A LONG TERM INVESTMENT. PROSPECTIVE POLICYOWNERS
SHOULD CONSIDER THEIR NEED FOR INSURANCE COVERAGE AND THE POLICY'S LONG TERM
INVESTMENT POTENTIAL. NO CLAIM IS MADE THAT THE POLICY IS IN ANY WAY SIMILAR OR
COMPARABLE TO AN INVESTMENT IN A MUTUAL FUND.
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DEFINITIONS
Additional Premium Payment -- An additional premium payment of at least $250
made by the Policyowner, which does not exceed the maximum premiums limitation
shown in the policy data pages; a payment, of at least $1,000, which is required
for an increase in the specified amount; or a payment properly made during the
grace period.
Age -- The insured's age on his or her nearest birthday.
Attained Age -- The insured's age on the policy date plus the number of years
since the policy date.
Beneficiary -- Primary and contingent beneficiaries are designated by the
Policyowner in the application. More than one primary or contingent beneficiary
may be named. If changed, the primary beneficiary or contingent beneficiary is
as shown in the latest change filed with Life of Virginia. If no beneficiary
survives the insured, the Policyowner or the Policyowner's estate will be the
beneficiary. The interest of any beneficiary may be subject to that of any
assignee.
Business Day -- Any day on which the New York Stock Exchange is open for
business and any other day in which there is a change in the value of the shares
of a portfolio of any one of the funds sufficient to materially affect the value
of the assets in the Investment Subdivision of Separate Account III that invests
in that portfolio.
Cash Value -- The value of the Policy equal to the Cash Value allocated to the
Investment Subdivisions of Separate Account III, plus the Cash Value held in the
general account to secure any Policy Debt.
Death Benefit -- The benefit provided under a Policy upon the death of the
insured.
Due Proof of Death -- Proof of death that is satisfactory to Life of Virginia.
Such proof may consist of the following if acceptable to Life of Virginia:
(a) A certified copy of the death certificate; or
(b) A certified copy of the decree of a court of competent jurisdiction as to
the finding of death.
Effective Date - The date coverage begins under the Policy.
Funds -- The mutual funds available under this Policy. Currently there are
seven: the Variable Insurance Products Fund, the Variable Insurance Products
Fund II, the Life of Virginia Series Fund, Inc., the Oppenheimer Variable
Account Funds, the Janus Aspen Series, the Federated Insurance Series, and The
Alger American Fund.
General Account -- The assets of Life of Virginia that are not segregated in
any of the separate investment accounts of Life of Virginia.
Home Office -- The principal offices of The Life Insurance Company of Virginia
at 6610 West Broad Street, Richmond, Virginia 23230.
Initial Investment Period -- The period that commences on the Effective Date
and ends on the date of receipt at the Home Office of the Policy Delivery and
Acceptance Letter, signed and dated by the Policyowner, indicating that the
Policyowner has received and accepted the Policy, or, if the Policy is not
accepted, when all amounts due are refunded, whichever is applicable.
Insured -- The person upon whose life the Policy is issued.
Investment Subdivision -- A subdivision of Separate Account III. After the
Initial Investment Period, premiums are allocated, in accordance with the
instructions of the Policyowner, among no more than seven of the twenty-seven
Investment Subdivisions of Separate Account III, each of which invests
exclusively in shares of a designated portfolio of one of the Funds. All
twenty-seven Investment Subdivisions may not be available in all states.
Maturity Date -- The date on which a Policy's Cash Value less any outstanding
Policy Debt becomes payable to the Policyowner,
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if living. The Maturity Date will be the policy anniversary nearest to the
insured's 95th birthday. The Policy terminates on the Maturity Date.
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Maximum Loan Amount -- The maximum amount that may be borrowed under a Policy.
The maximum loan amount equals 90% of the Policy's Cash Value on the date of the
loan, less any surrender charge.
Monthly Anniversary Day -- The same date in each month as the policy date.
Whenever the monthly anniversary day falls on a date other than a Business Day,
the monthly anniversary will be deemed the next Business Day.
Policy -- The variable life insurance policy issued by Life of Virginia and
described in this Prospectus. The term "Policy" or "Policies" includes the
Policy described in this Prospectus, the policy application, any supplemental
applications, and any endorsements.
Policy Date -- The date a Policy becomes effective and the date used to
determine policy years and policy months for the original specified amount and
the initial premium. Policy anniversaries are measured from the policy date.
Policy Debt -- The total of all outstanding policy loans plus accrued
interest.
Policy Month -- A one-month period beginning on a monthly anniversary day and
ending on the day immediately preceding the next monthly anniversary day.
Policyowner (or "Owner") -- The person who owns a Policy. The original
policyowner is named in the application. Contingent owners may also be named.
Proceeds -- The amount payable upon either the surrender of the Policy or the
death of the insured.
Separate Account III (or "Account") -- Life of Virginia Separate Account III,
a separate investment account established by Life of Virginia to receive and
invest premiums paid under the Policies.
Specified Amount -- The amount of insurance coverage purchased under a Policy.
The specified amount is set forth on the data page in each Policy.
Surrender Value -- A Policy's Cash Value, reduced by any outstanding Policy
Debt and less any surrender charge. This amount is payable to the Policyowner if
the Policy matures or is surrendered.
Valuation Period -- The period between the close of business on a Business Day
and the close of business on the next succeeding Business Day.
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SUMMARY
The Following Summary of Prospectus Information Should Be Read In Conjunction
With The Detailed Information Appearing Elsewhere In This Prospectus.
The Policy
The variable life insurance policy described in this Prospectus is a life
insurance contract with a Death Benefit, Cash Value, surrender rights, policy
loan privileges, and other features associated with conventional life insurance.
The Policy is a "variable" policy because, unlike the fixed benefits of an
ordinary life insurance policy, the Cash Value and, under certain circumstances,
the Death Benefit of the Policy and the duration of the life insurance coverage,
may increase or decrease depending upon the investment experience of the
Investment Subdivisions of Separate Account III to which the Policyowner
allocates premiums. Accordingly, the Policyowner reaps the benefit of any
appreciation in value of the underlying assets, but also bears the investment
risk of any depreciation in the value of those assets. However, so long as the
Policy's Surrender Value (the Cash Value reduced by any outstanding Policy Debt,
and less any surrender charges) continues to be sufficient to pay the monthly
deduction, the Policy provides for a Death Benefit at least equal to the
specified amount of the Policy.
The Policy is issued in consideration of the application and payment of an
initial premium. The minimum first-year planned premium is $5,000. All premium
payments are determined in accordance with the guideline premium test for life
insurance as set forth in the Internal Revenue Code. Although the Policy may
operate as a single premium policy, under certain circumstances additional
premiums either may be paid at the Policyowner's option or are required in order
to keep the Policy in force. (See Payments Made Under The Policy, p. 18.) The
Policyowner determines the allocation of the premiums and Cash Value among the
Investment Subdivisions of Separate Account III. (See Allocation of Premiums, p.
20.)
Policies issued prior to November 14, 1995, contain certain rights, benefits
and procedures which differ from those described elsewhere in this Prospectus.
An individual who has purchased such a Policy should refer to Appendix B in
conjunction with the remainder of this Prospectus in order to determine his or
her rights and benefits under the Policy.
Separate Account III
Separate Account III currently has twenty-seven Investment Subdivisions to
which premiums may be allocated. Each Investment Subdivision invests exclusively
in the shares of a portfolio of one of the Funds. Currently, the Funds include
the Variable Insurance Products Fund, the Variable Insurance Products Fund II,
the Life of Virginia Series Fund, Inc., the Oppenheimer Variable Account Funds,
the Janus Aspen Series, the Federated Insurance Series, and The Alger American
Fund. The accompanying prospectuses for the Funds describe the investment
objectives and the risks of each of the Funds' portfolios.
Separate Account III also has certain "closed" Investment Subdivisions no
longer available for allocation of premium payments and transfers of Cash Value.
Cash Value remaining in the closed Investment Subdivisions may, however, be
transferred to the Investment Subdivisions that are currently available under
the Policies. Further information about the shares of the Fund portfolios in
which the closed Investment Subdivisions are invested may be found in the
current prospectuses for those Fund Portfolios, and in a supplement to this
prospectus. Write or call Life of Virginia for more information if needed.
The Death Benefit may, and the Cash Value will, vary with the investment
experience of the Investment Subdivisions chosen by the Owner, as well as with
the frequency and amount of any Additional Premium Payments, and any charges
imposed in connection with the Policy. (See Cash Value Benefits, p. 22.)
Premiums
The initial premium is due on the Policy Date. The minimum first-year planned
premium is $5,000. So long as there is no outstanding Policy Debt, the
Policyowner may make Additional Premium Payments. If there is outstanding Policy
Debt, any payment received by Life of Virginia will be treated as repayment of
Policy Debt rather than as an Additional Premium Payment.
Premiums will be allocated among the Investment Subdivisions in accordance
with the Policyowner's written instructions; however, during the Initial
Investment Period, all premiums will be placed in the Investment Subdivision of
Separate Account III that invests exclusively in the Money Market Portfolio of
the Life of Virginia Series Fund, Inc.
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In order to allocate money out of the Money Market Portfolio of the Life of
Virginia Series Fund the Policyowner must have submitted, and Life of Virginia
must have received, the signed and dated Policy Delivery and Acceptance letter.
Thereafter, a Policy's cash value may not be invested in more than seven
Investment Subdivisions at any point in time.
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An Additional Premium Payment, a payment made in repayment of outstanding
Policy Debt, or both, may be required during the grace period in order to
prevent the Policy from lapsing. An Additional Premium Payment must be made if a
premium payment is required for an increase in specified amount. The Policyowner
also has the option to make an Additional Premium Payment, at his discretion, so
long as the amount of the payment is at least $250 and the payment plus the
total of all premiums previously paid does not exceed the applicable maximum
premiums limitation shown in the policy data pages. (See Payments Made Under The
Policy, p. 18.)
A Policy will lapse only when the Surrender Value is insufficient to pay the
monthly deduction (See Charges and Deductions -- Monthly Deduction, p. 29.), and
a grace period expires without a sufficient payment. (See Policy Lapse and
Reinstatement -- Lapse, p. 20.) This Policy, therefore, is different from a
conventional life insurance policy in that a Policy can lapse independent of the
amount and timing of premiums paid.
Policy Benefits
Cash Value Benefits. The Policy provides for a Cash Value. A Policy's Cash
Value in Separate Account III will reflect the amount of the initial premium and
any Additional Premium Payments, the investment experience of the Investment
Subdivisions of Separate Account III in which premiums are placed, policy loans,
transfers, and any charges imposed in connection with the Policy. Life of
Virginia does not guarantee a minimum Cash Value; therefore, the Policyowner
bears the entire investment risk. (See Cash Value Benefits -- Calculation of
Cash Value, p. 22.)
The Policyowner may at any time surrender a Policy during the insured's
lifetime and receive the Surrender Value. (See Cash Value Benefits -- Surrender
Privileges, p. 22.) Under certain circumstances, the Policyowner may also make
a Partial Withdrawal of certain portions of the cash value allocated to the
Separate Account. (See Partial Withdrawals, p. 22.)
Transfers. The Policyowner may transfer amounts among the Investment
Subdivisions of Separate Account III that are available at the time the transfer
is requested. Currently, there is no limit on the number of transfers that may
be made; however, Life of Virginia reserves the right to impose such a limit in
the future. Where permitted by state law, Life of Virginia also reserves the
right to refuse to execute transfers if any of the Investment Subdivisions that
would be affected by the transfer are unable to purchase or redeem shares of the
mutual funds in which they invest.
The first transfer in each calendar month will be made without a transfer
charge. Thereafter, each time amounts are transferred, a transfer charge of $10
will be imposed. (See Transfers, p. 23.) Life of Virginia may not honor
transfers made by third parties holding multiple powers of attorney. (See
Powers of Attorney, p. 24.)
Policy Loans. The Policyowner may exercise certain loan privileges under a
Policy. The amount available to be borrowed is the Maximum Loan Amount less any
outstanding Policy Debt. The Maximum Loan Amount is 90% of the Policy's Cash
Value at the end of the valuation period during which the loan request is
received, less any applicable surrender charge. The minimum loan amount is $500.
Loans will accrue interest daily at a fixed annual rate of 6%. Interest is due
and payable on each policy anniversary.
When a loan is made, a portion of the Policy's Cash Value sufficient to secure
the loan will be transferred from Separate Account III to Life of Virginia's
general account as security for the loan. Currently, Life of Virginia credits
such amounts with interest at an annual fixed rate of 6% for the portion equal
to the Cash Value less the total of all premium payments made; a 4% rate is
credited for the portion in excess of that amount. Life of Virginia reserves the
right to decrease, at its discretion, the rate of interest credited to those
amounts in the General Account that are held as security for policy loans to not
less than an annual fixed rate of 4%. Upon partial or full loan repayment, the
portion of Cash Value in the General Account securing the repaid portion of the
Policy Debt will be transferred to Separate Account III. (See Loan Benefits, p.
25.)
Policy loans may have federal tax consequences, and prior to age 59 1/2 may
result in a 10% penalty tax. (See Federal Tax Matters, p. 36.) In addition, a
policy loan entails the risk that the Policy will lapse if policy debt exceeds
Cash Value less applicable surrender charges. Adverse tax consequences may
result from a lapse if policy debt is outstanding. The risk of lapse due to a
policy loan is greater where interest charged on the loan is not paid when due.
Death Benefit. The Policy provides for the payment of a Death Benefit upon the
death of the Insured. The Death Benefit is based on the specified amount shown
in the policy data pages. The Death Benefit will be the greater of the specified
amount, or the Cash Value on the date of death multiplied by the applicable
corridor percentage, as set forth in the Policy.
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So long as a Policy remains in force, the Death Benefit will not be less than
the specified amount of the Policy. The Death Benefit may, however, exceed the
specified amount. The amount by which the Death Benefit exceeds the specified
amount depends upon the Cash Value of the Policy. (See Death Benefit, p. 26.) To
determine the Death Benefit Proceeds, the Death Benefit will be reduced by any
outstanding Policy Debt and any due and unpaid monthly deductions. The Proceeds
may be paid in a lump sum or in accordance with an optional payment plan. (See
Optional Payment Plans, p. 28.)
After the first policy year, the Policyowner may, subject to certain
restrictions, adjust the Death Benefit Proceeds payable under a Policy by
increasing the specified amount. The minimum increase in specified amount that
Life of Virginia will allow under the Policy is one which requires a $1,000
Additional Premium Payment. (See Changes in the Specified Amount, p. 27.) In
addition, the Policyowner may change the optional payment plan in effect. (See
Optional Payment Plans, p. 28.)
Benefits at Maturity
On the Maturity Date of a Policy, if the Insured is still living, the
Policyowner will be paid the Cash Value reduced by any outstanding Policy Debt.
(See Benefits at Maturity, p. 28.)
Charges and Deductions
Life of Virginia will deduct certain charges daily from the assets of the
Separate Account and monthly from the Policy's Cash Value.
A daily charge, at an effective annual rate of 1.30% of the net assets of
Separate Account III, is imposed against those assets to compensate Life of
Virginia for certain mortality and expense risks incurred in connection with the
Policy (.90%) and for the cost of administering the Policy (.40%). (See Charges
Against Separate Account III, p. 30.)
A deduction is made on each Monthly Anniversary Day in order to compensate
Life of Virginia for the cost of insurance. The cost of insurance charge equals
the current cost of insurance rate multiplied by the net amount at risk under
the Policy. As a current practice, Policies qualifying for the Preferred Funding
Risk Class may have a lower cost of insurance charge. Life of Virginia may, at
its discretion, increase or decrease this charge; however, in no event will the
cost of insurance charge exceed amounts based on the 1980 Commissioners'
Standard Ordinary Mortality Table, adjusted for any substandard rating.
A premium tax charge is deducted monthly during the first ten years following
each premium payment. (See Dates Under the Policy, p. 19.) This charge is
deducted at a rate equivalent to an annual rate of .20% of that portion of the
Policy's Cash Value in Separate Account III attributable to each premium
payment.
There are also two types of sales load charges. The first is called a
distribution expense charge and is deducted monthly during the first ten years
following each premium payment. The distribution expense charge is deducted at a
monthly rate of .0250% which is equivalent to an annual rate of .30% of that
portion of the Policy's Cash Value in Separate Account III attributable to each
premium payment. (See Monthly Deduction, p. 29.) The second is called a
surrender charge (sometimes referred to as a contingent deferred sales charge).
A surrender charge will be deducted if the Policy is surrendered within nine
years of any premium payments. If a Policy is surrendered during the first four
years following a premium payment, a surrender charge equal to 6% of that
premium payment will be imposed. During the six years that follow, the charge
decreases 1% per year, so that no surrender charge is ever attributable to a
premium payment made more than nine years prior to the date of surrender. (See
Dates Under the Policy, p. 18.) Furthermore, the surrender charge attributable
to a particular premium payment, when taken together with the total amount of
the distribution expense charges previously deducted attributable to that
premium payment, may never exceed 9% of the premium payment. (See Surrender
Charge, p. 31.) Depending on the investment experience of the Investment
Subdivisions chosen by the Policyowner, the maximum charge of 9% of a premium
payment may be collected before the ten-year period attributable to that premium
payment has run.
A charge equal to the lesser of (i) $25 or (ii) 2% of the amount withdrawn is
deducted from each Partial Withdrawal, (See Partial Withdrawals, p. 22.)
Finally, the value of the net assets of Separate Account III will also reflect
the investment advisory fee and other expenses incurred by the Funds.
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Distribution of the Policy
The Policy will be distributed by registered representatives of Forth
Financial Securities Corporation, which will act as the principal underwriter of
the Policy. Forth Financial Securities Corporation is registered as a
broker-dealer with the Securities and Exchange Commission and is a member of the
National Association of Securities Dealers, Inc. This Policy will also be
distributed through other registered broker-dealers who have entered into
written sales agreements with the principal underwriter.
Tax Treatment
Cash Value under this Policy should be subject to the same federal income tax
treatment as cash value in a conventional fixed-benefit policy. Under existing
tax law, a Policyowner is not deemed to be in constructive receipt of cash
values under a policy until actual surrender. However, certain pre-death
distributions (including surrenders, Partial Withdrawals and loans to the extent
of any income in the contract, as well as any assignment or pledge) under this
policy will usually have tax consequences and may also incur a 10% penalty tax,
unless the policy is not a "modified endowment contract" for federal income tax
purposes. This policy will generally be a modified endowment contract if it is
entered into after June 20, 1988 (or certain changes are made in it after that
date), because premiums are paid into it more rapidly than the rate defined by a
"7-Pay test", but in certain limited circumstances this may not be the case.
Apart from this (even if the policy is not a modified endowment contract), a
change of owners or a surrender may have tax consequences depending on the
particular circumstances. (See Federal Tax Matters, p. 36.)
Like death benefits payable under conventional life insurance policies, the
Death Benefit payable under this Policy should be completely excludable from the
gross income of the Beneficiary. As a result, the Beneficiary generally will not
be taxed on these proceeds.
For a discussion of tax issues and related developments which may affect the
tax treatment of the Policies, see Federal Tax Matters, p. 36.
Refund Privilege
The Policyowner is granted a period of time to examine a Policy and return it
for refund. The applicable period of time is 10 days after the Policy is
received or 45 days after Part I of the Application is signed, whichever is
later. The amount of refund will equal the advisory fee deducted from the Fund
attributable to the Policy, plus the premiums allocated to Separate Account III
adjusted by gains and losses. In certain states the Policyowner may have more
than 10 days to return the policy for a refund. (See Examination of Policy
(Refund Privilege), p. 21.)
Exchange Privilege
During the first 24 Policy Months, the Policyowner may convert this Policy to
a permanent fixed benefit policy in accordance with Life of Virginia's
procedures. (See Exchange Privilege, p. 21.)
Illustrations of Death Benefits, Cash Values and Surrender Values
Illustrations in the Appendix show how the Death Benefit, Cash Value, and
Surrender Value may vary based on certain rate of return assumptions and how
these benefits compare with amounts which would accumulate if premiums were
invested to earn interest (after taxes) at 5% compounded annually. Nonetheless,
the illustrations are based on hypothetical investment rates of return and are
not guaranteed. They are illustrative only and are not a representation of past
or future performance. Actual rates of return may be more or less than those
reflected in the illustrations and, therefore, actual values will be different
from those illustrated. If the Policy is surrendered in the early policy years,
the Surrender Value will be low as compared with premiums accumulated with
interest, and consequently, the insurance protection provided will be costly.
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LIFE OF VIRGINIA AND SEPARATE ACCOUNT III
The Life Insurance Company of Virginia
Life of Virginia is a stock life insurance company operating under a charter
granted by the Commonwealth of Virginia on March 21, 1871. Effective April 1,
1996, Life of Virginia is an indirectly, wholly-owned subsidiary of GNA
Corporation. Previously, Life of Virginia was an indirectly, wholly-owned
subsidiary of Aon Corporation, an affiliate of Aon Advisors. GNA Corporation is
a wholly-owned subsidiary of General Electric Capital Corporation ("GE
Capital"). GE Capital, a diversified financial services company, is a
wholly-owned subsidiary of General Electric Company. Life of Virginia is
principally engaged in the offering of life insurance and annuity policies and
ranks among the 25 largest stock life insurance companies in the United States
in terms of business in force. The Company is admitted to do business in 49
states and the District of Columbia. The principal offices of Life of Virginia
are at 6610 West Broad Street, Richmond, Virginia 23230.
General Electric Company
General Electric Company ("GE") is a New York corporation founded more than
100 years ago by Thomas Edison. GE is the world's largest manufacturer of jet
engines, engineering plastics, medical diagnostic equipment and large-sized
electric power generation equipment. Its subsidiary, GE Capital, is a
diversified financial services company with subsidiaries engaged in commercial
and industrial specialized, mid-market and indirect consumer financing
businesses. The GE family of companies includes numerous insurance companies,
including Great Northern Insured Annuity Corporation, Life of Virginia, American
First Security Life Insurance Company, Federal Home Life Insurance Company, the
Harvest Life Insurance Company, Union Fidelity Life Insurance Company and
others.
The GE family of companies also includes Forth Financial Securities
Corporation (a broker/dealer registered with the Securities and Exchange
Commission) which acts as principal underwriter for the Policies.
Separate Account III
Separate Account III was established by Life of Virginia as a separate
investment account on February 10, 1987. Separate Account III currently has
twenty-seven Investment Subdivisions available for allocation under the Policy,
but that number may change in the future. Each Investment Subdivision invests
exclusively in shares representing an interest in a separate corresponding
portfolio of one of the seven Funds described below. After the Initial
Investment Period, all premiums are allocated in accordance with the
instructions of the Policyowner among up to seven of the twenty-seven Investment
Subdivisions available under this Policy.
Under the Code of Virginia, the assets of Separate Account III are the
property of Life of Virginia. Nonetheless, the assets in Separate Account III
attributable to the Policies are not chargeable with liabilities arising out of
any other business which Life of Virginia may conduct. The assets of Separate
Account III shall, however, be available to cover the liabilities of Life of
Virginia's General Account to the extent that the assets of Separate Account III
exceed its liabilities arising under the Policies supported by it. Income and
both realized and unrealized gains or losses from the assets of Separate Account
III are credited to or charged against the Account without regard to the income,
gains, or losses arising out of any other business Life of Virginia may conduct.
Separate Account III is registered with the Securities and Exchange
Commission, (the "Commission") as a unit investment trust under the Investment
Company Act of 1940 (the "1940 Act") and meets the definition of a Separate
Account under the Federal Securities Laws. Registration with the Commission does
not involve supervision of the management or investment practices or policies of
Separate Account III by the Commission.
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Addition, Deletion or Substitution of Investments
Life of Virginia reserves the right, subject to compliance with applicable
law, to make additions to, deletions from, or substitutions for the shares of
the mutual fund portfolios that are held by Separate Account III or that
Separate Account III may purchase. If the shares of a portfolio are no longer
available for investment or if in its judgment further investment in any
portfolio should become inappropriate in view of the purposes of Separate
Account III, Life of Virginia reserves the right to eliminate the shares of any
of the portfolios of the Funds and to substitute shares of another portfolio or
of another open-end, registered investment company. Life of Virginia will not
substitute any shares attributable to a Policyowner's Cash Value in Separate
Account III without notice and prior approval of the Commission, to the extent
required by the Investment Company Act of 1940 or other applicable law. Nothing
contained herein shall prevent Separate Account III from purchasing other
securities for other series or classes of policies or from permitting a
conversion between portfolios or classes of policies on the basis of requests
made by Policyowners.
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Life of Virginia also reserves the right to establish additional Investment
Subdivisions of Separate Account III, each of which would invest in a separate
portfolio of a Fund, or in shares of another investment company, with a
specified investment objective. New Investment Subdivisions may be established
when, in the sole discretion of Life of Virginia, marketing, tax or investment
conditions warrant, and any new Investment Subdivisions may be made available to
existing Policyowners on a basis to be determined by Life of Virginia. One or
more Investment Subdivisions may also be eliminated if, in the sole discretion
of Life of Virginia, marketing, tax, or investment conditions warrant.
In the event of any such substitution or change, Life of Virginia may, by
appropriate endorsement, make such changes in these and other policies as may be
necessary or appropriate to reflect such substitution or change. If deemed by
Life of Virginia to be in the best interests of persons having voting rights
under the Policies, and if permitted by law, Life of Virginia may deregister
Separate Account III under the Investment Company Act of 1940 in the event such
registration is no longer required; manage Separate Account III under the
direction of a committee; or combine Separate Account III with other Life of
Virginia separate accounts. To the extent permitted by applicable law, Life of
Virginia may also transfer the assets of Separate Account III associated with
the Policies to another separate account. In addition, Life of Virginia may,
when permitted by law, restrict or eliminate any voting rights of Policyowners
or other persons who have voting rights as to Separate Account III.
The Policyowner will be notified of any material change in the investment
policy of any Portfolio in which the Owner has an interest. If the Policyowner
objects to the change, the Policy may be exchanged for a fixed-benefit policy.
In addition, the Policyowner may exercise the right to surrender the Policy.
(See Surrender Privileges, p. 22.) If the Policyowner chooses to exchange the
Policy, no evidence of insurability will be required. The new policy will be
subject to normal exchange rules and other conditions determined by Life of
Virginia. The exchange must be made within 60 days after the change in
investment policy becomes effective. Life of Virginia will notify Policyowners
of the options and procedures if any material change occurs.
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THE FUNDS
Separate Account III currently invests in seven series-type mutual funds. All
of the Funds currently available under the Policy are registered with the
Commission as open-end, diversified investment companies. The Commission,
however, does not supervise the management or the investment practices and
policies of the Funds.
Each Investment Subdivision invests exclusively in a designated portfolio of
one of the Funds. The assets of each Fund portfolio are separate from other
portfolios of that Fund and each portfolio has separate investment objectives
and policies. As a result, each portfolio operates as a separate investment
portfolio and the investment performance of one portfolio has no effect on the
investment of any other portfolio. Some of the Funds may, in the future,
activate additional portfolios.
Each of the Funds sells its shares to Separate Account III in accordance with
the terms of a participation agreement between the Fund and Life of Virginia.
The termination provisions of those agreements vary. (See Termination of
Participation Agreements, p. 17.) Should an agreement between Life of Virginia
and a Fund terminate, the Separate Account will not be able to purchase
additional shares of the Fund. In that event, Policyowners will no longer be
able to allocate cash values or premium payments to Separate Account
Subdivisions investing in portfolios of that Fund.
Additionally, in certain circumstances, it is possible that a Fund or a
portfolio of a Fund may refuse to sell its shares to the Separate Account
despite the fact that the participation agreement between the Fund and Life of
Virginia has not been terminated. Should a Fund or a portfolio of a Fund decide
not to sell its shares to Life of Virginia, Life of Virginia will be unable to
honor policyowner requests to allocate their cash values or premium payments to
Separate Account Subdivisions investing in shares of that Fund or portfolio.
Certain Investment Subdivisions of Separate Account III invest in Portfolios
that have similar investment objectives and/or policies; therefore, before
choosing Investment Subdivisions, carefully read the individual prospectuses for
the Funds, along with this prospectus.
Variable Insurance Products Fund
Variable Insurance Products Fund ("VIPF") currently has five portfolios, three
of which, Equity-Income Portfolio, Growth Portfolio, and Overseas Portfolio, are
available to Policyowners through Separate Account III
Equity-Income Portfolio seeks reasonable income by investing primarily in
income-producing equity securities. In choosing these securities, the Portfolio
will also consider the potential for capital appreciation. The Portfolio's goal
is to achieve a yield which exceeds the composite yield on the securities
comprising the Standard & Poor's Composite Index of 500 Stocks.
Growth Portfolio seeks to achieve capital appreciation. The Portfolio normally
purchases common stocks, although its investments are not restricted to any one
type of security. Capital appreciation may also be found in other types of
securities, including bonds and preferred stocks.
Overseas Portfolio seeks long-term growth of capital primarily through
investments in foreign securities. The Portfolio provides a means for investors
to diversify their own portfolios by participating in companies and economies
outside of the United States.
Fidelity Management & Research Company ("FMR") serves as investment advisor to
the VIPF. For managing each portfolio's investments and business affairs, each
portfolio pays FMR a monthly fee.
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VIPF Equity-Income, Growth, and Overseas Portfolios' fee rates are each made
up of two components: (1) a group fee rate based on the monthly average net
assets of all the mutual funds advised by FMR; and (2) an individual portfolio
fee rate of .20% for the VIPF Equity-Income Portfolio, .30% for the VIPF Growth
Portfolio and .45% for the VIPF Overseas Portfolio. The group fee rate cannot
rise above .52% and it drops as total assets in all mutual funds rise.
Therefore, the maximum total management fees that can be charged is .97% of the
average net assets of these Portfolios. One-twelfth of the sum of the group fee
rate and the individual fee rate is applied to each portfolio's net assets
averaged over the most recent month, giving a dollar amount which is the
management fee for that month.
Variable Insurance Products Fund II
Variable Insurance Products Fund II, ("VIPF-II"), which is managed by FMR,
currently has five portfolios, two of which, Asset Manager Portfolio and
Contrafund Portfolio, are available to Policyowners through Separate Account
III.
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Asset Manager Portfolio seeks high total return with reduced risk over the
long-term by allocating its assets among domestic and foreign stocks, bonds and
short-term fixed income instruments.
Contrafund Portfolio seeks capital appreciation by investing mainly in equity
securities of companies believed to be undervalued or out-of-favor.
FMR serves as investment advisor to VIPF-II's Asset Manager Portfolio and
Contrafund Portfolio. For managing the portfolios' investments and business
affairs, the portfolios pay a monthly fee to FMR. Asset Manager Portfolio's fee
rate is the sum of the following two components: (i) an individual fund fee rate
of .40% of the Portfolio's average net assets; and (ii) a group fee rate based
on the monthly average net assets of all the mutual funds advised by FMR. This
rate can not rise above .52% and it drops as total assets in all these funds
rise. Therefore, the maximum total management fee that can be charged is .92% of
the average net assets of this Portfolio. Contrafund Portfolio's fee rate is the
sum of the following two components: (i) an individual fund fee rate of .30% of
the Portfolio's average net assets; and (ii) a group fee rate based on the
monthly average net assets of all the mutual funds advised by FMR. This rate can
not rise above .52% and it drops as total assets in all these funds rise.
Therefore, the maximum total management fee that can be charged ranges from .58%
to .82% of the average net assets of this portfolio. One twelfth of the sum of
the group and individual fund fee rate is applied to the portfolio's net assets
averaged over the most recent month, giving a dollar amount which is the
management fee for that month.
Life of Virginia Series Fund, Inc.
Life of Virginia Series Fund, Inc. ("Life of Virginia Series Fund") currently
has six portfolios, all of which are currently available to Policyowners through
Separate Account III: Common Stock Index Portfolio, Government Securities
Portfolio, Money Market Portfolio, Total Return Portfolio, International Equity
Portfolio, and Real Estate Securities Portfolio.
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Money Market Portfolio has the investment objective of providing the highest
level of current income as is consistent with high liquidity and safety of
principal by investing in high quality money market securities.
Government Securities Portfolio has the investment objective of seeking high
current income and protection of capital through investments in intermediate and
long-term debt instruments issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
Common Stock Index Portfolio has the investment objective of providing capital
appreciation and accumulation of income that corresponds to the investment
return of the Standard & Poor's 500 Composite Stock Price Index, through
investment in common stocks traded on the New York Stock Exchange and the
American Stock Exchange, to a limited extent, in the over-the-counter markets.
Total Return Portfolio has the investment objective of providing the highest
total return, composed of current income and capital appreciation, as is
consistent with prudent investment risk by investing in common stocks, bonds and
money market instruments, the proportion of each being continuously determined
by the investment adviser.
International Equity Portfolio has the investment objective of providing
long-term capital appreciation. The Portfolio seeks to achieve its objective by
investing primarily in equity and equity-related securities of companies that
are organized outside of the U.S. or whose securities are principally traded
outside of the U.S.
Real Estate Securities Portfolio has the investment objective of providing
maximum total return through current income and capital appreciation. The
Portfolio seeks to achieve its objective by investing primarily in securities of
U.S. issuers that are principally engaged in or related to the real estate
industry including those that own significant real estate assets. The Portfolio
will not invest directly in real estate.
Aon Advisors, Inc. serves as investment adviser to Life of Virginia Series
Fund. Life of Virginia Series Fund pays Aon Advisors, Inc. compensation in the
form of an investment advisory fee, computed and accrued daily, and paid
monthly. The investment advisory fee for each portfolio is based on the average
daily net assets of the portfolio at the following annual rates: for Common
Stock Index Portfolio .35%; Government Securities Portfolio, Money Market
Portfolio, and Total Return Portfolio .50% of the first $100,000,000, .45% of
the next $100,000,000, .40% of the next $100,000,000, .35% of the next
$100,000,000, and .30% of amounts in excess of $400,000,000; International
Equity Portfolio 1.00% on the first $100,000,000, .95% on the next $100,000,000,
and .90% of the amounts in excess of $200,000,000; Real Estate Securities
Portfolio .85% of the first $100,000,000, .80% on the next $100,000,000, and
.75% of the amounts in excess of $200,000,000. See the fund prospectus for
further details. Aon Advisors, Inc. has agreed to waive a portion of the
investment advisory fee for the first $100,000,000 of average daily net assets
of the Money Market Portfolio for 1996, resulting in a fee of .10%. There is no
guarantee that the fee waiver will continue after 1996.
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Oppenheimer Variable Account Funds
Oppenheimer Variable Account Funds ("OVAF") currently has nine portfolios,
five of which are available to Policyowners through Separate Account III:
Oppenheimer High Income Fund, Oppenheimer Bond Fund, Oppenheimer Capital
Appreciation Fund, Oppenheimer Growth Fund, and Oppenheimer Multiple Strategies
Fund.
Oppenheimer High Income Fund seeks a high level of current income from
investment in high yield fixed income securities, including unrated securities
or high risk securities in the lower rating categories. These securities may be
considered to be speculative. This Fund may have substantial holdings of
lower-rated debt securities or "junk" bonds. The risks of investing in junk
bonds are described in the prospectus for the OVAF, which should be read
carefully before investing.
Oppenheimer Bond Fund primarily seeks a high level of current income from
investment in high yield fixed income securities rated "Baa" or better by
Moody's or "BBB" or better by Standard & Poor's. Secondarily, it seeks capital
growth when consistent with its primary objective.
Oppenheimer Capital Appreciation Fund seeks to achieve capital appreciation by
investing in "growth-type" companies.
Oppenheimer Growth Fund seeks to achieve capital appreciation by investing in
securities of well-known established companies.
Oppenheimer Multiple Strategies Fund seeks a total investment return (which
includes current income and capital appreciation in the value of its shares)
from investments in common stocks and other equity securities, bonds and other
debt securities, and "money market" securities.
Oppenheimer Funds Inc. ("OFI") serves as investment adviser to OVAF. OVAF pay
OFI a monthly management fee. The monthly fee payable to OFI is computed
separately on the net assets of each portfolio as of the close of business each
day. The management fee rates are as follows (i) for Capital Appreciation Fund,
Growth Fund, and Multiple Strategies Fund: 0.75% of the first $200 million of
net assets, 0.72% of the next $200 million, 0.69% of the next $200 million,
0.66% of the next $200 million, and 0.60% of net assets over $800 million; and
(ii) for High Income Fund and Bond Fund: 0.75% of the first $200 million of net
assets, 0.72% of the next $200 million, 0.69% of the next $200 million, 0.66% of
the next $200 million, 0.60% of the next $200 million, and 0.50% of net assets
over $1 billion.
Janus Aspen Series
The Janus Aspen Series ("JAS") currently has nine portfolios, six of which are
currently available to Policyowners through Separate Account III: Growth
Portfolio, Aggressive Growth Portfolio, Worldwide Growth Portfolio,
International Growth Portfolio, Balanced Portfolio, and Flexible Income
Portfolio. THE INTERNATIONAL GROWTH PORTFOLIO IS NOT AVAILABLE IN CONNECTION
WITH POLICIES ISSUED TO CALIFORNIA POLICYOWNERS.
Growth Portfolio has the investment objective of long-term capital growth in a
manner consistent with the preservation of capital. The Growth Portfolio is a
diversified portfolio that pursues its objective by investing in common stocks
of companies of any size. Generally, this Portfolio emphasizes larger, more
established issuers.
Aggressive Growth Portfolio has the investment objective of long-term growth
of capital. The Aggressive Growth Portfolio is a non-diversified portfolio that
will seek to achieve its objective by normally investing at least 50% of its
equity assets in securities issued by medium-sized companies.
Worldwide Growth Portfolio has the investment objective of long-term growth of
capital in a manner consistent with the preservation of capital. The Worldwide
Growth Portfolio will seek to achieve its objective by investing in a
diversified portfolio of common stocks of foreign and domestic issuers of all
sizes. The Portfolio normally invests in issuers from at least five different
countries including the United States.
International Growth Portfolio has the investment objective of long-term
growth of capital. The International Growth Portfolio will seek to achieve its
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seek to achieve its objective primarily through investments in common stocks of
issuers located outside the United States. The Portfolio normally invests at
least 65% of its total assets in securities of issuers from at least five
different countries, excluding the United States.
Balanced Portfolio has the investment objective of seeking long-term growth of
capital, consistent with the preservation of capital and balanced by current
income. The Portfolio normally invests 40-60% of its assets in securities
selected primarily for their growth potential and 40-60% of its assets in
securities selected primarily for their income potential.
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Flexible Income Portfolio has the investment objective of seeking to obtain
maximum total return, consistent with preservation of capital. Total return is
expected to result from a combination of income and capital appreciation. The
Portfolio pursues its objective primarily by investing in any type of
income-producing securities. This Portfolio may have substantial holdings of
lower-rated debt securities or "junk" bonds. The risks of investing in junk
bonds are described in the prospectus for the JAS, which should be read
carefully before investing.
Janus Capital Corporation serves as Investment Adviser to the portfolios of
JAS. The portfolios pay a fee to the Investment Adviser. The Growth, Aggressive
Growth, Worldwide Growth, International Growth and Balanced Portfolios are each
subject to the following advisory fee schedule: 1% of the first $30 million,
0.75% of the next $270 million, 0.70% of the next $200 million, 0.65% of amounts
over $500 million. The Flexible Income Portfolio is subject to the following
advisory fee schedule: .65% of the first $300 million, and .55% of amounts over
$300 million. Janus Capital has agreed to reduce the advisory fee for the
Growth, Aggressive Growth, Worldwide Growth, International Growth and Balanced
Portfolios to the extent that such fee exceeds the effective rate of the Janus
retail fund corresponding to such portfolios. In addition, Janus Capital has
agreed to reimburse each portfolio for advisory fees and other expenses in
excess of a specified percentage of net assets. The expense limits of the
portfolios differ and are set forth in the Statement of Additional Information
for JAS.
Federated Insurance Series
The Federated Insurance Series ("FIS") currently has seven portfolios, three
of which, Federated Utility Fund II, Federated High Income Bond Fund II and
Federated American Leaders Fund II, are available to Policyowners through
Separate Account III. THE FEDERATED AMERICAN LEADERS FUND II IS NOT AVAILABLE IN
CONNECTION WITH POLICIES ISSUED TO CALIFORNIA POLICYOWNERS.
Federated Utility Fund II has the investment objective of high current income
and moderate capital appreciation. The Federated Utility Fund II will seek to
achieve its objective by investing primarily in equity and debt securities of
utility companies.
Federated High Income Bond Fund II has the investment objective of high
current income. The Federated High Income Bond Fund II will seek to achieve its
objective by investing primarily in a diversified portfolio of professionally
managed fixed-income securities. The fixed-income securities in which the Fund
intends to invest are lower-rated corporate debt obligations, commonly referred
to as "junk bonds". The risks of these securities are described in the
prospectus for the FIS, which should be read carefully before investing.
Federated American Leaders Fund II has the primary investment objective of
long-term growth of capital, and a secondary objective of providing income. The
Federated American Leaders Fund II will seek to achieve its objective by
investing, under normal circumstances, at least 65% of its total assets in
common stock of "blue chip" companies.
Federated Advisers serves as investment adviser to the Federated Utility Fund
II, Federated High Income Bond Fund II and Federated American Leaders Fund II.
The maximum management fee is annual investment advisory fee equal to .75% of
the Federated Utility Fund II's average daily net assets, .60% of the Federated
High Income Bond Fund II's average daily net assets, and .75% of the Federated
American Leaders Fund II's average daily net assets. The adviser has voluntarily
chosen to waive all or a portion of its fee in order that the total annual
expenses for Federated Utility Fund II, Federated High Income Bond Fund II, and
Federated American Leaders Fund II would not exceed 0.85%, 0.80% and 0.85%,
respectively, of average net assets. Based on total expenses during 1995 of
3.09% for Federated Utility Fund II, 4.20% for Federated High Income Bond Fund
II, and 2.21% for Federated American Leaders Fund II, the adviser estimates that
during 1996 it will waive management fees of .75%, .60% and .75%, respectively.
The adviser can terminate this voluntary waiver at any time at its sole
discretion.
The Alger American Fund
The Alger American Fund ("AAF") currently has six portfolios, two of which are
currently available to Policyowners through Separate Account III: Alger American
Small Capitalization Portfolio and Alger American Growth Portfolio.
Alger American Small Capitalization Portfolio has the investment objective of
long-term capital appreciation. Except during temporary defensive periods, this
Portfolio invests at least 65% of its total assets in equity securities of
companies that, at the time
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of purchase, have a total market capitalization within the range of companies
included in the Russell 2000 Growth Index, updated quarterly. The Portfolio may
invest up to 35% of its total assets in equity securities of companies that, at
the time of purchase, have total market capitalization outside the range of
companies included in the Russell 2000 Growth Index and in excess of that amount
(up to 100% of its assets) during temporary defensive periods.
Alger American Growth Portfolio has the investment objective of long-term
capital appreciation. Except during temporary defensive periods, this Portfolio
invests at least 65% of its total assets in equity securities of companies that,
at the time of purchase, have a total market capitalization of $1 billion or
greater.
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Fred Alger Management, Inc. serves as the investment manager to the Alger
American Small Capitalization Portfolio and Alger American Growth Portfolio.
The manager receives an annual fee from each portfolio based on the average
daily net assets of the portfolio at the following rates: Small Capitalization
Portfolio, 0.85%; Growth Portfolio, 0.75%. Fred Alger Management, Inc. has
agreed to reimburse each of these portfolios to the extent that the annual
operating expenses (excluding interest, taxes, fees for brokerage services and
extraordinary expenses) exceed 1.50% of the average daily net assets of either
portfolio for any fiscal year.
THERE IS NO ASSURANCE THAT THE STATED OBJECTIVES AND POLICIES OF ANY OF THE
FUNDS WILL BE ACHIEVED.
Life of Virginia currently is compensated by an affiliate(s) of each of the
Funds based upon an annual percentage of the average assets held in the Fund by
Life of Virginia. These percentage amounts, which vary by Fund, are intended to
reflect administrative and other services provided by Life of Virginia to the
Fund and/or affiliate(s).
More detailed information concerning the investment objectives and policies of
the Funds and the investment advisory services and charges can be found in the
current prospectuses for the Funds which accompany or precede this Prospectus. A
prospectus for each Fund can be obtained by writing or calling Life of
Virginia's Home Office. The prospectus for each Fund should be read carefully
before any decision is made concerning the allocation of premium payments or
transfers among the Investment Subdivisions of Separate Account III.
Resolving Material Conflicts
The Funds are used as investment vehicles for variable life insurance and
variable annuity policies issued by Life of Virginia. In addition, all of the
Funds, other than the Life of Virginia Series Fund, Inc., are also available to
separate accounts of insurance companies other than Life of Virginia offering
variable life and variable annuity policies. As a result, there is a possibility
that a material conflict may arise between the interests of Policyowners owning
Policies whose Cash Values are allocated to Separate Account III and of
Policyowners owning policies whose cash values are allocated to one or more
other separate accounts investing in any one of the Funds.
In addition, Janus Aspen Series, Life of Virginia Series Fund, Inc., and The
Alger American Fund may sell shares to certain retirement plans. As a result,
there is a possibility that a material conflict may arise between the interests
of policyowners generally or certain classes of Policyowners, and such
retirement plans or participants in such retirement plans.
In the event of a material conflict, Life of Virginia will take any necessary
steps, including removing Separate Account III from that Fund, to resolve the
matter. See the individual Fund prospectus for greater details.
Termination of Participation Agreements
The participation agreements pursuant to which the Funds sell their shares to
Separate Account III contain varying provisions regarding termination. The
following summarizes those provisions:
Fidelity Variable Insurance Products Fund and Variable Insurance Products
Fund II (the "Fund"). These agreements provide for termination (1) on one
year's advance notice by either party, (2) at Life of Virginia's option if
shares of the Fund are not reasonably available to meet requirements of the
policies, (3) at the option of either party if certain enforcement proceedings
are instituted against the other, (4) upon vote of the policyowners to
substitute shares of another mutual fund, (5) at Life of Virginia's option if
shares of the Fund are not registered, issued, or sold in accordance with
applicable laws or if the Fund ceases to qualify as regulated investment
companies under the Internal Revenue Code, (6) at the option of the Fund or
their principal underwriters if they determine that Life of Virginia has
suffered material adverse changes in its business or financial condition or is
the subject of material adverse publicity, (7) at the option of Life of
Virginia if the Funds have suffered material adverse changes in their business
or financial conditions or are the subject of material adverse publicity, or
(8) at the option of the Funds or their principal underwriters if Life of
Virginia decides to make another mutual fund available as a funding vehicle
for its policies.
Life of Virginia Series Fund, Inc. This agreement may be terminated by
either party on 360 days' written notice to the other. Oppenheimer Variable
Account Funds. This agreement may be terminated by the parties on six
months' advance written notice. Janus Aspen Series. This agreement may be
terminated by the parties on six months' advance written notice. Federated
Insurance Series. This agreement may be terminated by any of the parties on
180 days advance written notice to the other parties.
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The Alger American Fund. This agreement may be terminated at the option of
any party upon six months' advance written notice to the other parties, unless a
shorter time is agreed to by the parties.
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THE POLICY
This Prospectus describes the basic Policy. There may be differences in your
Policy because of requirements of the state where your Policy is issued. Any
such differences will be included in your Policy.
Purpose of the Policy
The Policy is designed to provide the Owner with lifetime insurance
protection. Although the Policy may operate as a single premium policy, under
certain circumstances additional premiums either may be paid at the
Policyowner's option or are required in order to keep the Policy in force.
Moreover, the Policy enables the Policyowner to adjust the level of Death
Benefit Proceeds payable under a Policy by increasing the specified amount.
Thus, as insurance needs or financial conditions change, the Policyowner has
flexibility to adjust Death Benefit Proceeds and to make Additional Premium
Payments.
The Policy is a "variable" policy because, unlike the fixed benefits of an
ordinary life insurance policy, the Cash Value will, and under certain
circumstances the Death Benefit may, increase or decrease depending upon the
investment experience of the Investment Subdivisions of Separate Account III to
which the Policyowner allocates premiums. Accordingly, the Policyowner reaps the
benefit of any appreciation in value of the underlying assets, but also bears
the investment risk of any depreciation in the value of those assets. The
payment of one or more premiums does not guarantee that the Policy will stay in
force. Instead, whether or not a Policy continues in force will depend on the
amount of the Surrender Value, which in turn will depend upon the investment
experience of the chosen Investment Subdivision(s) of Separate Account III. So
long as the Policy remains in force, the Death Benefit payable will never be
less than the specified amount; however, there is no guaranteed minimum Cash
Value.
Purchasing a Policy
Individuals wishing to purchase a Policy must complete an application and
submit it to an authorized registered agent or to Life of Virginia at its Home
Office at 6610 West Broad Street, Richmond, Virginia 23230. Life of Virginia
will not issue Policies to insure persons older than age 75. Acceptance of an
application is subject to Life of Virginia's underwriting rules and Life of
Virginia reserves the right to reject an application for any lawful reason and
in a manner such that similarly-situated risks are treated in a consistent
manner and unfair discrimination is avoided. Life of Virginia assigns Insureds
to standard and substandard risk classes. Cost of insurance deductions will
generally be higher under Policies insuring persons assigned to substandard risk
classes.
If the first full premium is not paid with the application, insurance will
become effective on the Effective Date, which is the date that premium is paid
and the Policy is delivered while all persons proposed for insurance are
insurable. If the first full premium is paid and a conditional receipt is given
to the applicant, then, subject to a maximum limitation, insurance as provided
by the terms and conditions of the Policy applied for will become effective on
the Effective Date specified by the conditional receipt, provided the insured is
found to be, on the Effective Date, insurable at standard premium rates for the
plan and amount of insurance requested in the application.
The Effective Date specified in the conditional receipt is the latest of (i)
the date of completion of the application, (ii) the date of completion of all
medical exams and tests required by Life of Virginia, and (iii) the policy date
requested by the applicant when that date is later than the date the application
is completed.
Dates Under The Policy
A Policy Date is assigned to each Policy when the Policy is issued. The Policy
Date will normally be a date between the date the application is signed and the
date the Policy is issued; however, the Policy Date may be any other date
mutually agreeable to Life of Virginia and the Policyowner. If the Policy Date
would otherwise fall on the 29th, 30th, or 31st day of a month, the Policy Date
will be the 28th.
"Policy years" for the original specified amount and the initial premium are
measured from the Policy Date. With regard to increases in the specified amount,
however, "years" are measured from the effective date of the increase, while
"years" for determining charges attributable to Additional Premium Payments are
measured from the policy anniversary coincident with or preceding receipt of the
Additional Premium Payment.
Payments Made Under The Policy
Initial Premium. The initial premium is due on the Policy Date. This amount
will be stated on the policy data pages. If the Insured is above age 60, the
initial premium must equal the total planned premium.
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All premiums are payable to Life of Virginia at its Home Office.
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Planned Premiums. The amount of the planned premium will be stated on the
policy data pages. The minimum first year planned premium is $5,000.
The total planned premium must equal the guideline single premium for life
insurance as determined in the Internal Revenue Code for the Policy's initial
specified amount. The relationship between the guideline single premium and the
specified amount depends on the age, sex and risk class of the Insured.
Generally, the same guideline single premium will purchase a higher specified
amount for a younger Insured than for an older Insured of the same sex and risk
class. Likewise, the same guideline single premium will purchase a slightly
higher specified amount for a female Insured than for a male Insured of the same
age and risk class. Representative specified amounts for a $10,000 guideline
single premium are set forth below:
Specified Amount for a $10,000 Guideline Single Premium
Age Male Female
10 $172,614 $222,762
20 118,079 148,384
30 79,351 97,259
40 51,445 63,084
50 34,265 42,083
60 23,862 28,731
70 17,680 20,131
Preferred Funding Risk Class
A Policy issued with respect to an Insured assigned to the standard risk
class may qualify for the Preferred Funding Risk Class, provided that the amount
of total premiums paid under the Policy meets the premium requirements of the
Preferred Funding Schedule. The Preferred Funding Schedule, set forth below,
shows the amount of total premiums that must be paid (as a percentage of a
Policy's total planned premiums) as of the beginning of Policy years one through
five in order for a Policy to qualify for the Preferred Funding Risk Class. Cost
of insurance charges deducted under Policies in this risk class are subject to
certain limits. See below.
Policy Year Total Premiums
(as a % of the Total Planned Premium)
1 20%
2 40%
3 60%
4 80%
5+ 100%
Additional Premium Payments. Although the Policy can operate as a single
premium policy, Additional Premium Payments may be made under certain
circumstances, so long as there is no outstanding Policy Debt. If there is
Policy Debt outstanding, any payment received by Life of Virginia will be
considered repayment of that debt. Should any such payment exceed the amount of
Policy Debt outstanding, the amount in excess of Policy Debt will be treated as
an Additional Premium Payment. The circumstances under which Additional Premium
Payments can be made are listed below:
(1) Increases in Specified Amount -- After the first Policy Year, the
Policyowner may request an increase in specified amount. (See Changes in
the Specified Amount, p. 27.) If the Policyowner's request is approved,
Life of Virginia will require the Policyowner to make an Additional Premium
Payment in order for an increase to become effective. The minimum
Additional Premium Payment Life of Virginia will allow in connection with
an increase in the specified amount is $1,000.
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(2) In Order to Prevent Lapse -- If the Surrender Value on a Monthly
Anniversary Day is insufficient to cover the monthly deduction due on that
Monthly Anniversary Day, then in order to prevent lapse, the Policyowner
must make a payment during the grace period sufficient to cover the monthly
deduction. Payments received in excess of any outstanding Policy Debt will
be treated as Additional Premium Payments. The minimum payment that may be
made in this circumstance will be stated in the notice mailed to the
Policyowner. The Policyowner may make an Additional Premium Payment in an
amount greater than that required to prevent lapse as long as the total of
all premium payments, immediately after the payment to prevent lapse, is
less than the maximum premiums limitation shown in the policy data pages.
If the Policyowner does not make a sufficient payment, the Policy will
lapse and terminate without value. (See Policy Lapse and Reinstatement, p.
20.)
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(3) At the Policyowner's Discretion -- Additional Premium Payments may be
made, at the Policyowner's discretion, so long as the amount of the payment is
at least $250 and the payment plus the total of all premiums previously paid
does not exceed the maximum premiums limitation shown in the policy data pages.
The maximum premiums limitation will be derived from the guideline premium test
for life insurance set forth in the Internal Revenue Code. If the initial
premium equals the maximum premiums limitation at issue, discretionary
Additional Premium Payments normally will not be permitted during the early
years of the Policy.
In the event that a discretionary Additional Premium Payment is made that
causes the total amount of premiums paid under the Policy to exceed the maximum
premiums limitation, Life of Virginia will accept only the portion of the
premium which, together with premiums previously paid, equals the maximum
premiums limitation, and will return the excess to the Policyowner. Thereafter,
no discretionary Additional Premium Payments will be accepted until allowed by
the maximum premiums limitation.
Additional Premium Payments made in accordance with the terms of the Policy
are credited as of the next close of business (on a Business Day) following
receipt of payment at the Home Office.
Repayment of Outstanding Policy Debt. If there is any outstanding Policy Debt
on the date Life of Virginia receives a payment, the payment will be treated
first as a repayment of outstanding Policy Debt. (See Loan Benefits -- Repayment
of Policy Debt, p. 25.) Only the portion of the payment in excess of any
outstanding Policy Debt will be treated as an Additional Premium Payment.
Allocation of Premiums
The Policyowner determines the allocation of premiums among Investment
Subdivisions of Separate Account III that will take effect after the Initial
Investment Period. The initial allocation is made in the application. The
Policyowner may allocate premiums totally to one Investment Subdivision of
Separate Account III, or partially to any of these Investment Subdivisions;
however, at any one point in time, the Cash Value may not be invested in more
than seven Investment Subdivisions. Furthermore, the minimum percentage that may
be allocated to any one Investment Subdivision is 1%.
If the first full premium is paid and a conditional receipt given to the
applicant, the premium is placed in Life of Virginia's General Account until the
Effective Date. On the Effective Date, the premium is placed in the Investment
Subdivision of Separate Account III that invests exclusively in the Money Market
Portfolio of the Life of Virginia Series Fund, Inc. until the end of the Initial
Investment Period. For premiums received after the Policy is approved for issue,
but before the end of the Initial Investment Period, the premiums will also be
placed in the Investment Subdivision that invests exclusively in the Money
Market Portfolio of the Life of Virginia Series Fund, Inc. at the end of the
valuation period during which they were received until the end of the Initial
Investment Period. The Initial Investment Period ends either on the date the
Home Office receives a form satisfactory to Life of Virginia and signed by the
Policyowner, indicating that the Policyowner has received and accepted the
Policy, or if the Policy is not accepted when all amounts due are refunded.
The Policyowner may change the allocation of later premiums at any time,
without charge, simply by sending written notice to Life of Virginia at its Home
Office. The allocation will apply to any premiums received after Life of
Virginia records the change. The Cash Value will vary with the investment
performance of the Investment Subdivisions the Policyowner selects, and the
Policyowner bears the entire investment risk for the Cash Value in any
particular Investment Subdivision. The allocation of premiums will affect not
only the Policy's Cash Value, but it may also affect the Death Benefit. The
Policyowner should periodically review his allocation of Cash Value in light of
market conditions and overall financial planning requirements.
Policy Lapse and Reinstatement
Lapse. The Policy will lapse if, on a Monthly Anniversary Day, the Surrender
Value (Cash Value less outstanding Policy Debt and any applicable surrender
charge) is insufficient to cover the monthly deduction due on that Monthly
Anniversary Day (See Charges and Deductions -- Monthly Deduction, p. 29), and a
grace period expires without a sufficient payment. Life of Virginia allows the
Policyowner a 61-day grace period to make a payment sufficient to cover the
monthly deduction. The grace period will begin on the date Life of Virginia
mails notice of the insufficiency. Life of Virginia will mail notice to the
Policyowner and to any assignee of record in its Home Office.
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The Policyowner must, during the grace period, make a payment which is
sufficient to cover any due and unpaid monthly deductions in order to avoid
lapse of the Policy. Failure to make a sufficient payment by the end of the
grace period will cause the Policy to lapse and terminate without value.
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So long as there is outstanding Policy Debt, that portion of any sufficient
payment received during the grace period that is less than or equal to the
amount of the Policy Debt will be treated as a repayment of Policy Debt and not
as an Additional Premium Payment. If a payment is treated as repayment of
outstanding Policy Debt, Life of Virginia will transfer the amount of Cash Value
held in the General Account as security for that part of the Policy Debt being
repaid into Separate Account III, which increases the Surrender Value of the
Policy, thereby preventing lapse.
Insurance coverage continues during the grace period, but the Policy will be
deemed to have no Cash Value for purposes of policy loans and surrenders. If the
Insured dies during the grace period, the Death Benefit Proceeds payable during
the grace period will equal the amount of the Death Benefit in effect
immediately prior to the commencement of the grace period less any due and
unpaid monthly deductions. A lapse of the Policy may result in adverse tax
consequences. (See Federal Tax Matters, p. 36.)
Reinstatement. If the Policy is terminated during the Insured's life because a
grace period ended without a sufficient payment being made, the Policy can be
reinstated. Reinstatement must occur within three years of the expiration of the
grace period and prior to the Maturity Date. To reinstate, evidence satisfactory
to Life of Virginia must be submitted that the Insured is insurable. In
addition, a payment must be made which is sufficient to cover the monthly
deductions for the first two Policy Months following reinstatement. Life of
Virginia may, however, accept a payment larger than this amount as long as
immediately after the payment the total of all premium payments made is less
than the maximum premiums limitation shown in the policy data pages. Unless the
payment is repayment of outstanding Policy Debt, the amount paid will be treated
as an Additional Premium Payment. The Policy will be reinstated on the date the
reinstatement is approved by Life of Virginia.
Any Policy Debt which existed at the end of the grace period will be
reinstated if it is not paid. If Policy Debt is reinstated, all payments
received by Life of Virginia will be treated first as repayment of Policy Debt.
If a payment larger than the Policy Debt is made, the excess will be treated as
an Additional Premium Payment. Regardless of whether the payment made is
repayment of Policy Debt or an Additional Premium Payment, the amount of the
payment must be sufficient to cover the monthly deductions for the first two
policy months following reinstatement.
Life of Virginia will not reinstate a Policy that has been surrendered for its
Surrender Value.
Examination of Policy (Refund Privilege)
The Policyowner may examine the Policy and return it for refund within 10 days
after it is received, or within 45 days after Part I of the application is
signed, whichever is latest. The amount of refund will equal the advisory fee
deducted from the Funds attributable to the Policy, plus the premiums allocated
to Separate Account III adjusted by investment gains and losses. The state in
which the Policy is issued may require, instead, a refund of the gross premiums
paid. In certain states the Policyowner may have more than 10 days to return the
policy for a refund. A Policyowner wanting a refund should return the Policy to
either Life of Virginia at its Home Office or to the registered agent who sold
it.
Exchange Privilege
During the first 24 Policy Months, the Policyowner may convert this Policy to
a permanent fixed benefit policy. The amount of the new policy will be the
specified amount of this Policy on the date of exchange. Premiums will be based
on the same issue age and risk classification of the Insured as the existing
Policy. The conversion will be subject to an equitable adjustment in payments
and cash values to reflect variances, if any, in the payments and cash values
under the existing Policy and the new policy.
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POLICY RIGHTS AND BENEFITS
While the Policy is in effect it provides for certain benefits. Subject to
certain limitations, the Policyowner may at any time obtain the Surrender Value
by surrendering the Policy. (See Surrender Privileges, p. 22.) In addition,
the Policyowner has certain policy loan privileges under the Policy. (See Loan
Benefits, p. 25.) The Policy also provides for the payment of a Death Benefit
upon the death of the Insured. (See Death Benefit, p. 26.)
Cash Value Benefits
Surrender Privileges. During the Insured's life, and as long as the Policy is
in effect, a Policyowner may surrender the Policy at any time by sending a
written request in a form acceptable to Life of Virginia, along with the Policy,
to Life of Virginia at its Home Office.
The amount payable on surrender of the Policy is the Surrender Value at the
end of the Valuation Period during which the request is received. The Surrender
Value may be paid in a lump sum or under one of the optional payment plans
specified in the Policy. (See Optional Payment Plans, p. 28.)
Surrender Value. The Surrender Value equals the Cash Value on the date Life
of Virginia receives a request for surrender, less any outstanding Policy Debt
and less any applicable surrender charge. (See Surrender Charge, p. 31.)
Surrender Value will be determined at the end of the Valuation Period during
which the request for a surrender is received. Proceeds will generally be paid
within seven days of receipt of a request for a surrender. Postponement of
payments may occur in certain circumstances. (See Postponement of Payment, p.
33.)
Partial Withdrawals. In each Policy Year after the first, the Policyowner may
make one partial withdrawal from the Cash Value of the Policy. The amount which
may be withdrawn is that amount of Cash Value of the Policy which exceeds the
sum of the premiums paid and outstanding policy debt. A charge equal to the
lesser of $25 or 2% of the amount withdrawn will be deducted from each
withdrawal. No surrender charge will apply.
The Policyowner may tell Life of Virginia how to allocate the partial
withdrawal from the Investment Subdivisions of the Separate Account. If no
notification is given, the partial withdrawal will be made from each Investment
Subdivision in the same proportion that the Policy's Cash Value in that
Investment Subdivision bears to the total Cash Value on the date the request for
withdrawal is received in the home office of the company.
If a partial withdrawal is made, the Specified Amount under the Policy will be
reduced by the amount which the Partial Withdrawal amount would purchase if paid
as a single premium on the date of the withdrawal.
Partial withdrawals may have federal tax consequences, and prior to age 59 1/2
may result in a 10% penalty tax. (See Federal Tax Matters, p. 36).
Calculation of Cash Value. The Policy provides for an accumulation of Cash
Value. Cash Value will be determined on a daily basis. A Policy's Cash Value
will reflect a number of factors, including premiums paid, partial withdrawals,
policy loans, charges assessed in connection with the Policy, and the investment
performance of the Investment Subdivisions of Separate Account III to which the
Cash Value is allocated. There is no guaranteed minimum Cash Value. The Cash
Value equals the sum of all amounts in each Investment Subdivision of Separate
Account III plus the value of any amount transferred to the General Account to
secure Policy Debt.
On the later of the Policy Date or the date the initial premium is received,
the Cash Value is the initial premium, less any due and unpaid monthly
deductions, adjusted by the Policy's share of investment gains and losses in
that Investment Subdivision. On that date, the Cash Value is allocated entirely
to the Investment Subdivision of Separate Account III that invests exclusively
in the Money Market Portfolio of the Life of Virginia Series Fund, Inc. and,
therefore, there is no Cash Value in the other Investment Subdivisions. (See
Allocation of Premiums, p. 20.)
At the end of each Valuation Period thereafter, the Cash Value in each
Investment Subdivision of Separate Account III is (a) plus (b) plus (c) minus
(d) minus (e) where:
(a) is the Cash Value allocated to the Investment Subdivision at the end of
the preceding Valuation Period, multiplied by the Investment
Subdivision's Net Investment Factor for the current period;
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(b) is any Additional Premium Payments received during the current Valuation
Period that have been allocated to the Investment Subdivision;
(c) is any other amounts transferred into the Investment Subdivision during
the current Valuation Period; and
(d) is any Cash Value transferred out of the Investment Subdivision during
the current Valuation Period; and
(e) is any Cash Value withdrawn as a partial withdrawal.
In addition, whenever a Valuation Period includes the Monthly Anniversary Day,
the Cash Value at the end of such period is reduced by the monthly deduction
allocated to the Cash Value in the Investment Subdivision for that Monthly
Anniversary Day. (See Charges and Deductions -- Monthly Deduction, p. 29.)
Unit Value. Each Investment Subdivision has a Unit Value. When premiums or
other amounts are transferred into an Investment Subdivision, a number of Units
are purchased based on the Unit Value of the Investment Subdivision as of the
end of the Valuation Period during which the transfer is made. Likewise, when
amounts are transferred out of an Investment Subdivision, including Partial
Withdrawals, Units are redeemed in a similar manner.
For each Investment Subdivision, the Unit Value for the first Valuation Period
was $10.00. The Unit Value for each subsequent period is the Net Investment
Factor for that period, multiplied by the Unit Value for the immediately
preceding period. The Unit Value for a Valuation Period applies to each day in
the period.
Net Investment Factor. The Net Investment Factor measures investment
performance of the Investment Subdivisions of Separate Account III during a
Valuation Period. Each Investment Subdivision has its own Net Investment Factor
for a Valuation Period. The Net Investment Factor of an Investment Subdivision
for a Valuation Period is (a) divided by (b), minus (c), where:
(a) is (1) the value of the net assets of that Investment Subdivision at the
end of the preceding Valuation Period, plus (2) the investment income and
capital gains, realized or unrealized, credited to the net assets of that
Investment Subdivision during the Valuation Period for which the Net
Investment Factor is being determined, minus (3) the capital losses,
realized or unrealized, charged against those assets during the Valuation
Period, minus (4) any amount charged against that Investment Subdivision
for taxes, or any amount set aside during the Valuation Period by Life of
Virginia as a provision for taxes attributable to the operation or
maintenance of that Subdivision; and
(b) is the value of the net assets of that Investment Subdivision at the end
of the preceding Valuation Period; and
(c) is a charge no greater than .0035750% for each day in the Valuation
Period. This corresponds to 1.30% per year of the net assets of that
Investment Subdivision for mortality and expense risks and administrative
expenses.
The value of the assets in Separate Account III will be taken at their fair
market value in accordance with generally accepted accounting principles and
applicable laws and regulations.
How The Period of Coverage Under a Policy Can Vary. The period of coverage
under a Policy depends upon the Surrender Value. The Policy will remain in force
as long as the Surrender Value is sufficient to pay the monthly deduction. (See
Charges and Deductions -- Monthly Deduction, p. 29.) When, however, the
Surrender Value is insufficient to pay the monthly deduction and the grace
period expires without an adequate payment by the Policyowner, the Policy will
lapse and terminate without value. (See Policy Lapse and Reinstatement --
Lapse, p. 20.)
Transfers
After the Initial Investment Period, Policyowners may transfer amounts among
the Investment Subdivisions of Separate Account III that are available at the
time of the request by sending a written request to the Home Office. Telephone
transfers are subject to Life of Virginia's administrative requirements.
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The transfer will be effective as of the end of the Valuation Period during
which the request is received at the Home Office. Currently, there is no limit
to the number of transfers that may be made; however, Life of Virginia reserves
the right to limit the number of transfers, if necessary, in order that the
Policy will continue to receive life insurance treatment by the Internal Revenue
Service. Where permitted by state law, Life of Virginia also reserves the right
to refuse to execute any transfer if any of the Investment Subdivisions that
would be affected by the transfer are unable to purchase or redeem shares of the
mutual funds in which they invest.
The first transfer in each calendar month will be made without charge.
Thereafter, each time amounts are transferred, a transfer charge of $10 will be
imposed. This charge is deducted from the amount transferred. The Cash Value on
the date of transfer will not be affected by the transfer except to the extent
of the transfer charge. The transfer charge is Life of Virginia's estimate of
the average actual cost of present and future typical transfers; Life of
Virginia does not expect to make a profit from the process of executing
transfers. Once a Policy is issued, the amount of the transfer charge is
guaranteed for the life of the Policy.
Telephone Transfers
Life of Virginia permits telephone transfers and may be liable for losses
resulting from unauthorized or fraudulent telephone transfers if it fails to
employ reasonable procedures to confirm that the telephone instructions that it
receives are genuine. Therefore, Life of Virginia will employ means to prevent
unauthorized or fraudulent telephone requests, such as sending written
confirmation, recording telephone requests, and/or requesting other identifying
information. In addition, Life of Virginia may require written authorization
before allowing Policyowners to make telephone transfers.
To request a telephone transfer, Policyowners should call Life of Virginia's
Telephone Transfer Line at 800-772-3844. Life of Virginia will record all
telephone transfer requests. Transfer requests received at least one hour prior
to the close of the New York Stock Exchange will be executed that Business Day
at that day's prices. Requests received after that time will be executed on the
next Business Day at that day's prices.
Dollar-Cost Averaging
Policyowners may elect to have Life of Virginia automatically transfer
specified amounts from one of certain designated Investment Subdivisions of
Separate Account III to any other subdivision(s) on a monthly or quarterly
basis. This privilege is intended to permit policyowners to utilize "Dollar-Cost
Averaging," a long-term investment method that provides for regular investing
over a period of time. Life of Virginia makes no representations or guarantees
that Dollar-Cost Averaging will result in a profit or protect against loss.
Policyowners must select Dollar-Cost Averaging on the application or complete
a Dollar-Cost Averaging Agreement in order to begin the Dollar-Cost Averaging
program. Currently, the Investment Subdivision designated for the purpose of
Dollar-Cost Averaging is the investment subdivision that invests in the Money
Market Portfolio of Life of Virginia Series Fund, Inc. Money may also be
transferred to the designated Investment Subdivision from other subdivisions
within the Separate Account. Any amount allocated or transferred must conform to
the minimum amount and percentage requirements. (See Transfers p. 23).
Dollar-Cost Averaging will continue until the entire cash value in the
subdivision designated for Dollar-Cost Averaging is depleted. The policyowner
has the option of discontinuing Dollar-Cost Averaging by sending Life of
Virginia a written cancellation notice. Policyowners may make changes to their
Dollar-Cost Averaging program by calling Life of Virginia's Telephone Transfer
Line at 800-772-3844. Also, Life of Virginia reserves the right to discontinue
Dollar-Cost Averaging upon 30 days written notice to the Policyowner.
Powers of Attorney
As a general rule and as a convenience to Policyowners, Life of Virginia
allows the use of powers of attorney whereby Policyowners give third parties the
right to effect cash value transfers on behalf of the Policyowners. However,
when the same third party possesses powers of attorney executed by many
Policyowners, the result can be simultaneous transfers involving large amounts
of cash value. Such transfers can disrupt the orderly management of the mutual
funds underlying the variable policy, can result in higher costs to
Policyowners, and are generally not compatible with the long-range goals of
purchasers of variable policies. Life of Virginia believes that such
simultaneous transfers
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effected by such third parties are not in the best interests of all shareholders
of the funds underlying its policies, and this position is shared by the
managements of those mutual funds.
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Therefore, to the extent necessary to reduce the adverse effects of
simultaneous transfers made by third parties holding multiple powers of
attorney, Life of Virginia may not honor such powers of attorney and has
instituted or will institute procedures to assure that the transfer requests
that it receives have, in fact, been made by the policyowners in whose names
they are submitted. However, these procedures will not prevent Policyowners from
making their own cash value transfer requests.
Loan Benefits
Policy Loans. As long as the Policy remains in effect, a Policyowner may
borrow money from Life of Virginia at any time, using the Policy as the only
security for the loan. Life of Virginia's claim for repayment of a policy loan
has priority over the claims of any assignee of the Policy or other person. The
minimum loan amount is $500. The Maximum Loan Amount is 90% of the Policy's Cash
Value at the end of the Valuation Period during which the loan request is
received, less any surrender charge. The amount available to be borrowed at any
given time is the Maximum Loan Amount reduced by any outstanding Policy Debt.
Policy loans ordinarily will be paid within seven days after Life of Virginia
receives a request for a loan at its Home Office, although payments may be
postponed under certain circumstances. (See Postponement of Payment, p. 33.)
When a policy loan is made, a portion of the Policy's Cash Value equal to the
loan amount will be transferred out of Separate Account III into Life of
Virginia's General Account. The Policyowner may indicate, in writing, from which
Investment Subdivisions the Cash Value is to be transferred out of Separate
Account III. If no such written instruction is received with the loan request,
the Cash Value transferred out will automatically be transferred from the
Investment Subdivisions in the same proportion that the Cash Value in each
Investment Subdivision bears to the total Cash Value in all Investment
Subdivisions on the date the loan is made.
Currently, Life of Virginia credits interest at an annual rate of 6% for that
part of the General Account Cash Value up to an amount equal to the Cash Value
less the total of all premium payments made. An annual rate of 4% is credited to
that part of the General Account Cash Value in excess of the above amount. For
purposes of crediting these two rates of interest, the Cash Value as calculated
on the preceding Monthly Anniversary Day, or, if more recent, on any other
Business Day when a loan is made or Policy Debt is repaid, will be used. Life of
Virginia reserves the right to decrease, at its discretion, the rate of interest
credited to the amount of Cash Value transferred to the General Account to an
effective annual rate of not less than 4%. On each policy anniversary, the
interest earned since the preceding policy anniversary will be credited and
transferred to Separate Account III. Absent written instruction, Life of
Virginia will allocate this amount among the Investment Subdivisions of Separate
Account III in the same manner as policy loans are allocated.
Even though the loan may be repaid in whole or in part at any time while the
Insured is living, policy loans will permanently affect the Cash Value of a
Policy. The effect could be favorable or unfavorable depending upon whether the
investment performance of the Investment Subdivision(s) from which the Cash
Value is transferred is less than or greater than the interest rate being
credited to the Cash Value in the General Account while the loan is outstanding.
In comparison to a Policy under which no loan is made, Policy values will be
lower where such interest rate credited is less than the performance of the
Investment Subdivision(s), but will be greater where such interest rate is
greater than the performance of the Investment Subdivision(s). In addition,
Proceeds payable upon death or surrender will be reduced by the amount of any
outstanding Policy Debt.
Policy loans may have federal tax consequences, and prior to age 59 1/2 may
result in a 10% penalty tax. (See Federal Tax Matters, p. 36.) In addition, a
policy loan entails the risk that the Policy will lapse if interest credited to
the Cash Value in the general account while the loan is outstanding plus
earnings on Cash Value in the Investment Subdivisions is insufficient to prevent
policy debt from exceeding Cash Value less applicable surrender charges. Adverse
tax consequences may result from a lapse if Policy Debt is outstanding. The risk
of lapse due to a policy loan is greater where interest charged on the loan is
not paid when due.
Loan Interest Charged. Life of Virginia will charge a fixed interest rate of
6% per year on all outstanding policy loans. Interest accrues daily and is due
and payable on each policy anniversary. If interest is not paid when due, an
amount equal to the amount owed will be treated as a policy loan and interest
will be charged on that amount. Absent written instruction, the amount
transferred out of Separate Account III will be transferred from the Investment
Subdivisions of Separate Account III in the same proportion as policy loans are
transferred.
Policy Debt. Policy Debt equals the total of all outstanding policy loans,
plus accrued interest on policy loans. If Policy Debt exceeds the Cash Value
less any applicable surrender charge, Life of Virginia will notify the
Policyowner and any assignee of record. A payment at least equal to the excess
Policy Debt must be made to Life of Virginia within 61 days from the date notice
is sent; otherwise the Policy will lapse and terminate without value. (See
Policy Lapse and Reinstatement, p. 20.) The Policy may, however, later be
reinstated.
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Repayment of Policy Debt. Policy Debt may be repaid in whole or in part any
time during the Insured's life while the Policy is in effect. So long as there
is any outstanding Policy Debt, any payments received by Life of Virginia will
be considered as repayment of the Policy Debt. The portion of a payment in
excess of any outstanding Policy Debt will be treated as an Additional Premium
Payment, if the other conditions for an Additional Premium Payment are met.
Whenever a repayment is made, the Cash Value in the General Account securing the
repaid portion of the Policy Debt will be transferred back to Separate Account
III and allocated among the Investment Subdivisions in accordance with the
written instructions of the Policyowner. If no written instruction is received
with the repayment, Life of Virginia will allocate the repaid portion among the
Investment Subdivisions of Separate Account III in the same manner as premium
payments are allocated.
Death Benefit
So long as the Policy remains in force, the Policy provides for the payment of
a Death Benefit upon the death of the Insured. The death benefit proceeds will
be paid to a named Beneficiary or Contingent Beneficiary. One or more Primary
Beneficiaries or Contingent Beneficiaries may be named. The amount of the Death
Benefit Proceeds will be determined on the date on which the Insured's death
occurred. The Death Benefit Proceeds may be paid in a lump sum or under an
optional payment plan. (See Optional Payment Plans, p. 28.) In determining the
Proceeds payable, the Death Benefit provided by the Policy will be reduced by
any outstanding Policy Debt and any due and unpaid monthly deductions. The
Proceeds will ordinarily be paid within seven days after Life of Virginia
receives due proof of death. Payment may, however, be postponed under certain
circumstances. (See Postponement of Payment, p. 33.)
The amount of the Death Benefit provided by a Policy will be the greater of:
(1) the specified amount; or (2) the Cash Value on the date of death, multiplied
by the applicable corridor percentage. Accordingly, the Death Benefit will never
be less than the specified amount, as long as the Policy remains in force. Under
the terms of the Policy, however, the Policy's Death Benefit may be greater than
the specified amount, depending upon the length of time the Policy is in force,
any Additional Premium Payments made, and the Policy's investment results. If
the death benefit is greater than the specified amount, it will vary with the
Policy's Cash Value. Initially, the specified amount is determined when the
Policy is issued by the amount of the total planned premium and the age, sex and
risk class of the Insured. (See Premiums, p. 7.) After a Policy has been in
effect for one year, however, the specified amount may be increased. (See
Changes in the Specified Amount, p. 27.)
The calculation of the Death Benefit based upon the corridor percentage occurs
only when the Cash Value reaches a certain proportion of the specified amount.
Because there is no guaranteed Cash Value, there is no guarantee this will
occur. The corridor percentage depends upon the Attained Age of the Insured. The
corridor percentage for each age is set forth in the table below.
Attained Corridor Attained Corridor Attained Corridor
Age Percentage Age Percentage Age Percentage
40 or younger 250% 54 157% 68 117%
41 243 55 150 69 116
42 236 56 146 70 115
43 229 57 142 71 113
44 222 58 138 72 111
45 215 59 134 73 109
46 209 60 130 74 107
47 203 61 128 75
48 197 62 126 through 105
49 191 63 124 90
50 185 64 122 91 104
51 178 65 120 92 103
52 171 66 119 93 102
53 164 67 118 94 101
Examples. For this purpose, assume that the Insured is under the age of 40,
the specified amount is $100,000, and that there is no outstanding Policy Debt
or any due and unpaid monthly deductions.
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The Policy will initially provide for a $100,000 Death Benefit. However,
because the Death Benefit cannot be less than 250% (the applicable corridor
percentage) of Cash Value, any time the Cash Value of this Policy exceeds
$40,000, the Death Benefit will exceed the $100,000 specified amount. If the
Cash Value equals or exceeds $40,000, each additional dollar added to the Cash
Value will increase the Death Benefit by $2.50. Thus, for a Policy with a
specified amount of $100,000 and a Cash Value of $80,000, the Beneficiary will
be entitled to a Death Benefit of $200,000 (250% x $80,000); Cash Value of
$120,000 will yield a Death Benefit of $300,000 (250% x $120,000); and a Cash
Value of $200,000 will yield a Death Benefit of $500,000 (250% x $200,000).
Similarly, so long as Cash Value exceeds $40,000, each dollar decrease in Cash
Value will reduce the Death Benefit by $2.50. If at any time, however, the Cash
Value multiplied by the corridor percentage is less than the specified amount,
the Death Benefit will equal the specified amount of the Policy.
The applicable corridor percentage becomes lower as the Insured's Attained Age
increases. If the Attained Age of the Insured in the illustration were, for
example, 50 (rather than under age 40), the applicable corridor percentage would
be 185%. Therefore, the Death Benefit payable would not exceed the $100,000
specified amount unless the Cash Value exceeded approximately $54,054 (rather
than $40,000), and each $1 increase or decrease in the Cash Value would change
the Death Benefit by $1.85 (rather than $2.50).
Changes in the Specified Amount
After a Policy has been in effect for one year, a Policyowner may adjust the
existing insurance coverage by increasing the specified amount. Prior to any
increase in specified amount, the total planned premium for the original
specified amount must have been paid. To apply for an increase, the Policyowner
must first complete a supplemental application and submit evidence, satisfactory
to Life of Virginia, that the Insured is insurable. At the time of the requested
increase, the Insured must be in the same risk class as at the time the Policy
was issued. In order for an increase to become effective, the Policyowner must
make an Additional Premium Payment after an increase is approved. The required
Additional Premium Payment depends on the amount of the increase requested and
the Attained Age, sex and risk class of the Insured. The minimum increase in the
specified amount that Life of Virginia will allow under the Policy is one which
requires a $1,000 Additional Premium Payment.
Representative minimum increases are set forth below:
Specified Amount for a $1,000 Additional Premium Payment
Standard Standard
Age Male Female
10 $16,945 $21,813
20 11,497 14,530
30 7,789 9,549
40 5,048 6,188
50 3,351 4,116
60 2,321 2,806
70 1,708 1,958
The required Additional Premium Payment will be the lesser of (a) or (b),
where (a) is the increase in the guideline single premium due to the increase in
specified amount and (b) is the maximum premiums limitation allowed immediately
after the increase in specified amount, less the total premiums paid to date.
The increase in specified amount will become effective on the date Life of
Virginia receives the required payment, which will be shown in the supplemental
policy data pages.
A Partial Withdrawal will result in a reduction in the Specified Amount. The
amount of the reduction will be that which the Partial Withdrawal amount would
purchase if paid as a single premium on the date of the withdrawal.
A change in the existing insurance coverage may have federal tax consequences.
(See Federal Tax Matters, p. 36.)
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Benefits at Maturity
If the Policy is in effect on the Maturity Date, Life of Virginia will pay to
the Policyowner the Policy's Cash Value less any outstanding Policy Debt. (See
Loan Benefits, p. 25.) Benefits payable upon maturity may be paid in a lump sum
or under an optional payment plan. The maturity date is the date shown in the
Policy.
Optional Payment Plans
"Proceeds" means the amount payable upon surrender or upon the death of the
Insured. If the Policy is surrendered, the Proceeds will be the Surrender Value.
The Proceeds payable on the death of the Insured will be the Death Benefit less
any Policy Debt and any due and unpaid monthly deductions. The actual amount of
Proceeds will depend on: the Death Benefit determined as above; the use of the
Cash Value during the Insured's life; the Insured's suicide during the first two
policy years; and any misstatement of the Insured's age or sex.
Proceeds payable upon death of the Insured or upon surrender of the Policy,
and the benefits payable upon maturity, may be paid in whole or in part under an
optional payment plan. Any Death Benefit Proceeds that are paid in one lump sum
will include interest from the date of death to the date of payment. Interest
will be paid at a rate set by Life of Virginia, or by law if greater. The
minimum interest rate which will be paid is 2.5%. Interest will not be paid
beyond one year or any longer time set by law. There are currently five optional
payment plans available. A plan may be designated in the application or by
notifying Life of Virginia in writing at its Home Office. A choice or change of
a plan must be sent in writing to the Home Office of Life of Virginia. Any
amount left with Life of Virginia for payment under an optional payment plan
will be transferred to Life of Virginia's General Account. During the life of
the Insured, the Policyowner can select a plan. If a plan has not been chosen at
the Insured's death, a Beneficiary can choose a plan. If a Beneficiary is
changed, the plan selection will no longer be in effect unless the Policyowner
requests that it continue.
In selecting an optional payment plan: (1) the payee under a plan cannot be a
corporation, association or fiduciary; (2) the Proceeds applied under a plan
must be at least $10,000; and (3) the amount of each payment under a plan must
be at least $50. Payments under Plans 1, 2, 3 or 5 will begin on the date of the
Insured's death or on surrender. Payments under Plan 4 will begin at the end of
the first interest period after the date proceeds are otherwise payable.
Plan 1 -- Life Income. Equal monthly payments will be made for a guaranteed
minimum period. If the payee lives longer than the minimum period, payments will
continue for his or her life. The minimum period can be 10, 15 or 20 years.
Guaranteed amounts payable under this plan will earn interest at 3% compounded
yearly. Life of Virginia may increase the interest rate and the amount of any
payment. If the payee dies before the end of the guaranteed period, the amount
of remaining payments for the minimum period will be discounted at a yearly rate
of 3%. The discounted amounts will be paid in one sum to the payee's estate
unless otherwise provided.
Plan 2 -- Income for a Fixed Period. Equal periodic payments will be made for
a fixed period not longer than 30 years. Payments can be annual, semi-annual,
quarterly, or monthly. Guaranteed amounts payable under this plan will earn
interest at 3% compounded yearly. Life of Virginia may increase the interest and
the amount of any payment. If the payee dies, the amount of the remaining
guaranteed payments will be discounted to the date of the payee's death at a
yearly rate of 3%. "Discounted" means that Life of Virginia will deduct the
amount of interest each remaining payment would have earned had it not been paid
out early. The discounted amount will be paid in one sum to the payee's estate
unless otherwise provided.
Plan 3 -- Income of a Definite Amount. Equal periodic payments of a definite
amount will be paid. Payments can be annual, semi-annual, quarterly, or monthly.
The amount paid each year must be at least $120 for each $1,000 of Proceeds.
Payments will continue until the Proceeds are exhausted. The last payment will
equal the amount of any unpaid Proceeds. Proceeds will earn interest at 3%
compounded yearly. Life of Virginia may increase the interest rate; if the
interest rate is increased, the payment period will be extended. If the payee
dies, the amount of the remaining Proceeds with earned interest will be paid in
one sum to his or her estate unless otherwise provided. If the payee is age 80
or older, payments under Plan 3 may not qualify for favorable tax treatment if
the expected payment period exceeds the life expectancy of the payee.
Plan 4 -- Interest Income. Periodic payments of interest earned from the
Proceeds left with Life of Virginia will be paid. Payments can be annual,
semi-annual, quarterly, or monthly, and will begin at the end of the first
period chosen. Proceeds will earn interest at 3% compounded yearly. Life of
Virginia may increase the interest rate and the amount of any payment. If the
payee dies, the amount of remaining Proceeds and any earned but unpaid interest
will be paid in one sum to his or her estate unless otherwise provided.
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Plan 5 -- Joint Life and Survivor Income. Equal monthly payments will be made
to two payees for a guaranteed minimum of 10 years. Each payee must be at least
35 years old when payments begin. The guaranteed amount payable under this plan
will earn interest at 3% compounded yearly. Life of Virginia may increase the
interest rate and the amount of any payment. Payments will continue as long as
either payee is living. If both payees die before the end of the minimum period,
the amount of the remaining payments for the 10-year period will be discounted
at a yearly rate of 3%. The discounted amount will be paid in one sum to the
survivor's estate unless otherwise provided.
Specialized Uses of the Policy
The Policy should be purchased as a long-term investment designed to provide a
death benefit. The Policy's Surrender Value, as well as its death benefit, may
be used to provide proceeds for various individuals and business financial
planning purposes. However, loans and partial withdrawals will affect the
Surrender Value and death benefit proceeds, and may cause the Policy to lapse.
If the investment performance of Investment Subdivisions to which cash value is
allocated is not sufficient to provide funds for the specific planning purpose
contemplated, or if insufficient payments are made or cash value maintained,
then the Owner may not be able to utilize the Policy to achieve the purposes for
which it was purchased. Because the Policy is designed to provide benefits on a
long-term basis, before purchasing a Policy for a specialized purpose a
purchaser should consider whether the long-term nature of the Policy, and the
potential impact of any contemplated loans and partial withdrawals, are
consistent with the purpose for which the Policy is being considered.
CHARGES AND DEDUCTIONS
Monthly Deduction
On each Monthly Anniversary Day, a deduction will be made from the Policy's
Cash Value in Separate Account III in order to compensate Life of Virginia for
the cost of insurance and certain other expenses incurred in connection with the
Policies. The monthly deduction for a Policy Month will be allocated among the
Investment Subdivisions of Separate Account III in the same proportion that the
Policy's Cash Value in each Investment Subdivision bears to the total Cash Value
in all Investment Subdivisions at the beginning of the Policy Month. The actual
amount of each monthly deduction will vary because (1) some of these charges are
based on percentages of Cash Value which varies from one Valuation Period to the
next; (2) some of these charges are further based upon portions of Cash Value
attributable to Additional Premium Payments; and (3) the cost of insurance can
vary from month to month.
Charges Attributable to Premium Payments. During the first ten years following
a premium payment (See Dates Under the Policy, p. 18.), Life of Virginia will
deduct premium tax and distribution expense charges attributable to that premium
payment in order to recover premium taxes and distribution expenses associated
with that premium payment. In general, the amount of each charge is calculated
by multiplying the rate for the charge by the portion of Cash Value in Separate
Account III attributable to that premium payment. All premium payments made
during a Policy year are deemed to have been made on the first day of such
Policy year; accordingly, one year is considered to have elapsed since the
payment of such premiums on each subsequent policy anniversary. In order to
determine the portion of Cash Value in Separate Account III subject to the
premium tax charge and distribution expense charge, premiums are grouped by
Policy year.
Premium Tax Charge--Premium tax charges are not deducted at the time a
premium payment is made, although Life of Virginia does pay state premium
taxes attributable to a particular Policy when those taxes are incurred and
expects to pay an average state premium tax rate of 2.3% of premium for all
states. To reimburse Life of Virginia for the payment of such taxes, a premium
tax charge is deducted monthly during the first ten years following each
premium payment. This charge is computed on each Monthly Anniversary Day and
will equal .0167% of that portion of the Policy's Cash Value in each
Investment Subdivision of Separate Account III on that date attributable to
each premium payment made during the previous ten years. This is equivalent to
an annual rate of .20%.
Distribution Expense Charge--Life of Virginia incurs certain sales and other
distribution expenses when the Policies are issued. The majority of these
expenses consist of commissions paid for sales of the Policies; however, other
distribution expenses are incurred in connection with the printing of
prospectuses, conducting seminars and other marketing, sales, and promotional
activities. To recover a portion of these expenses, a distribution expense
charge is deducted monthly during the first ten years following each premium
payment. This charge is computed on each Monthly Anniversary Day and will
equal .0250% of that portion of the Policy's Cash Value in each Investment
Subdivision of Separate Account III on that date attributable to each premium
payment made during the previous ten years. This is equivalent to an annual
rate of .30%.
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In no event, however, will the sum of the cumulative distribution expense
charges previously deducted, attributable to a particular premium payment,
exceed 9% of that premium payment. Depending on the investment experience of
the Investment Subdivisions chosen by the Policyowner, the maximum charge of
9% of a premium payment may be collected before the ten-year period
attributable to that premium payment has run.
For purposes of calculating these charges, Life of Virginia determines that
portion of the Cash Value in Separate Account III which is attributable to each
premium payment every time an Additional Premium Payment is received. Prior to
receiving the first Additional Premium Payment, the entire Cash Value under the
Policy is attributable to the initial premium payment. The portion of the Cash
Value in Separate Account III attributable to the first Additional Premium
Payment is calculated by dividing (a) by (b), where (a) is the amount of the
Additional Premium Payment and (b) is the Policy's total Cash Value in Separate
Account III immediately after receipt of the Additional Premium Payment. In
calculating the charges described above, Life of Virginia will use this ratio to
determine the portion of Cash Value in Separate Account III attributable to that
payment until another Additional Payment is made. The portion of Cash Value in
Separate Account III attributable to the initial premium payment is determined
using a ratio calculated as one (1) minus the ratio used for the Additional
Premium Payment.
These ratios are used by Life of Virginia, in connection with the premium tax
and distribution expense charges described above, to calculate that portion of
Cash Value held in Separate Account III attributable to premium payments made
during the previous ten years. Every time another Additional Premium Payment is
made, Life of Virginia recalculates the ratio for each premium payment. It does
so by multiplying the last calculated ratio for each prior premium payment by
the difference between one and the ratio calculated for the most recent
Additional Premium Payment.
Cost of Insurance Charge. A cost of insurance charge will be deducted on each
Monthly Anniversary Day. To determine the cost of insurance charge, a Policy's
net amount at risk for a policy month is divided by 1,000 and the result is
multiplied by the applicable current cost of insurance rate. To determine the
net amount at risk on a Monthly Anniversary Day, the Death Benefit on that date
is divided by 1.0032737 (which reduces the net amount at risk, solely for
purposes of computing the cost of insurance, by taking into account assumed
monthly earnings at an annual rate of 4%) and then the Policy's Cash Value on
that date is subtracted. Thus, the net amount at risk depends upon and will be
affected by changes in the Policy's Cash Value.
On those Monthly Anniversary Days on which a Policy qualifies for the
Preferred Funding Risk Class (see above), the cost of insurance charge will not
exceed .0792% of the Policy's Cash Value on the Monthly Anniversary Day.
Furthermore, once the amount of total premiums paid meets or exceeds total
planned premium, the cost of insurance charge will not exceed .05% of the
Policy's Cash Value on the Monthly Anniversary Day. These are equivalent to
annual rates of .95% and .60%, respectively, of a Policy's Cash Value. These
limits on the cost of insurance charge represent Life of Virginia's current
practice, which we may change at our discretion.
Changes in the Death Benefit may affect the amount of the cost of insurance
charge deductible under the Policies. Because the cost of insurance charge
varies with the net amount at risk, an increase in specified amount or the
calculation of the Death Benefit based on the corridor percentage (See, Death
Benefit, p. 26.) may cause the cost of insurance charge to increase.
The current monthly cost of insurance rate is based on the Insured's sex,
Attained Age, policy duration and risk class. Life of Virginia may, at its
discretion, increase or decrease this rate; however, in no event will the
current cost of insurance rate exceed the guaranteed maximum cost of insurance
rate set forth in the Policy. The guaranteed maximum cost of insurance rate is
based on the Insured's sex, Attained Age and risk class. The guaranteed maximum
cost of insurance rates allowable under the Policies are based on the
Commissioners' 1980 Standard Ordinary Mortality Table, adjusted for any
substandard rating. The current and guaranteed cost of insurance rates generally
increase as the Insured's Attained Age increases.
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Charges Against Separate Account III
Mortality and Expense Risk Charge. A charge will be deducted from each
Investment Subdivision of Separate Account III to compensate Life of Virginia
for certain mortality and expense risks assumed in connection with the Policies.
The charge will be deducted daily and equals .0024769% for each day in a
Valuation Period. The effective annual rate of this charge, which is compounded
daily, is .90%.
The mortality risk assumed is the risk that Insureds may live for a shorter
period of time than estimated and, therefore, a greater amount of Death Benefit
Proceeds than expected will be payable. The expense risk assumed is that
expenses incurred in issuing and administering the Policies will be greater than
estimated and, therefore, will exceed the expense charge limits set by the
Policies. Life of Virginia has compared the mortality and expense risk charge
assessed under the Policies with charges under comparable contracts and
determined that its charge is reasonable in relation to the risks assumed and is
within the range of industry practice for comparable variable life insurance
contracts. Nevertheless, the mortality and expense risk charge may be a source
of profit for Life of Virginia if it proves to be more than sufficient to meet
risk-related expenses over the long run.
Administrative Expense Charge. A charge will be deducted from each Investment
Subdivision of Separate Account III to compensate Life of Virginia for certain
administrative expenses incurred in connection with the Policies. The charge
will be deducted daily and equals .0010981% for each day in a Valuation Period.
The effective annual rate of this charge, which is compounded daily, is .40%.
The administrative expense charge will compensate Life of Virginia for issuance,
underwriting, processing, start-up and on-going administration expenses. These
expenses include the cost of processing applications, conducting medical
examinations, determining insurability, establishing Policy records, premium
collection, recordkeeping, processing Death Benefit claims, surrenders,
transfers, policy loans and changes, and reporting and overhead costs. Life of
Virginia has set this charge at a level which is intended to recover no more
than the actual costs associated with administering the contract.
Life of Virginia may administer the Policy itself, or Life of Virginia may
purchase administrative services from such sources (including affiliates) as may
be available. Such services will be acquired on a basis which, in Life of
Virginia's sole discretion, affords the best services at the lowest cost. Life
of Virginia reserves the right to select a company to provide services which
Life of Virginia deems, in its sole discretion, is the best able to perform such
services in a satisfactory manner even though the costs for such services may be
higher than would prevail elsewhere.
Taxes. Currently, no charge is made to Separate Account III for federal income
taxes that may be attributable to it. Life of Virginia may, however, make such a
charge in the future. Charges for other taxes, if any, attributable to Separate
Account III may also be made. At present, state and local taxes, other than
premium or similar taxes, are not significant, and therefore Life of Virginia is
not currently making a charge against Separate Account III for such amounts.
(See Federal Tax Matters, p. 36.)
Surrender Charge
A surrender charge (sometimes referred to as a contingent deferred sales
charge) will be imposed upon surrenders that occur within nine years of any
premium payments to cover certain expenses relating to the sale of the Policy,
including premium taxes, commissions to registered representatives, and other
promotional expenses. The total surrender charge will equal the sum of the
surrender charges, if any, attributable to the premium payments made under the
Policy prior to surrender. For purposes of this section, all premium payments
made during a Policy year are deemed to have been made on the first day of such
Policy year; accordingly, one year is considered to have elapsed on each policy
anniversary.
If the Policy is surrendered during the first four years following a premium
payment, a surrender charge equal to 6% of that premium payment will be imposed.
During the six years that follow, the charge decreases 1% per year, so that no
surrender charge is ever attributable to a particular premium payment made more
than nine years prior to the date of surrender. The surrender charge will be
further limited, such that the surrender charge attributable to a particular
premium payment, when taken together with the total amount of distribution
expense charges previously deducted attributable to that premium payment, will
never exceed 9% of that premium payment. Thus, in the event of surrender, if the
surrender charge otherwise calculated would cause the sum of those charges to
exceed 9% of a particular premium payment, the surrender charge will be limited
so that it equals the difference between 9% of the premium payment and the total
monthly Distribution Expense Charges attributable to premium payments that have
been deducted. This surrender charge, along with any outstanding Policy Debt,
will be deducted from the Cash Value to determine the amount payable upon
surrender.
Life of Virginia expects to incur the majority of its premium tax and
distribution expenses in the years in which premiums are paid under the
Policies. Although the surrender charge is higher in early policy years than in
subsequent years, the surrender charge in any policy year is not necessarily
related to actual distribution expenses incurred in that year. Life of Virginia
expects to recover any deficiency due to the insufficiency of amounts received
from surrender charges and distribution expense charges
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over the life of the Policy from Life of Virginia's general assets, including
amounts derived from the mortality and expense risk charge and from mortality
gains. Life of Virginia has reviewed this arrangement and concluded that this
distribution financing arrangement will benefit Separate Account III and the
Policyowners.
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Partial Withdrawal Charge
A charge equal to the lesser of $25 or 2% of the amount withdrawn will be
deducted from the amount of any Partial Withdrawal. The surrender charge does
not apply to Partial Withdrawals.
Transfer Charge
The Policyowner may transfer amounts among the Investment Subdivisions of
Separate Account III that are available at the time of the request. Currently,
there is no limit on the number of transfers that may be made; however, Life of
Virginia reserves the right to impose such a limit in the future. Where
permitted by state law, Life of Virginia also reserves the right to refuse to
execute any transfer if any of the Investment Subdivisions that would be
affected by the transfer are unable to purchase or redeem shares of the mutual
funds in which they invest.
The first transfer in each calendar month will be made without charge.
Thereafter, each time amounts are transferred, a transfer charge of $10 will be
deducted from the amount transferred to compensate Life of Virginia for the
costs in making the transfer. Life of Virginia does not expect to make a profit
on the transfer charge. The transfer charge will not be imposed on transfers
that occur as a result of policy loans or the reallocation of Cash Value
following expiration of the Initial Investment Period.
Other Charges
Because Separate Account III purchases shares of the Funds, the net assets of
each Investment Subdivision in the Account will reflect the investment advisory
fee and other expenses incurred by the portfolio of the Fund in which the
Investment Subdivision invests. (See The Funds on p. 13 for a discussion of
these charges.) For more information concerning these charges, read the
individual Fund prospectus.
Reduction of Charges for Group Sales
The distribution expense charge and/or the surrender charge may be reduced for
sales of the Policies to a trustee, employer or similar entity representing a
group or to members of the group where such sales result in savings of expenses
incurred by Life of Virginia in connection with the sale of the Policies. The
entitlement to such a reduction in such charges will be determined by Life of
Virginia based on the following factors:
(1) The size of the group. Generally, the sales expenses for each individual
Policyowner for a larger group are less than for a smaller group because
more Policies can be implemented with fewer sales contacts and less
administrative cost.
(2) The total amount of premium payments to be received from a group. Per
Policy sales and other expenses are generally proportionately less on
larger purchase payments than on smaller ones.
(3) The purpose for which the Policies are purchased. Certain types of plans
are more likely to be stable than others. Such stability reduces the
number of sales contacts and administrative and other services required,
reduces sales administration and results in fewer Policy terminations. As
a result, sales and other expenses can be reduced.
(4) The nature of the group for which the Policies are being purchased.
Certain types of employee and professional groups are more likely to
continue Policy participation for longer periods than are other groups
with more mobile membership. If fewer Policies are terminated in a given
group, Life of Virginia's sales and other expenses are reduced.
(5) There may be other circumstances of which Life of Virginia is not
presently aware which could result in reduced sales expenses.
If, after consideration of the foregoing factors, Life of Virginia determines
that a group purchase would result in reduced sales expenses, such a group may
be entitled to a reduction in distribution expense charges and/or surrender
charges. Reductions in these charges will not be unfairly discriminatory against
any person including the affected owners and all other owners of Policies funded
by Separate Account III.
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GENERAL PROVISIONS
Postponement of Payment
General. Amounts payable as a result of surrender, partial withdrawals, policy
loan, and the payment of Death Benefit Proceeds or benefits at maturity may be
postponed whenever: (1) the New York Stock Exchange is closed other than
customary weekend and holiday closings, or trading on the New York Stock
Exchange is restricted as determined by the Commission; or (2) the Commission by
order permits postponement for the protection of Policyowners; or (3) an
emergency exists, as determined by the Commission, as a result of which disposal
of securities is not reasonably practicable or it is not reasonably practicable
to determine the value of the net assets of Separate Account III.
Payment by Check. Payments under a Policy which are derived from any amount
paid to Life of Virginia by check or draft may be postponed until such time as
Life of Virginia is satisfied that the check or draft has cleared the bank upon
which it is drawn.
Limits on Contesting the Policy
Life of Virginia relies on statements in the policy application. In the
absence of fraud, the statements are considered representations, not warranties.
Life of Virginia can contest the Policy, or an increase in the specified amount,
if any material misrepresentation of fact was made in the application or in a
supplemental application, and a copy of that application was attached to the
Policy when issued or was made a part of the Policy when a change went into
effect. With respect to the original specified amount, a Policy will not be
contested after it has been in effect during the Insured's life for two years
from the Policy Date. With respect to increases in the specified amount, Life of
Virginia will not contest an increase in the specified amount after that
increase has been in effect during the Insured's life for two years from the
effective date of the increase.
The Contract
"Policy" means the Policy described in this Prospectus, the policy
application, any supplemental applications and any endorsements. A Policy is a
legal contract and constitutes the entire contract between the Policyowner and
Life of Virginia. An agent cannot change this contract. Any change to a Policy
must be in writing and approved by the President or a Vice President of Life of
Virginia.
Misstatement of Age or Sex
If the Insured's age or sex was misstated in an application, the Death Benefit
Proceeds will be adjusted. The adjusted Death Benefit Proceeds will be the
greater of (a) and (b), where: (a) is the specified amount including any
increases in the specified amount which should have been issued at the Insured's
true age or sex for the premiums that were required to be paid for the original
amount of, and any increases in, the specified amount; and (b) is the Cash Value
on the date of death, multiplied by the corridor percentage for the Insured's
true Attained Age on the date of death.
Suicide
If the Insured commits suicide, while sane or insane, within two years of the
Policy Date, Death Benefit Proceeds payable under the Policy will be limited to
the initial premium paid, plus any Additional Premium Payments, other than those
required for an increase in specified amount, less outstanding Policy Debt. If
the Insured commits suicide, while sane or insane, within two years after an
increase in the specified amount was effective, Life of Virginia will limit the
Proceeds payable with respect to the increase. The Proceeds thus limited will
equal the Additional Premium Payment required for the increase.
Annual Statement
Within 30 days after each policy anniversary, an annual statement will be sent
to each Policyowner. The statement will show the amount of the Death Benefit
payable under the Policy, the Cash Value for each Investment Subdivision, the
Surrender Value, and Policy Debt as of the policy anniversary. The statement
will also show premiums paid and charges made during the policy year.
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Nonparticipating
The Policy does not participate in the divisible surplus of Life of Virginia.
No dividends are payable.
Written Notice
Any written notice should be sent to Life of Virginia at its Home Office at
6610 West Broad Street, Richmond, Virginia 23230. The notice should include the
Policy number and the Insured's full name. Any notice sent by Life of Virginia
to a Policyowner will be sent to the address shown in the application unless an
appropriate address change form has been filed with the Company.
The Owner
The Policyowner is the person so designated in the application or as
subsequently changed. The Policyowner has rights in a Policy during the
Insured's lifetime. If the Policyowner dies before the Insured and there is no
Contingent Owner, ownership passes to the Policyowner's estate. Unless an
optional payment plan is chosen, the Proceeds payable on surrender of the Policy
will be paid to the Policyowner in a lump sum.
The Beneficiary
The original Beneficiaries and Contingent Beneficiaries are designated by the
Policyowner in the application. If changed, the Primary Beneficiary or
Contingent Beneficiary is as shown in the latest change filed with Life of
Virginia. One or more Primary or Contingent Beneficiaries may be named in the
application. In such a case, the Proceeds will be paid in equal shares to the
survivors in the appropriate Beneficiary class, unless requested otherwise by
the Policyowner.
Unless an optional payment plan is chosen, the Death Benefit Proceeds payable
at the Insured's death will be paid in a lump sum to the primary Beneficiary. If
the primary Beneficiary dies before the Insured, the Proceeds will be paid to
the Contingent Beneficiary. If no Beneficiary survives the Insured, the Proceeds
will be paid to the Policyowner or the Policyowner's estate.
Changing the Owner or Beneficiary
During the Insured's life, the Policyowner may be changed. If the right is
reserved, the Beneficiary may also be changed during the Insured's life. To make
a change, written request must be sent to Life of Virginia at its Home Office.
The request and the change must be in a form satisfactory to Life of Virginia
and must actually be received by the Company. The change will take effect as of
the date the request is signed by the Policyowner. The change will be subject to
any payment made before the change is recorded by Life of Virginia.
Using the Policies as Collateral
The Policy can be assigned as collateral security. Life of Virginia must be
notified in writing if a Policy is assigned. Any payment made before the
assignment is recorded at Life of Virginia's Home Office will not be affected.
Life of Virginia is not responsible for the validity of an assignment. A
Policyowner's rights and the rights of a Beneficiary may be affected by an
assignment.
Optional Insurance Benefits
There are currently no optional insurance benefits offered under the Policy.
Reinsurance
Life of Virginia intends to reinsure a portion of the risks assumed under the
Policies.
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DISTRIBUTION OF THE POLICY
The Policies will be sold by individuals who, in addition to being licensed as
life insurance agents for Life of Virginia, are also registered representatives
of Forth Financial Securities Corporation, the principal underwriter of the
Policies, or of broker-dealers who have entered into written sales agreements
with the principal underwriter. Forth Financial Securities Corporation, a
Virginia corporation located at 6610 W. Broad St., Richmond, Virginia 23230, is
registered with the Commission under the Securities Exchange Act of 1934 as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc. Forth Financial Securities Corporation also serves as principal underwriter
for other variable life insurance and variable annuity policies issued by Life
of Virginia. However, no amounts have been retained by Forth Financial
Securities Corporation for acting as principal underwriter of the Life of
Virginia policies.
Writing agents of Life of Virginia will receive commissions based on a
commission schedule and rules. Commissions depend on the premiums paid. The
agent will receive a commission of 2.9% of the initial premium paid and any
Additional Premium Payments.
Agents may also be eligible to receive certain bonuses and allowances, as well
as retirement plan credits, based on commissions earned. Field management of
Life of Virginia receives compensation which may be in part based on the level
of agent commissions in their management units. Broker-dealers and their
registered agents will receive first-year and subsequent year commissions
equivalent to the total commissions and benefits received by the field
management and writing agents of Life of Virginia.
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FEDERAL TAX MATTERS
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE.
Tax Status of the Policy
The Internal Revenue Code of 1986 as amended, (the "Code"), in Section 7702,
establishes a statutory definition of life insurance for tax purposes. Life of
Virginia believes that the Policy meets the statutory definition of life
insurance, which places limitations on the amount of premiums that may be paid.
If the specified amount of a Policy is increased or decreased, the applicable
premium limitation may change.
The Technical and Miscellaneous Revenue Act of 1988 ("TAMRA") places limits on
certain of the policy charges used in determining the maximum amount of premiums
that may be paid under section 7702 for Policies entered into on or after
October 21, 1988. There is some uncertainty as to the interpretation of these
new limits. Nonetheless, Life of Virginia believes that the maximum amount of
premiums it has determined for the Policies will comply with the requirements of
section 7702 as amended by TAMRA. If it is determined that only a lower amount
of premiums may be paid for a Policy under TAMRA, Life of Virginia will refund
any premiums paid which exceed that lower amount within 60 days after each
anniversary of the Policy, and will reflect interest or earnings (which will be
includable in income subject to tax) as required by law on the amount refunded.
The Code (section 817(h)) also authorizes the Secretary of the Treasury (the
"Treasury") to set standards by regulation or otherwise for the investments of
Separate Account III to be "adequately diversified" in order for the Policy to
be treated as a life insurance contract for federal tax purposes. Separate
Account III, through the Funds, intends to comply with the diversification
requirements prescribed by the Treasury. Although Life of Virginia does not
control the Funds (other than the Life of Virginia Series Fund), it has entered
into agreements regarding participation in the Funds, which requires the Funds
to be operated in compliance with the requirements prescribed by the Treasury.
Thus, Life of Virginia believes that Separate Account III will be treated as
adequately diversified for federal tax purposes.
In certain circumstances, variable contract owners may be considered the
owners, for federal tax purposes, of the assets of the separate account used to
support such contracts. In those circumstances, income and gains from the
separate account assets would be includable in the variable contract owners'
gross income annually as earned. The Internal Revenue Service (the "Service")
has stated in published rulings that a variable contract owner will be
considered the owner of separate account assets if the owner possesses incidents
of ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has announced, in connection with the
issuance of temporary regulations concerning diversification requirements, that
those temporary regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor, rather than the insurance company, to be treated
as the owner of the assets in the account." This announcement also stated that
guidance would be issued by way of regulation or published rulings on the
"extent to which policyholders may direct their investments to particular
sub-accounts [of a separate account] without being treated as owners of the
underlying assets."
The ownership rights under the Policy are similar to, but different in certain
respects from, those present in situations addressed by the Service in rulings
in which it was determined that contract owners were not owners of separate
account assets. For example, the owner of this Policy has the choice of more
Funds to which to allocate premiums and Cash Values and may be able to
reallocate more frequently than in such rulings. These differences could result
in a Policyowner being considered, under the standard of those rulings, the
owner of the assets of Separate Account III. To ascertain the tax treatment of
its Policyowners, Life of Virginia has requested, with regard to this policy, a
ruling from the Service that it, and not its Policyowners, is the owner of the
assets of Separate Account III for federal income tax purposes. The Service has
informed Life of Virginia that it will not rule on the request until issuance of
the promised guidance referred to in the preceding paragraph. Life of Virginia
has reserved the right to modify its practices to attempt to prevent the
Policyowner from being considered the owner of the assets of Separate Account
III.
Frequently, if the Service or the Treasury Department sets forth a new
position which is adverse to taxpayers, the position is applied on a prospective
basis only. Thus, if the Service or the Treasury Department were to issue
regulations or a ruling which treated a Policyowner as the owner of the assets
of Separate Account III, that treatment might apply only on a prospective basis.
However, if the ruling or regulations were not considered to set forth a new
position, a Policyowner might be retroactively determined to be the owner of the
assets of Separate Account III.
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The following discussion assumes that the Policy will qualify as a life
insurance contract for federal tax purposes.
Tax Treatment of Policy Proceeds
The Policies should receive the same federal income tax treatment as fixed
benefit life insurance. As a result, the Death Benefits payable under the Policy
are excludable from the gross income of the Beneficiary under Section 101 of the
Code, and the Policyowner is not deemed to be in constructive receipt of the
cash values under a Policy until actual surrender. If Proceeds payable upon
death of the Insured are paid under optional payment plan 4 (interest income),
the interest payments will be includable in the Beneficiary's income. If
Proceeds payable on death are applied under optional payment plan 3 and the
Beneficiary is at an advanced age at such time, such as age 80 or older, it is
possible that payments would be treated in a manner similar to that under Plan
4. If Proceeds payable upon death of the Insured are paid under one of the other
optional payment plans, the payments will be prorated between amounts
attributable to the Death Benefit which will be excludable from the
Beneficiary's income and amounts attributable to interest which will be
includable in the Beneficiary's income.
Generally, interest paid on any loans under this Policy will not be tax
deductible under the current tax law. Interest on a loan may be deductible under
limited circumstances, however, and a Policyowner should consult a tax advisor
for advice on these circumstances.
The right to exchange the Policy for a permanent fixed benefit policy (See
Addition, Deletion, or Substitution of Investments, p. 11, and Exchange
Privilege, p. 10.), the right to change owners (See Changing the Owner or
Beneficiary, p. 34.), as well as provision for surrenders, and other changes
reducing future death benefits may have tax consequences depending on the
circumstances of such exchange, surrender, or change. Upon complete surrender or
when maturity benefits are paid, if the amount received plus the Policy Debt
exceeds the total premiums paid that are not treated as previously withdrawn by
the Policyowner, the excess generally will be treated as ordinary income.
Federal estate and state and local estate, inheritance and other tax
consequences of ownership or receipt of Policy Proceeds depend on the
circumstances of each Policyowner or Beneficiary.
Tax Treatment of Policy Loans and Other Distributions Under Certain Policies
TAMRA includes the following provisions, which affect the taxation of
distributions (other than proceeds paid at the death of the insured) from life
insurance contracts:
l. If premiums are paid more rapidly than the rate defined by a "7-Pay Test,"
the contract will be classified as a "modified endowment contract."
2. Any contract received in exchange for a policy classified as a modified
endowment contract will be treated as a modified endowment contract
regardless of whether it meets the 7-Pay Test.
3. Loans (including unpaid interest thereon) from a modified endowment
contract will be considered distributions.
4. Distributions (including Partial Withdrawals, loans and loan interest,
assignments and pledges) from a modified endowment contract will be taxed
first as distributions of income from the contract (to the extent that the
cash value of the contract, before reduction by any surrender charge or
loan, exceeds the total premiums paid less any previous untaxed
withdrawals), and then as non-taxable recovery of premium.
5. An extra tax of 10% will be imposed on distributions (including
surrenders, partial withdrawals, loans and loan interest, assignments and
pledges) from a modified endowment contract includable in income, unless
such distributions are made (1) after the policyowner attains age 59 1/2,
(2) because the policyowner has become disabled, or (3) as substantially
equal annuity payments over the life or life expectancy of the policyowner
(or the joint lives or life expectancies of the policyowner and his or her
beneficiary).
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Policies entered into prior to June 21, 1988, will not be classified as
modified endowment contracts unless the policyowner makes Additional Premium
Payments. Additional Premium Payments made in order to increase the Specified
Amount on or after June 21, 1988, may cause the Policy to be classified as a
modified endowment contract, and loans and other distributions would be treated
as described immediately above. Depending on the circumstances, other Additional
Premium Payments may also cause the Policy to be classified as a modified
endowment contract. If a Policy is not classified as a modified endowment
contract, a loan received under a Policy generally will be treated as
indebtedness of the Policyowner, so that no part of any loan under a Policy will
constitute income to the Policyowner so long as the Policy remains in force.
However, with respect to the portion of any loan that is attributable to cash
value in excess of the total premium payments under the Policy, it is possible
that the Service could treat the Policyowner as being in receipt of certain
amounts of income.
Policies entered into on or after June 21, 1988, will be classified as
modified endowment contracts if cumulative premiums paid exceed the schedule of
premiums allowed by the 7-pay test. Additional Premium Payments made in order to
increase the Specified Amount also will generally cause the Policy to be
classified as a modified endowment contract. For policies classified as modified
endowment contracts, loans and other distributions will be treated as described
in items 3, 4 and 5 above, and Life of Virginia will withhold and report on that
basis for income tax purposes.
Additionally, all life insurance contracts which are treated as modified
endowment contracts and which are issued by Life of Virginia or any of its
affiliates with the same person designated as the Policyowner within the same
calendar year will be aggregated and treated as one contract for purposes of
determining any tax on distributions.
The provisions of TAMRA are complex and are open to considerable variation in
interpretation. Policyowners should consult their tax advisors before making any
decisions regarding increases in or additions to coverage or distributions from
their Policies.
Taxation of the Company
Because of its current status under the Code, Life of Virginia does not expect
to incur any federal income tax liability that would be chargeable to Separate
Account III. Based upon this expectation, no charge is being made currently to
Separate Account III for federal income taxes. If, however, Life of Virginia
determines that such taxes may be incurred, it may assess a charge for those
taxes from Separate Account III.
Life of Virginia may also incur state and local taxes (in addition to premium
taxes for which deductions are currently made) in several states. At present,
these taxes are not significant. If there is a material change in applicable
state or local tax laws, charges for such taxes attributable to Separate Account
III may be made.
Income Tax Withholding
Generally, unless the Policyowner provides Life of Virginia a written election
to the contrary before a distribution is made, Life of Virginia is required to
withhold income taxes from a portion of the money received by the Policyowner
upon partial or full surrender of the Policy or if the Policy matures (and, if
the Policy is a modified endowment contract, upon a Policy loan). If the
Policyowner requests that no taxes be withheld, or if Life of Virginia does not
withhold a sufficient amount of taxes, the Policyowner will be responsible for
the payment of any taxes and early distribution penalties that may be due on the
amounts received. The Policyowner may also be required to pay penalties under
the estimated tax rules, if the Policyowner's withholding and estimated tax
payments are insufficient. The Policyowner may, therefore, want to consult a tax
advisor.
Other Considerations
The foregoing discussion is general and is not intended as tax advice. Any
person concerned about these tax implications should consult a competent tax
advisor. This discussion is based on Life of Virginia's understanding of the
present federal income tax laws as they are currently interpreted by the
Internal Revenue Service. No representation is made as to the likelihood of
continuation of these current laws and interpretations. It should be further
understood that the foregoing discussion is not exhaustive and that special
rules not described in this Prospectus may be applicable in certain situations.
Moreover, no attempt has been made to consider any applicable state or other tax
laws.
52
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LEGAL DEVELOPMENTS REGARDING EMPLOYMENT-RELATED BENEFIT PLANS
In 1983, the Supreme Court held in Arizona Governing Committee v. Norris that
optional annuity benefits provided under an employee's deferred compensation
plan could not, under Title VII of the Civil Rights Act of 1964, vary between
men and women on the basis of sex. The Policy described in this Prospectus
contains guaranteed cost of insurance rates and guaranteed purchase rates for
certain optional payment plans that distinguish between men and women.
Accordingly, employers and employee organizations should consider, in
consultation with legal counsel, the impact of Norris, and Title VII generally,
on any employment-related insurance or benefit program for which a Policy may be
purchased.
SAFEKEEPING OF THE ASSETS OF SEPARATE ACCOUNT III
Life of Virginia holds the assets of Separate Account III. The assets are kept
segregated and held separate and apart from the General Account. Life of
Virginia maintains records of all Separate Account III purchases and redemptions
of the shares of each portfolio of the Funds.
VOTING RIGHTS
To the extent required by law, Life of Virginia will vote the Funds' shares
held in Separate Account III at regular and special shareholder meetings of the
Funds in accordance with instructions received from persons having voting
interests in Separate Account III. If, however, the Investment Company Act of
1940 or any regulation thereunder should be amended or if the present
interpretation thereof should change, and as a result, Life of Virginia
determines that it is permitted to vote Fund shares in its own right, it may
elect to do so.
The number of votes which each Policyowner has the right to instruct will be
determined by dividing a Policy's Cash Value in an Investment Subdivision of
Separate Account III by the net asset value per share of the corresponding
portfolio in which the Subdivision invests. Fractional shares will be counted.
The number of votes which the Policyowner has the right to instruct will be
determined as of the date coincident with the date established by a particular
Fund for determining shareholders eligible to vote at the meeting of that Fund.
Voting instructions will be solicited by written communications prior to such
meeting in accordance with procedures established by that Fund.
Life of Virginia will vote Fund shares held in Separate Account III as to
which no timely instructions are received and Fund shares held in Separate
Account III that it owns as a consequence of accrued charges under the Policies,
in proportion to the voting instructions which are received with respect to all
Policies funded through Separate Account III. Each person having a voting
interest will receive proxy materials, reports, and other materials relating to
the appropriate Portfolio.
Disregard of Voting Instructions. Life of Virginia may, when required by state
insurance regulatory authorities, disregard voting instructions if the
instructions require that the shares be voted so as to cause a change in the
sub-classification or investment objective of a Fund or one or more of its
portfolios or to approve or disapprove an investment advisory contract for a
portfolio of a Fund. In addition, Life of Virginia itself may disregard voting
instructions in favor of changes initiated by a Policyowner in the investment
policy or the investment advisor of a Portfolio of a Fund if Life of Virginia
reasonably disapproves of such changes. A change would be disapproved only if
the proposed change is contrary to state law or prohibited by state regulatory
authorities or Life of Virginia determined that the change would have an adverse
effect on its General Account in that the proposed investment policy for the
portfolio may result in overly speculative or unsound investments. In the event
Life of Virginia does disregard voting instructions, a summary of that action
and the reasons for such action will be included in the next semi-annual report
to Policyowners.
STATE REGULATION OF LIFE OF VIRGINIA
Life of Virginia, a stock life insurance company organized under the laws of
Virginia, is subject to regulation by the State Corporation Commission of the
Commonwealth of Virginia. An annual statement is filed with the Virginia
Commissioner of Insurance on or before March 1 of each year covering the
operations and reporting on the financial condition of Life of Virginia as of
December 31 of the preceding year. Periodically, the Commissioner of Insurance
examines the liabilities and reserves of Life of Virginia and Separate Account
III and certifies their adequacy, and a full examination of Life of Virginia's
operations is conducted by the State Corporation Commission, Bureau of Insurance
of the Commonwealth of Virginia at least once every five years.
In addition, Life of Virginia is subject to the insurance laws and regulations
of other states within which it is licensed to operate. Generally, the Insurance
Department of any other state applies the laws of the state of domicile in
determining permissible investments.
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EXECUTIVE OFFICERS AND DIRECTORS OF LIFE OF VIRGINIA
Name and Position(s)
With Life of Virginia* Principal Occupations Last Five Years
Patrick E. Welch*** Chairman of the Board of Directors of Life of
Virginia since April 1, 1996. Director, President
and Chief Executive Officer of Great Northern
Insured Annuity Corporation ("GNA") since 1992.
Executive Vice President and Chief Operating
Officer of GNA 1991-1992. Senior Vice President
and Chief Financial Officer of GNA Corporation and
its subsidiaries 1983-1991. President and CEO of
GNA Investors Trust since 1992. Senior Vice
President and Treasurer of GNA Investors Trust
1986-1992.
Paul E. Rutledge III** Director, President and Chief Operating Officer,
Life of Virginia, 5/91 to present; Executive Vice
President and Chief Operating Officer, United
Investors Life Insurance Company, Birmingham,
Alabama, 9/87 to 4/91.
John J. Palmer** Director, Life of Virginia, since 1986; Senior
Vice President, Life of Virginia, since 1980;
President, Life of Virginia Series Fund, Inc.,
since 1986; President, Forth Financial Securities
Corporation, since 2/92; President, Aon Asset
Management Fund, Inc., since 1991.
H. Gaylord Hodges, Jr.** Director, Life of Virginia, since 1987; Senior
Vice President, Life of Virginia, since 1986.
William D. Baldwin** Director, Life of Virginia since 1987; Senior Vice
President, Life of Virginia, since 1985.
Selwyn L. Flournoy, Jr.** Director, Life of Virginia, since 5/89; Senior
Vice President, Life of Virginia, since 1980.
Robert A. Bowen** Director, Life of Virginia, since 2/93; Senior
Vice President, Life of Virginia, since 1986;
Systems Manager, Life of Virginia, since 1986.
Linda L. Lanam** Director, Life of Virginia, since 2/93, Vice
President and Senior Counsel, Life of Virginia,
since 1989; Corporate Secretary for Life of
Virginia and for a number of Life of Virginia
affiliates, since 1992.
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Robert D. Chinn Senior Vice President - Agency, Life of Virginia,
since 1/92; Vice President, Life of Virginia,
since 1985.
Thomas A. Barefield Senior Vice President - Special Markets, Life of
Virginia, since 1993; Vice President - Special
Markets, Life of Virginia, 1/91 to 12/93; Vice
President - Registered Products, Life of Virginia,
12/86 to 1/91.
Hans L. Carstensen*** Director, Life of Virginia, since April 1, 1996.
Director and Chief Marketing Officer of GNA since
April 1994. Senior Vice President of GNA since
1987.
Victor C. Moses*** Director, Life of Virginia, since April 1, 1996.
Director of GNA since April 1994. Senior Vice
President, Business Development, and Chief Actuary
of GNA since May 1993. Senior Vice President and
Chief Financial Officer of GNA 1991-1993. Vice
President and Chief Actuary of GNA 1983-1991.
Senior Vice President, Controller and Treasurer
GNA Investors Trust 1992-1993.
Geoffrey S. Stiff*** Director, Life of Virginia, since April 1, 1996.
Director of GNA since April 1994. Senior Vice
President, Chief Financial Officer and Treasurer
of GNA since May 1993. Vice President, Chief
Financial Officer and Director of Employers
Reinsurance Corporation 1987-1993. Senior Vice
President, Controller and Treasurer of GNA
Investors Trust since 1993.
- -------------------------------------------------------------------------------
* The principal business address of each person listed, unless otherwise
indicated, is The Life Insurance Company of Virginia, 6610 W. Broad Street,
Richmond, VA 23230.
** Messrs. Baldwin, Bowen, Hodges, Palmer, Cox, Rutledge, Flournoy and Ms. Lanam
are members of the Executive Committee of the Board of Directors of Life of
Virginia.
***The principal business address of these individuals is GNA Corporation, Two
Union Square, 601 Union Street, Seattle, WA 98101.
The composition of the Board of Directors of Life of Virginia changed following
the sale of Life of Virginia on April 1, 1996.
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LEGAL MATTERS
Sutherland, Asbill & Brennan of Washington, D.C. has provided advice on
certain legal matters relating to federal securities laws applicable to the
issue and sale of the variable life insurance Policy described in this
Prospectus. All matters of Virginia law pertaining to the Policy, including the
validity of the Policy and Life of Virginia's right to issue the Policies under
Virginia insurance law, have been passed upon by William E. Daner, Jr., Counsel
of Life of Virginia.
LEGAL PROCEEDINGS
There are no legal proceedings to which Separate Account III is a party or to
which the assets of the Account are subject. Neither Life of Virginia nor Forth
Financial Securities Corporation is involved in any litigation that is of
material importance in relation to its total assets or that refers to Separate
Account III.
EXPERTS
The consolidated financial statements of The Life Insurance Company of
Virginia and subsidiaries and the financial statements of Life of Virginia
Separate Account III appearing in this prospectus and registration statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon appearing elsewhere herein and in the registration
statement, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
Actuarial matters included in this Prospectus have been examined by Bruce E.
Booker, F.S.A., Vice President and Actuary of Life of Virginia, as stated in the
opinion filed as an exhibit to the Registration Statement.
ADDITIONAL INFORMATION
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
Policy offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement and the amendments and exhibits to the
Registration Statement, to all of which reference is made for further
information concerning Separate Account III, Life of Virginia and the Policy
offered hereby. Statements contained in this Prospectus as to the contents of
the Policy and other legal instruments are summaries. For a complete statement
of the terms thereof, reference is made to such instruments as filed.
FINANCIAL STATEMENTS
The consolidated financial statements of The Life Insurance Company of
Virginia and subsidiaries included herein should be distinguished from the
financial statements of Separate Account III and should be considered only as
bearing on the ability of Life of Virginia to meet its obligations under the
Policy. Such consolidated financial statements of The Life Insurance Company of
Virginia and subsidiaries should not be considered as bearing on the investment
performance of the assets held in Separate Account III.
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Audited Financial Statements
Life of Virginia Separate Account III
Year ended December 31, 1995
with Report of Independent Auditors
<PAGE>
Life of Virginia Separate Account III
Audited Financial Statements
Year ended December 31, 1995
TABLE OF CONTENTS
Report of Independent Auditors.................................................1
Statements of Assets and Liabilities...........................................3
Statements of Operations.......................................................9
Statements of Changes in Net Assets............................................9
Notes to Financial Statements.................................................26
<PAGE>
1
[Ernst & Young LLP letterhead]
Report of Independent Auditors
Policyholders
Life of Virginia Separate Account III
and
Board of Directors
The Life Insurance Company of Virginia
We have audited the accompanying statements of assets and liabilities of Life of
Virginia Separate Account III (comprising, the Life of Virginia Series Fund,
Inc.--Common Stock Index, Government Securities, Money Market, Total Return,
International Equity and Real Estate Securities portfolios; the Oppenheimer
Variable Account Funds--Money, Bond, Capital Appreciation, Growth, High Income
and Multiple Strategies portfolios, Variable Insurance Products Fund--Money
Market, High Income, Equity-Income, Growth and Overseas portfolios; the Variable
Insurance Products Fund II--Asset Manager and Contrafund portfolios; the
Advisers Management Trust--Balanced, Bond and Growth portfolios; the Insurance
Management Series--Corporate Bond and Utility portfolios; Janus
Aspen--Aggressive Growth, Growth, Worldwide Growth, Balanced and Flexible Income
portfolios; and Alger American--Small Cap and Growth portfolios) as of December
31, 1995, and the related statements of operations and changes in net assets for
each of the three years in the period then ended for the Life of Virginia Series
Fund, Inc. Common Stock Index, Government Securities, Money Market and Total
Return portfolios, the Oppenheimer Variable Account Funds portfolios, the
Variable Insurance Products Fund portfolios, the Variable Insurance Products
Fund II Asset Manager portfolio, the Advisers Management Trust portfolios, and
for the period from June 30, 1995 (date of inception) to December 31, 1995 for
the Life of Virginia Series Fund, Inc. International Equity portfolio, for the
period from December 6, 1995 (date of inception) to December 31, 1995 for the
Life of Virginia Series Fund, Inc. Real Estate Securities portfolio, for the
period from January 16, 1995 (date of inception) to December 31, 1995 for the
Variable Insurance Products Fund II Contrafund portfolio, for the period from
February 7, 1995 (date of inception) to December 31, 1995 for the Insurance
Management Series portfolios, for the year ended December 31, 1995 and for the
period from May 11, 1994 (date of inception) to December 31, 1994 for the Janus
Aspen Aggressive Growth, Growth, and Worldwide Growth portfolios, for the period
from October 27, 1995 (date of inception) to December 31, 1995 for the Janus
Aspen Balanced portfolio, for the period from November 1, 1995 (date of
inception) to December 31, 1995 for the Janus Aspen Flexible Income portfolio,
<PAGE>
for the period from October 6, 1995 (date of inception) to December 31, 1995 for
the Alger American Small Cap portfolio and for the period from November 2, 1995
(date of inception) to December 31, 1995 for the Alger American Growth
portfolio. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1995, by correspondence with
the custodians. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
portfolios constituting Life of Virginia Separate Account III at December 31,
1995, and the results of their operations and changes in their net assets for
the periods described in the first paragraph, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Richmond, Virginia
February 8, 1996
<PAGE>
Life of Virginia Separate Account III
Statements of Assets and Liabilities
December 31, 1995
<TABLE>
<CAPTION>
LIFE OF VIRGINIA SERIES FUND, INC.
-----------------------------------------------------------------------------------------------
COMMON GOVERNMENT MONEY TOTAL INTERNATIONAL REAL ESTATE
STOCK INDEX SECURITIES MARKET RETURN EQUITY SECURITIES
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investment in Life of Virginia Series
Fund, Inc., at fair value (Note 2):
Common Stock Index Portfolio
(40,635 shares;
cost - $765,026) $852,939
Government Securities Portfolio
(76,649 shares; $803,282
cost - $780,980)
Money Market Portfolio
(671,930 shares;
cost - $7,161,616) $6,961,195
Total Return Portfolio
(68,685 shares;
cost - $949,095) $1,094,153
International Equity Portfolio
(19,702 shares;
cost - $202,297) $206,280
Real Estate Securities Portfolio $ 394
(36 shares; cost - $396)
Receivable from affiliate (Note 3) 5,942 - - 1,143 - -
Deposits in process - - - - 6,483 -
-----------------------------------------------------------------------------------------------
858,881 803,282 6,961,195 1,095,296 212,763 394
LIABILITIES
Accrued expenses payable to
affiliate (Note 3) 61 1,922 28,568 78 18 -
Deposits pending policy approval - - 1,175,117 - - -
Withdrawal in process - - 19,782 - - -
-----------------------------------------------------------------------------------------------
TOTAL LIABILITIES 61 1,922 1,223,467 78 18 -
-----------------------------------------------------------------------------------------------
NET ASSETS $858,820 $801,360 $5,737,728 $1,095,218 $212,745 $ 394
===============================================================================================
Outstanding units 39,687 45,046 412,193 53,713 20,127 34
===============================================================================================
Net asset value per unit $ 21.64 $ 17.79 $ 13.92 $ 20.39 $ 10.57 $11.60
===============================================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Life of Virginia Separate Account III
Statements of Assets and Liabilities (continued)
December 31, 1995
<TABLE>
<CAPTION>
OPPENHEIMER VARIABLE ACCOUNT FUNDS
--------------------------------------------------------------------------------------
CAPITAL HIGH MULTIPLE
MONEY BOND APPRECIATION GROWTH INCOME STRATEGIES
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investment in Oppenheimer Variable
Account Funds, at fair value
(Note 2):
Money Fund (336,990 shares;
cost-$336,990) $336,990
Bond Fund (135,878 shares;
cost-$1,534,945) $1,608,790
Capital Appreciation Fund (96,965
shares; cost-$2,667,890) $3,317,179
Growth Fund (48,305 shares;
cost-$894,027) $1,137,577
High Income Fund (194,246
shares; cost-$2,059,190) $2,064,837
Multiple Strategies Fund (143,429
(shares; cost-$1,895,648) $2,086,887
Receivable from affiliate (Note 3) - - 6,191 - 5,830 724
--------------------------------------------------------------------------------------
336,990 1,608,790 3,323,370 1,137,577 2,070,667 2,087,611
LIABILITIES
Accrued expenses payable to affiliate
(Note 3) 705 3,700 238 1,975 148 149
Withdrawal in process - - 4 - - -
--------------------------------------------------------------------------------------
TOTAL LIABILITIES 705 3,700 242 1,975 148 149
--------------------------------------------------------------------------------------
NET ASSETS $336,285 $1,605,090 $3,323,128 $1,135,602 $2,070,519 $2,087,462
======================================================================================
Outstanding units 23,192 81,518 130,729 57,586 80,911 105,534
======================================================================================
Net asset value per unit $ 14.50 $ 19.69 $ 25.42 $ 19.72 $ 25.59 $ 19.78
======================================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Life of Virginia Separate Account III
Statements of Assets and Liabilities (continued)
December 31, 1995
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
------------------------------------------------------------------------------------
MONEY HIGH EQUITY-
MARKET INCOME INCOME GROWTH OVERSEAS
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in Variable Insurance
Products Fund, at fair value
(Note 2):
Money Market Portfolio
(2,227,781 shares;
cost-$2,227,781) $2,227,781
High Income Portfolio (184,368
shares; cost-$2,156,308) $2,221,631
Equity-Income Portfolio (442,466
shares; cost-$6,928,355) $8,526,314
Growth Portfolio (223,289
shares; cost-$5,271,963) $6,520,026
Overseas Portfolio (414,085
shares; cost-$6,645,028) $7,060,144
Receivable from affiliate (Note 3) 390 - 51,294 - -
Deposits in process - - - - 6,485
---------------------------------------------------------------------------------
2,228,171 2,221,631 8,577,608 6,520,026 7,066,629
LIABILITIES
Accrued expenses payable to affiliate
(Note 3) 159 5,071 613 10,493 49,998
Withdrawal in process - - 4 5 -
---------------------------------------------------------------------------------
TOTAL LIABILITIES 159 5,071 617 10,498 49,998
---------------------------------------------------------------------------------
NET ASSETS $2,228,012 $2,216,560 $8,576,991 $6,509,528 $7,016,631
=================================================================================
Outstanding units 153,233 101,444 373,400 267,882 460,711
=================================================================================
Net asset value per unit $ 14.54 $ 21.85 $ 22.97 $ 24.30 $ 15.23
=================================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Life of Virginia Separate Account III
Statements of Assets and Liabilities (continued)
December 31, 1995
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS
FUND II ADVISERS MANAGEMENT TRUST
---------------------------------- --------------------------------------------------
ASSET
MANAGER CONTRAFUND BALANCED BOND GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in Variable Insurance
Products Fund II, at fair
value (Note 2):
Asset Manager Portfolio
(527,417 shares;
cost-$7,498,547) $8,327,912
Contrafund Portfolio
(106,094 shares;
cost - $1,398,819) $1,461,968
Investment in Advisers Management
Trust, at fair value (Note 2):
Balanced Portfolio (109,870
shares; $1,924,916
cost-$1,595,765)
Bond Portfolio (60,252 shares;
cost-$849,761) $886,300
Growth Portfolio (30,129 shares;
cost-$716,962) $779,128
Receivables from affiliate (Note 3) - 528 5,268 9,769 -
-------------------------------------------------------------------------------------
8,327,912 1,462,496 1,930,184 896,069 779,128
LIABILITIES
Accrued expenses payable to
affiliate (Note 3) 15,085 105 138 64 3,414
-------------------------------------------------------------------------------------
TOTAL LIABILITIES 15,085 105 138 64 3,414
-------------------------------------------------------------------------------------
NET ASSETS $8,312,827 $1,462,391 $1,930,046 $896,005 $775,714
=====================================================================================
Outstanding units 462,080 105,208 124,279 75,868 54,860
=====================================================================================
Net asset value per unit $ 17.99 $ 13.90 $ 15.53 $ 11.81 $ 14.14
=====================================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
Life of Virginia Separate Account III
Statements of Assets and Liabilities (continued)
December 31, 1995
<TABLE>
<CAPTION>
INSURANCE
MANAGEMENT
SERIES JANUS ASPEN
--------------------------- ------------------------------------------------------------------
CORPORATE AGGRESSIVE WORLDWIDE FLEXIBLE
BOND UTILITY GROWTH GROWTH GROWTH BALANCED INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investment in Insurance Management
Series, at fair value (Note 2):
Corporate Bond Portfolio
(10,026 shares; $98,152
cost - $96,687)
Utility Portfolio (8,387 shares; $92,505
cost - $80,407)
Investment in Janus Aspen, at
fair value (Note 2):
Aggressive Growth Portfolio
(109,583 shares; $1,871,685
cost-$1,748,630)
Growth Portfolio (97,113 $1,306,169
shares; cost-$1,124,523)
Worldwide Growth Portfolio
(87,307 shares; cost- $1,336,664
$1,135,490)
Balanced Portfolio (2,436 $31,747
shares; cost-$29,981)
Flexible Income Portfolio $6,932
(624 shares; cost-$6,906)
Receivable from affiliate (Note 3) 73 103 80,623 1,557 1,651 - 17
Deposits in process - - - - 6,483 - -
--------------------------- ------------------------------------------------------------------
98,225 92,608 1,952,308 1,307,726 1,344,798 31,747 6,949
LIABILITIES
Accrued expenses payable to
affiliate (Note 3) 7 7 140 93 96 185 1
--------------------------- ------------------------------------------------------------------
TOTAL LIABILITIES 7 7 140 93 96 185 1
--------------------------- ------------------------------------------------------------------
NET ASSETS $98,218 $92,601 $1,952,168 $1,307,633 $1,344,702 $31,562 $6,948
=========================== ==================================================================
Outstanding units 8,274 7,584 136,420 104,527 110,584 2,972 662
=========================== ==================================================================
Net asset value per unit $ 11.87 $ 12.21 $ 14.31 $ 12.51 $ 12.16 $ 10.62 $10.49
=========================== ==================================================================
</TABLE>
See accompanying notes.
7
<PAGE>
Life of Virginia Separate Account III
Statements of Assets and Liabilities (continued)
December 31, 1995
ALGER AMERICAN
----------------------------
SMALL
CAP GROWTH
PORTFOLIO PORTFOLIO
----------------------------
ASSETS
Investment in Alger American, at
fair value (Note 2):
Small Cap Portfolio
(8,107 shares;
cost - $314,324) $319,520
Growth Portfolio (3,257
shares; cost-$99,504) $101,477
----------------------------
319,520 101,477
LIABILITIES
Accrued expenses payable to
affiliate (Note 3) 5,105 537
----------------------------
TOTAL LIABILITIES 5,105 537
----------------------------
NET ASSETS $314,415 $100,940
============================
Outstanding units 33,520 10,482
============================
Net asset value per unit $ 9.38 $ 9.63
============================
See accompanying notes.
8
<PAGE>
Life of Virginia Separate Account III
<TABLE>
<CAPTION>
LIFE OF VIRGINIA SERIES FUND, INC.
-------------------------------------------------------------------------------
COMMON GOVERNMENT
STOCK INDEX SECURITIES
PORTFOLIO PORTFOLIO
-------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1995 1994 1993 1995 1994 1993
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
INVESTMENT INCOME
Income--Dividends $ 16,395 $ 3,862 $15,976 $ 47,230 $ 30,120 $ 37,428
Expenses--Mortality and
expense risk charges (Note 3) 5,726 2,438 1,015 11,615 7,015 5,259
-------------------------------------------------------------------------------
Net investment income 10,669 1,424 14,961 35,615 23,105 32,169
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) 5,027 24,353 (255) 12,380 (726) 407
Unrealized appreciation
(depreciation) on investments 109,436 (18,877) (6,074) 79,507 (53,290) (5,864)
-------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments 114,463 5,476 (6,329) 91,887 (54,016) (5,457)
-------------------------------------------------------------------------------
Increase (decrease) in net assets
from operations $125,132 $ 6,900 $ 8,632 $127,502 $(30,911) $ 26,712
===============================================================================
STATEMENTS OF CHANGES IN NET ASSETS
INCREASE IN NET ASSETS
From Operations:
Net investment income $ 10,669 $ 1,424 $14,961 $ 35,615 $ 23,105 $ 32,169
Net realized gain (loss) 5,027 24,353 (255) 12,380 (726) 407
Unrealized appreciation
(depreciation) on investments 109,436 (18,877) (6,074) 79,507 (53,290) (5,864)
-------------------------------------------------------------------------------
Increase (decrease) in net assets
from operations 125,132 6,900 8,632 127,502 (30,911) 26,712
From Capital Transactions:
Net premiums - - - - - -
Loan interest (19) 1 (12) (29) (1) (3)
Transfers (to) from the general account
of Life of Virginia:
Surrenders - (1,587) (1,324) (57,612) - -
Loans - 2,349 - (2,218) - -
Cost of insurance and administrative
expense (Note 3) (4,705) (2,040) (821) (9,352) (5,709) (4,240)
Transfer gain (loss) and transfer
fees (Note 3) 2,612 (2,559) 307 (845) (1,072) 282
Transfers (to) from the Guarantee
Account (Note 1) 8,390 - - - - -
Interfund transfers 493,348 139,818 24,743 35,175 316,447 60,647
-------------------------------------------------------------------------------
Increase (decrease) in net assets
from capital transactions 499,626 135,982 22,893 (34,881) 309,665 56,686
-------------------------------------------------------------------------------
INCREASE IN NET ASSETS 624,758 142,882 31,525 92,621 278,754 83,398
NET ASSETS AT BEGINNING OF YEAR 234,062 91,180 59,655 708,739 429,985 346,587
-------------------------------------------------------------------------------
NET ASSETS AT END OF YEAR $858,820 $234,062 $91,180 $801,360 $708,739 $429,985
===============================================================================
</TABLE>
See accompanying notes
9
<PAGE>
<TABLE>
<CAPTION>
LIFE OF VIRGINIA SERIES FUND, INC.
-------------------------------------------------------------------------------
MONEY MARKET TOTAL RETURN
PORTFOLIO PORTFOLIO
-------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1995 1994 1993 1995 1994 1993
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
INVESTMENT INCOME
Income--Dividends $ 259,698 $ 121,314 $ 56,347 $ 78,232 $ 28,915 $ 42,460
Expenses--Mortality and
expense risk charges (Note 3) 60,222 56,058 29,837 11,743 8,331 5,968
-------------------------------------------------------------------------------
Net investment income 199,476 65,256 26,510 66,489 20,584 36,492
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) 128,436 71,551 (27,086) 10,068 12,297 9,288
Unrealized appreciation
(depreciation) on investments (122,638) (35,496) (22,117) 134,624 (23,103) 3,955
-------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments 5,798 36,055 (49,203) 144,692 (10,806) 13,243
-------------------------------------------------------------------------------
Increase (decrease) in net assets
from operations $ 205,274 $ 101,311 $ (22,693) $ 211,181 $ 9,778 $ 49,735
===============================================================================
STATEMENTS OF CHANGES IN NET ASSETS
INCREASE IN NET ASSETS
From Operations:
Net investment income $ 199,476 $ 65,256 $ 26,510 $ 66,489 $ 20,584 $ 36,492
Net realized gain (loss) 128,436 71,551 (27,086) 10,068 12,297 9,288
Unrealized appreciation
(depreciation) on investments (122,638) (35,496) (22,117) 134,624 (23,103) 3,955
-------------------------------------------------------------------------------
Increase (decrease) in net assets
from operations 205,274 101,311 (22,693) 211,181 9,778 49,735
From Capital Transactions:
Net premiums 14,618,729 20,660,275 10,578,102 - 38,027 -
Loan interest 2 4 6 (90) (517) (224)
Transfers (to) from the general account
of Life of Virginia:
Surrenders (83,593) (9,028) - (52,620) (82,639) (1,311)
Loans - - - 5,060 20,066 24,139
Cost of insurance and administrative
expense (Note 3) (49,685) (47,797) (24,901) (9,674) (6,767) (4,738)
Transfer gain (loss) and transfer
fees (Note 3) (455,729) (13,101) (3,674) 1,184 (11) (462)
Transfers (to) from the Guarantee
Account (Note 1) 35,940 - - 2,000 - -
Interfund transfers (12,260,599) (19,072,381) (9,287,350) 180,662 249,860 115,969
-------------------------------------------------------------------------------
Increase (decrease) in net assets
from capital transactions 1,805,065 1,517,972 1,262,183 126,522 218,019 133,373
-------------------------------------------------------------------------------
INCREASE IN NET ASSETS 2,010,339 1,619,283 1,239,490 337,703 227,797 183,108
NET ASSETS AT BEGINNING OF YEAR 3,727,389 2,108,106 868,616 757,515 529,718 346,610
-------------------------------------------------------------------------------
NET ASSETS AT END OF YEAR $ 5,737,728 $ 3,727,389 $ 2,108,106 $1,095,218 $757,515 $529,718
===============================================================================
</TABLE>
10
<PAGE>
LIFE OF VIRGINIA SEPARATE ACCOUNT III
<TABLE>
<CAPTION>
LIFE OF VIRGINIA SERIES FUND, INC.
(CONTINUED)
-----------------------------------------------
REAL ESTATE
INTERNATIONAL SECURITIES
EQUITY PORTFOLIO PORTFOLIO
---------------------- ------------------------
PERIOD FROM JUNE 30, PERIOD FROM
1995 TO DECEMBER 31, DECEMBER 6, 1995
1995 TO DECEMBER 31, 1995
---------------------- ------------------------
STATEMENTS OF OPERATIONS (CONTINUED)
<S> <C> <C>
INVESTMENT INCOME
Income--Dividends $ 3,880 $ 22
Expenses--Mortality and expense risk charges (Note 3) 737 -
---------------------- ------------------------
Net investment income 3,143 22
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain 44 -
Unrealized appreciation (depreciation) on investments 3,983 (2)
---------------------- ------------------------
Net realized and unrealized gain (loss) on investments 4,027 (2)
---------------------- ------------------------
Increase in net assets from operations $ 7,170 $ 20
====================== ========================
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
INCREASE IN NET ASSETS
From Operations:
Net investment income $ 3,143 $ 22
Net realized gain 44 -
Unrealized appreciation (depreciation) on investments 3,983 (2)
---------------------- ------------------------
Increase in net assets from operations 7,170 20
From Capital Transactions:
Transfers (to) from the general account of Life of Virginia:
Cost of insurance and administrative expense (Note 3) (624) -
Transfer gain (loss) and transfer fees (Note 3) (13) (1)
Transfers from the Guarantee Account (Note 1) 14,623 -
Interfund transfers 191,589 375
---------------------- ------------------------
Increase in net assets from capital transactions 205,575 374
---------------------- ------------------------
INCREASE IN NET ASSETS 212,745 394
NET ASSETS AT BEGINNING OF PERIOD - -
---------------------- ------------------------
NET ASSETS AT END OF PERIOD $212,745 $ 394
====================== ========================
</TABLE>
See accompanying notes.
11
<PAGE>
Life of Virginia Separate Account III
<TABLE>
<CAPTION>
-------------------------------------------
MONEY
PORTFOLIO
-------------------------------------------
YEAR ENDED DECEMBER 31,
1995 1994 1993
-------------------------------------------
STATEMENTS OF OPERATIONS (CONTINUED)
<S> <C> <C> <C>
INVESTMENT INCOME (EXPENSE)
Income--Dividends $ 20,916 $ 7,934 $ 8,325
Expenses--Mortality and expense risk charges (Note 3) 4,563 2,444 2,669
-------------------------------------------
Net investment income (expense) 16,353 5,490 5,656
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) - - -
Unrealized appreciation (depreciation) on investments - - -
-------------------------------------------
Net realized and unrealized gain (loss) on investments - - -
-------------------------------------------
Increase (decrease) in net assets from operations $ 16,353 $ 5,490 $ 5,656
===========================================
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
INCREASE (DECREASE) IN NET ASSETS
From Operations:
Net investment income (expense) $ 16,353 $ 5,490 $ 5,656
Net realized gain (loss) - - -
Unrealized appreciation (depreciation) on investments - - -
-------------------------------------------
Increase (decrease) in net assets from operations 16,353 5,490 5,656
From Capital Transactions:
Loan interest - - -
Transfers (to) from the general account of Life of Virginia:
Death benefits - - -
Surrenders - - -
Loans - - -
Cost of insurance and administrative expense (Note 3) (4,184) (1,573) (1,296)
Transfer gain (loss) and transfer fees (Note 3) (1,197) (795) (2,546)
Transfers (to) from the Guarantee Account (Note 1) - - -
Interfund transfers 64,757 209,744 (133,839)
-------------------------------------------
Increase (decrease) in net assets from capital transactions 59,376 207,376 (137,681)
-------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 75,729 212,866 (132,025)
NET ASSETS AT BEGINNING OF YEAR 260,556 47,690 179,715
-------------------------------------------
NET ASSETS AT END OF YEAR $336,285 $260,556 $ 47,690
===========================================
</TABLE>
See accompanying notes.
12
<PAGE>
<TABLE>
<CAPTION>
OPPENHEIMER VARIABLE ACCOUNT FUNDS
--------------------------------------------------------------------------------------------------
BOND CAPITAL APPRECIATION GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------- --------------------------------- ------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1995 1994 1993 1995 1994 1993 1995 1994 1993
--------------------------------- --------------------------------- ------------------------------
STATEMENTS OF OPERATIONS
(CONTINUED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (EXPENSE)
Income -- Dividends $ 89,363 $ 77,461 $ 38,165 $ 9,020 $ 75,387 $ 4,362 $ 20,599 $ 7,353 $ 9,124
Expenses -- Morality and expense
risk charges (Note 3) 21,561 11,684 7,280 29,001 12,482 5,050 12,467 9,424 5,508
--------------------------------- --------------------------------- ------------------------------
Net investment income (expense) 67,802 65,777 30,885 (19,981) 62,905 (688) 8,132 (2,071) 3,616
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) 16,138 1,885 4,114 18,656 (63,084) 87,712 58,948 1,904 27,000
Unrealized appreciation
(depreciation) on investments 167,799 (109,321) 24,422 654,277 (44,360) 22,618 212,160 (3,327) (4,304)
--------------------------------- --------------------------------- ------------------------------
Net realized and unrealized gain
(loss) on investments 183,937 (107,436) 28,536 672,933 (107,444) 110,330 271,108 (1,423) 22,696
--------------------------------- --------------------------------- ------------------------------
Increase (decrease) in net
assets from operations $ 251,739 $ (41,659) $ 59,421 $ 652,952 $ (44,539) $109,642 $ 279,240 $ (3,494) $ 26,312
================================= ================================= ==============================
STATEMENT OF CHANGES IN
NET ASSETS (CONTINUED)
INCREASE (DECREASE) IN NET ASSETS
From Operations:
Net investment income (expense) $ 67,802 $ 65,777 $ 30,885 $ (19,981) $ 62,905 $ (688) $ 8,132 $ (2,071) $ 3,616
Net realized gain (loss) 16,138 1,885 4,114 18,656 (63,084) 87,712 58,948 1,904 27,000
Unrealized appreciation
(depareciation) on
investments 167,799 (109,321) 24,422 654,277 (44,360) 22,618 212,160 (3,327) (4,304)
--------------------------------- --------------------------------- ------------------------------
Increase (decrease) in net
assets from operations 251,739 (41,659) 59,421 652,952 (44,539) 109,642 279,240 (3,494) 26,312
From Capital Transactions:
Loan interest (521) (25) (36) (876) (783) - (8) 855 36
Transfers (to) from the general
account of Life of Virginia:
Death benefits - - (20,675) - - - - - -
Surrenders (89,985) (13,105) - (9,862) - (1,423) (16,486) (16,371) (15,445)
Loans (3) (838) (4,551) (7,659) - - - 771 (3,248)
Cost of insurance and
administrative
expense (Note 3) (15,660) (10,719) (5,774) (23,791) (10,705) (4,965) (10,195) (7,676) (4,453)
Transfer gain (loss) and
transfer fees (Note 3) (11,174) 7,513 (2,865) (1,288) 5,785 20,632 (304) (2,179) (728)
Transfers (to) from the
Guarantee Account (Note 1) - - - 15,348 - - 2,000 - -
Interfund transfers (1,051,342) 1,974,504 104,351 1,211,520 671,394 536,499 81,977 232,662 197,216
--------------------------------- --------------------------------- ------------------------------
Increase (decrease) in net
assets from capital
transactions (1,168,685) 1,957,330 70,450 1,183,392 665,691 550,743 56,984 208,062 173,378
--------------------------------- --------------------------------- ------------------------------
INCREASE (DECREASE) IN NET ASSETS (916,946) 1,915,671 129,871 1,836,344 621,152 660,385 336,224 204,568 199,690
NET ASSETS AT BEGINNING OF YEAR 2,522,036 606,365 476,494 1,486,784 865,632 205,247 799,378 594,810 395,120
--------------------------------- --------------------------------- ------------------------------
NET ASSETS AT END OF YEAR $1,605,090 $2,522,036 $606,365 $3,323,128 $1,486,784 $865,632 $1,135,602 $799,378 $594,810
================================= ================================= ==============================
</TABLE>
13
<PAGE>
Life of Virginia Separate Account III
<TABLE>
<CAPTION>
OPPENHEIMER VARIABLE ACCOUNT FUNDS (CONTINUED)
------------------------------------------- ------------------------------------------
HIGH INCOME MULTIPLE STRATEGIES
PORTFOLIO PORTFOLIO
------------------------------------------- ------------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1995 1994 1993 1995 1994 1993
------------------------------------------- ------------------------------------------
STATEMENTS OF OPERATIONS (CONTINUED)
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Income--Dividends $ 157,280 $ 66,988 $ 21,558 $ 142,518 $ 78,665 $ 42,136
Expenses--Mortality and expense
risk charges (Note 3) 22,782 9,119 2,200 25,397 18,173 13,387
------------------------------------------- ------------------------------------------
Net investment income 134,498 57,869 19,358 117,121 60,492 28,749
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) 18,618 (7,921) 951 24,327 7,076 35,660
Unrealized appreciation (depreciation)
on investments 83,576 (88,498) 11,143 206,074 (115,438) 71,724
------------------------------------------- ------------------------------------------
Net realized and unrealized gain
(loss) on investments 102,194 (96,419) 12,094 230,401 (108,362) 107,384
------------------------------------------- ------------------------------------------
Increase (decrease) in net assets
from operations $ 236,692 $ (38,550) $ 31,452 $ 347,522 $ (47,870) $ 136,133
=========================================== ==========================================
STATEMENTS OF CHANGES IN NET
ASSETS (CONTINUED)
INCREASE IN NET ASSETS
Net investment income $ 134,498 $ 57,869 $ 19,358 $ 117,121 $ 60,492 $ 28,749
Net realized gain (loss) 18,618 (7,921) 951 24,327 7,076 35,660
Unrealized appreciation (depreciation)
on investments 83,576 (88,498) 11,143 206,074 (115,438) 71,724
------------------------------------------- ------------------------------------------
Increase (decrease) in net assets
from operations 236,692 (38,550) 31,452 347,522 (47,870) 136,133
From Capital Transactions:
Loan interest (42) 116 374 (433) (876) (32)
Transfers (to) from the general account
of Life of Virginia:
Death benefits - (13,450) - (3,955) - -
Surrenders (24,217) (7,877) - (179,975) (79,370) (181,607)
Loans (18,152) (976) 118 (63,108) 18,360 76,257
Cost of insurance and administrative
expense (Note 3) (15,109) (7,582) (1,698) (20,637) (14,828) (10,359)
Transfer gain (loss) and transfer
fees (Note 3) 8,580 (2,970) (1,948) 928 (499) (1,610)
Transfers (to) from the Guarantee
Account (Note 1) 9,748 - - - - -
Interfund transfers 760,586 865,998 270,814 222,736 912,293 147,100
------------------------------------------- ------------------------------------------
Increase (decrease) in net assets
from capital transactions 721,394 833,259 267,660 (44,444) 835,080 29,749
------------------------------------------- ------------------------------------------
INCREASE IN NET ASSETS 958,086 794,709 299,112 303,078 787,210 165,882
NET ASSETS AT BEGINNING OF YEAR 1,112,433 317,724 18,612 1,784,384 997,174 831,292
------------------------------------------- ------------------------------------------
NET ASSETS AT END OF YEAR $2,070,519 $1,112,433 $317,724 $2,087,462 $1,784,384 $ 997,174
=========================================== ==========================================
</TABLE>
See accompanying notes.
14,15
<PAGE>
Life of Virginia Separate Account III
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
--------------------------------------------- --------------------------------------
MONEY MARKET HIGH INCOME
PORTFOLIO PORTFOLIO
--------------------------------------------- --------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1995 1994 1993 1995 1994 1993
--------------------------------------------- --------------------------------------
STATEMENTS OF OPERATIONS (CONTINUED)
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (EXPENSE)
Income--Dividends $ 237,224 $ 117,080 $ 48,010 $ 186,422 $ 74,381 $ 39,264
Expenses--Mortality and expense risk
charges (Note 3) 54,127 36,325 19,864 28,004 24,358 8,267
--------------------------------------------- --------------------------------------
Net investment income (expense) 183,097 80,755 28,146 158,418 50,023 30,997
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
ON INVESTMENTS
Net realized gain (loss) - - - 137,054 (9,188) 3,638
Unrealized appreciation (depreciation)
on investments - - - 66,195 (98,535) 70,284
--------------------------------------------- --------------------------------------
Net realized and unrealized gain
(loss) on investments - - - 203,249 (107,723) 73,922
--------------------------------------------- --------------------------------------
Increase (decrease) in net assets
from operations $ 183,097 $ 80,755 $ 28,146 $ 361,667 $ (57,700) $104,919
============================================= ======================================
STATEMENTS OF CHANGES IN NET
ASSETS (CONTINUED)
INCREASE (DECREASE) IN NET ASSETS
From Operations:
Net investment income (expense) $ 183,097 $ 80,755 $ 28,146 $ 158,418 $ 50,023 $ 30,997
Net realized gain (loss) - - - 137,054 (9,188) 3,638
Unrealized appreciation (depreciation)
on investments - - - 66,195 (98,535) 70,284
--------------------------------------------- --------------------------------------
Increase (decrease) in net assets from
operations 183,097 80,755 28,146 361,667 (57,700) 104,919
From Capital Transactions:
Net premiums - - - 4,082 - -
Loan interest (2,227) 459 468 (11) (394) 358
Transfers (to) from the general account
of Life of Virginia:
Death benefits (18,745) - - - - -
Surrenders (442,432) (188,736) - (28,969) - -
Loans (37,441) (127,953) (5,809) (9,125) (38,133) (14,899)
Cost of insurance and administrative
expense (Note 3) (43,910) (29,075) (15,888) (21,564) (20,127) (6,706)
Transfer gain (loss) and transfer
fees (Note 3) (6,558) 3,232 124 (1,538) (4,154) 1,008
Transfers (to) from the Guarantee
Account (Note 1) 59,781 - - (32,657) - -
Interfund transfers (1,749,674) 3,439,732 (82,633) (572,358) 1,830,069 236,515
--------------------------------------------- --------------------------------------
Increase (decrease) in net assets from (2,241,206) 3,097,659 (103,738) (662,140) 1,767,261 216,276
capital transactions
--------------------------------------------- --------------------------------------
INCREASE (DECREASE) IN NET ASSETS (2,058,109) 3,178,414 (75,592) (300,473) 1,709,561 321,195
NET ASSETS AT BEGINNING OF YEAR 4,286,121 1,107,707 1,183,299 2,517,033 807,472 486,277
--------------------------------------------- --------------------------------------
NET ASSETS AT END OF YEAR $ 2,228,012 $4,286,121 $1,107,707 $2,216,560 $2,517,033 $807,472
============================================= ======================================
</TABLE>
See accompanying notes.
16
<PAGE>
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
--------------------------------------------------------------------------------------
EQUITY-INCOME GROWTH
PORTFOLIO PORTFOLIO
--------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1995 1994 1993 1995 1994 1993
------------------------------------------ ----------------------------------------
STATEMENTS OF OPERATIONS (CONTINUED)
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (EXPENSE)
$ 399,376 $ 223,035 $ 44,113 $ 20,548 $ 169,544 $ 22,662
Income--Dividends
Expenses--Mortality and expense risk
charges (Note 3) 82,498 49,043 20,798 65,478 44,949 22,359
------------------------------------------ ----------------------------------------
Net investment income (expense) 316,878 173,992 23,315 (44,930) 124,595 303
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
ON INVESTMENTS
Net realized gain (loss) 130,101 39,859 55,528 280,133 50,460 47,037
Unrealized appreciation (depreciation)
on investments 1,347,468 5,531 133,181 1,091,397 (175,677) 216,365
------------------------------------------ ----------------------------------------
Net realized and unrealized gain
(loss) on investments 1,477,569 45,390 188,709 1,371,530 (125,217) 263,402
------------------------------------------ ----------------------------------------
Increase (decrease) in net assets
from operations $ 1,794,447 $ 219,382 $ 212,024 $1,326,600 $ (622) $ 263,705
========================================== ========================================
STATEMENTS OF CHANGES IN NET
ASSETS (CONTINUED)
INCREASE (DECREASE) IN NET ASSETS
From Operations:
Net investment income (expense) $ 316,878 $ 173,992 $ 23,315 $ (44,930) $ 124,595 $ 303
Net realized gain (loss) 130,101 39,859 55,528 280,133 50,460 47,037
Unrealized appreciation (depreciation)
on investments 1,347,468 5,531 133,181 1,091,397 (175,677) 216,365
------------------------------------------ ----------------------------------------
Increase (decrease) in net assets from
operations 1,794,447 219,382 212,024 1,326,600 (622) 263,705
From Capital Transactions:
Net premiums 10,886 - - - 38,543 -
Loan interest (1,495) (242) (67) (717) (605) (698)
Transfers (to) from the general account
of Life of Virginia:
Death benefits (4,351) (9,401) - (10,299) - -
Surrenders (112,902) (91,168) (3,961) (120,929) (77,570) (18,213)
Loans (106,657) (46,996) 12,987 (117,116) (44,927) (4,225)
Cost of insurance and administrative
expense (Note 3) (66,845) (41,229) (17,555) (53,507) (36,257) (19,003)
Transfer gain (loss) and transfer
fees (Note 3) 14,451 21,282 17,578 (7,004) (5,419) 17,017
Transfers (to) from the Guarantee
Account (Note 1) 4,600 - - (33,912) - -
Interfund transfers 2,227,097 2,288,157 1,391,206 1,797,003 1,173,835 1,354,413
------------------------------------------ ----------------------------------------
Increase (decrease) in net assets from
capital transactions 1,964,784 2,120,403 1,400,188 1,453,519 1,047,600 1,329,291
------------------------------------------ ----------------------------------------
INCREASE (DECREASE) IN NET ASSETS 3,759,231 2,339,785 1,612,212 2,780,119 1,046,978 1,592,996
NET ASSETS AT BEGINNING OF YEAR 4,817,760 2,477,975 865,763 3,729,409 2,682,431 1,089,435
------------------------------------------ ----------------------------------------
NET ASSETS AT END OF YEAR $ 8,576,991 $4,817,760 $2,477,975 $6,509,528 $3,729,409 $2,682,431
========================================== ========================================
</TABLE>
17
<PAGE>
Life of Virginia Separate Account III
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
(CONTINUED)
----------------------------------------------
OVERSEAS
PORTFOLIO
----------------------------------------------
YEAR ENDED DECEMBER 31,
1995 1994 1993
----------------------------------------------
STATEMENTS OF OPERATIONS (CONTINUED)
<S> <C> <C> <C>
INVESTMENT INCOME (EXPENSE)
Income--Dividends $ 25,524 $ 25,352 $ 62,852
Expenses--Mortality and expense risk charges (Note 3) 70,739 46,220 45,727
----------------------------------------------
Net investment income (expense) (45,215) (20,868) 17,125
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain 383,399 799,938 15,392
Unrealized appreciation (depreciation) on investments 356,600 (781,857) 979,332
----------------------------------------------
Net realized and unrealized gain on investments 739,999 18,081 994,724
----------------------------------------------
Increase (decrease) in net assets from operations $ 694,784 $ (2,787) $1,011,849
==============================================
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
INCREASE (DECREASE) IN NET ASSETS
From Operations:
Net investment income (expense) $ (45,215) $ (20,868) $ 17,125
Net realized gain 383,399 799,938 15,392
Unrealized appreciation (depreciation) on investments 356,600 (781,857) 979,332
----------------------------------------------
Increase (decrease) in net assets from operations 694,784 (2,787) 1,011,849
From Capital Transactions:
Net premiums 2,721 - 2,553
Loan interest (240) 176 (481)
Transfers (to) from the general account of Life of Virginia:
Death benefits - (23,147) -
Surrenders (7,562) (8,499) -
Loans 2,467 (108,886) 135,805
Cost of insurance and administrative expense (Note 3) (58,660) (36,676) (37,243)
Transfer gain (loss) and transfer fees (Note 3) (8,973) (69,891) 4,463
Transfers (to) from Guarantee Account (Note 1) (35,445) - -
Interfund transfers 3,279,602 (1,281,245) 925,760
----------------------------------------------
Increase (decrease) in net assets from capital 3,173,910 (1,528,168) 1,030,857
transactions
----------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 3,868,694 (1,530,955) 2,042,706
NET ASSETS AT BEGINNING OF YEAR 3,147,937 4,678,892 2,636,186
----------------------------------------------
NET ASSETS AT END OF YEAR $7,016,631 $ 3,147,937 $4,678,892
==============================================
</TABLE>
See accompanying notes.
18
<PAGE>
Life of Virginia Separate Account III
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
---------------------------------------------------------------
CONTRAFUND
ASSET MANAGER PORTFOLIO PORTFOLIO
--------------------------------------------- ---------------
PERIOD FROM
JANUARY 16,
1995 TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
1995 1994 1992 1995
--------------------------------------------- ---------------
STATEMENTS OF OPERATIONS (CONTINUED)
<S> <C> <C> <C> <C>
INVESTMENT INCOME (EXPENSE)
Income--Dividends $ 156,409 $ 244,645 $ 31,941 $ 18,917
Expenses--Mortality and expense risk charges (Note 3) 96,822 85,004 32,174 5,771
--------------------------------------------- ---------------
Net investment income (expense) 59,587 159,641 (233) 13,146
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on investments 13,225 (78,029) 20,784 10,744
Unrealized appreciation (depreciation) on investments 1,011,885 (664,103) 450,922 63,150
--------------------------------------------- ---------------
Net realized and unrealized gain (loss) on investments 1,025,110 (742,132) 471,706 73,894
--------------------------------------------- ---------------
Increase (decrease) in net assets from operations $1,084,697 $ (582,491) $ 471,473 $ 87,040
============================================= ===============
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
INCREASE IN NET ASSETS
From Operations:
Net investment income (expense) $ 59,587 $ 159,641 $ (233) $ 13,146
Net realized gain (loss) 13,225 (78,029) 20,784 10,744
Unrealized appreciation (depreciation) on
investments 1,011,885 (664,103) 450,922 63,150
--------------------------------------------- ---------------
Increase (decrease) in net assets from operations 1,084,697 (582,491) 471,473 87,040
From Capital Transactions:
Net premiums - - - -
Loan interest (675) 248 (59) -
Transfers (to) from the general account
of Life of Virginia:
Death benefits - (36,529) - -
Surrenders (202,275) (9,335) - (22,360)
Loans (244,730) 28,270 21,120 (2,010)
Cost of insurance and administrative expense (78,782) (69,410) (27,062) (4,851)
(Note 3)
Transfer gain (loss) and transfer fees (Note 3) 100,982 (13,452) 15,954 464
Transfers from Guarantee Account (Note 1) - - - 100
Interfund transfers 363,603 3,330,776 3,533,658 1,404,008
--------------------------------------------- ---------------
Increase (decrease) in net assets from capital (61,877) 3,230,568 3,543,611 1,375,351
transactions
--------------------------------------------- ---------------
INCREASE IN NET ASSETS 1,022,820 2,648,077 4,015,084 1,462,391
NET ASSETS AT BEGINNING OF PERIOD 7,290,007 4,641,930 626,846 -
--------------------------------------------- ---------------
NET ASSETS AT END OF PERIOD $8,312,827 $7,290,007 $4,641,930 $1,462,391
============================================= ===============
</TABLE>
See accompanying notes.
19
<PAGE>
Life of Virginia Separate Account III
<TABLE>
<CAPTION>
ADVISERS MANAGEMENT TRUST
--------------------------------------------------------------------------------------------------
BALANCED BOND GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO
----------------------------------- ------------------------------- ------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1995 1994 1993 1995 1994 1993 1995 1994 1993
----------------------------------- ------------------------------- ------------------------------
STATEMENTS OF OPERATIONS
(CONTINUED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (EXPENSE)
Income--Dividends $ 47,572 $ 62,843 $ 20,151 $ 51,824 $ 14,592 $ 2,591 $ 11,027 $ 32,391 $ 678
Expenses--Mortality
and expense
risk charges (Note 3) 27,169 22,785 19,172 11,324 8,596 1,538 6,161 3,818 2,375
----------------------------------- ------------------------------- ------------------------------
Net investment income (expense) 20,403 40,058 979 40,500 5,996 1,053 4,866 28,573 (1,697)
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) 103,017 13,727 14,594 (637) (5,627) 3,222 3,921 (7,042) 1,209
Unrealized appreciation
(depreciation) on
investments 294,095 (137,181) 63,608 39,427 (3,564) 422 87,810 (44,045) 18,281
----------------------------------- ------------------------------- ------------------------------
Net realized and unrealized
gain (loss) on investments 397,112 (123,454) 78,202 38,790 (9,191) 3,644 91,731 (51,087) 19,490
----------------------------------- ------------------------------- ------------------------------
Increase (decrease) in net
assets from operations $ 417,515 $ (83,396) $ 79,181 $ 79,290 $ (3,195) $ 4,697 $ 96,597 $(22,514) $ 17,793
=================================== ==============================================================
STATEMENTS OF CHANGES IN
NET ASSETS (CONTINUED)
INCREASE IN NET ASSETS
From Operations:
Net investment
income (expense) $ 20,403 $ 40,058 $ 979 $ 40,500 $ 5,996 $ 1,053 $ 4,866 $ 28,573 $ (1,697)
Net realized gain (loss) 103,017 13,727 14,594 (637) (5,627) 3,222 3,921 (7,042) 1,209
Unrealized appreciation
(depreciation) on
investments 294,095 (137,181) 63,608 39,427 (3,564) 422 87,810 (44,045) 18,281
----------------------------------- ------------------------------- ------------------------------
Increase (decrease)
in net assets
from operations 417,515 (83,396) 79,181 79,290 (3,195) 4,697 96,597 (22,514) 17,793
From Capital Transactions:
Net premiums 4,082 40 - 2,721 - - 2,721 - -
Loan interest (420) - - 851 - - - - -
Transfers (to)
from the general
account of Life of Virginia:
Death benefits - - - - (8,977) - - - -
Surrenders (186,754) - (14,516) - (82,405) - - - -
Loans (73,079) (1,218) - 3,998 (26,252) - (710) (20,645) -
Cost of insurance and
administrative
expenses (Note 3) (22,223) (18,451) (16,437) (9,345) (7,646) (1,250) (5,013) (3,141) (1,959)
Transfer gain and transfer
fees (Note 3) 6,489 (3,236) 7,865 1,033 (1,860) (3) (693) (1,848) 279
Interfund transfers (102,681) 417,986 233,345 5,402 745,043 130,848 380,756 83,486 240,738
----------------------------------- ------------------------------- ------------------------------
Increase (decrease)
in net assets
from capital transactions (374,586) 395,121 210,257 4,660 617,903 129,595 377,061 57,852 239,058
----------------------------------- ------------------------------- ------------------------------
INCREASE IN NET ASSETS 42,929 311,725 289,438 83,950 614,708 134,292 473,658 35,338 256,851
NET ASSETS AT BEGINNING OF YEAR 1,887,117 1,575,392 1,285,954 812,055 197,347 63,055 302,056 266,718 9,867
----------------------------------- ------------------------------- ------------------------------
NET ASSETS AT END OF YEAR $1,930,046 $1,887,117 $1,575,392 $896,005 $812,055 $197,347 $775,714 $302,056 $266,718
=================================== =============================== ==============================
</TABLE>
See accompanying notes.
20,21
<PAGE>
Life of Virginia Separate Account III
<TABLE>
<CAPTION>
INSURANCE MANAGEMENT
SERIES
------------------------------
CORPORATE
BOND UTILITY
PORTFOLIO PORTFOLIO
------------------------------
PERIOD FROM FEBRUARY 7,
1995
TO DECEMBER 31, 1995
------------------------------
STATEMENTS OF OPERATIONS (CONTINUED)
<S> <C> <C>
INVESTMENT INCOME
Income--Dividends $ 1,350 $ 2,908
Expenses--Mortality and expense risk charges (Note 3) 190 839
------------------------------
Net investment income 1,160 2,069
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain 8 237
Unrealized appreciation on investments 1,465 12,097
------------------------------
Net realized and unrealized gain on investments 1,473 12,334
------------------------------
Increase in net assets from operations $ 2,633 $14,403
==============================
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
INCREASE IN NET ASSETS
From Operations:
Net investment income $ 1,160 $ 2,069
Net realized gain 8 237
Unrealized appreciation on investments 1,465 12,097
------------------------------
Increase in net assets from operations 2,633 14,403
From Capital Transactions:
Loan interest - (40)
Transfers (to) from the general account of Life of Virginia:
Loans - (1,207)
Cost of insurance and administrative expense (Note 3) (151) (686)
Transfer gain (loss) and transfer fees (Note 3) 73 65
Interfund transfers 95,663 80,066
------------------------------
Increase in net assets from capital transactions 95,585 78,198
------------------------------
INCREASE IN NET ASSETS 98,218 92,601
NET ASSETS AT BEGINNING OF PERIOD - -
------------------------------
NET ASSETS AT END OF PERIOD $98,218 $92,601
==============================
</TABLE>
See accompanying notes.
22
<PAGE>
Life of Virginia Separate Account III
<TABLE>
<CAPTION>
JANUS ASPEN
--------------------------------------------------------------------
AGGRESSIVE GROWTH
PORTFOLIO GROWTH PORTFOLIO
--------------------------------- ---------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED MAY 11, 1994 YEAR ENDED MAY 11, 1994
DECEMBER TO DECEMBER TO
31, DECEMBER 31, 31, DECEMBER 31,
1995 1994 1995 1994
--------------------------------- ---------------------------------
STATEMENTS OF OPERATIONS
(CONTINUED)
<S> <C> <C> <C> <C>
INVESTMENT INCOME (EXPENSE)
Income--Dividends $ 23,054 $ 3,044 $ 27,427 $ 1,325
Expenses--Mortality and
expense risk charges (Note 3) 12,371 1,506 11,359 2,240
--------------------------------- ---------------------------------
Net investment income (expense) 10,683 1,538 16,068 (915)
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) 127,218 11,250 22,274 554
Unrealized appreciation
(depreciation) on investments 116,589 6,467 180,762 884
--------------------------------- ---------------------------------
Net realized and unrealized
gain (loss) on investments 243,807 17,717 203,036 1,438
--------------------------------- ---------------------------------
Increase (decrease) in net
assets from operations $ 254,490 $ 19,255 $ 219,104 $ 523
================================= =================================
STATEMENTS OF CHANGES IN NET
ASSETS (CONTINUED)
INCREASE IN NET ASSETS
From Operations:
Net investment income (expense) $ 10,683 $ 1,538 $ 16,068 $ (915)
Net realized gain (loss) 127,218 11,250 22,274 554
Unrealized appreciation
(depreciation)
on investments 116,589 6,467 180,762 884
--------------------------------- ---------------------------------
Increase (decrease) in net assets
from operations 254,490 19,255 219,104 523
From Capital Transactions:
Loan interest - - - -
Transfers (to) from the general
account of Life
of Virginia:
Surrenders (5,038) - - -
Loans (2,322) - (22,537) -
Cost of insurance (Note 3) (12,055) (1,760) (9,297) (1,892)
Transfer gain (loss) and
transfer fees (Note 3) 55,524 24,384 (777) 1,810
Transfers (to) from the
Guarantee Account (Note 1) 10,848 - 2,500 -
Interfund transfers 1,209,599 399,243 471,417 646,782
--------------------------------- ---------------------------------
Increase in net assets
from capital transactions 1,256,556 421,867 441,306 646,700
--------------------------------- ---------------------------------
INCREASE IN NET ASSETS 1,511,046 441,122 660,410 647,223
NET ASSETS AT BEGINNING
OF PERIOD 441,122 - 647,223 -
--------------------------------- ---------------------------------
NET ASSETS AT END OF PERIOD $1,952,168 $ 441,122 $1,307,633 $ 647,223
================================= =================================
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
JANUS ASPEN
--------------------------------------------------------------------
FLEXIBLE
WORLDWIDE GROWTH BALANCED INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------ ---------------------------------
PERIOD FROM PERIOD FROM PERIOD FROM
YEAR ENDED MAY 11, 1994 OCTOBER 27, NOVEMBER 1,
DECEMBER TO 1995 TO 1995 TO
31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1995 1995
------------------------------ -------------- ----------------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
(CONTINUED)
INVESTMENT INCOME (EXPENSE)
Income--Dividends $ 5,062 $ 8 $ 242 $ 182
Expenses--Mortality and
expense risk charges (Note 3) 10,890 2,227 70 11
------------------------------ -------------- ----------------
Net investment income (expense) (5,828) (2,219) 172 171
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) 17,153 (4,342) 6 -
Unrealized appreciation
(depreciation) on investments 203,456 (2,281) 1,767 26
------------------------------ -------------- ----------------
Net realized and unrealized
gain (loss) on investments 220,609 (6,623) 1,773 26
------------------------------ -------------- ----------------
Increase (decrease) in net
assets from operations $ 214,781 $ (8,842) $ 1,945 $ 197
============================== ============== ================
STATEMENTS OF CHANGES IN NET
ASSETS (CONTINUED)
INCREASE IN NET ASSETS
From Operations:
Net investment income (expense) $ (5,828) $ (2,219) $ 172 $ 171
Net realized gain (loss) 17,153 (4,342) 6 -
Unrealized appreciation
(depreciation)
on investments 203,456 (2,281) 1,767 26
------------------------------ -------------- ----------------
Increase (decrease) in net assets
from operations 214,781 (8,842) 1,945 197
From Capital Transactions:
Loan interest 9 - - -
Transfers (to) from the general
account of Life
of Virginia:
Surrenders (4,667) - - -
Loans (2,293) - - -
Cost of insurance (Note 3) (8,860) (1,830) (54) (12)
Transfer gain (loss) and
transfer fees (Note 3) 2,987 (1,887) (185) 17
Transfers (to) from the
Guarantee Account (Note 1) - - - -
Interfund transfers 729,507 425,797 29,856 6,746
------------------------------ -------------- ----------------
Increase in net assets
from capital transactions 716,683 422,080 29,617 6,751
------------------------------ -------------- ----------------
INCREASE IN NET ASSETS 931,464 413,238 31,562 6,948
NET ASSETS AT BEGINNING
OF PERIOD 413,238 - - -
------------------------------ -------------- ----------------
NET ASSETS AT END OF PERIOD $1,344,702 $413,238 $31,562 $6,948
============================== ============== ================
</TABLE>
See accompanying notes.
24
<PAGE>
Life of Virginia Separate Account III
<TABLE>
<CAPTION>
ALGER AMERICAN
--------------------------------------------------
SMALL CAP GROWTH
PORTFOLIO PORTFOLIO
------------------------ ------------------------
PERIOD FROM OCTOBER 6 PERIOD FROM NOVEMBER 2,
1995 TO DECEMBER 31, 1995 TO DECEMBER 31,
1995 1995
------------------------ ------------------------
STATEMENTS OF OPERATIONS (CONTINUED)
<S> <C> <C>
INVESTMENT INCOME (EXPENSE)
Income--Dividends $ - $ -
Expenses--Mortality and expense risk charges (Note 3) 312 81
------------------------ ------------------------
Net investment income (expense) (312) (81)
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain 912 1
Unrealized appreciation on investments 5,196 1,973
------------------------ ------------------------
Net realized and unrealized gain on investments 6,108 1,974
------------------------ ------------------------
Increase in net assets from operations $ 5,796 $ 1,893
======================== ========================
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
INCREASE IN NET ASSETS
From Operations:
Net investment income (expense) $ (312) $ (81)
Net realized gain 912 1
Unrealized appreciation on investments 5,196 1,973
------------------------ ------------------------
Increase in net assets from operations 5,796 1,893
From Capital Transactions:
Transfers (to) from the general account of Life of Virginia:
Cost of insurance (Note 3) (243) (84)
Transfer gain (loss) and transfer fees (Note 3) (5,081) (530)
Interfund transfers 313,943 99,661
------------------------ ------------------------
Increase in net assets from capital transactions 308,619 99,047
------------------------ ------------------------
INCREASE IN NET ASSETS 314,415 100,940
NET ASSETS AT BEGINNING OF PERIOD - -
------------------------ ------------------------
NET ASSETS AT END OF PERIOD $314,415 $100,940
======================== ========================
</TABLE>
See accompanying notes.
25
<PAGE>
Life of Virginia Separate Account III
Notes to Financial Statements
December 31, 1995
1. DESCRIPTION OF ENTITY
Life of Virginia Separate Account III (the Account) is a separate investment
account established in 1987 by The Life Insurance Company of Virginia (Life of
Virginia) under the laws of the Commonwealth of Virginia. The Account operates
as a unit investment trust under the Investment Company Act of 1940. The Account
is used to fund certain benefits for single premium variable life insurance
policies issued by Life of Virginia. Life of Virginia is an indirect
wholly-owned subsidiary of Aon Corporation (Aon). In December 1995, Aon signed a
definitive agreement with General Electric Capital Corporation the sale of Life
of Virginia. Management does not expect the sale of Life of Virginia to have a
significant impact on the Account.
During 1995, nine new investment subdivisions were added to the Account. The
Utility and Corporate Bond each invests solely in a designated portfolio of the
Insurance Management Series (IMS), a series type mutual fund. The Contrafund
invests solely in a designated portfolio of the Variable Insurance Products Fund
II (VIP II), a series type mutual fund. The International Equity and the Real
Estate Securities each invests solely in a designated portfolio of Life of
Virginia Series Fund, Inc., a series type mutual fund. The Balanced and Flexible
Income each invests solely in a designated portfolio of Janus Aspen, a series
type mutual fund. The Growth and Small Capitalization each invests solely in a
designated portfolio of the Alger American Fund, a series type mutual fund.
In November 1995, six subdivisions were closed to new money. Three of these
subdivisions, the Balanced, Bond, and Growth each invests solely in a designated
portfolio of the Advisers Management Trust, a series type mutual fund. The
fourth and fifth closed subdivisions, the Money Market and High Income, each
invests solely in a designated portfolio of the Variable Insurance Products
Fund, a series type mutual fund. The sixth closed subdivision , the Money,
invests solely in a designated portfolio of the Oppenheimer Variable Account
Funds, a series type mutual fund.
Policyowners may transfer cash values between the Account's portfolios and the
Guarantee Account that is part of the general account of Life of Virginia.
Amounts transferred to the Guarantee Account earn interest at the interest rate
in effect at the time of such transfer and remain in effect for one year, after
which a new rate may be declared.
26
<PAGE>
Life of Virginia Separate Account III
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Investments are stated at fair value of which is based on the percentage owned
by the Account of the net asset value of the respective portfolios or funds.
Purchases and sales of investments are recorded on the trade date. Realized
gains and losses on investments are determined on the average cost basis. The
units and unit values are disclosed as of the last business day in the
applicable year or period.
The aggregate cost of the investments acquired and the aggregate proceeds of
investments sold, for the year ended December 31, 1995, were:
COST OF SHARES PROCEEDS FROM
FUND/PORTFOLIO ACQUIRED SHARES SOLD
- --------------------------------------------------------------------------------
Life of Virginia Series Fund, Inc.:
Common Stock Index $ 569,611 $ 67,781
Government Securities 332,114 330,583
Money Market 24,072,308 21,662,968
Total Return 339,444 147,668
International Equity 208,606 6,353
Real Estate 397 1
Oppenheimer Variable Account Funds:
Money 383,052 307,229
Bond 803,367 1,893,045
Capital Appreciation 1,383,506 263,830
Growth 414,708 349,819
High Income 3,018,509 2,171,294
Multiple Strategies 728,784 601,148
Variable Insurance Products Fund:
Money Market 9,766,291 11,821,843
High Income 7,053,786 7,556,535
Equity-Income 3,210,057 957,285
Growth 2,852,709 1,483,359
Overseas 11,537,725 8,436,506
Variable Insurance Products Fund II:
Asset Manager 1,977,378 2,069,205
Contrafund 1,513,284 125,210
Advisers Management Trust:
Balanced 345,888 707,194
Bond 591,540 533,835
Growth 434,255 51,704
Insurance Management Series:
Corporate Bond 97,014 335
Utility 82,975 2,804
27
<PAGE>
Life of Virginia Separate Account III
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS (CONTINUED)
COST OF SHARES PROCEEDS FROM
FUND/PORTFOLIO ACQUIRED SHARES SOLD
- -----------------------------------------------------------------------------
Janus Aspen:
Aggressive Growth $5,692,824 $4,481,684
Growth 1,013,174 382,235
Worldwide Growth 1,038,053 337,147
Balanced 30,098 123
Flexible Income 6,928 23
Alger American:
Small Cap 515,602 202,191
Growth 99,661 158
NET ASSET VALUE PER UNIT
The net asset value per unit may not compute due to rounding.
FEDERAL INCOME TAXES
The Account is not taxed separately because the operations of the Account are
part of the total operations of Life of Virginia. Life of Virginia is taxed as a
life insurance company under the Internal Revenue Code (the Code). Life of
Virginia is included in the Aon life - nonlife consolidated federal income tax
return. The Account will not be taxed as a regulated investment company under
subchapter M of the Code. Under existing federal income tax law, no taxes are
payable on the investment income or on the capital gains of the Account.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the 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 increases and decreases in net assets from operations
during the reporting period. Actual results could differ from those estimates.
28
<PAGE>
Life of Virginia Separate Account III
Notes to Financial Statements (continued)
3. RELATED PARTY TRANSACTIONS
The premiums transferred from Life of Virginia to the Account represent gross
premiums recorded by Life of Virginia on its flexible premium variable life
insurance policies. During the first ten years following a premium payment, a
charge is deducted monthly at an effective annual rate of .50% from the policy
cash value to cover distribution expenses and premium taxes. If a policy is
surrendered or lapses during the first nine years, a charge is made by Life of
Virginia to cover the expenses of issuing the policy. Subject to certain
limitations, the charge generally equals 6% of the premium withdrawn in the
first four years, and this charge decreases 1% per year for every year
thereafter. A charge equal to the lesser of $25 or 2% of the amount paid on a
partial surrender will be made to compensate Life of Virginia for the costs
incurred in connection with the partial surrender.
A charge based on policy specified amount of insurance, death benefit option,
cash values, duration, the insured's sex, attained age and risk class, is
deducted from policy cash values each month to compensate Life of Virginia for
the cost of insurance. In addition, Life of Virginia charges the Account for the
mortality and expense risk that Life of Virginia assumes. This charge is
deducted daily and equals the effective annual rate of .90% of the net assets of
the Account. Life of Virginia also charges the Account for certain
administrative charges which are deducted daily and equal the effective annual
rate of .40% of the net assets of the Account.
Gains or losses resulting from the processing time between the receipt of an
initial premium and the investment of that premium are charged to Life of
Virginia. In addition, any such gain or loss resulting from the processing time
between a request for policy surrender and the payment is also charged to Life
of Virginia.
Life of Virginia Series Fund, Inc. (the Fund) is an open-end diversified
management investment company whose shares are sold to Life of Virginia's
Separate Accounts.
Forth Financial Securities Corporation (FFSC), an indirect wholly-owned
subsidiary of Aon, acts as principal underwriter (as defined in The Investment
Company Act of 1940) of the Account's policies pursuant to an agreement with
Life of Virginia.
29
<PAGE>
Life of Virginia Separate Account III
Notes to Financial Statements (continued)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
Aon Advisors, Inc. (Investment Advisor), a wholly-owned subsidiary of Aon,
serves as investment advisor to the Fund and provides portfolio management,
investment advice, and related administrative services for the Fund. As
compensation for its services, the Investment Advisor is paid an investment
advisory fee by the Fund based on the average daily net assets at an effective
annual rate of .35% for the Common Stock Index portfolio, .50% for the
Government Securities, Money Market and Total Return portfolios, 1.00% for the
International Equity portfolio and .85% for the Real Estate Securities
portfolio. Effective July 1, 1994, the investment advisor agreed to waive a
portion of the advisory fee for the Money Market portfolio such that the
effective annual rate is .10%. Prior to May 1, 1993, the effective annual rate
for the Common Stock Index portfolio was .50%.
Certain officers and directors of Life of Virginia are also officers and
directors of FFSC, the Fund, the Investment Advisor or Aon.
30
<PAGE>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
THE LIFE INSURANCE COMPANY OF VIRGINIA
AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1995
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Financial Statements
Consolidated Statements of Financial Position
as of December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Income for the years
ended December 31, 1995, 1994, and 1993. . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1994, and 1993. . . . . . . . . . . . . . . . . 5
Consolidated Statements of Stockholder's Equity for the years
ended December 31, 1995, 1994, and 1993. . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 7
- ----------------------------------------------------------------------------
<PAGE>
[ERNST & YOUNG LLP LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Life Insurance Company of Virginia
We have audited the accompanying consolidated statements of financial position
of The Life Insurance Company of Virginia (an indirect wholly-owned subsidiary
of Aon Corporation) and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, stockholder's equity, and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Life Insurance
Company of Virginia and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Notes 1 and 2, the Company changed its method of accounting for
certain investments in 1994.
/s/ ERNST & YOUNG LLP
Richmond, Virginia
February 8, 1996
- 1 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(millions) December 31
1995 1994
ASSETS
INVESTMENTS
Fixed maturities
Available for sale - at fair value;
(amortized cost: 1995 - $4,267.2;
1994- $2,065.4) $4,411.0 $1,910.5
Held to maturity - at amortized cost
(fair value: 1994 - $2,790.0) - 3,023.7
Equity securities - at fair value
Common stocks (cost: 1995 - $31.5;
1994 - $10.9) 35.4 13.4
Preferred stocks (cost: 1995 - $102.2;
1994 - $117.2) 121.5 111.8
Mortgage loans on real estate (net of reserve
for losses: 1995 - $23.6; 1994 - $27.3) 592.5 527.6
Real estate (net of accumulated depreciation:
1995 - $5.6; 1994 - $6.5) 36.6 35.4
Policy loans 151.7 165.3
Other long-term investments - 9.3
Short-term investments 81.7 106.9
-------- --------
Total investments 5,430.4 5,903.9
CASH 1.6 23.0
RECEIVABLES
Premiums and other 13.5 68.3
Accrued investment income 72.3 75.6
Receivable from affiliates 558.4 347.2
-------- --------
Total receivables 644.2 491.1
DEFERRED POLICY ACQUISITION COSTS 363.9 388.1
COST OF INSURANCE PURCHASED
(net of accumulated amortization: 1995 - $32.5;
1994 - $70.1) 32.6 48.6
PROPERTY AND EQUIPMENT AT COST
(net of accumulated depreciation: 1995 - $18.4;
1994 - $23.5) 3.7 7.5
ASSETS HELD UNDER SPECIAL CONTRACTS 2,019.6 1,429.7
OTHER ASSETS 65.9 57.9
-------- --------
TOTAL ASSETS $8,561.9 $8,349.8
======== ========
- ----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- 2 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION -- Continued
(millions)
December 31
1995 1994
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY LIABILITIES
Future policy benefits $ 472.4 $ 589.9
Policy and contract claims 31.7 83.8
Unearned and advance premiums .3 229.7
Other policyholder funds 5,013.9 5,019.8
-------- --------
Total policy liabilities 5,518.3 5,923.2
GENERAL LIABILITIES
Commissions and general expenses 12.8 46.9
Current income taxes 9.5 14.5
Deferred income taxes 75.5 21.0
Liabilities held under special contracts 2,019.6 1,429.7
Other liabilities 104.3 147.1
-------- --------
TOTAL LIABILITIES 7,740.0 7,582.4
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDER'S EQUITY
Common stock - $1,000 par value:
Authorized, issued and outstanding: 4,000 shares 4.0 4.0
Paid-in additional capital 749.1 704.1
Net unrealized investment gains (losses) 103.1 (97.5)
Net foreign exchange losses - (3.0)
Retained earnings (deficit) (34.3) 159.8
--------- --------
TOTAL STOCKHOLDER'S EQUITY 821.9 767.4
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $8,561.9 $8,349.8
======== ========
- ----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- 3 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(millions)
Years ended December 31
1995 1994 1993
REVENUE
Premiums and policy fees $197.0 $230.1 $256.5
Net investment income (Note 2) 402.1 490.6 513.5
Realized investment losses (76.5) (25.8) (1.6)
Other income 2.8 8.5 14.5
------ ------ ------
Total revenue earned 525.4 703.4 782.9
BENEFITS AND EXPENSES
Benefits to policyholders 372.9 477.1 491.0
Commissions and general expenses 43.7 75.7 92.4
Amortization of deferred policy acquisition costs 39.3 57.1 65.7
Amortization of cost of insurance purchased 3.2 5.1 5.4
------ ------ ------
Total benefits and expenses 459.1 615.0 654.5
INCOME BEFORE INCOME TAX 66.3 88.4 128.4
Provision for income tax (Note 3)
Current 37.9 21.0 52.9
Deferred - credit (10.8) (5.7) (6.7)
------ ------ ------
27.1 15.3 46.2
NET INCOME $ 39.2 $ 73.1 $ 82.2
====== ====== ======
- ----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions) Years ended December 31
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 39.2 $ 73.1 $ 82.2
Adjustments to reconcile net income to
cash provided by (used by) operating
activities:
Policy liabilities 114.2 331.4 334.9
Accrued investment income (2.1) 1.8 (2.3)
Deferred policy acquisition costs (76.1) (91.8) (105.4)
Amortization of deferred policy
acquisition costs 39.3 57.1 65.7
Amortization of cost of insurance purchased 3.2 5.1 5.4
Other amortization and depreciation (1.2) 2.3 2.1
Premiums and operating receivables,
commissions and general expenses, income
taxes, other assets and other liabilities (65.7) (139.7) (161.1)
Realized investment losses 76.5 25.8 1.6
------- ------- -------
CASH PROVIDED BY OPERATING ACTIVITIES 127.3 265.1 223.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments-net (18.8) (.3) (17.3)
Sale or maturity of investments
Fixed maturities - Held to maturity
Maturities 3.9 50.8 64.6
Calls and Prepayments 60.9 727.5 1,962.5
Sales - - 28.0
Fixed maturities - Available for sale
Maturities 35.0 50.4 -
Calls and Prepayments 58.6 269.1 480.9
Sales 1,700.3 444.7 209.0
All other investments 124.6 231.1 184.3
Purchase of investments
Fixed maturities - Held to maturity - (734.0)(2,142.7)
Fixed maturities - Available for sale (1,950.7)(1,018.5) (967.1)
All other investments (183.5) (357.1) (260.6)
Sale (purchase) of property and equipment (.8) (1.8) 22.7
-------- -------- --------
CASH USED BY INVESTING ACTIVITIES (170.5) (338.1) (435.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends to stockholder (6.0) (20.0) (59.0)
Interest sensitive life, annuity and
investment contract deposits 1,059.5 1,455.5 1,376.0
Interest sensitive life, annuity and
investment contract withdrawals (1,031.7)(1,362.6)(1,089.9)
-------- -------- --------
CASH PROVIDED BY FINANCING ACTIVITIES 21.8 72.9 227.1
INCREASE (DECREASE) IN CASH (21.4) (.1) 14.5
CASH AT BEGINNING OF YEAR 23.0 23.1 8.6
-------- -------- --------
CASH AT END OF YEAR $ 1.6 $ 23.0 $ 23.1
======== ======== ========
- ----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- 5 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(millions)
Years ended December 31
1995 1994 1993
COMMON STOCK
Balance at January 1 and December 31 $ 4.0 $ 4.0 $ 4.0
PAID-IN ADDITIONAL CAPITAL
Balance at January 1 704.1 704.1 704.1
Capital contribution from parent (Note 8) 45.0 - -
------ ------ ------
Balance at December 31 749.1 704.1 704.1
NET UNREALIZED INVESTMENT GAINS (LOSSES)
Balance at January 1 (97.5) 23.6 17.0
Effect of change in accounting principles
at January 1 - 25.1 -
Net unrealized investment gains (losses) 200.6 (146.2) 6.6
------ ------ ------
Balance at December 31 103.1 (97.5) 23.6
NET FOREIGN EXCHANGE GAINS (LOSSES)
Balance at January 1 (3.0) (2.3) (2.4)
Net foreign exchange gains (losses) 3.0 (.7) .1
------ ------ ------
Balance at December 31 - (3.0) (2.3)
RETAINED EARNINGS (DEFICIT)
Balance at January 1 159.8 126.7 110.6
Net income 39.2 73.1 82.2
Dividends to stockholder (40.0) (40.0) (59.0)
Stock dividend to affiliate (Note 8) (193.3) - (7.1)
------ ------ ------
Balance at December 31 (34.3) 159.8 126.7
------ ------ ------
STOCKHOLDER'S EQUITY AT DECEMBER 31 $821.9 $767.4 $856.1
====== ====== ======
- ----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- 6 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES
Principles of Consolidation
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles and include
the accounts of The Life Insurance Company of Virginia and its
subsidiaries ("Life of Virginia"). Life of Virginia is an indirect
wholly owned subsidiary of Aon Corporation ("Aon"). These statements
include informed estimates and assumptions that affect the amounts
reported. Actual results could differ from the amounts reported. All
material intercompany accounts and transactions have been eliminated.
Recognition of Premium Revenue and Related Expenses
For universal life-type and investment products, generally there is no
requirement for payment of premium other than to maintain account
values at a level sufficient to pay mortality and expense charges.
Consequently, premiums for universal life-type policies and investment
products are not reported as revenue, but as deposits. Policy fee
revenue for universal life-type policies and investment products
consists of charges for the cost of insurance, policy administration,
and surrenders assessed during the period. Expenses include interest
credited to policy account balances and benefit claims incurred in
excess of policy account balances.
In general, for accident and health products, premiums collected are
reported as earned proportionately over the period covered by the
policies. For all other life products, premiums are recognized as
revenue when due. Benefits and related expenses associated with the
premium revenues are charged to expense proportionately over the lives
of the policies through a provision for future policy benefit
liabilities and through deferral and amortization of deferred policy
acquisition costs.
Reinsurance
Reinsurance premiums, commissions, and expense reimbursements on
reinsured business are accounted for on a basis consistent with those
used in accounting for the original policies issued and the terms of
the reinsurance contracts. Premiums and benefits ceded to other
companies have been reported as a reduction of premium revenue and
benefits. Expense reimbursements received in connection with
reinsurance ceded have been accounted for as a reduction of the related
policy acquisition costs or, to the extent such reimbursements exceed
the related acquisition costs, as other revenue. All reinsurance
receivables and prepaid reinsurance premium amounts are reported as
assets.
Income Tax
Deferred income taxes have been provided for the effects of temporary
differences between financial reporting and tax bases of assets and
liabilities and have been measured using the enacted marginal tax rates
and laws that are currently in effect.
Investments
Fixed maturities, where the intent is to hold to maturity, are carried
generally at amortized cost. Fixed maturities that are available for
sale are carried at fair value. The amortized cost of fixed maturities
is adjusted for amortization of premiums and accretion of discounts to
maturity that are included in net investment income. Included in fixed
- 7 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
AND PRACTICES -- Continued
maturities are investments in collateralized mortgage obligations
("CMOs"). Premiums and discounts arising from the purchase of CMOs are
treated as yield adjustments and included in net investment income.
Prepayment assumptions are obtained from dealer surveys. The
retrospective adjustment method is used to adjust for prepayment
activity. Equity securities are valued at fair value. Unrealized gains
and temporary unrealized losses on fixed maturities available for sale
and equity securities are excluded from income and are recorded
directly to stockholder's equity, net of related deferred income taxes
and adjustments to amortization of deferred policy acquisition costs.
Mortgage loans are carried at amortized cost, net of reserves. Real
estate is carried generally at cost less accumulated depreciation.
Policy loans are carried at unpaid principal balance. Other long-term
investments are carried generally at cost. Realized investment gains or
losses are computed using specific costs of securities sold.
Investments that have declines in fair value below cost, that are
judged to be other than temporary, are written down to estimated fair
values and reported as realized investment losses. Additionally,
reserves for mortgage loans and certain other long-term investments are
established based on an evaluation of the respective investment
portfolio, past credit loss experience, and current economic
conditions. Writedowns and the change in reserves are included in
realized investment gains and losses in the statements of income. In
general, Life of Virginia ceases to accrue investment income where
interest or dividend payments are in arrears.
Accounting policies relating to derivative financial instruments are
discussed in Note 11.
Deferred Policy Acquisition Costs
Costs of acquiring new business, principally the excess of new
commissions over renewal commissions, underwriting and sales expenses
that vary with and are primarily related to the production of new
business, are deferred. For non-universal life-type products,
amortization of deferred acquisition costs and the cost of insurance
purchased is related to and based on the expected premium revenues on
the policies. In general, such amortization is adjusted to reflect
current withdrawal experience. Expected premium revenues are estimated
by using the same assumptions used in estimating future policy
benefits.
In general, deferred policy acquisition costs and cost of insurance
purchased related to universal life-type policies and investment
products are amortized in relation to the present value of expected
gross profits on the policies. Such amortization is adjusted
periodically to reflect differences in actual and assumed gross
profits.
To the extent that unrealized gains or losses on available for sale
securities would result in an adjustment of deferred policy acquisition
costs, had those gains or losses actually been realized, the related
deferred policy acquisition cost adjustments are recorded along with
the unrealized gains or losses included in stockholder's equity with no
effect on net income.
- 8 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
AND PRACTICES -- Continued
Property and Equipment
Property and equipment are generally depreciated using the
straight-line method over their estimated useful lives.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate fair values
for financial instruments. The carrying amounts in the consolidated
statements of financial position for cash and short-term investments
approximate their fair values. Fair values for fixed maturity
securities and equity securities are based on quoted market prices or,
if they are not actively traded, on estimated values obtained from
independent pricing services. The fair values for mortgage loans and
policy loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for similar loans to borrowers
with similar credit ratings. Fair values of derivatives are based on
quoted prices for exchange-traded instruments or the cost to terminate
or offset with other contracts.
In general, other long-term investments are comprised of real estate
joint ventures and limited partnerships. It was not practicable to
estimate the fair value of other long-term investments because of the
lack of quoted market prices and the inability to estimate fair value
without incurring excessive costs. In addition, the determination of
the fair value of investment commitments was deemed impracticable due
to the inability to estimate future cash flows.
Fair values for liabilities for investment-type contracts are estimated
using discounted cash flow calculations based on interest rates
currently being offered for similar contracts with maturities
consistent with those remaining for the contracts being valued.
Assets and Liabilities Held Under Special Contracts
Assets held under special contracts principally represent designated
funds of group pension, variable life and annuity policyholders. These
assets are offset by liabilities that represent such policyholders'
equity in those assets. The net investment income generated from these
assets is not included in the consolidated statements of income.
Future Policy Benefit Liabilities and Unearned Premiums and Policy and
Contract Claims
Future policy benefit liabilities on non-universal life-type and
accident and health products have been provided on the net level
premium method. The liabilities are calculated based on assumptions as
to investment yield, mortality, morbidity and withdrawal rates that
were determined at the date of issue or acquisition of Life of Virginia
by Aon, and provide for possible adverse deviations. Interest
assumptions are graded and range from 9.3% to 7.5%. Withdrawal
assumptions are based principally on experience and vary by plan, year
of issue, and duration.
Policyholder liabilities on universal life-type and investment products
are generally based on policy account values. Interest credit rates for
these products range from 6.8% to 5%.
Unearned premiums generally are calculated using the pro rata method
based on gross premiums. However, in the case of credit life and credit
accident and health, the unearned premiums are calculated such that the
- 9 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
AND PRACTICES -- Continued
premiums are earned over the period of risk in a reasonable
relationship to anticipated claims.
Policy and contract claim liabilities represent estimates for reported
claims, as well as provisions for losses incurred, but not yet
reported. These claim liabilities are based on historical experience
and are estimates of the ultimate amount to be paid when the claims are
settled. Changes in the estimated liability are reflected in income as
the estimates are revised.
Foreign Currency Translation
Foreign revenues and expenses are translated at average exchange rates.
Foreign assets and liabilities are translated at year-end exchange
rates. Unrealized foreign exchange gains or losses on translation are
generally reported in stockholder's equity. No tax effect was taken
into consideration for unrealized losses.
Accounting Changes
In 1995, Life of Virginia adopted Financial Accounting Standards Board
(FASB) Statement Nos. 114 and 118 which relate to accounting by
creditors for impairment of a loan. Implementation of these statements
did not have a material effect on Life of Virginia's consolidated
financial statements.
Life of Virginia adopted FASB Statement No. 115 in 1994 which requires
categorization of fixed maturities either as held to maturity,
available for sale or trading and equity securities as available for
sale or trading. In accordance with Statement No. 115, prior period
financial statements have not been restated to reflect the change in
accounting principle.
In late 1995, the FASB issued a special report entitled "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities." In accordance with the provisions in
that special report, Life of Virginia chose to reclassify all held to
maturity securities to available for sale (see Note 2).
In 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." Life of Virginia anticipates adopting this statement in
its 1996 financial statements as required. Implementation of this
statement is not expected to have a material effect on Life of
Virginia's financial statements.
- 10 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS
The components of net investment income are as follows:
(millions) Years ended December 31
1995 1994 1993
Fixed maturities $332.8 $404.1 $426.8
Equity securities 10.8 25.2 19.7
Mortgage loans on real estate 49.8 49.9 50.0
Short-term investments 3.5 3.8 1.5
Other investments 13.2 18.0 23.9
------ ------ ------
Gross investment income 410.1 501.0 521.9
Investment expenses 8.0 10.4 8.4
------ ------ ------
Net investment income $402.1 $490.6 $513.5
====== ====== ======
Realized gains (losses) on investments are as follows:
Years ended December 31
1995 1994 1993
Fixed maturities available for sale:
Gross gains $ 12.9 $ 8.6 $ -
Gross losses (90.2) (39.2) -
Fixed maturities held to maturity:
Gross gains 1.1 11.3 49.8
Gross losses (13.8) (9.8) (33.5)
Equity Securities 5.6 (1.9) 2.2
Mortgage loans on real estate 2.3 9.6 (15.8)
Other 5.6 (4.4) (4.3)
------ ------ ------
Total before tax (76.5) (25.8) (1.6)
Less applicable tax 26.8 9.0 .5
------ ------ ------
Total $(49.7) $(16.8) $ (1.1)
====== ====== ======
The components of net unrealized investment gains (losses) are as
follows:
(millions) Year ended December 31
1995 1994 1993
Gross unrealized investment gains (losses)
Fixed maturities available for sale $143.8 $(154.9) $ -
Equity securities 23.2 (2.9) 35.9
Deferred tax credit (charge) (58.7) 40.1 (12.3)
Deferred policy acquisition costs -
net of tax (5.2) 20.2 -
------ ------- -----
Net unrealized investment gains (losses) $103.1 $ (97.5) $ 23.6
====== ======= ======
- 11 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS -- Continued
The changes in net unrealized gains (losses) on fixed maturities and
equity security investments are as follows:
(millions) Years ended December 31
1995 1994 1993
Fixed maturities:
Available for sale $298.7 $(214.2) $ (.2)
Held to maturity 233.7 (351.0) 35.2
Equity securities 26.1 (38.8) 10.1
------ ------- -----
Total $558.5 $(604.0) $45.1
====== ======== =====
The cumulative effect on January 1, 1994 of adopting Statement No. 115
increased stockholder's equity by $25.1 million (net of adjustments to
deferred policy acquisition costs of $14.0 million and deferred income
taxes of $20.2 million) to reflect the net unrealized fixed maturities
holding gains on securities previously carried at amortized cost; there
was no effect on net income as a result of the adoption.
On November 30, 1995, Life of Virginia reclassified all held to
maturity securities to available for sale in accordance with the FASB
Statement 115 special report. The amortized cost and related unrealized
gains for the securities reclassified was $2,698.3 million and $50.9
million, respectively.
The amortized cost and fair values of investments in fixed maturities
are as follows:
(millions) December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale:
U. S. government
and agencies $ 60.7 $ 1.5 $ - $ 62.2
States and political
subdivisions 2.2 .2 - 2.4
Foreign
governments 18.6 .6 - 19.2
Corporate
securities 2,478.6 140.2 (9.9) 2,608.9
Mortgage-backed
securities 1,596.3 19.6 (16.9) 1,599.0
Other fixed
maturities 110.8 8.5 - 119.3
-------- ------ ----- --------
Total fixed
maturities 4,267.2 170.6 (26.8) 4,411.0
Total equity
securities 133.7 26.2 (3.0) 156.9
-------- ------ ----- --------
Total available
for sale $4,400.9 $196.8 $(29.8) $4,567.9
======== ====== ====== ========
- 12 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS -- Continued
(millions) December 31, 1994
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held to maturity:
U. S. government
and agencies $ 3.2 $ .1 $ - $ 3.3
States and political
subdivisions 2.3 .1 - 2.4
Foreign
governments .1 - - .1
Corporate
securities 1,428.3 14.8 (96.5) 1,346.6
Mortgage-backed
securities 1,589.8 1.0 (153.2) 1,437.6
-------- ------ ------- --------
Total held to
maturity $3,023.7 $ 16.0 $(249.7) $2,790.0
======== ====== ======= ========
December 31, 1994
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale:
U. S. government
and agencies $ 26.2 $ .1 $ (.4) $ 25.9
States and political
subdivisions .4 - - .4
Foreign
governments 43.7 .8 (1.0) 43.5
Corporate
securities 869.9 6.3 (47.1) 829.1
Mortgage-backed
securities 1,118.3 .8 (113.7) 1,005.4
Other fixed
maturities 6.9 .1 (.8) 6.2
-------- ----- ------ --------
Total fixed
maturities 2,065.4 8.1 (163.0) 1,910.5
Total equity
securities 128.1 5.6 (8.5) 125.2
-------- ----- ------ --------
Total available
for sale $2,193.5 $13.7 $(171.5) $2,035.7
======== ===== ======= ========
- 13 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS -- Continued
The amortized cost and fair value of fixed maturities, by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
(millions)
December 31, 1995
Amortized Fair
Cost Value
Due in one year or less $ 109.4 $ 110.8
Due after one year through five years 621.0 658.4
Due after five years through ten years 1,258.4 1,301.8
Due after ten years 682.1 741.0
Mortgage-backed securities 1,596.3 1,599.0
-------- -------
$ 4,267.2 $4,411.0
========= ========
Securities on deposit for regulatory authorities as required by law
amounted to $4.5 million and $31.1 million at December 31, 1995 and
1994, respectively.
At December 31, 1995 and 1994, respectively, Life of Virginia had $34.2
million and $5.9 million of non-income producing investments.
Commercial mortgage loans represent over 96% of total mortgage loans at
December 31, 1995 and 1994. Mortgage loans on real estate and real
estate in the South Atlantic region totaled $301.0 million and $24.1
million, respectively, at December 31, 1995 and $288.0 and $26.8
million, respectively, at December 31, 1994.
3. INCOME TAX
Beginning in 1992, Life of Virginia was included in the consolidated
life-nonlife federal income tax return of Aon Corporation and its
principal domestic subsidiaries. In accordance with intercompany
policy, Life of Virginia provides taxes on income based on a separate
company basis.
The Omnibus Budget Reconciliation Act of 1993 changed Life of
Virginia's prevailing federal income tax rate from 34% to 35% effective
January 1, 1993. The application of the 35% tax rate to the December
31, 1992 deferred income tax liability balance resulted in a $2.3
million increase in federal income tax expense for 1993. A
reconciliation of the income tax provisions based on the statutory
corporate tax rate to the provisions reflected in the consolidated
financial statements is as follows:
1995 1994 1993
------ ------ -----
Statutory tax rate 35.0% 35.0% 35.0%
Tax-exempt investment income deductions (0.1) (0.9) (0.6)
Increase in deferred taxes due to
enacted rate increase from 34% to 35% - - 1.8
Adjustment of prior year taxes 5.3 (13.3) -
Other - net .7 (3.5) (0.2)
---- ---- ----
Effective tax rate 40.9% 17.3% 36.0%
===== ===== =====
- 14 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INCOME TAX -- Continued
Significant components of Life of Virginia's deferred tax liabilities
and assets as of December 31 are as follows (in millions):
1995 1994
Deferred tax liabilities:
Policy acquisition costs $ 96.9 $116.2
Employee benefits 11.0 9.4
Unrealized investment gains 58.7 -
Other 35.2 38.4
------ ------
Total deferred tax liabilities 201.8 164.0
------ ------
Deferred tax assets:
Insurance reserve amounts 78.2 66.2
Unrealized investment losses - 40.1
Other 48.1 36.7
------ ------
Total deferred tax assets 126.3 143.0
------ ------
Net deferred tax liabilities $ 75.5 $ 21.0
====== ======
As of December 31, 1994, the deferred tax asset relating to unrealized
investment losses is net of a $15.0 valuation allowance that was
provided directly in stockholder's equity in 1994. In 1995, this
valuation allowance was reversed.
The amount of income taxes paid for 1995, 1994 and 1993 was $44.9
million, $56.7 million and $65.6 million, respectively.
4. REINSURANCE AND CLAIM RESERVES
Life of Virginia is involved in both the cession and assumption of
reinsurance with other companies. In 1995, Life of Virginia's
reinsurance consists primarily of long-duration contracts that are
entered into with financial institutions and related party reinsurance
as described in Note 8. In 1994 and 1993, Life of Virginia's
reinsurance consisted primarily of short-duration contracts that were
entered into with numerous automobile dealerships, financial
institutions, and related party reinsurance as described in Note 8.
Life of Virginia would remain liable to the extent that the reinsuring
companies are unable to meet their obligations.
A summary of reinsurance activity is as follows:
(millions) Years ended December 31
1995 1994 1993
Ceded premiums earned $86.5 $193.7 $204.3
Ceded premiums written 86.5 196.3 214.2
Assumed premiums earned 4.3 8.3 13.7
Assumed premiums written 4.3 8.7 12.5
Ceded benefits to policyholders 63.1 102.1 113.5
5. STOCKHOLDER'S EQUITY
Generally, the capital and surplus of Life of Virginia available for
transfer to Aon are limited to the amounts that the statutory capital
and surplus exceed minimum statutory capital requirements; however,
payments of the amounts as dividends may be subject to approval by
regulatory authorities.
Net income, as determined using statutory accounting practices,
amounted to $53.9 million, $58.2 million and $89.3 million for the
years ended December 31, 1995, 1994 and 1993, respectively. Statutory
stockholder's equity amounted to $364.2 million and $400.6 million at
December 31, 1995 and 1994, respectively.
- 15 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. EMPLOYEE BENEFITS
Savings Plan
Life of Virginia participates in Aon's contributory savings plan for
the benefit of salaried and commissioned employees. Provisions made for
the savings plan were $.8 million, $1.2 million and $1.1 million for
1995, 1994 and 1993, respectively.
Employee Stock Ownership Plan
Aon maintains a leveraged ESOP for the benefit of salaried and certain
commissioned employees. Shares are allocated to eligible employees over
a period of ten years through 1998. Contributions to the ESOP for 1995,
1994 and 1993 charged to Life of Virginia's operations amounted to $.5
million, $.6 million, and $.7 million, respectively.
Pension Plan
Life of Virginia participates in Aon's non-contributory defined benefit
pension plan providing retirement benefits for salaried employees and
certain commissioned employees based on years of service and salary.
Aon's funding policy is to contribute amounts to the plan sufficient to
meet the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974, plus such additional amounts as
Aon determines to be appropriate from time to time. The components of
net periodic pension cost and benefit obligations of the Aon defined
benefit plan are not separately available for Life of Virginia. In
connection with Life of Virginia's participation in the Aon defined
benefit plan, net pension credits of $3.8 million in 1995 and $3.1
million in both 1994 and 1993 were recorded.
During 1993, the Aon Pension Plan was amended to include certain
additional amounts of compensation in determining plan benefits and in
1994 to reduce the maximum amount of compensation that can be
considered under the plan as required by law. Further, the Pension Plan
was amended in 1994 to provide increases in benefits to current
pensioners.
Postretirement Benefits Other Than Pensions
Aon sponsors two defined benefit postretirement health and welfare
plans in which Life of Virginia participates that cover both salaried
and nonsalaried employees. One plan provides medical benefits, prior to
and subsequent to Medicare eligibility, and the other provides life
insurance benefits. The postretirement health care plan is
contributory, with retiree contributions adjusted annually; the life
insurance plan is noncontributory. Both plans are funded on a
pay-as-you-go basis.
7. LEASE COMMITMENTS
Life of Virginia has noncancelable operating leases for certain office
space, equipment and automobiles. Future minimum rental payments
required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year at December 31, 1995
are as follows:
(millions) Minimum Lease Payments
1996 $ 2.6
1997 2.1
1998 1.9
1999 1.6
2000 1.4
Later years 3.5
-----
Total minimum payments required $13.1
=====
- 16 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LEASE COMMITMENTS -- Continued
Rental expenses for all operating leases for the years ended December
31, 1995, 1994, and 1993 amounted to $3.6 million, $5.1 million, and
$4.5 million, respectively.
8. RELATED PARTY TRANSACTIONS
Life of Virginia pays investment advisory fees and other fees to
affiliates. Amounts incurred for these items aggregated $5.8 million,
$37.8 million and $33.5 million for 1995, 1994, and 1993, respectively.
Life of Virginia charges affiliates for certain services and for the
use of facilities and equipment which aggregated $10.0 million, $101.2
million and $88.8 million for 1995, 1994, and 1993, respectively.
At December 31, 1995 and 1994, Life of Virginia held investments in
securities of certain affiliates amounting to $12.6 million and $47.4
million, respectively. Amounts included in net investment income
related to these holdings totaled $1.0 million, $3.5 million and $4.0
million for 1995, 1994, and 1993, respectively.
In January 1995, Life of Virginia dividended 100% of its Globe Life
Insurance Company ("Globe") common stock to Combined Insurance Company
of America ("Combined"), a subsidiary of Aon. At December 31, 1994,
Globe had assets of $954.9 million, liabilities of $765.7 million and
stockholder's equity of $189.2 million.
In January 1995, Life of Virginia ceded to Combined $600 million of its
single premium deferred annuity liabilities. In conjunction with the
liability cession, Life of Virginia transferred to Combined available
for sale fixed maturities with a fair value of $436.1 million and cost
of $501.4 million and held to maturity fixed maturities with a fair
value of $81.4 million and a cost of $95.1 million. In addition, $5.5
million of accrued income related to the assets above was transferred
to Combined. This transaction resulted in a reinsurance gain of $77.0
million that will be recognized in income over the expected life of the
business (3 years). Additionally, Life of Virginia recognized a $79.0
million realized investment loss. See Note 12.
In 1995, Life of Virginia received from Combined, in the form of a
capital contribution, fixed maturities with a fair value of $45.0
million.
In January 1995, Life of Virginia transferred limited partnership
investments with a fair value of $8.0 million and cost of $7.5 million,
common stocks with a fair value of $5.6 million and cost of $3.4
million, and cash of $6.4 million to pay a $20.0 million dividend
declared but not paid in 1994. A $2.7 million realized investment gain
was recorded on this transfer.
In December 1994, Life of Virginia exchanged common stocks with a fair
value of $61.4 million and cost of $67.1 million for Combined's
available for sale fixed maturities and related accrued income with
fair values of $60.9 million and $.5 million, respectively. Life of
Virginia recorded the fixed maturity securities at Combined's fair
value of $60.9 million resulting in a $5.7 million realized loss that
is reflected in the statement of income.
In December 1994, Life of Virginia ceded to Combined $406.6 million of
its guaranteed investment contract liabilities. In conjunction with the
liability cession, Life of Virginia transferred to Combined available
for sale fixed maturities with a fair value of $278.1 million and a
cost of $287.2 million and preferred stock with a fair value of $110.5
million and a cost of $119.7 million. See Note 12.
- 17 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RELATED PARTY TRANSACTIONS -- Continued
In July 1994, Life of Virginia ceded to Union Fidelity Life Insurance
Company ("UFLIC") $280.7 million of its credit life and health reserves
and associated acquisition costs of $107.0 million. In conjunction with
the liability cession, Life of Virginia transferred to UFLIC the
following invested assets in November 1994:
(millions) Amortized
Cost Fair Accrued
or Cost Value Interest
Fixed maturities:
Held to maturity $ 22.3 $ 19.6 $ .5
Available for sale 212.3 203.7 4.0
Preferred stock 66.9 66.0 -
Common stock 3.8 7.7 -
------ ------ ----
Totals $305.3 $297.0 $4.5
====== ====== ====
Included in receivable from affiliate is $107.0 million from UFLIC
related to the acquisition costs.
This transaction resulted in a $29.1 million loss which is reflected as
a $20.8 million premium ceded and $8.3 million realized loss on
investments.
Premiums, benefits to policyholders, and commissions and general
expenses ceded to UFLIC during the second six months of 1994 amounted
to $35.0 million, $14.4 million, and $14.2 million, respectively. These
amounts have been classified as a receivable from affiliate.
In December 1993, Life of Virginia contributed 267,800 shares at cost
of Aon common stock to Combined. The fair value and cost of the Aon
shares were $12.6 million and $7.1 million, respectively.
In 1993, Life of Virginia formed and then purchased all 100 outstanding
shares of Newco for $100. Life of Virginia then transferred to Newco,
in the form of a capital contribution, certain properties, including
all company-occupied properties, which had a book value of $24.5
million. The Newco common stock was then sold to Combined for $21.5
million. A realized investment loss of $3.0 million has been included
in the consolidated statement of income.
9. LITIGATION
Life of Virginia is subject to numerous claims and lawsuits that arise
in the ordinary course of business. In some of these cases the remedies
that may be sought or damages claimed are substantial, including cases
that seek punitive or extraordinary damages. Accruals for these
lawsuits have been provided to the extent that losses are deemed
probable and are estimable. Although the ultimate outcome of these
suits cannot be ascertained and liabilities in indeterminate amounts
may be imposed on Life of Virginia, on the basis of present
information, availability of insurance coverage, and advice received
from counsel, it is the opinion of management that the disposition or
ultimate determination of such claims and lawsuits will not have a
material adverse effect on the consolidated financial position or
results of operations of Life of Virginia.
- 18 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SEGMENT INFORMATION
Life of Virginia primarily sells variable annuities and universal life
insurance to customers throughout most of the United States. Life of
Virginia distributes variable annuities primarily through stockbrokers
and universal life insurance primarily through career agents and
independent brokers. Life of Virginia is also engaged in the sale of
traditional individual and group life products and guaranteed
investment contracts. Approximately 43% of premium and annuity
consideration collected in 1995 came from customers residing in the
South Atlantic region of the United States.
Significant data concerning Life of Virginia's product segments are as
follows:
(millions) Years ended December 31
1995 1994 1993
-------- -------- ------
Revenues
Life and Annuity $ 550.0 $ 655.6 $ 666.8
Accident and Health 3.4 14.9 53.9
Corporate and Other (28.0) 32.9 62.2
-------- -------- --------
$ 525.4 $ 703.4 $ 782.9
======== ======== ========
Income (loss) Before Income Tax
Life and Annuity $ 98.4 $ 76.7 $ 73.1
Accident and Health .7 (11.5) 6.0
Corporate and Other (32.8) 23.2 49.3
-------- -------- --------
$ 66.3 $ 88.4 $ 128.4
======== ======== ========
Identifiable Assets
Life and Annuity $7,694.8 $7,182.7 $6,943.1
Accident and Health 4.8 241.1 251.3
Corporate and Other 862.3 926.0 1,035.0
-------- -------- --------
$8,561.9 $8,349.8 $8,229.4
======== ======== ========
The above results include allocations of investment income and certain
expense elements considered reasonable under the circumstances. Other
acceptable methods of allocation might produce different results.
11. FINANCIAL INSTRUMENTS
Financial Risk Management
Life of Virginia is exposed to market risk from changes in interest
rates. To manage the volatility related to this exposure, Life of
Virginia enters into derivative transactions that have the effect of
minimizing this risk by creating offsetting market exposures. If Life
of Virginia did not use the derivative contracts, its exposure and
market risk would be higher. The derivative financial instruments held
by Life of Virginia are held for purposes other than trading.
Derivative transactions are governed by a uniform set of policies and
procedures covering areas such as authorization, counterparty exposure
and hedging practices. Positions are monitored using techniques such as
market value and sensitivity analyses.
In addition to creating market risks that offset the underlying
business exposures, derivative instruments also give rise to credit
risks due to possible non-performance by counterparties. The credit
risk is generally
- 19 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. FINANCIAL INSTRUMENTS -- Continued
Financial Risk Management -- Continued
limited to the fair value of those contracts that are favorable to Life
of Virginia. Life of Virginia has limited its credit risk by restricting
investments in derivative contracts to a diverse group of highly rated
major financial institutions. Life of Virginia closely monitors the
credit worthiness of, and exposure to, its counterparties and considers
its credit risk to be minimal.
Interest Rate Risk Management
Life of Virginia uses interest rate swap agreements to manage asset and
liability durations relating to its capital accumulation annuity
business. As of December 31, 1995 and 1994, these swap agreements had
the net effect of lengthening liability durations. Variable rates
received on interest rate swap agreements correlate with crediting
rates paid on outstanding liabilities. The net effect of swap payments
is settled periodically and reported in income. There is no settlement
of underlying notional amounts.
Life of Virginia performs frequent analyses to measure the degree of
correlation associated with its derivative program. Life of Virginia
assesses the adequacy of the correlation analyses results in
determining whether the derivatives qualify for hedge accounting.
Realized gains and losses on derivatives that qualify as hedges are
deferred and reported as an adjustment of the cost basis of the hedged
item. Deferred gains and losses are amortized into income over the life
of the hedged item. The fair value of swap agreements hedging
liabilities are not recognized in the consolidated statements of
financial position.
Notional and Other Data
Life of Virginia had $250.0 million and $750.0 million notional amount
of interest rate swaps outstanding at December 31, 1995 and 1994,
respectively.
During 1995 Life of Virginia amortized $1.4 million of net deferred
losses relating to interest rate swaps into income.
The interest rates on Life of Virginia's principal outstanding swaps at
December 31, are presented below:
Pay Receive
Fixed Variable
1995 7.9 - 8.3% 5.4%
1994 7.7 - 8.3% 7.8%
As of December 31, 1995, the principal swaps have maturities ranging
from September 1999 to October 2000 and variable rates based on five
year treasury rates.
Other Financial Instruments
Life of Virginia has certain investment commitments to provide capital
and fixed-rate loans as well as certain forward contract purchase
commitments. The investment commitments, which would be collateralized
by related properties of the underlying investments, involve varying
elements of credit and market risk. Investment commitments outstanding
at December 31, 1995 and 1994, totaled $21.7 million and $32.1 million,
respectively.
- 20 -
<PAGE>
THE LIFE INSURANCE COMPANY OF VIRGINIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. FINANCIAL INSTRUMENTS -- Continued
Fair Value of Financial Instruments
Accounting standards require the disclosure of fair values for certain
financial instruments. The fair value disclosures are not intended to
encompass the majority of policy liabilities, various other
non-financial instruments, or other intangible items related to Life of
Virginia's business. Accordingly, care should be exercised in deriving
conclusions about Life of Virginia's business or financial condition
based on the fair value disclosures.
The carrying amount and fair value of certain of Life of Virginia's
financial instruments are as follows:
As of December 31
(millions) 1995 1994
---------------- ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets:
Fixed maturities and equity
securities (Note 2) $4,567.9 $4,567.9 $5,059.4 $4,825.7
Mortgage loans on real estate 592.5 638.2 527.6 530.8
Policy loans 151.7 150.2 165.3 162.0
Cash, short-term investments
and receivables 727.5 727.5 621.0 621.0
Liabilities:
Investment type insurance
contracts 2,769.7 2,796.9 3,380.3 3,295.5
Commissions and general
expenses 12.8 12.8 46.9 46.9
Derivatives - 24.1 - 3.7
See Note 1 regarding the method used to estimate fair values.
12. SUBSEQUENT EVENT
In the fourth quarter of 1995, Aon reached a definitive agreement to
sell Life of Virginia to General Electric Capital Corporation. Pending
the receipt of required regulatory consents, the sale is expected to
close during the first half of 1996. In connection with the sale, Life
of Virginia will recapture the guaranteed investment contract and the
single premium deferred annuity assets and liabilities ceded to
Combined in December 1994 and January 1995, respectively.
13. SUBSEQUENT EVENT (UNAUDITED)
The sale mentioned in footnote 12 closed on April 1, 1996.
- 21 -
<PAGE>
APPENDIX
Illustrations of Death Benefits, Cash Values and Surrender Values
The following tables illustrate how the Death Benefits, Cash Values and
Surrender Values of a Policy change with the investment experience of Separate
Account III and with changes in the cost of insurance charges.
The tables illustrate the Policy values that would result based upon the
hypothetical investment rates of return if premiums are paid as indicated, if
all premiums are allocated equally among the Investment Subdivisions of Separate
Account III, and if no Policy loans, partial withdrawals or transfer requests
have been made. The tables are also based on the assumption that the Policyowner
as not requested an increase in the specified amount of the Policy.
The tables illustrate a Policy issued to a male, age 55, with a total planned
premium of $50,000. The first two illustrations show a single premium of $50,000
paid at issue, with no further premiums. The last two illustrations show an
annual premium of $10,000 payable for five years, with no further premiums. The
specified insurance amount for the first three illustrations is $141,964.
Because the fourth illustration shows a rating of 200% (substandard), the
specified insurance amount is $125,475. The second column of each illustration
shows the accumulated value of the premiums paid at the stated interest rate.
The remaining columns illustrate the Death Benefit, Cash Value and Surrender
Value of a Policy over the designated period under varying assumptions of
investment rates of return and cost of insurance charges. Death benefits, cash
and surrender values also take into account charges deducted from Cash Value.
(See Charges and Deductions, p. 29.)
The amounts shown reflect a monthly deduction, during the first ten policy
years after a premium payment is made, for premium taxes and distribution
expenses incurred by Life of Virginia. The premium tax deduction is equivalent
to an annual rate of .20% of that portion of the Policy's cash value
attributable to the premium payment. The distribution expense deduction is
equivalent to an annual rate of .30% of that portion of the cash value
attributable to the premium payment.
The guaranteed cost of insurance charges allowable under the Policy (shown in
the illustrations as "guaranteed") are based upon the 1980 Commissioners'
Standard Ordinary Mortality Table, adjusted for any substandard rating class.
These guaranteed charges are used to determine the maximum monthly deduction for
cost of insurance. Life of Virginia currently deducts lower cost of insurance
charges (shown in the illustrations as "current") and anticipates deducting
these charges for the foreseeable future.
The current cost of insurance charge equals the current cost of insurance rate
multiplied by the net amount at risk under the Policy. Policies qualifying for
the Preferred Funding Risk Class may have a lower cost of insurance charge.
The illustration columns using the guaranteed cost of insurance charges will
show the minimum values that would be available under the Policy's terms based
on the assumed investment rates of return of 0, 6 or 10%. The Death Benefits,
Cash Values and Surrender Values would be different from those shown if the
gross annual investment rates of return averaged 0, 6 or 10%, over a period of
years, but fluctuated above and below those averages for individual Policy
years.
The illustration columns using the cost of insurance charges currently
deducted by Life of Virginia assume those current cost of insurance charges are
continued for the entire period indicated. Although Life of Virginia currently
makes deductions for cost of insurance based upon the current charges, and
anticipates continuing such practice for the foreseeable future, THERE IS NO
GUARANTEE THAT SUCH CHARGES WILL BE CONTINUED. At the discretion of Life of
Virginia, the charges could be increased or decreased, based upon its estimate
of expected mortality. Thus, the values in the ninth through the eleventh
columns of those illustrations using current cost of insurance charges indicate
values that would be available, assuming the stated investment rates of return,
if the current cost of insurance charges are continued. THOSE COLUMNS DO NOT
ILLUSTRATE VALUES THAT WOULD BE GUARANTEED IF THE HYPOTHETICAL INVESTMENT RATES
OF RETURN WERE EARNED.
The amounts shown for the Death Benefit, Cash Values and Surrender Values
reflect the fact that the net investment return of the Investment Subdivision is
lower than the gross, after-tax return on the assets held in the particular Fund
as a result of expenses paid by it and charges levied against the Investment
Subdivision. The illustrations take into account a charge of 0.60%, which
represents the average investment advisory fee of the Funds, and a charge of
0.30%, which represents the average annual other expenses of the Funds. Assumed
charges for investment advisory fees and other expenses, as an annual percentage
of the average daily net assets of the Funds, are based on the actual fees and
expenses incurred by the Funds in 1995, or on estimates as described below.
Actual fees and expenses will depend on the Investment Subdivisions chosen by
the Policyowner. The illustrations also take into account the daily charges by
Life of Virginia to an Investment Subdivision for assuming mortality and expense
risks and administrative expenses, which is equivalent to a charge at an annual
rate of 1.30% of the net assets of the Investment Subdivision. After deduction
of these amounts, the illustrated gross annual investment rates of return of 0%,
6% and 10% correspond to approximate net annual rates of -2.20%, 3.80% and
7.80%, respectively.
A-1
<PAGE>
The annual expenses used for all the funds in these illustrations are net of
certain reimbursements and fee waivers by the Funds' investment advisors. Life
of Virginia cannot guarantee that the reimbursements will continue.
The management fees and other expenses during 1995 for the portfolios of the
Variable Insurance Products Fund were 0.61% for Equity-Income Portfolio, 0.70%
for Growth Portfolio and 0.91% for Overseas Portfolio.
Absent reimbursements, the total annual expenses during 1995 for the
portfolios of the Variable Insurance Products Fund II were 0.81% for Asset
Manager Portfolio and 0.73% for Contrafund Portfolio.
Absent reimbursements, the management fees and other expenses during 1995 for
the portfolios of Life of Virginia Series Fund would have been 0.66% for Common
Stock Index Portfolio, 0.74% for Government Securities Portfolio, 0.63% for
Money Market Portfolio, 0.65% for Total Return Portfolio, 1.61% for Real Estate
Securities Portfolio, and 2.17% for International Equity Portfolio.
The management fees and other expenses during 1995 for the portfolios of the
Oppenheimer Variable Account Funds were .81% for Oppenheimer High Income Fund,
.80% for Oppenheimer Bond Fund, .78% for Oppenheimer Capital Appreciation Fund,
.77% for Oppenheimer Multiple Strategies Fund; and .79% for Oppenheimer Growth
Fund.
Absent certain fee waivers or reductions, the total annual expenses of the
portfolios of the Janus Aspen Series for the fiscal year ended December 31, 1995
would have been .98% for Growth Portfolio, .93% for Aggressive Growth Portfolio,
1.09% for Worldwide Growth Portfolio, 3.57% for International Growth Portfolio,
1.55% for Balanced Portfolio, and 1.07% for Flexible Income Portfolio.
The total annual expenses for Federated Utility Fund II, Federated High Income
Bond Fund II, and Federated American Leaders Fund II are 0.85%, 0.80% and 0.85%,
respectively, of the average daily net assets. The adviser has agreed to waive
all or a portion of its fee so that the total annual expenses would not exceed
0.85% of average net assets for Federated Utility Fund II, 0.80% of average net
assets for Federated High Income Bond Fund II, and 0.85% of average net assets
for Federated American Leaders Fund II. The adviser can terminate this voluntary
waiver at any time at its sole discretion. Without this waiver and other
voluntary reimbursement of certain other operating expenses, the total operating
expenses were 3.09% for Federated Utility Fund II, 4.20% for Federated High
Income Bond Fund II, and 2.21% for Federated American Leaders Fund II.
The total annual expenses for the portfolios of The Alger American Fund for
the period ended December 31, 1995 were 0.92% for Alger American Small
Capitalization Portfolio and 0.85% for Alger American Growth Portfolio.
All of the information used to determine average fees and expenses for the
illustrations was provided by the Funds. In some cases, estimates were
substituted by the Funds for the actual fees and expenses. Life of Virginia does
not represent that such estimates are true and complete, and has not
independently verified these figures.
The hypothetical values shown in the tables do not reflect any charges for
federal income taxes against Separate Account III, since Life of Virginia is not
currently making such charges. However, such charges may be made in the future
and, in that event, the gross annual investment rate of return would have to
exceed 0%, 6% or 10% by an amount sufficient to cover the tax charges in order
to produce the death benefits and Cash Values illustrated. (See Federal Tax
Matters, p. 36.)
The tables also do not reflect any reduction in sales charges available to
certain groups (See Reduction in Charges for Group Sales, p. 32.); if the
reduced charges were illustrated they would show increased Cash Values.
Upon request, Life of Virginia will provide a comparable illustration based
upon the proposed Insured's age, sex and risk class and the proposed premium
payments.
A-2
<PAGE>
VARIABLE LIFE INSURANCE
Male Issue Age 55 Initial Specified Amount $141,964
Rating 100% (Standard) Initial Premium $ 50,000
Level Death Benefit Total Planned Premium (1) $ 50,000
<TABLE>
<CAPTION>
0% Assumed Hypothetical 6% Assumed Hypothetical 6% Assumed Hypothetical
Gross Annual Investment Gross Annual Investment Gross Annual Investment
Premiums Return with Guaranteed Return with Guaranteed Return with Current
End of Accumulated Cost of Insurance Rates (2)(3) Cost of Insurance Rates(2)(3) Cost of Insurance Rates (2)(4)
Policy At 5% Interest Surrender Cash Death Surrender Cash Death Surrender Cash Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 52,500 45,365 48,365 141,964 48,332 51,332 141,964 48,332 51,332 141,964
2 55,125 42,993 45,993 141,964 48,961 51,961 141,964 49,699 52,699 141,964
3 57,881 40,559 43,559 141,964 49,523 52,523 141,964 51,103 54,103 141,964
4 60,775 38,050 41,050 141,964 50,009 53,009 141,964 52,544 55,544 141,964
5 63,814 35,954 38,454 141,964 50,910 53,410 141,964 54,524 57,024 141,964
6 67,005 33,752 35,752 141,964 51,709 53,709 141,964 56,543 58,543 141,964
7 70,355 31,422 32,922 141,964 52,390 53,890 141,964 58,602 60,102 141,964
8 73,873 28,935 29,935 141,964 52,929 53,929 141,964 60,703 61,703 141,964
9 77,566 26,256 26,756 141,964 53,298 53,798 141,964 62,847 63,347 141,964
10 81,445 23,349 23,349 141,964 53,466 53,466 141,964 65,034 65,034 141,964
15 103,946 1,840 1,840 141,964 49,166 49,166 141,964 76,050 76,050 141,964
20 132,665 * * * 32,297 32,297 141,964 88,931 88,931 141,964
25 169,318 * * * * * * 103,994 103,994 141,964
30 216,097 * * * * * * 121,608 121,608 141,964
35 275,801 * * * * * * 142,205 142,205 149,316
</TABLE>
* In the absence of an additional premium, the Policy would lapse.
(1) The values illustrated assume a single premium of $50,000 with no
additional premiums. Values would be different if premiums are paid with a
different frequency or in different amounts.
(2) The values and benefits are as of the end of the year shown. They assume
that no policy loans have been made. Excessive loans may cause this Policy
to lapse because of insufficient Cash Value.
(3) The values and benefits are shown using the maximum cost of insurance
charges allowable under the Policy. Accordingly, if the assumed
hypothetical gross annual investment return were earned, the values and
benefits of an actual Policy with the listed specifications could never be
less than those shown, and in some cases may be greater than those shown.
(4) The values and benefits are shown using the cost of insurance charges
currently deducted by Life of Virginia. Although Life of Virginia
anticipates deducting these charges for the foreseeable future, THESE
CHARGES ARE NOT GUARANTEED AND COULD BE RAISED AT THE DISCRETION OF LIFE OF
VIRGINIA. Accordingly, even if the assumed hypothetical gross annual
investment return were earned, the values and benefits under an actual
Policy with the listed specifications may be less than those shown if the
cost of insurance charges were increased.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND
ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A
REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF
INFLATION, AND THE ALLOCATIONS MADE BY AN OWNER AMONG THE INVESTMENT OPTIONS.
THE GROSS HYPOTHETICAL INVESTMENT RATES OF RETURN OF 0% AND 6% SHOWN ABOVE
CORRESPOND TO NET ANNUAL RATES OF -2.20% AND 3.80%. THE DEATH BENEFIT AND CASH
VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT
RATE OF RETURN AVERAGES 0% AND 6% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE
OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE
MADE BY LIFE OF VIRGINIA OR THE FUNDS THAT THESE HYPOTHETICAL INVESTMENT RATES
OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-3
<PAGE>
<TABLE>
<CAPTION>
VARIABLE LIFE INSURANCE
Male Issue Age 55 Initial Specified Amount $141,964
Rating 100% (Standard) Initial Premium $ 50,000
Level Death Benefit Total Planned Premium (1) $ 50,000
0% Assumed Hypothetical 10% Assumed Hypothetical 10% Assumed Hypothetical
Gross Annual Investment Gross Annual Investment Gross Annual Investment
Premiums Return with Guaranteed Return with Guaranteed Return with Current
End of Accumulated Cost of Insurance Rates (2)(3) Cost of Insurance Rates(2)(3) Cost of Insurance Rates (2)(4)
Policy At 5% Interest Surrender Cash Death Surrender Cash Death Surrender Cash Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 52,500 45,365 48,365 141,964 50,310 53,310 141,964 50,310 53,310 141,964
2 55,125 42,993 45,993 141,964 53,139 56,139 141,964 53,839 56,839 141,964
3 57,881 40,559 43,559 141,964 56,117 59,117 141,964 57,602 60,602 141,964
4 60,775 38,050 41,050 141,964 59,257 62,257 141,964 61,618 64,618 141,964
5 63,814 35,954 38,454 141,964 63,075 65,575 141,964 66,407 68,907 141,964
6 67,005 33,752 35,752 141,964 67,082 69,082 141,964 71,494 73,494 141,964
7 70,355 31,422 32,922 141,964 71,296 72,796 141,964 76,874 78,374 141,964
8 73,873 28,935 29,935 141,964 75,732 76,732 141,964 82,573 83,573 141,964
9 77,566 26,256 26,756 141,964 80,411 80,911 141,964 88,614 89,114 141,964
10 81,445 23,349 23,349 141,964 85,358 85,358 141,964 95,028 95,028 141,964
15 103,946 1,840 1,840 141,964 116,431 116,431 141,964 134,668 134,668 156,214
20 132,665 * * * 165,021 165,021 176,572 191,130 191,130 204,509
25 169,318 * * * 235,752 235,752 247,540 273,052 273,052 286,704
30 216,097 * * * 333,210 333,210 349,870 386,513 386,513 405,839
35 275,801 * * * 462,975 462,975 486,123 546,042 546,042 573,344
</TABLE>
* In the absence of an additional premium, the Policy would lapse.
(1) The values illustrated assume a single premium of $50,000 with no
additional premiums. Values would be different if premiums are paid with a
different frequency or in different amounts.
(2) The values and benefits are as of the end of the year shown. They assume
that no policy loans have been made. Excessive loans may cause this Policy
to lapse because of insufficient Cash Value.
(3) The values and benefits are shown using the maximum cost of insurance
charges allowable under the Policy. Accordingly, if the assumed
hypothetical gross annual investment return were earned, the values and
benefits of an actual Policy with the listed specifications could never be
less than those shown, and in some cases may be greater than those shown.
(4) The values and benefits are shown using the cost of insurance charges
currently deducted by Life of Virginia. Although Life of Virginia
anticipates deducting these charges for the foreseeable future, THESE
CHARGES ARE NOT GUARANTEED AND COULD BE RAISED AT THE DISCRETION OF LIFE OF
VIRGINIA. Accordingly, even if the assumed hypothetical gross annual
investment return were earned, the values and benefits under an actual
Policy with the listed specifications may be less than those shown if the
cost of insurance charges were increased.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND
ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A
REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF
INFLATION, AND THE ALLOCATIONS MADE BY AN OWNER AMONG THE INVESTMENT OPTIONS.
THE GROSS HYPOTHETICAL INVESTMENT RATES OF RETURN OF 0% AND 10% SHOWN ABOVE
CORRESPOND TO NET ANNUAL RATES OF -2.20% AND 7.80%. THE DEATH BENEFIT AND CASH
VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT
RATE OF RETURN AVERAGES 0% AND 10% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE
OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE
MADE BY LIFE OF VIRGINIA OR THE FUNDS THAT THESE HYPOTHETICAL INVESTMENT RATES
OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-4
<PAGE>
<TABLE>
<CAPTION>
VARIABLE LIFE INSURANCE
Male Issue Age 55 Initial Specified Amount $141,964
Rating 100% (Standard) Initial Premium $ 10,000
Level Death Benefit Total Planned Premium (1) $ 50,000
0% Assumed Hypothetical 10% Assumed Hypothetical 10% Assumed Hypothetical
Gross Annual Investment Gross Annual Investment Gross Annual Investment
Premiums Return with Guaranteed Return with Guaranteed Return with Current
End of Accumulated Cost of Insurance Rates (2)(3) Cost of Insurance Rates(2)(3) Cost of Insurance Rates (2)(4)
Policy At 5% Interest Surrender Cash Death Surrender Cash Death Surrender Cash Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C>
1 10,500 9,039 9,639 141,964 10,025 10,625 141,964 10,025 10,625 141,964
2 21,525 16,516 17,716 141,964 19,474 20,674 141,964 20,713 21,913 141,964
3 33,101 23,747 25,547 141,964 29,657 31,457 141,964 32,107 33,907 141,964
4 45,256 30,747 33,147 141,964 40,654 43,054 141,964 44,249 46,649 141,964
5 58,019 37,625 40,525 141,964 52,655 55,555 141,964 57,500 60,400 141,964
6 60,920 35,101 37,801 141,964 55,459 58,159 141,964 61,698 64,398 141,964
7 63,966 32,551 34,951 141,964 58,470 60,870 141,964 66,261 68,661 141,964
8 67,164 29,948 31,948 141,964 61,690 63,690 141,964 71,207 73,207 141,964
9 70,523 27,257 28,757 141,964 65,121 66,621 141,964 76,553 78,053 141,964
10 74,049 24,343 25,343 141,964 68,667 69,667 141,964 82,220 83,220 141,964
15 94,507 3,705 3,705 141,964 88,682 88,682 141,964 116,468 116,468 141,964
20 120,618 * * * 117,330 117,330 141,964 165,280 165,280 176,850
25 153,942 * * * 165,588 165,588 173,867 236,123 236,123 247,929
30 196,473 * * * 234,040 234,040 245,742 334,239 334,239 350,951
35 250,755 * * * 325,184 325,184 341,444 472,192 472,192 495,802
</TABLE>
* In the absence of an additional premium, the Policy would lapse.
(1) The values illustrated assume five annual premiums of $10,000 paid at the
beginning of each year, with no additional premiums. Values would be
different if premiums are paid with a different frequency or in different
amounts.
(2) The values and benefits are as of the end of the year shown. They assume
that no policy loans have been made. Excessive loans may cause this Policy
to lapse because of insufficient Cash Value.
(3) The values and benefits are shown using the maximum cost of insurance
charges allowable under the Policy. Accordingly, if the assumed
hypothetical gross annual investment return were earned, the values and
benefits of an actual Policy with the listed specifications could never be
less than those shown, and in some cases may be greater than those shown.
(4) The values and benefits are shown using the cost of insurance charges
currently deducted by Life of Virginia. Although Life of Virginia
anticipates deducting these charges for the foreseeable future, THESE
CHARGES ARE NOT GUARANTEED AND COULD BE RAISED AT THE DISCRETION OF LIFE OF
VIRGINIA. Accordingly, even if the assumed hypothetical gross annual
investment return were earned, the values and benefits under an actual
Policy with the listed specifications may be less than those shown if the
cost of insurance charges were increased.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND
ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A
REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF
INFLATION, AND THE ALLOCATIONS MADE BY AN OWNER AMONG THE INVESTMENT OPTIONS.
THE GROSS HYPOTHETICAL INVESTMENT RATES OF RETURN OF 0% AND 10% SHOWN ABOVE
CORRESPOND TO NET ANNUAL RATES OF -2.20% AND 7.80%. THE DEATH BENEFIT AND CASH
VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT
RATE OF RETURN AVERAGES 0% AND 10% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE
OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE
MADE BY LIFE OF VIRGINIA OR THE FUNDS THAT THESE HYPOTHETICAL INVESTMENT RATES
OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-5
<PAGE>
<TABLE>
<CAPTION>
VARIABLE LIFE INSURANCE
Male Issue Age 55 Initial Specified Amount $125,475
Rating 200% (Substandard) Initial Premium $ 10,000
Level Death Benefit Total Planned Premium (1) $ 50,000
0% Assumed Hypothetical 10% Assumed Hypothetical 10% Assumed Hypothetical
Gross Annual Investment Gross Annual Investment Gross Annual Investment
Premiums Return with Guaranteed Return with Guaranteed Return with Current
End of Accumulated Cost of Insurance Rates (2)(3) Cost of Insurance Rates(2)(3) Cost of Insurance Rates (2)(4)
Policy At 5% Interest Surrender Cash Death Surrender Cash Death Surrender Cash Death
Year Per Year Value Value Benefit Value Value Benefit Value Value Benefit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,500 8,292 8,892 125,475 9,244 9,844 125,475 9,244 9,844 125,475
2 21,525 14,739 15,939 125,475 17,551 18,751 125,475 19,206 20,406 125,475
3 33,101 20,947 22,747 125,475 26,516 28,316 125,475 29,955 31,755 125,475
4 45,256 26,932 29,332 125,475 36,233 38,633 125,475 41,567 43,967 125,475
5 58,019 32,808 35,708 125,475 46,915 49,815 125,475 54,232 57,132 125,475
6 60,920 29,133 31,833 125,475 48,211 50,911 125,475 57,796 60,496 125,475
7 63,966 25,255 27,655 125,475 49,493 51,893 125,475 61,609 64,009 125,475
8 67,164 21,107 23,107 125,475 50,726 52,726 125,475 65,676 67,676 125,475
9 70,523 16,606 18,106 125,475 51,863 53,363 125,475 70,005 71,505 125,475
10 74,049 11,560 12,560 125,475 52,753 53,753 125,475 74,512 75,512 125,475
15 94,507 * * * 50,591 50,591 125,475 99,148 99,148 125,475
20 120,618 * * * 23,407 23,407 125,475 135,825 135,825 145,333
25 153,942 * * * * * * 190,422 190,422 199,943
30 196,473 * * * * * * 261,301 261,301 274,366
35 250,755 * * * * * * 346,507 346,507 363,833
</TABLE>
* In the absence of an additional premium, the Policy would lapse.
(1) The values illustrated assume five annual premiums of $10,000 paid at the
beginning of each year, with no additional premiums. Values would be
different if premiums are paid with a different frequency or in different
amounts.
(2) The values and benefits are as of the end of the year shown. They assume
that no policy loans have been made. Excessive loans may cause this Policy
to lapse because of insufficient Cash Value.
(3) The values and benefits are shown using the maximum cost of insurance
charges allowable under the Policy. Accordingly, if the assumed
hypothetical gross annual investment return were earned, the values and
benefits of an actual Policy with the listed specifications could never be
less than those shown, and in some cases may be greater than those shown.
(4) The values and benefits are shown using the cost of insurance charges
currently deducted by Life of Virginia. Although Life of Virginia
anticipates deducting these charges for the foreseeable future, THESE
CHARGES ARE NOT GUARANTEED AND COULD BE RAISED AT THE DISCRETION OF LIFE OF
VIRGINIA. Accordingly, even if the assumed hypothetical gross annual
investment return were earned, the values and benefits under an actual
Policy with the listed specifications may be less than those shown if the
cost of insurance charges were increased.
THE HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND
ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A
REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING PREVAILING INTEREST RATES, RATES OF
INFLATION, AND THE ALLOCATIONS MADE BY AN OWNER AMONG THE INVESTMENT OPTIONS.
THE GROSS HYPOTHETICAL INVESTMENT RATES OF RETURN OF 0% AND 10% SHOWN ABOVE
CORRESPOND TO NET ANNUAL RATES OF -2.20% AND 7.80%. THE DEATH BENEFIT AND CASH
VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT
RATE OF RETURN AVERAGES 0% AND 10% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE
OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE
MADE BY LIFE OF VIRGINIA OR THE FUNDS THAT THESE HYPOTHETICAL INVESTMENT RATES
OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-6
<PAGE>
Life of Virginia Separate Account III
APPENDIX B
MATTERS RELATING TO POLICIES ISSUED PRIOR TO 11/14/95
Policies issued prior to November 14, 1995 contain certain rights, benefits
and procedures which differ from those described elsewhere in this Prospectus.
An individual who has purchased such a Policy must refer to this Appendix in
conjunction with the remainder of this Prospectus in order to determine his or
her rights and benefits under the Policy.
Summary of Rights and Benefits Under These Policies. Policies issued on or
before November 14, 1995 were designed to operate generally as single premium
policies; the minimum initial premium was $5,000.
Policies issued before November 14, 1995 utilized only one underwriting class
with respect to Insureds, and imposed a current cost of insurance charge at a
rate equivalent to an annual rate of 0.55% of a Policy's Cash Value in Separate
Account III. The initial specified amount was determined in part by the initial
premium paid.
Rights, benefits, and procedures with respect to the policies issued prior to
November 14, 1995 are set forth in greater detail below.
* * *
With respect to the rights and benefits described below, these rights and
benefits should be substituted in their entirety for the related rights and
benefits found elsewhere in this Prospectus. All other procedures described
herein, however, are meant to modify the procedures found elsewhere in the
Prospectus, and must be read in conjunction with the procedures found elsewhere
in this Prospectus. The page references listed below indicate where in the
Prospectus the substituted or modified terms and procedures are described.
* * *
While this policy is designed to operate generally as a single premium policy,
it does offer an additional premium payment option (so long as there is no
outstanding Policy Debt), which provides limited premium flexibility.
* * *
References to the minimum first-year planned premium, wherever they appear in
the Prospectus, should be replaced with references to the minimum initial
premium; specifically, the minimum initial premium required to issue a Policy is
$5,000.
The third paragraph of the Charges and Deductions provision on p. 9 is
replaced with the following: A deduction is made on each Monthly Anniversary Day
in order to compensate Life of Virginia for the cost of insurance. The cost of
insurance charge is currently deducted at a rate equivalent to an annual rate of
.55% of the Policy's Cash Value in Separate Account III. Life of Virginia may,
at its discretion, increase or decrease this charge; however, in no event will
the current charge exceed amounts based on the 1980 Commissioners' Standard
Ordinary Mortality Table.
* * *
The following sentence is deleted from the end of the first paragraph under
Purchasing a Policy on p. 18: Life of Virginia assigns Insureds to standard and
substandard risk classes. Cost of insurance deductions will generally be higher
under Policies insuring persons assigned to substandard risk classes.
* * *
The Initial Premium provision beginning on p. 19 of the Prospectus is replaced
with the following:
Initial Premium. The initial premium is due on or before the Policy Date. The
initial premium is the guideline single premium for life insurance as determined
in the Internal Revenue Code. This amount will be stated on the policy data
pages. The minimum initial premium is $5,000. All premiums are payable to Life
of Virginia at its Home Office.
* * *
The fifth sentence of the second paragraph of the Death Benefit provision on
p. 26 of the Prospectus is replaced with the following: Initially, the specified
amount is determined when the Policy is issued by the amount of the initial
premium and the age and sex of the Insured.
70
<PAGE>
The first two paragraphs of the Changes in the Specified Amount provision on
p. 27 of the Prospectus are replaced with the following:
After a Policy has been in effect for one year, a Policyowner may adjust the
existing insurance coverage by increasing the specified amount. To apply for an
increase, the Policyowner must first complete a supplemental application and
submit evidence, satisfactory to Life of Virginia, that the Insured is
insurable. In order for an increase to become effective, the Policyowner must
make an Additional Premium Payment after an increase is approved. The required
Additional Premium Payment depends on the amount of the increase requested and
the Attained Age and sex of the Insured. The premium required for a particular
increase in specified amount will increase as the Attained Age of the Insured
increases. The minimum increase in the specified amount that Life of Virginia
will allow under the Policy is one which requires a $1,000 Additional Premium
Payment.
* * *
The following is deleted from the Charges Attributable to Premium Payments
provision on p. 29 of the Prospectus. All premium payments made during a Policy
year are deemed to have been made on the first day of such Policy year;
accordingly, one year is considered to have elapsed since the payment of such
premiums on each subsequent policy anniversary. In order to determine the
portion of Cash Value in Separate Account III subject to the premium tax charge
and distribution expense charge, premiums are grouped by Policy year.
* * *
The Cost of Insurance Charge provision beginning on p. 30 of the Prospectus is
replaced with the following:
Cost of Insurance Charge. A cost of insurance charge will be deducted on each
Monthly Anniversary Day. Currently, the charge is equal to .0458% of the
Policy's Cash Value in each Investment Subdivision on the Monthly Anniversary
Day. This is equivalent to an annual rate of .55% of a Policy's Cash Value in
Separate Account III. Life of Virginia may, at its discretion, increase or
decrease this charge; however, in no event will the current charge exceed the
guaranteed cost of insurance charge set forth in the Policy.
To determine the guaranteed cost of insurance charge, a Policy's net amount at
risk for a policy month is divided by 1,000 and the result is multiplied by the
applicable guaranteed maximum cost of insurance rate. To determine the net
amount at risk on a Monthly Anniversary Day, the Death Benefit on that date is
divided by 1.0032737 (which reduces the net amount at risk, solely for purposes
of computing the cost of insurance, by taking into account assumed monthly
earnings at an annual rate of 4%) and then the Policy's Cash Value on that date
is subtracted. Thus, the net amount at risk depends upon and will be affected by
changes in the Policy's Cash Value.
Changes in the Death Benefit may affect the amount of the guaranteed cost of
insurance charge deductible under the Policies. Because the cost of insurance
charge varies with the net amount at risk, an increase in specified amount or
the calculation of the Death Benefit based on the corridor percentage (See,
Death Benefit, p. 26.) may cause the guaranteed cost of insurance charge to
increase.
The guaranteed monthly cost of insurance rate is based on the Insured's sex
and Attained Age. The guaranteed maximum cost of insurance rates allowable under
the Policies are based on the Commissioners' 1980 Standard Ordinary Mortality
Table. The guaranteed cost of insurance rates generally increase as the
Insured's Attained Age increases.
* * *
The third paragraph of the Tax Treatment of Policy Loans and Other
Distributions Under Certain Policies provision on p. 37 of the prospectus is
replaced with the following:
Policies entered into on or after June 21, 1988, are modified endowment
contracts because the initial premium exceeds the premium allowed by the 7-Pay
Test for the first year. Because these Policies are modified endowment
contracts, loans and other distributions will be treated as described in items
3, 4 and 5 above. (Exception: If a Policy is received in exchange for a policy
that was not a modified endowment contract, the Policy may not be a modified
endowment contract. If partial withdrawals are made from the Policy, however,
this might cause the Policy to become a modified endowment contract. Unless Life
of Virginia can so determine, Life of Virginia will assume that the Policy is a
modified endowment contract, and will withhold and report on that basis for
income tax purposes.)
71
<PAGE>
SUPPLEMENT TO PROSPECTUS
DATED MAY 1, 1996
FOR LIFE OF VIRGINIA SEPARATE ACCOUNT III
General Information
Contributions and/or transfers to the Guarantee Account, as described below,
become part of the General Account of Life of Virginia. Because of exemptive and
exclusionary provisions, interests in the General Account have not been
registered under the Securities Act of 1933, (the "1933 Act"), and the General
Account is not registered as an investment company under the Investment Company
Act of 1940, (the "1940 Act"). Accordingly, neither the General Account nor any
interests therein are subject to the provisions of the 1933 Act or the 1940 Act,
and the information in this supplement has not been reviewed by the staff of the
Securities and Exchange Commission. Disclosure regarding the Guarantee Account
and the General Account, however, may be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
The Guarantee Account
The Policyowner may allocate premium payments to the Guarantee Account or
transfer amounts between the Guarantee Account and the Investment Subdivisions
of Separate Account III. Upon maturity or surrender of the policy, the cash
value of the policy, reduced by any Policy Debt, and after deduction of any
applicable surrender charge, is paid in a lump sum, or applied under an optional
payment plan, (see Optional Payment Plans, p. 28). The cash value of the policy
includes the cash value in the Guarantee Account, the cash value in the Separate
Account, and the cash value held in the General Account to secure policy debt.
Amounts allocated or transferred to the Guarantee Account earn interest at the
interest rate in effect at the time of such allocation. This rate is guaranteed
to be at least 4% per annum, however a higher rate of interest may be credited.
Any interest credited in excess of the guaranteed interest rate of 4% per annum
will be determined at the sole discretion of Life of Virginia. Life of Virginia
has no obligation to credit excess interest. With respect to each amount
allocated, the interest rate in effect at the time of allocation will be
credited for one year from that date. Each year for which a particular interest
rate is guaranteed with respect to a particular allocation is the interest rate
guarantee period. At the end of the interest rate guarantee period, a new
interest rate will become effective, and a new interest rate guarantee period
will commence with respect to that portion of the cash value in the Guarantee
Account represented by that particular allocation.
Charges
The mortality and expense risk charge is not deducted from the Guarantee
Account. This charge is borne solely by the Separate Account. The administrative
expense charge will be deducted daily from the cash value of the Guarantee
Account, at an annual effective rate of .40%.
Monthly deductions for cost of insurance are taken from the cash value in the
Guarantee Account in the same manner in which these deductions apply to cash
value in the Separate Account.
The distribution expense charge and the premium tax recovery charge do not
apply to and are not deducted from the cash value in the Guarantee Account.
Surrender and Partial Withdrawal charges apply to cash value allocated to the
Guarantee Account in the same manner in which these charges apply to cash value
allocated to the Separate Account.
Transfers
The policyowner may transfer amounts between the Guarantee Account and the
Investment Subdivisions of Separate Account III. Transfers will be effective on
the date the Policyowner's transfer request is received by the company.
With respect to transfers between the Guarantee Account and the Investment
Subdivisions of Separate Account III, the following restrictions may be imposed:
Transfers from any particular allocation to the Guarantee Account to
subdivisions of Separate Account III may be made only during the 30 day period
following the interest rate guarantee period applicable to that particular
allocation. The company may limit the amount which may be transferred, but
that amount will not be limited to less than 25% of that portion of that
particular allocation, plus any accrued interest on that amount.
<PAGE>
No transfers from any subdivision of Separate Account III to the Guarantee
Account may be made during the six month period following the transfer of any
amount from the Guarantee Account to any subdivisions of the Separate Account.
In all other respects, the rules and charges applicable to transfers between
the various Investment Subdivisions of the Separate Account will apply to
transfers involving the Guarantee Account.
Dollar-Cost Averaging
For policies issued on or after May 1, 1995, as an alternative to the
dollar-cost averaging program described above, Policyowners may elect to have
Life of Virginia automatically transfer specified amounts from the Guarantee
Account to any available Investment Subdivision on a monthly or quarterly basis.
To make the election, Policyowners must complete a Dollar-Cost Averaging
Agreement. Money may be allocated to the Guarantee Account as an initial or
subsequent premium or in the form of a transfer of cash value from one or more
Investment Subdivisions. Such allocations must comply with all applicable
minimum amount and percentage requirements (see Purchasing a Policy, p. 18 and
Allocation of Premiums, p. 20) as well as rules applicable to transfers to the
Guarantee Account. Apart from automatic transfers under the Dollar-Cost
Averaging Agreement, all rules regarding transfers from the Guarantee Account
will apply.
Surrenders, Partial Withdrawals and Loans
Surrenders, partial withdrawals and loans may be made from the Guarantee
Account in addition to the Separate Account, (see Policy Rights and Benefits p.
22). If a partial withdrawal or loan is requested, the Policyowner may specify
the accounts from which amounts should be taken. If no account is specified,
amounts will be taken first from the Investment Subdivisions of the Separate
Account on a pro-rata basis, in proportion to the cash value in each subdivision
of the Separate Account. Any amount remaining will be taken from the cash value
in the Guarantee Account. Amounts taken from the Guarantee Account will come
from the amounts, (including interest credited to such amounts), which have been
in the Guarantee Account for the longest period of time.
Deferral of Payment
Life of Virginia may defer payment of any amount from the Guarantee Account
for up to six months. Payment will not be deferred if applicable law requires
earlier payment, or if the amount payable is to be used to pay premiums on
policies in force with the company.
THE GUARANTEE ACCOUNT MAY NOT BE AVAILABLE IN ALL STATES OR MARKETS
Dated May 1, 1996
The Life Insurance Company of Virginia
6610 West Broad Street
Richmond, Virginia 23230
